.png)
Divorce Rich with Jacki Roessler, CDFA
Welcome to the Divorce Rich Podcast! Join your host, highly sought-after speaker and experienced Certified Divorce Financial Analyst, Jacki Roessler, CDFA in this engaging and down to earth show. Along with her guests, Jacki offers clear and detailed advice to improve your financial decisions before, during and after divorce so you can survive divorce rich! New episodes are posted every Thursday! You can reach Jacki through her Michigan-based firm, Roessler Divorce Consulting, located at 600 S. Adams, Suite 300, Birmingham, MI 48009 or by email at jacqueline@roesslerdivorce.com.
Divorce Rich with Jacki Roessler, CDFA
Divorce Like a Boss: Real Talk and Strategy for High Earners with Financial Advisor, Nick Defenthaler, CFP, RIPC
Tax strategies that high-wage earners need during divorce but rarely receive proper guidance on - that's the focus of this deep-diving conversation between host Jacki Roessler, CDFA and returning guest Nick Defenthaler, CFP and partner at the Center for Financial Planning.
For executives receiving equity compensation, the conversation turns to concentration risk - the danger of having too much net worth tied to a single company's performance. "Our general rule of thumb is no more than 10-20% within one particular company stock," explains Nick, while acknowledging the emotional attachment many feel to their company shares. The solution? A strategic "capital gains budget" approach that systematically diversifies assets while managing tax implications.
Throughout the episode, both experts emphasize that while technical knowledge matters, successful financial planning during divorce requires balancing mathematical precision with empathy for the client's emotional reality. As Nick puts it: "You can look at the math and it could tell us one thing, but there's this other component called the human element."
- Ready for some advanced tax planning tailored to your post-divorce life? Reach out to Nick by calling 248-948-7900 or clicking this link: CLICK HERE
- Want to create your idea "paycheck" in retirement? Listen to Nick's previous guest spot on the podcast by CLICKING HERE
- Think you may be a good fit for divorce financial planning? Book a complimentary intro consultation with Jacki by CLICKING HERE
Visit us at https://www.roesslerdivorce.com/ to learn more about Jacki's practice and to find valuable resources for your case.
The Divorce Rich podcast is proudly sponsored by Center for Financial Planning: Striving to Improve Lives through Financial Planning Done Right! https://www.centerfinplan.com/
Welcome to the Divorce Rich Podcast. I'm your host, jackie Ressler. I've been a certified divorce financial analyst for 28 years, helping clients and their attorneys navigate the often complex and confusing financial issues in divorce. If you're in the process of, or considering, divorce, now is the time for you to take a deep breath and give yourself permission to find clarity on the financial issues you're facing. Rich means many things to many people. I believe the best definition of being rich is someone who has access to many resources. Along with my guests on this podcast, I will be bringing you a wide variety of information so that you can make sound and informed financial decisions for your financial future. Hey, if you're recently divorced or still in the middle of it, you already know that life can feel like it's been turned upside down and, let's be honest, the financial part it's overwhelming, confusing and often the last thing you want to deal with. That's why I want to tell you about the Independent Wealth Management Team at Center for Financial Planning. Their team of certified you want to deal with. That's why I want to tell you about the independent wealth management team at Center for Financial Planning. Their team of certified financial planners specializes in helping people just like you navigate life changes with confidence. Whether it's assessing your new financial circumstances, creating or updating your retirement plan or helping you adjust to the new normal, they'll work with you to get a clear, customized plan to feel in control and move forward with confidence. So if you're interested in working with a financial planner who you can trust to have your best interests in mind and you're ready to take the next step, visit centerfinplancom that's centerfinplancom and schedule a conversation. Center for Financial Planning Live your plan. Securities offered through Raymond James Financial Services Inc. Member FINRA. Sipc. Investment advisory services offered through Center for Financial Planning Inc. Center for Financial Planning Inc. Is not a registered broker-dealer and is independent of Raymond James Financial Services Planning Inc. Center for Financial Planning Inc. Is not a registered broker-dealer and is independent of Raymond James Financial Services.
Speaker 1:Hey everyone and welcome back to the Divorce Rich Podcast. Today we are going to be doing a deep dive on a topic that I've wanted to cover for a long time. We actually did a part one of this topic in a more broad sense a little while ago. I have invited back a friend of the podcast, nick Deppenthaler, who is a CFP and a partner at the Center for Financial Planning. They have offices in Southfield and Brighton, michigan, and Nick, in my opinion, is I've known him for a long time. You've always been really wanting to go deep into tax and retirement account issues in a way that many financial planners don't have the time or the inclination to do. So welcome, nick, because we're very lucky to have all of your knowledge back on the podcast.
Speaker 2:I appreciate the kind words and introduction. Had a great time chatting with you about all the things we did on episode one, so I'm happy to join you for episode two, and always a pleasure to chat with you.
Speaker 1:So we are going to talk today about topics that are specific to high wage earners and I know that it sounds silly to say this, but a lot of our listeners fall into that category and they're sometimes overlooked when we're talking about the divorce issues that affect a high wage earner, because we're always really, I think, on the lookout for the lower wage earner. But 50% of the time I know I work with a high wage earner and there are some very specific tax advantages that they can benefit from that they don't think about or know about, and I run across so many clients that have the kind of benefits they might have, so a lot of money in retirement accounts, and they might have more complicated tax-related assets that they don't really get any advice about specifically. So let's dive in. Tell me what are some of the things that you think get overlooked for this demographic group.
Speaker 2:Right and, first and foremost, I think you hit the nail on the head. There are a lot of things that oftentimes get overlooked with high earners. And that's okay, because more than likely, you know for someone who's very successful in their career, they're successful because they're working their tail off and they're very busy. They're trying to manage many different things. I mean very few people that I know who are earning a strong income have a ton of leftover time to give to much of anything else. Let it be, you know, to friends, family, health, all these things, let alone your finances. So if this is you and you're listening today and you're hearing some of these things, you're like, oh my gosh, I never heard of it.
Speaker 2:You know, it's common for what I've seen over the years with chatting with folks who are in that position might feel almost a sense of guilt. I hate to say it. They're like, yeah, I'm doing great. How did I not know about these things? And don't beat yourself up about that, I just I want to mention that first and foremost because this is what we do each and every day. There's a reason why you know, if you're listening today, you're really good at your job. There's a ninety nine9% chance that I'm not going to have any clue of all the great things that you're doing well in your job. So I just I want to mention that up front, because I see that often, where you know, there's almost a sense of guilt or beating yourself up.
Speaker 2:So move past that and talk about how we can, how we can make it better moving forward.
Speaker 1:So I absolutely agree with you. I think people do tend to get caught up in that, and to the point where it prevents them from moving forward and they feel like, well, why didn't I think about that? So I love that you mentioned that.
Speaker 2:Thank you, yeah, absolutely. So. You know, getting into some of the great strategies, I always like to start with foundational ones, because those are usually most important, because the way that I like to think about saving and you know whether it's saving or distributing wealth over time you know what's the most tax efficient way that we could do that, because certainly our team specializes in managing the investments within those accounts, but other ways that we can add value or any advisor for that matter, is really honing in on the taxes. So foundational things that we'd like to talk about with clients is something as simple as maxing out your 401k or your 403b and more than likely, if you're earning a higher level of income let's call it $200,000 and above we can pick our threshold. High income is going to look and feel different for each and every person, but I'm just thinking through it from a tax bracket standpoint. Usually it makes sense to have a good chunk, if not all, of those contributions going into your 401k or 403b to go into the pre-tax component of that, because when that happens and this might be, like I said, a little foundational, but it's important, I think, to start here Any income that you put in to that 401k you essentially get a tax deduction on.
Speaker 2:So if you're making $300,000 a year and you put in $30,000 into a 401k, $270,000 shows up on your tax return, 270 000 shows up on your tax return and it's actually a reduction of your adjusted gross income which can actually affect positively affect your income or potential tax credits more favorably. You know throughout, you know overall how the tax return is ultimately calculated and different credits and brackets, all that good stuff. So the whole point of that is, more often than not, folks are generally in a higher tax bracket when they're working as compared to when they retire, right. So it's more beneficial to put money into a 401k or a 403b pre-tax, get that tax deduction once you're in that very high bracket, right, and get the deduction when you're in that higher bracket and your income is significantly higher than, ultimately, when you do retire. More often than not, like I mentioned, you're in a lower bracket. You can pull that money out. It is taxable to you, but now you're paying a lower rate of tax as compared to what you were making when you got the deduction. So we call that almost that tax arbitrage Kind of a fancy word for just a tax differential.
Speaker 2:So that's a really important thing, first and foremost because for a lot of folks, especially if you're a W-2 employee, there's not a lot of these creative tax strategies that you can do to reduce your income. I mean, there's only so much you can do, and so making sure that you max out the pre-tax component is really important. You know, if you're over the age of 50, you actually get a $7,500 catch-up that you can put into they call it a quote unquote catch-up. You can put it into your 401k plan, so that's an additional amount that you can put in. Right, and there's actually this new rule. One last thing I'll mention on the catch-up. There's this new rule Once you attain age 60, from age 60 to age 63, you can actually put in $11,250 as the catch-up.
Speaker 1:Oh really.
Speaker 2:Didn't know that. It's brand new, just went into effect this year. You have to be 60 by the end of, you know, december 31st of the year and 63, you know, on the flip side, once you're in the tail end of that short window where you can put a little bit more, it's not huge, it's not going to be you know, life changing amount, that additional monies that you're putting in the 401k. But it's going to help. Yeah, it's definitely going to help.
Speaker 1:I think I'm so glad you brought that up, nick, because I that's one of those, that's one of the things that I see. So I don't you know. Again, I'm only advising people through the divorce process, not after. And I see a lot of high wage earners that have so much money in their Roth 401k and I asked them why did you decide to put the money in the Roth instead of the regular? And I've never heard anyone say anything other than I don't know.
Speaker 2:Right, yeah, and I get it because you know you read articles. You're going to get 50 different opinions on the matter, but we've actually put pen to paper and looked at the math. So really, the only thing that matters when it boils down to determining do you put money in the Roth bucket within the 401k or the pre-tax quote unquote traditional bucket of the 401k is what tax bracket am I in now compared to what tax bracket am I going to be in in the future? That's really what it boils down to. On episode one we talked about Roth conversion. So I love Roth IRAs and 401ks, don't get me wrong. But you got to use them at the right point, you know, and at the right time in your life to make the full, you know, make full use of them. Let's say Right.
Speaker 1:And again, I don't think that there's enough education for people, for individuals, about even an executive at a company who has access, maybe, to some information internally that they could, you know, receive. But they just people, think, ok, the Roth must be better because it's going to be tax free, but it's such an important tax-free, but it's such an important point to make. Well, what do you think? No one has a crystal ball, right? So we don't know what the tax brackets are going to be in the future, but we know what they are today.
Speaker 2:Exactly 100% and it's not totally uncommon where I'll actually recommend that a client does a little bit of a balance. I just had this conversation with someone a couple of days ago that a client does a little bit of a balance. I just had this conversation with someone a couple of days ago. They're in the 24% tax bracket More than likely. There's a good chance they'll be in that same bracket, maybe a little bit lower, in retirement. But we don't to your point, jack, we don't have that crystal ball of knowing exactly where they're going to be in the future. So, just how we like to diversify the investments within a client's account, ideally I like to diversify the tax treatment of the types of accounts that clients are contributing to. But for someone who's earning $500,000, $750,000, or a million dollars a year, that changes the conversation more than likely. And it's not black and white. Every situation is going to be unique. But typically that makes a little bit more sense to take a very close look at potentially putting everything into that pre-tax component.
Speaker 2:Got it Okay, great tip Still chat with your tax advisor about that one, of course, but, like I said, everyone's situation is going to be unique. But once your income gets really, really high and you're in those brackets that are north of 37%, to me, it becomes a more clear pick, if you will.
Speaker 1:Okay, that's a great tip. So what is another tip that you've got for our?
Speaker 2:listeners. Sure, so for many high income earners, they're already maxing out the 401k, which is awesome. So I kind of think about these different buckets that we should be filling out right. So 401k, if is awesome. So I kind of think about these different buckets that we should be filling up right. So 401k, if you're really focusing on saving for retirement bucket number one. Bucket number two is something called a Roth IRA, which I know we just talked about.
Speaker 1:We just dissed the Roth IRA right.
Speaker 2:Talked a little smack about the Roth IRA, but we'll show it some love here. So, um, so this is where it can get a little tricky. So, within a 401k, you can have these different contribution types Most plans do, right, so the pre-tax or the Roth component. So I'm shifting gears a little bit and now talking about a Roth IRA. It's something you do completely on your own, separate from your employer plan. Okay, you have full control over it. It's not managed by your employer.
Speaker 2:So the most that you can put into a Roth IRA for 2020, for 2025 is going to be is going to be 6,000. Or, excuse me, it's going to be 7,000. I misspoke. These amounts change every single year For some reason. I got tripped up there. So 7,000 for 2025. If you're over the age of 50, it's going to be 8,000. Okay, all right, and so that's the most that you can put in.
Speaker 2:However, there's income limitations on being able to contribute directly to a Roth IRA and once your income is over a certain threshold, then you're no longer able to contribute directly to that Roth IRA. So there's this loophole strategy, if you will, known as a backdoor Roth IRA conversion. Okay, and some people have heard of this, some haven't. If you haven't, essentially what happens is, instead of contributing directly to that Roth IRA, you contribute to a IRA okay, a traditional IRA and because your income is at a certain level, you do not receive a tax deduction on it. And so then you, within a reasonable amount of time, usually within a week or two, you end up converting, shifting money over from that traditional IRA that you did not get a deduction on over to the Roth IRA. So it's a roundabout way, if you will, to shift money over from a traditional IRA over to a Roth and not incur any sort of tax liability.
Speaker 1:Oh, you've got to be probably really careful about doing that and working with someone like you.
Speaker 2:You do, you really do, and it's a great kind of segue into my next point, or caution. These backdoor Roth IRA conversions were great if you don't already have significant money in an existing traditional IRA, because then you can run into something called this aggregation rule, which I won't bore you with oh my gosh, confusing topic. And bottom line if you did this backdoor conversion, it would end up becoming taxable to you, which we want to avoid.
Speaker 1:And so that could be done every year. You can do that kind of backdoor contribution every year.
Speaker 2:You could do that each and every year 100%. So this strategy works really well for folks who have virtually all of their retirement money in a 401k or a 403b. Okay, Because if we have money in those sort of quote unquote qualified accounts, that aggregation rule does not come into play.
Speaker 1:Okay.
Speaker 2:So it's a little bit silly in my opinion, because at the end of the day 401k and an IRA have the same exact tax treatment opinion because, at the end of the day, corwin Kane and IRA have the same exact tax treatment. But we got to play by the IRS's rules. So, to your point, it's a tricky one. You want to make sure you get it right. I've seen these things blown up before and they can cause some tax headaches. Don't let that shoo you away from exploring the strategy, because it could be a great one. You just got to make darn sure that you're doing it right.
Speaker 1:Okay, and you work pretty closely with a client's tax advisor, right, so that you get that kind of input, although I'm sure the reality is that the tax advisor is probably looking to you to come up with some of these ideas.
Speaker 2:Right, but it's not uncommon that I will absolutely reach out to the client's CPA and check in on overall income level. If we're close, hey can we do a direct contribution. Do we need to do the backdoor Roth? You know, anytime that was going to be one of the things I was going to mention today. Anytime, especially for folks who are earning a high level of income, collaboration with other professionals on the client's team is so important in my opinion. You know, if you're earning a strong level of income and you have a significant net worth, you should have a good CPA, you should have a good estate planning attorney, you should also have a quality financial advisor and ideally those folks are having conversations. It doesn't mean once a month or even once a year at times, but when things change or when you're considering doing more of these creative strategies, some level of collaboration is typically advised. Usually when I see clients get better results, when the team you know, the players on your team, if you will are working together.
Speaker 1:Right. I mean, not everyone can be an expert in everything. So working with people that collaborate with each other is really important to have that and have those professionals that are OK with collaborating. Some professionals that I run across sometimes might say well, I do all of that and they feel uncomfortable admitting that there's an aspect that they don't know. But you can't know everything about all of these areas.
Speaker 2:You can't, and nor do I, frankly do. I want to know all of those mysterious.
Speaker 1:You can't, and nor do I, frankly, do I want to know all of those.
Speaker 2:There's only so much, you know, brainpower that we all have, and we need to be humble enough to admit that and say, hey, this is not my discipline or my core area of expertise. But, good news, you have someone wonderful on your team who can help with taxes and we're going to work together to figure out a strategy that's most appropriate for you.
Speaker 1:So I have just a follow-up question on the backdoor IRA. So with the backdoor Roth IRA you can't get a deduction for it, so your income is already above the level where you could get a deduction for a regular IRA and then there's no tax due on the conversion. Is that right?
Speaker 2:That's correct. That's correct. Yeah, you got it, and so you're not the one thing that I didn't mention that I should have. You're not receiving an immediate tax benefit, right, right, and so that not perfect, right, like we all want to reduce our immediate taxes, but this is more of a play for the future. Yeah, for a high wage earner. Exactly so later on in life, if you play by the rules, yeah for a high wage earner completely tax-free. So the money that you put in did not get that tax deduction. Hypothetically, it grew for, you know, 15, 20, 30 years and all that, all those gains are completely tax-free.
Speaker 1:Right and you weren't able to get the deduction anyway. So it's not as if you you know you chose like in somebody choosing to go pre-tax or Roth in their 401k they weren't going to get a deduction in that kind of an IRA contribution regardless.
Speaker 2:So you get out of it. Yeah, and that's why I like it to be bucket number two, because if the most important thing, you know, for a lot of folks who have been at very high level of income, we want to reduce that tax burden right now. So let's do that through those pre-tax contributions more than likely.
Speaker 1:And then step number two if you will with that bucket is going to be that backed overall. We all agree divorce is emotional, but your financial decisions shouldn't be. I'm Jackie Ressler, certified Divorce Financial Analyst. On this podcast. I help you make smart, informed choices about money during divorce so you can move forward with clarity and confidence. Not sure where to start? Let's talk. Schedule a free 30-minute consultation with me to see if divorce financial planning is the right fit for you. At the end of this episode you can check on my show notes. There's a link for you to sign up for a free 30-minute consultation, because financial peace of mind is possible. I wanted to ask you something, maybe slightly off topic, but I do also run across a lot of clients that have health care savings accounts.
Speaker 2:Yeah.
Speaker 1:And I know that that's a great retirement vehicle, but most of them are not using it as a retirement vehicle.
Speaker 2:So health savings accounts are hands down, the most tax efficient vehicle that we have in this country. Wow, the most tax-efficient vehicle that we have in this country. You have to be on a high-deductible healthcare plan to be able to contribute to one, however. So I've seen that before where people are on just these normal, typical HMO plans and, unbeknownst to them, they didn't realize it, but they're putting money into a high-deductible plan that they started up at their bank or credit union and they're kind of running afoul, if you will. So, first and foremost, got to be on a high deductible plan. The money that you put in to a high deductible health care, I want to say it's around eight or nine thousand that you can put in and you do get a catch up as well. It's the catch up amount's a little bit different. It actually starts at age 55 instead of 50.
Speaker 1:Okay, and it's an additional thousand bucks, I don't know how you remember all of these things.
Speaker 2:Well, I couldn't remember the contribution amount but you know, coming from Slack on that one, I also have three kids, you know, 10 and under, so they heard some of the memory that I'm used to.
Speaker 1:Yeah, they take some of the brain cells away, that's true.
Speaker 2:They need to be able to maintain. But at the end of the day, the HSA is wonderful because you get a tax deduction when the money goes in. You get tax deferral while the money is growing within that HSA if you invest it wisely. And then, when you pull it out, if you use it for a qualified medical expense, all of the distributions are completely tax-free. So it's basically like a Roth IRA with a tax deduction on the front end.
Speaker 1:It's amazing, but so many people use it every year just to pay their medical expenses.
Speaker 2:Yeah, yeah, yep, and that's one of the key strategies that we advise folks. If they can afford it and many of the clients that we work with, similar to those that you're talking about today, are earning a very strong level of income they can put money and defer it into that HSA, that health savings account. But the key way to really maximize these is, when expenses do come up, don't pay them out of the HSA. Pay them out of pocket, from your, you know, from your cash flow, from your checking and savings account. What that allows you to do over time is build up this significant account balance with the HSA and then save that for retirement, Because hands down healthcare there's been a ton of research on it. That's going to be your number one cost in retirement.
Speaker 1:Right.
Speaker 2:So it's very smart to have that nest egg set up just for that and in my experience and these haven't been around forever, but I'm starting to see more people who are retiring with, you know, 80, 100. I even saw someone the other day with about 150 grand in the interest, which is probably the highest balance that I've seen. But that's going to continue to be a trend and is going to continue to grow Because, like I said, these, these accounts, really haven't been in vogue, for all you know, for too long. But to know when you retire, hey, I got this pot of money that, specifically, is earmarked for healthcare. It helps people transition into retirement even better, in my opinion, because they're they're not as worried about where everything is going to have to come from and the definition of qualified medical expenses.
Speaker 1:As far as when I looked at it the last time was very broad.
Speaker 2:Very broad. I actually, within the last couple of years, purchased a sauna for my home with my HSA account. There you go.
Speaker 1:Yeah, I purchased a sauna for my home with my HSA account.
Speaker 2:Yeah, there you go. Yeah, yeah, and it was a qualified expense and you'd be surprised to your point, jackie, on how wide these have become. You know I didn't follow my own rule of like paying expenses on a hot dog, but it was too enticing.
Speaker 1:I don't blame you, yeah.
Speaker 2:So treat yourself a little bit Right.
Speaker 1:And those are actually divisible in a divorce. An HSA account, you can actually divide them and it's not based on the company, it's an IRS regulation that you can divide them in divorce Can't continue to add to them if you don't have that plan yourself but you can. You know I try to encourage clients get your half of the HSA and then leave it and don't use it.
Speaker 2:Right, can I? Can I make one more point on the HSA before?
Speaker 1:we move on. Yeah, of course.
Speaker 2:So one thing, admittedly, that I found out about four or five years ago, because there are so many moving parts with these. There are some tricky rules, like right before you go on Medicare or once you're on Medicare, with being able to contribute. There's a myriad of things, but one of the most important things that listeners should know about is these accounts are terrible to inherit. Okay, not so great type of account to inherit, especially if someone's going through a divorce and they're single. So my let's use my mom as an example.
Speaker 2:She's a single woman. If she has a seven you know $75,000 HSA that she has when she passes away and she names me as her primary beneficiary. I received that account that 75 grand but 75,000 of income immediately hits my tax return. Whatever the balance is in that account, it hits your tax return, with the exception that if a spouse inherits that account, that does not occur, but if a non-spouse inherits an HSA, it really does create a tax bond for the person who's inheriting it. So great, great tool to use. But I encourage clients hey, once you're in retirement, let's not save this thing until you're 80 or 90 years old.
Speaker 2:Like you worked hard to accumulate it. Let's start chipping away at that balance.
Speaker 1:I didn't know that, nick. Wow, that's great information. So different than an inherited IRA which there are some continued tax benefits for.
Speaker 2:That is that's really good info and I'll be comfortable too, jackie, like I said, I wasn't even aware of that rule until about four or five years ago and I was kind of floored. And it has changed my recommendations over the last four to five years on how to best utilize them once a client is in retirement.
Speaker 1:Wow, that's great information.
Speaker 1:So one last topic that I wanted to cover, so it sounds like I might even need to have you back again for a third time to talk about this but what I really want to make sure we cover is this is something I see all the time, nick I have clients that they get RSUs, they get company stock, they have an ESOP and they keep all of that company stock as part of their portfolio and their risk return ratio. They don't realize that they're way overweighted in a specific sector. If you worked in the pharmaceutical business and you got everything you own is in the pharmaceutical companies, can we talk a little bit about the worries about that for a high wage earner in an industry where they're getting company stock?
Speaker 2:Yeah, 100%. Yeah, it's a great benefit to have, certainly. I mean, when you're seeing RSUs or stock options, you know you're invested in the company's success and it's very common for firms or companies who are offering those to really be in growth mode and that's a big reason why they're offering those and they can pay off wonderfully. That said, you know you do have to be very cognizant of what you hit the nail on the head with, which is that concentration risk. You know I, as an owner of the Center for Financial Planning, you know I think about this as well frankly of you know making sure that you know my investments are well diversified and making sure that concentration risk you know, at some point in your life it's probably going to be at a level that is a little bit too high. But that's how, you know, oftentimes wealth is built. But over time, as you get closer and closer to retirement, it is very important to rethink that, rethink that strategy. So you know, if you're in your forties you could probably get away with a little bit more. You know concentration risk right Once you're in your I would say, mid to late fifties. In a perfect world like our general rule of thumb is, you know no more than 10 to 20% within one particular company stock or concentration. Even if you think the world of the stock and you work for that company and you think they're doing wonderful things, you know at the end of the day it could potentially derail retirement if things don't go the way that you want them to.
Speaker 2:So oftentimes what we will do with a client who is getting close you know let's call it within 10 years of retirement, where they have more of that concentration, we can show them within our financial planning software and say, hey, if, if this stock went down by 50% or let's, you know worst case scenario, the company went bankrupt, how does this impact your financial plan? And when we start with that and show them, oh my gosh, like this would delay retirement by three, four or five years. It can really be eyeopening because you hear these general rules of thumb and it's like, yeah, but like the company's doing so great. You look at the analysis and there's dials and reports that we can show and it's a good, like I said, a little bit of a dose of reality to help someone be very intentional and prudent with how much risk they're taking on Now if a client based on their retirement goals, that they have their financial plan can withstand that company going bankrupt and they have 30% in that company and they're comfortable with that risk, then maybe that's okay for them.
Speaker 2:You know, everyone's situation is a little bit unique. I, you know, there's always these general rules of thumb, but it's not gospel, if you will. It's going to be different for everybody.
Speaker 1:That is true. I think you hit on. A really important point, though, is it's up to you what you want to do with it, but you need to be educated, you need to have literacy about the risk involved with having 50% of your investments in your company stack, and then you make the decision. A lot of people they don't seek out that information. They don't even know that that's an issue, and so working with a really competent financial advisor that brings that up to you is. I always like to think of a financial planner as a thinking partner in a lot of ways not, you know, dictating what someone's going to do, but giving them options.
Speaker 2:Right, 100%, and that's what we'd like to do is just share with folks. Hey, this is a risk, are you? You do have significantly appreciated stock from your company and you're going through is going to be in a lower tax bracket. Their capital gains rate potentially would be significantly less as compared to yours if you ended up selling that stock or if you're very charitably inclined this is something we do very often with clients to, you know, give a significant amount of charity each and every year. We can gift those appreciated shares of the stock directly to a charity or to something called the donor advice fund, which I could spend 20 minutes talking about how great those are, but maybe on episode three or something like that at some point. But point being, there are some really great ways to, over time, divest those appreciated shares and it doesn't always have to mean that you are selling them. There could be some great tools and ways to look at it.
Speaker 2:And last thing maybe I'll mention on the topic is what I like to do with clients who do have that appreciated stock. We both agree, hey, too much risk. This company is signing my paycheck every two weeks and I have 40 or 50 or 60% of my net worth tied up in the performance of the stock. I'm just not comfortable with that. We developed something known as a capital gains budget. How much are you comfortable realizing in tax each year? We're not going to sell like if a client has a million dollar portfolio Microsoft stock and they have $800,000 of capital gains. It would probably be egregious to do all of that in one year.
Speaker 2:But we agree and we say, hey, let's start chipping away at this and making it manageable and keeping you by it. If we do that, we can keep you in a certain tax bracket, we can keep you at a certain level of tax on your capital gains rate, because that ends up going up over time, depending on your income. So you know just, you need to have a thoughtful and intentional game plan around it, and that's the biggest thing that I see lacking with folks who do have, you know, those situations where there's a lot of concentration risk.
Speaker 1:One of my favorite clients of all time was a couple I was neutral and they had all of their wealth in Microsoft stock and it was a significant dollar amount that had accumulated. They were getting divorced in their 70s and they had all of and neither one of them wanted to touch any of that money. They both wanted half of it and they both wanted to keep it. People get emotionally tied, especially when it's their company too. They get emotionally tied to an asset instead of thinking about what it's going to do for them financially.
Speaker 2:They do and I can absolutely appreciate and understand where they're coming from. They do and I can absolutely appreciate and understand where they're coming from. And that's why usually in my experience, in our firm's experience, a balanced approach and recognizing that those things exist, and that's why, you know, one of the many reasons why I love my job, is like, hey, you can look at and the role that we serve for clients is, you know, you can look at the math and it and it could tell us one thing, but guess what? There's this other component called the human element, right. So combining those two things is really the art form, in my opinion, and that's one of, like I said, one of the many reasons why I love doing what I do, because that usually means that you have to kind of meet somewhere in the middle, finding a big financial decision like that where you're keeping the client's plan intact and save, but also recognizing, hey, there's more to it than just the dollars and cents.
Speaker 1:Right, and that's what you're absolutely right, and that's why I think a financial advisor needs to have both components to their personality when they're working with clients. You need to be really good with numbers and be able to communicate that, but you also need to have empathy for where your client's head is 100%.
Speaker 2:Absolutely.
Speaker 1:So thank you so much, Nick. It's always so much fun to talk to you and I learned again so much from having you here on the episode today. So thank you again.
Speaker 2:Always great chatting with you, jackie, and always enjoy our conversations. I think we always learn one or two. I always learn one or two things from you and you know glad to hear that I'm able to return the favor, but always happy to be a resource for you and your clients who are going through this tough transition. It's it's a big deal to have someone you trust in their corner. So thank you again for having me on.
Speaker 1:Thank you, Nick. Thank you so much for taking time out of your day to listen to Divorce Rich Podcast. If you like this podcast, please follow us on Apple or anywhere that you download podcasts and share this link with any friends or family that you think might benefit from this information.
.jpg)
