Why Everyone Needs an Investing Coach in Their Corner

Paul Winkler: Welcome, this is “The Investor Coaching Show.” I am Paul Winkler, talking money and investing today, as I always do around this place.

Delegators vs. Do-It-Yourselfers

Why should this weekend be any different? Except the only difference is I’m by myself. It’s so sad. It’s so lonely.

But that’s okay. You guys, for probably 20 years, had nothing but me anyway.

So that’s all right. You’ll live. You’ll be okay.

So lots, lots, lots of fun stuff to talk about today. And some of it is behavioral in nature. I’m just eternally interested in why people don’t solve their financial problems.

I sat through a workshop this week. And the workshop, it was really interesting. It’s not one I normally would ever go to. Let me just put it this way.

I typically don’t get into marketing workshops or anything like that. Used to, many years ago, spend a lot of time on how do you market your business? How do you make people interested in what you do?

And it’s an area of fascination for me because when you’re dealing with contractors or something like that, getting people to show up would be a huge benefit to them because they would get return business. Getting people to do what they say they’re going to do at a car dealership or at a car repair shop or getting people to do what they say they’re going to do just about anywhere would be an incredible boon to the business of somebody in that business.

---

To me, I think it’s important to do what you say you’re going to do, simply because people often do it themselves. 

---

And this is kind of what’s going on in the back of my head. And this was something that came up in this workshop. It was the number of people that are delegators, as they called them, versus do-it-yourselfers in the financial world.

And the number of people that were delegators was very few. I thought it was interesting because it was in keeping with the number of people that are actually doing really well in retirement because they have somebody helping them with every step of the way.

People Need a Coach

Now there’s something to that in that let’s say that you’re trying to get in shape, and fitness is your thing. You’re trying to get in better shape, you’re trying to get your workout, you’re trying to get gains in that particular area.

And this is something I’ve been through since I was 14 years old. I’ve been a person that worked out. But I’m one of these people that tends to stay with things and tends to do things, and I don’t need anybody kind of pushing me. And I’ve been told that that’s kind of a weird thing.

Well, what we find is that most people need somebody like a coach or somebody to guide them. But let me just step back for a second.

---

I probably don’t have nearly the gains that I probably should in fitness because I don’t have anybody guiding me. 

---

And I used to have somebody that was my personal coach and I would work with and they would get me doing exercises that would never occur to me. I was reminded of this as I’m talking to my son the other day, and he’s talking about, he says, “Oh dad, have you ever seen …” And he’s describing an exercise and he says, “It’s fantastic for the shoulder.”

And all I could think as I was doing that is he’s telling me this is, You don’t know what you don’t know. That’s what was hitting me. And I didn’t know.

I hadn’t even thought of this exercise. And I’m a guy that has worked out. I’m not a bodybuilder. I’m an ectomorph from way back is what they call a person that can’t gain muscle to save their life.

As opposed to a mesomorph, they just look at a weight and they get bigger. Nick is like, “That’s me, man.” All he has to do is look at a weight, and it’s just not fair.

That makes me mad that you’re able to do that. And he’s like shrugging his shoulders. “What can you do?”

So anyway, what happened was that, and I’ve gotten, as I’ve gotten older, I recognize that exercise needs to change and what I used to do when I was in my 20s and in my 30s, I have to do differently. And my son was just telling me a little bit about his experience and getting a coach and having somebody work with him made me think about the financial world.

Mega Roth Conversions

How often are people right now there’s a huge push, and they talk about this in this workshop, there’s a huge push to Roth IRA conversions, and they’re talking about how many of you do this? How many do mega Roths?

Mega Roth conversions and these types of things. And a mega Roth conversion.

---

So let’s say you’re taking your 401(k), you contribute to the 401(k), and then you actually roll it over into a Roth IRA; you pay taxes on the contribution.

---

And who would do this, but a person that has an incredibly high income? Now what’s the issue with mega Roth?

Well, it sounds really good. And this guy was talking about how the number of views that he got with this investment strategy or this financial strategy were just off the charts. Now mind you, he’s trying to guide people on how to market, and he’s talking about this particular strategy and how talking about it in a video was so important to him.

And I’m listening, and my perspective is: Okay, but you’re talking about doing a strategy where you’re a really high-income person, you’re converting to a Roth IRA and paying taxes at a rate that would probably not be at the 10 or 12% tax bracket, but 22, 24, 35, 37, you might be way up there. The reality of it is you are taking a huge gamble that tax rates are not going to change or taxes are not going to change in the future, as I’ve talked about on this show many times.

And what I talk about here is that you have these gradients. You have number one, your first income is not taxed at all because of a standard deduction. So you might have 30-plus thousand dollars that you’re earning, that you’re not paying any taxes on whatsoever. Then you might have another 20,000, 20-plus thousand dollars that you’re being taxed at a 10% rate.

Then you may have this next huge amount of income is taxed at a 12% rate. And for most people, that’s it, you’re done. You’re out of tax; your income is done at that particular point. You’re not going up into the higher tax rates like 22%, 24%, and so on and so forth on up.

High Income Tax Right

Now for the person that is in a high income tax rate, they may be there. They may be up there at those much, much higher rates.

So imagine somebody that is going to contribute over $50,000, and that’s what this basically is, into this mega Roth because you’re contributing to a 401(k) plan. Not only do you have the contribution limits for the regular deferrals in a 401 plan. In other words, you can defer your income away, and if you’re over age 50, 50 or above, you have what you call the catch-up provision, and then you can also have profit sharing.

So you can actually have a pretty significant amount of money going into a 401(k), pre-tax. Then what they’re talking about is now converting that over to a Roth IRA at that particular point, paying taxes on it so that it’s not taxed ever again.

Now for some people that may be a really good strategy, but to put that out and broadcast that as a broad type of an investment strategy or financial planning strategy could be really bad for many people because they may, at that point, have so much income and be so close to retirement, and they may be in catch-up mode that they may be in a situation that they physically get to retirement, and when they pull that money out, they may have so little income that they’re just avoiding a 0% rate, a 10% rate, a 12% rate, maybe a 22% rate. But when they made the contributions, because it was a mega contribution, they may have actually ended up taking it on the chin upwards in that 30% range, 30% plus tax range.

---

So you can see where you don’t want to pay taxes on a higher rate than what you pull it out at because that’s counterproductive. 

---

Now, I’ve heard financial planners do this, but I’ve never been in such a large group of planners that we’re all saying, “This is great. This is wonderful.” I thought it was a fairly limited number of people that were actually talking about and teaching this, but that’s the problem you run into.

Pre-Tax Contributions

So let me give you a number example for those of you that are going, “What on earth is he talking about?” Let’s just use a small number, a relatively small number. Let’s say it’s $10,000, and let’s say that we only have two tax rates, 30% and 10%.

So if I take my $10,000 of income and I avoid a 30% tax rate, I have avoided $3,000 in taxes by putting that money in a pre-tax type of an environment. A traditional type of an environment is what we would call that. Now, if I decide then to turn around and pull that back out, this mega conversion idea that we’re talking about, now I’m turning around deciding to pay that $3,000 in taxes.

Now I’ve whittled the account down to $7,000, and I’m assuming that I don’t make it up someplace, just to keep this example really simple, because it gets complicated when you look at it a little differently. But let’s say that I do that.

Then, in the future, my tax rate is, let’s say, 10%. Well, what have I avoided when that $7,000 grows to whatever it’s going to grow to? Let’s say it grows by 10 times.

It grows from $7,000 to $70,000, and then I pull that money back out. I don’t have any taxes. I can spend all of the $70,000.

Okay. Now that you got that concept, I have $10,000 of original income; that’s my gross income. Then in the future, I’m able to pay 70 by doing my little strategy that I did.

Now let’s say, on the other hand, that what I have done is I’ve decided to leave it in the pre-tax. Now I have the full $10,000 in there. Got 10 grand in there. I just go, “Okay, I’m just going to leave it there.”

And in the future, I get up there, and I’m in 10% tax bracket land. Okay. Now I have $10,000. Now let’s say that that’s grown by 10 times, just like my seven grew to 70,000, my 10 grew to 100,000. Now I pull that out at a 10% rate, let’s say.

---

Now what do I have in taxes? I have $10,000 in taxes. What do I have to spend? $90,000. 

---

Now, when I take that $90,000, is it greater than the 70 that I had elsewhere? Yes. So by not doing this strategy, I have $20,000 more to actually spend.

Paying Taxes on Social Security

Now there are all kinds of complexities that can be in this particular example because you could have IRMA, but if you’re really a lower-income person, you’re an average person, we’re not dealing with that, which is additional premiums on Medicare. You’re probably not dealing with, no matter what, I mean, look into the future, and based on what’s going on with Social Security right now, we’re probably all going to be paying taxes on Social Security.

It used to be that it was three out of 10 people, I think it was. I remember when I took a class on one of my designations that I have, one of my financial planning designations, was really heavily exposing us to data and information on Social Security, and they gave us tax data, and they were talking about how many people actually pay taxes on your Social Security, and so on and so forth.

Well, that number has been creeping up and up and up and up to the point where, based on what’s going on with Social Security, probably everybody’s going to be paying taxes on it because they’re trying to make the system solvent. Matter of fact, when Trump said no taxes on Social Security, that’s why he didn’t get it through.

He didn’t get it through because if he got it through, the problem you were going to run into is you were going to lose a funding source for Social Security. So that kind of just went by the wayside.

So back to my example here, and I’m saying, okay, so here we have a situation where I’m telling somebody to do something like this for marketing purposes, and all I can think of is out there as a practitioner listening to this is that how many people avoid going to financial planners maybe because they hear this stuff. And maybe even for them it seems to not make any sense to be told to do something like this, number one.

Number two, the other thing is that people hear conflicting things about investing all the time. I will often bring people through this process. I go psychologically; people have a fear of the future. They want to predict the future.

They look to the past, and they hear everybody talking about how “we’re the best. We have the best investment strategies. We have the methods of looking at companies and determining which areas in the market we ought to be in. We have great research,” and then everybody’s talking.

I mean, I hear the words they’re saying; it just gets confusing. And when I’m confused, what do I typically do? And the answer would be nothing.

---

When I’m confused, I usually will do nothing because I’m afraid of making the wrong step. 

---

And this is why it’s been forever my focus here on the show is to educate on these things and help you understand a little bit more of, what am I doing? Why am I doing things? How does this work?

Understanding How the Financial World Works

So I’m listening to this, and one of the things that they talk about in there is the number of people that are delegating versus the number of people. Now, even with much of the bad information out here, I’m going to sound like I’m contradicting myself, but I want you to hear something: Even with the bad information out there, so often I am firmly of the opinion that having somebody advising and helping in these particular areas gets you to do things that you’re not likely to do.

Because it’s our human nature to put something off if it’s uncomfortable, if I’m confused, I don’t know what I’m doing, I don’t know why I’m doing it, or if nobody is reminding me of what I need to be thinking about, which is my future. And I’ve talked about studies like this before, but I think it bears repeating that when people are shown future versions of themselves, when they’re aged, artificially in a computer, studies show that they save, and one study showed people save twice as much money when they actually saw themselves in the future.

I wonder, I don’t know the data on this, but I wonder how many people save more money. I’ve seen some vague data on this. I think it’d be worth looking into a little bit more.

---

People that work with planners tend to have less worry, more peace of mind, and have saved more than people that don’t. 

---

And I think there’s a big part of that coaching aspect in there. So what I’m going to do today is I’m going to talk a little bit about some of the things that I think you ought to know as an investor.

Some of the things I think that people just miss, that they hear things in the news and the more you start to get this stuff, the more you start to understand how the financial world works and the more you hear how a lot of the things that you’re being taught are marketing, and you can get yourself, you can walk yourself through some of these things and understand what is marketing and what’s real, the more confident you are. And I believe the more confident you are as an investor, the more you will save for your own future because you’re not feeling like you’re throwing money down a disposal.

It’s like, I don’t want to throw good money after bad. And so often what people do is nothing because they’re afraid they’re going to do the wrong thing, and that’s what this show is all about.

Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.