Today, Rick Bloom takes a deep dive into the financial strategies presented by "Celebrity Financial Advisors," most notably Suze Orman and Dave Ramsey.
Additionally, Rick answers listener emails regarding Roth vs Traditional 401K plans, long term care and life insurance, and the differences between UGMA, UTMA, and 529 savings plans.
If you have a question for Rick Bloom, you can email him at Rick@RickBloomTalksMoney.com
Bloom Asset Management website: http://www.bloomassetmanagement.com/
Rick Bloom Talks Money Episode 6 - The Problems with Suze Orman and Dave Ramsey
Rick: Hello and welcome. I'm Rick Bloom and welcome to Rick Bloom Talks Money. Our podcast is dedicated to you, helping you make better decisions with your money because I believe money looks better in your pocket than it does anywhere else. I'm an attorney, certified public accountant, financial advisor. Independent financial advice, that's what you're going to get from this show at all times. I want to remind you about our email. If you've got questions at the end of every podcast, we take your questions. And also, any comments about the podcast. Our email is Rick@rickbloomtalksmoney.com; any and every comment we'd appreciate it. In fact, today's podcast came about because of a couple of emails that I received.
A couple of emails asked me about what my thoughts are of the celebrity financial advisors that you hear on the air, particularly Dave Ramsey, Suze Orman, along with some of the other radio shows that you hear, what do I think about those? Well, first to be fair and upfront with you, I did a local radio show, many of, you know, in the Detroit metropolitan area for over 20 years and I tried to give the best advice I can. But you know what --radio was different back then. When I first started doing my radio show, they paid me to do the show and their one direction to me was just do the best show I can. Don't worry about advertisers, just worry about doing the best show. Well, today, unfortunately, that's not the case. Today most of the radio shows on finance are bought and paid for. In other words, they're just infomercials. And we all know about infomercials, you have to be very careful. So when it comes to some of these radio shows today, I say, buyer beware. You have to be very careful because all too often, all they're trying to do is sell you products. And that's the exact opposite of what I want to do. I want to make sure you have more money in your pocket because I think that's where it looks better.
When it comes to Dave Ramsey and Suze Orman, I generally like a lot of what they say, because I think it's important to encourage people to get involved with money, to have an appreciation and an understanding of money and to take some responsibility. And I think they both do that. Although, one thing I don't like about either one of them is sometimes they try to shame their callers and to make people feel bad about what they’ve done. I know that's part of the entertainment aspect, but I think when it comes to your money, you don't have to be so entertaining and you shouldn't have to shame people. People make mistakes all the time with their money. The key is not what you've done in the past but what you're going to do in the future. So sometimes their style is not something that I appreciate because I want to encourage people to come forth with their money issues.
Remember this, we live in the greatest capitalist society in the history of the world and they never teach us about money. Therefore, it's not unusual people make money mistakes, and you shouldn't be ashamed that you do. Just like when you get scammed sometimes, you shouldn't be ashamed that you've been scammed and all too often, people are. The key is we want to make tomorrow better. So their styles are not something that I agree with.
One thing I do like is the fact that they both talk about debt and getting out of debt and cutting down your lifestyle. Suze Orman talks a lot about getting rid of luxuries and Dave Ramsey talks about living a sparse lifestyle, and I agree with the idea that you have to keep costs under control at all times. However, you know, it's sort of like dieting. There's a reason why diets don't work, because you get real motivated at first so you do everything right, but you can't stick to how strict some of these diets are. It's the same thing when it comes to managing your money. I believe you got to live for today and save for tomorrow.
There's nothing wrong with having some luxuries and things of that nature. The key is you have to find the balance. And I think that is really what you focus on -- live for today, save for tomorrow. Suze Orman talks about if you give up Starbucks and you invest that money, by time you retire it'll be worth a million dollars. It's a nice sound bite, but it's just not true. I played with the numbers; it just does a work. And one of my problems sometimes is some of these hosts give some great sound bites because it sounds good, but the problem is the information is wrong. I believe that when you give numbers, particularly in a financial setting, they should be accurate.
When it comes to debt Dave Ramsey has a very interesting way of paying down debt and he basically believes that before you start investing in your 401k, you have to get out of debt. That's one thing I don't necessarily agree with. And the reason is particularly if your employer has a match, you should take advantage of that -- it's like leaving money on the table. I personally believe the day you start working is the day you have to start saving for retirement. If you start saving for your retirement in your 50’s, it's too late; you need to start the day you start working. So I disagree with them about putting off starting investing.
Also, he talks about his snowball effect and what that deals with is how he pays debts off. So he believes that when you free up some money to pay debt, what you should do is pay off your lowest balance first. And he feels, it builds momentum. He's looking at the psychological aspect of investing and money management, and there's a lot of truth to that. He recognizes as a lot of financial advisors do that your worst enemy is yourself. So he's trying to build this momentum in paying down debt. I just don't believe that the strategy works, and I believe there's a better strategy. Take for example, someone has two debts-- $25,000 charge card where they're paying 20 percent interest and a $5,000 student loan where they're paying four percent interest.And somehow, they come up with $5,000 to pay down in their debt. Dave Ramsey would say, well let's build that momentum, pay off the four percent debt. Well, that'll save you $200 a year in interest. Me, on the other hand, I'm saying no; focus on the highest interest rate.In this case, the 20 percent. So I would take the $5,000, pay it on the $25,000 loan because now I'm saving 20 percent of $5,000; I'm saving $1,000 a year versus the $200 that Dave Ramsey would have you save. So my belief is to keep the momentum going focus, on the interest that you are saving.
Now, if you have a situation where you have two debts and they're pretty close to the same interest rate, yes, it doesn't make much of a difference. But particularly when you have charged card debt and you're paying 20 percent you want to pay that debt off first. I believe that's the strategy, not the lowest balance.
Dave Ramsey also has an interesting view on charge cards. His view basically is no one needs a charge card; cut them up, don't use them. I guess what I kind of analogize to--an alcoholic should not drink. That does mean you and I, who drink responsibly, can't have a drink or two. It's the same thing when it comes to charge cards. People that use their charge cards responsibly, no problem; they can use charge cards. If you cannot use your charge card responsibly, you should not have a charge card. And it's real simple. What is using a charge card responsibly? As far as I'm concerned, it's when you don't pay finance charges. So if you use your charge card like me, you get the bill, you pay it off, you don't pay interest. That's responsible and in those situations, charge cards can be a pretty good financial tool.
Think about it. Not only can you get points and miles and discounts, but there's all sorts of other perks. Sometimes you get extended warranties. What happened to me a number of years ago, I was on vacation in Hawaii and I bought something, and I shipped it home. And when it came home, it was totally broken.
My first call was to American Express. Why? Because I wanted to make sure I was protected. And the bottom line: I worked with American express and I didn't have to pay for the purchase. If I had used a debit card or I paid cash, I can assure you, I would not have gotten that money back. So charge cards can be a very good tool if you use them responsibly.
And in that regard, I've mentioned this in the past. You should shop around your charge card every so often. If you’re using it responsibly, the interest isn't the real key. What the key is, is what perks you use. So, as an example, you may have a charged car that pays miles. Well, because of the Coronavirus you may be saying I'm not flying in the near future, any time in the near future, so maybe I want a charge card that has different perks. You could shop charge cards around; focus on the perks that you use. But I disagree with Dave Ramsey where he wants to throw out the baby with the bath water. I think if you use charge cards responsibly, they can be a very good tool.
When it comes to investing, that's probably where I have the greatest disagreements with both Suze Orman and Dave Ramsey. I like the idea that they're encouraging people to invest money and getting them involved in the investment world, but there's some things about their advice that I have questions about. To me, one of the most important things, and if you look at all the independent studies they say the same thing--to be successful as an investor, you have to have the right allocation. Not only the allocation between stocks and bonds, but within stocks, how much in U.S., how much in international. It's the allocation that makes someone successful. And I think that's where both Dave Ramsey and Suze Orman fail. As an example, one of Suze Orman's ways of allocating your portfolio is based upon your age. What she says is you take 110 and subtract that from your age and that'll tell you how much you should have in stocks. As an example, if you're 50 years old, 50 from 110 is 60. That means you should have 60 percent of your portfolio in stocks, 40 percent in bonds. If you're 60 years old, your portfolio should be 50/50. As far as I'm concerned, that is just wrong; it makes no sense. Age really doesn't tell you how you should invest money. Think about it; you could have two next door neighbors. They work at the same company, they make the same amount of money, but their goals and objectives are totally different. You could be someone who is 60 that is retired, or you may be 60 that still has kids in college, and you can't afford to retire. I believe to be successful as an investor, you need to look at your individual goals and objectives-- what you are trying to achieve. And look at the timeframe you have to achieve those goals. If your goal is 10, 15 years down the road, it really doesn't matter if you're 70 years old or if you're 25 years old. The other thing that you need to look at is you need to look at your risk tolerance. That also helps you to determine how your portfolio should be allocated. And I think one of the reasons Suze Orman uses the 110 from your age--it's a nice sound bite; it sounds good on TV. However, we're talking about your money and that's important. So we don't want to do what everyone else is doing your age. We want to do things that make sense for you and your individual situation. So as far as I'm concerned, when they talk about investing money based upon age, it's a fool's game. Age doesn't tell you anything about how you should invest your money.
Now Dave Ramsey, on the other hand, has a unique way of allocating his portfolios. He believed you only need four funds. Four areas to invest it in and that's all. And his areas are growth, growth and income, aggressive growth, and international. His view is all you need to do is invest in those four areas and you’re fine. Well, that's wrong as well, as far as I'm concerned. First of all, there is no asset allocation. I believe it's important to have an allocation towards bonds, fixed income investments in your portfolio. Just think what's happened over the last four or five months. If you needed money from your portfolio in March, when the market was way down and you had a 100 percent stock portfolio, you have to sell, taking a significant loss. On the other hand, if you have bonds in your portfolio, you could have sold those and taken a far less loss, and then you have time to let the markets recoup.So I just can't figure out why he would not want to have bonds in the portfolio. And I know bonds aren't doing great right now. They're paying low rates of return. However, we're looking at the entire portfolio and we're looking at protecting and growing your money. We don't want to gamble. When you have 100 percent stocks in your portfolio that is very aggressive and you're taking a gamble.
The other thing that doesn't make sense to me with his allocation is when you look at growth, growth and income, and aggressive growth, there could be a lot of overlap between those categories. In other words, you may find that the same fund, the same stock is in all three of those portfolios, so you may not have diversification. And also you're probably not going to have small companies and midsize companies in the portfolio, which is important in spreading out risk. And the other thing, when he talks about international, well, international markets are just as complex as our markets. You have to have small companies, you have to have large companies, and also when it comes to international, you have to think about emerging markets. Emerging markets are the new economies in the world. The Chinas, the Vietnams, which are important to have money invested into. But, you don't want to have 100 percent of your money invested in emerging markets. So my problem, when you have one international fund, you're not going to have any sort of diversification within the international side of the portfolio. I believe if you want to be successful as investor first of all, remember, it's not gambling. You want to spend time and having the right allocation. If you do that, you'll be successful.
One of the things that I just shake my head sometimes about Dave Ramsey is how he wants to implement his recommendations. Dave Ramsey is all about saving money and I love that. I'm a little tight with the buck, my friends say I'm cheap, but that's okay. I look at saving money. I like coupons, I like on sale and I try to do that in every aspect of my life. And it seems Dave Ramsey sort of does the same thing except when it comes to implementing his portfolios. He recommends that everyone implement their investments by using Class A mutual funds.Now I love using mutual funds, I think they're a great investment vehicle for the great majority people. However, it's mind boggling that he doesn't consider the no-load funds. No-load means no commissions. When you don't pay commissions and you invest with low cost, you have a much better opportunity to make money. Low costs equal high returns. Keep that in mind. So think about it; when you buy a Class A mutual fund, what that means is you're paying your commission upfront. And it can be as high as eight and-a-half percent. In most cases, it averages about six percent, but also every time you get a dividend in and you have money reinvested, you're paying the commission again, you're getting killed with fees. So if you invested $100,000 and you had an eight-and-a-half percent commission fund, $8,500 right off the bat is going to pay the salesperson, not going into the investment. If you use a no-load fund and you invest $100,000, all $100,000 goes to work for you. And that is significant. And so I don't understand why he's recommending commission-based funds. And there's so many ways that you can invest commission free. In fact, Fidelity has some funds now that are commission-free, no cost; Schwab has them. It's across the board; you can go to a company like Vanguard. Investing commission free is going to save you money. And as I always say, the purpose of this podcast is to keep more money in your pocket because it looks better there. That is why when it comes to implementing a portfolio, you should look at commission-free funds. And also, someone may say, yes, but I'm going to need the advice of an advisor. Well, we've talked about this in the past, hire an advisor that's fee-only, pay them a fee for their services. When you go to a salesperson, they're going to sell you a product that is good for them. And particularly when it comes to commissions, there are all sorts of different ways different mutual funds have commissions. And unfortunately, when you deal with the salesperson, they generally go into the class share that best suits their situation, not yours. So I would tell you if your goal is like mine, to be able to keep more money in your pocket, invest using no-load funds, avoid the commission-based funds. It doesn't make sense. And again, it's mind boggling to me, Dave Ramsey, who's all about being fiscally responsible and saving money, he seems to forget about that when it comes to investing.
When it comes to dealing with a professional, whether it's a doctor or a financial advisor, you should never feel nervous about going to see a professional. And those professionals, particularly financial advisors should never make you feel guilty, should never put you on the defensive for things you've done in the past. If you go to a financial advisor and they try to shame you, the first thing you should do is get up and leave. Remember, you don't work for them, they work for you. So I would always tell you, you should never hesitate calling someone to seek professional help. And that's how you know you're dealing with a professional --if they treat you like professionals treat their clients.
Something that both Suze Orman and Dave Ramsey do is they constantly preach about a 12 percent return. Unfortunately, that's not realistic, particularly in the world that we live in. And I think that even though it sounds good, it's a great sound bite, you have to look at realistic numbers. Moving forward you're not going to get a 12 percent return on a long-term basis; it's just not going to, it happened. I tell people and I think Warren Buffett says the same thing--you're talking moving forward six to seven percent return. And I'll tell you where that is important. Let's say you're 20 years away from retirement and you have $100,000 to invest. Well, if you think you're going to get a 12 percent return on that money, that means that when you retire that'll be about a million dollars. On the other hand, if you get the six to seven percent return that is more realistic, you're going to have less than a half a million dollars. And that could make a big difference when it's determining whether you can afford to retire or not. You want to use realistic projections. So I think both of them, they're wrong to use projections that are not realistic. And I analogize to; I play golf. In the Vegas sense of the word I get more strokes per dollar than most people, but every time I play, I project I'm going to play well, it just never happens. Projections don't mean much. So don't get caught up with this 12 percent return because it really doesn't make sense.
Also Suze Orman, her new thing is she likes to say it and it sounds great as a sound soundbite that, 70 is the new 65, that people should look at not retiring at 65, they should look at retiring at 70. Well again, both Dave Ramsey and Suze Orman like to paint the broad brush—everyone this, everyone that; it just doesn't work that way in the real world. When it comes to retirement, the issue isn’t whether your next-door neighbor can retire or your brother, your sister; the issue is you. What is your individual situation that will allow you to retire? So I don't want to focus on these generalities that Suze Orman says it's now 70. Maybe you want to retire at 60 and you have the resources for that. So the key is to look at your individual situation, not get caught up with some of this broad advice that doesn't make sense. I've always been a believer when it comes to your money, the key is to focus on your individual situation. When you do that, you will be successful. And I think again, one of the problems with Dave Ramsey and Suze Orman it's either/or, I mean, you have to do it their way or it's the wrong way. And they don't seem to have compromises. Life is a compromise, handling your money as a compromise, and you have to make decisions that work for you and that should be the focus, not what everyone else is doing.
And again, when it comes to retirement, the key is can you afford to stay retired. People can retire all the time if they want, but the question is how long can they retire? There was a recent study that showed that five years after retirement most retirees are running short. That's why I always believe, and I calculate when it comes time for someone to retire, I want to make sure they can have a rising income throughout their lifetime. And I want to use realistic numbers, project realistic things not make up numbers that sound good for soundbites.
So on the whole, I think Suze Orman, Dave Ramsey, do a good job of getting people involved with their money, try to get people to take responsibility; however, I believe there's room for improvement.
As I mentioned on every show, we're going to take some of your questions. So I’ll take a couple of questions. One is from Debra.
Question: How are you? I'm fortunate to have a retired girlfriend who introduced me to your newsletter. I've been reading them for the past few weeks. I'm 58 years old and plan to work as long as I can and being again, collecting social security at 70.
Answer: Let me just say, I always liked the idea of delaying social security, as long as you can because it makes sense when you look at how much your return goes up by delaying social security. People can take social security at 62, for the great majority of people that's going to be a mistake. I think you wait till you get your full social security or even wait until 70.
Today I have a couple questions asked.
Question: I've read that it's better to save in a 401k instead of a traditional 401k because the money will be taxed now instead of later when tax it's just maybe higher. So since my income will be less when I retire does it make sense for me to invest in a Roth 401k now?
Answer: Well, one of the things that, and you do look at, you project where your tax bracket is. If you think that you're going to be in a lower tax bracket when you retire, then it makes sense to use the traditional IRA. On the other hand, if you think your tax bracket is going to be the same or even higher, then you'd rather use the Roth. Now keep this in mind, that minimum required distributions, now at 72 years of age, are not required from Roth IRAs. So one of the other benefits of Roth is that you could let them grow tax free for as long as you choose, where in a traditional IRA at 72 you have to begin taking it out. And where that enters into the equation is remember depending on what your other income is, if you have to take minimum required distributions, that may mean that your Medicare Schedule B may be higher. As you know, you get Medicare A by right and then you pay for Medicare B. That premium is based upon your income. So you may want to look at that, but I think in your situation you're going to be in a lower bracket, you know that when you retire, I have no problem using the traditional versus the Roth.
Question: Also, I need to purchase the long-term care and life insurance. My mom and grandmother died from Alzheimer's. I want to protect myself. Also, I want life insurance for burial purposes when it's my time. So I'm wondering what is the best option for me? Life insurance, with a long-term care rider; your thoughts?
Answer: Well, I don't like those insurance with long-term care riders because I find that they're more expensive and you get the worst of both worlds. I would rather buy a policy for burial and then a separate long-term care policy. And when you shop around for a long-term care policy, make sure you shop around and do some independent research. And one way you potentially can lower your premium is to raise the waiting period. We all know in insurance we have deductibles and it's usually based upon money, like our auto insurance. And when I first started driving, it was normal to have a $250 deductible. Now it's $500 or a $1,000. The higher the deductible, the less the premiums. Well in long-term care, the deductible is a waiting period, and most policies have a 90-day waiting period because you can get Medicare. So you have to wait 90 days to get your benefit. Sometimes you could lower your premium by going 180-days waiting period, or even a one-year waiting period. So I would tell you when you're shopping around, get competitive bids and also see what the amount your premium go down if you get a longer waiting period, six months or even a year.
One thing about long-term care policies, there are not as many good companies as they used to be. It's unfortunate. So shop around and get competitive bids.
This is from Mark.
Question: Rick, What's the difference between UGMA and UTMA or 529 plans? Does it matter if I set up a 529 plan in Michigan if we live here? I don't know where my son will go to school. Thanks, Mark.
Answer: Well, Mark, thanks for the question. First of all, UGMA and UTMA are very close. The real difference is what type of assets they can hold. UGMA typically holds financial assets: stocks, bonds, mutual funds; UTMA usually holds investments like real estate or business interests. So most people use the UGMA.
Now, the 529 plans or something totally different; 529 are used for educational purposes. And I generally love 529 plans. I think they're much better than UGMAs. And the reason is typically under a UGMA when the kid is 18 or 21, depending on the situation, the money is theirs. So if they decide they don't want to go to college, they don't have to; it's their money. Well, in the 529 plan you're in control of the money. So if they're not going to use it for educational purposes, it's not theirs, they just can't take it and take a trip to Hawaii; so you have control.Also in a 529 plan, if for some reason you decide that the child you set it up for isn't responsible and you don't want them to have that money, you could switch it to another child or another relative and let them use it for educational purposes. Whether you live in Michigan or son goes to Michigan, the Michigan Education Savings Plan is a great plan to use. Basically, he can use it for any public or private institution in the country. So it doesn't matter where your son or daughter ends up going to college.
One of the nice things is being a Michigan resident is you can write off part of your contribution off your Michigan Income Tax Return. So I would tell you, I think if you're saving for college, Michigan Education Savings Plan, www.misaves.com is a great way of going. And in that regard, I would tell everyone when you have a newborn, whether it's a child, a grandchild, you should start saving for college as soon as you can. College is expensive; it's going to be more expensive in the future. And so the sooner you could save, the better it is. And one of the nice things about the Michigan Education Savings Plan, make sure you use the commission-free option; if you deal directly with them, you can. But also, it only takes $25 to start a plan, which means that just about anyone can start investing. And one thing I always tell people, when you get a newborn as opposed to giving them more presents and toys that they'll forget about in 10 minutes, why not recommend that they make a contribution to their college savings plan because the child may like the toy better, but we all know what's better for them, and the Michigan Education Savings Plan is one of the best college plans in the country. There are some other good plans; Vanguard has one and Fidelity. The key to using any sort of 529 plan is to make sure it's broad-based and that you can use it in any public or private institution in the country.
Just to reminder for those of you with questions or comments, feel free to email me. My email address is Rick@rickbloomtalksmoney.com.
Well, as I record this, it's a July 1st, which means the 4th of July is just right around the corner.I want to wish everyone a very Happy 4th of July and always remember that despite our current troubles we are the freest, greatest country in the history of the world and we should all be proud of what we have accomplished as Americans. All you have to do, I always tell people this, is leave the country to see what kind of country that we really have.
So on that note, I hope you have a wonderful 4th of July. Thanks so much for the company today. I enjoyed it. Hope you did too. Thanks for joining me. Bye now.
Jon: This podcast is brought to you by Bloom Asset Management, building financial futures since 1984. Bloom Asset Management is a fee-only investment management and advice firm. With its team of expert financial legal and tax professionals, you can be sure that Bloom Asset Management will be your long-term partner in building your financial future.