Following the Market Breadcrumbs
by SGL Financial
Our 2 Cents – Episode #263
Following the Market Breadcrumbs
We’ve packed a lot into this episode of Our 2 Cents! Join the Lewits as they break down quotes, quick hits, key market indicators, and Roth conversions. Tune in now and don’t miss a minute!
- Quotes of the Month:
- “Most people work just hard enough to not get fired and get paid just enough money not to quit.” – George Carlin
- “Ninety percent of my salary I spent on booze and women…and the other ten percent I wasted.” – Tug McGraw
- Gabriel’s Quick Hits:
- The U.S national debt has hit $40 trillion. Now what?
- Hot dogs, gas, and healthcare? Costco is rolling out these financial plans.
- Here are the financial lessons every parent should teach their college-bound kid.
- Market Signals:
- What are the key market indicators telling investors today?
- Pay More Today, Save More Later:
- Your future self might thank you: a Roth conversion can turn today’s tax bill into tomorrow’s tax-free opportunity.
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847.499.3330
Podcast Transcript
Announcer: You’re listening to Our 2 Cents with the team from SGL Financial, building wealth for life. Steve Lewit is the President of SGL Financial and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Well, hello everybody. We are so excited to be back with you here for another amazingly, hopefully awesome episode of Our 2 Cents. Amazingly, hopefully awesome.
Steve Lewit: No hope, man. Let’s just make it that way.
Gabriel Lewit: We certainly shall try, and we are so excited to have you with us here. It’s the best part of our day and week, talking with you here, although we don’t really talk with you so much as to you. But we hope that you’re listening and finding lots of value in all the various topics that we talk about.
Steve Lewit: The guy on Star Trek, the boss of the spaceship, what he would say, he’d say, “We’re going to Neptune or somewhere.” And then he’d say, “Make it so.”
Gabriel Lewit: Okay, I don’t think I’ve seen that in-
Steve Lewit: So, make it so.
Gabriel Lewit: I don’t remember that.
Steve Lewit: Oh yeah, he said that all the time.
Gabriel Lewit: Well, before my time, I guess.
Steve Lewit: No, no, no. I can tell you some things that are before your time.
Gabriel Lewit: Oh, I’m sure you could. Well, we hope we found you on a great day here. We’ve got a great show lined up for you here today. To kick things off, have a little bit of fun, let’s start off with our favorite thing to talk about here and there are some quotes of the month. And I’ve got a couple here for you. The first is from a fella named George Carlin. Everybody in the older days probably knew him.
Steve Lewit: No, people know him in the newer days, too.
Gabriel Lewit: Mr. George said, “Most people work just hard enough not to get fired and get paid just enough money not to quit.”
Steve Lewit: Yes, that is called human nature.
Gabriel Lewit: Yes, yes. So work just hard enough not to get fired and get paid just enough money not to quit.
Steve Lewit: Yeah, it’s kind of a bind, isn’t it?
Gabriel Lewit: It is, it is. Well, hopefully you’re getting paid more than you need, but if you’re feeling like you’re not getting enough and you’re ready to retire, well, we can help you map that out.
Steve Lewit: We sure can.
Gabriel Lewit: I just had a client yesterday, he said, “Gabe, I want to move up my retirement date. Work isn’t going for me anymore, it’s just not working. Just not working for me.”
Steve Lewit: Yeah, but he at least saved money to do that.
Gabriel Lewit: Yes, you do have to do that part of it. Okay, now another guy, this guy was what, a pitcher, I think you said, for the Mets?
Steve Lewit: Who is it?
Gabriel Lewit: Tug McGraw.
Steve Lewit: Tug McGraw, absolutely.
Gabriel Lewit: What a name, right?
Steve Lewit: He was with the Mets and then I’m not a baseball aficionado, but then he went somewhere else.
Gabriel Lewit: Yeah. And he said, “90% of my salary I spent on booze and women and the other 10% I wasted.”
Steve Lewit: Tug is very honest.
Gabriel Lewit: Oh, gosh. Well, what does that have to do with planning priorities? How you want to spend your money?
Steve Lewit: Did not have a financial plan.
Gabriel Lewit: Oh, anyways, anyways. Yeah, just wanted to lighten the mood here for you with those here today. All right, well-
Steve Lewit: He was a pretty good pitcher, too. Yeah.
Gabriel Lewit: Well, hey, speaking of baseball, Cubs-White Sox, Crosstown Classic just recently here. I’m not sure what team you’re a fan of. I’ve always told my kids I’m a fan of both teams unless the Cubs play the White Sox, and then I am a White Sox fan at heart.
Steve Lewit: You are.
Gabriel Lewit: I am. And they did lose two of the three in the series, but there were some good games, there were some good games. I only watched two of them, the two that they lost, of course.
Steve Lewit: I can’t watch a baseball game.
Gabriel Lewit: Why not?
Steve Lewit: It’s just too slow. I mean, they’ve done a good job of speeding it up, for God’s sake. But I don’t know, just don’t have the… I can listen to a baseball game, but watching a baseball game… I think baseball was actually made for radio.
Gabriel Lewit: Well, you don’t have a… No, it’s made for TV. You don’t have the love of the game, man. You don’t have the love of the game.
Steve Lewit: Maybe not, maybe not.
Gabriel Lewit: Well, let’s give you some financial news here. US national debt hits $40 trillion. How about that?
Steve Lewit: It’s a lot of zero; it’s a lot of numbers with zeros.
Gabriel Lewit: Yeah, I think it officially passed the mark here Wednesday, yesterday. We’re recording this on Thursday. Saw a lot of headlines coming across the desk here, $40 trillion. Let me give you a little bit here. $40,47,425,768,420.22, which is now outdated because it’s higher than that because it’s rising regularly.
Steve Lewit: Every minute. Yeah, projected to be what? In 2020, 2020… I’m getting signals here.
Gabriel Lewit: Anyways, so yeah, it was five months ago in March, $39 trillion. So it went up a$1 trillion in a five-month period, folks. So that is a pretty unheard of trajectory here where the whole goal, I think, for most people was trying to hopefully get this debt under control. And it’s seemingly, again, not trying to get political here, but the debt is still rising substantially.
Steve Lewit: Yeah, so let me interject there, Gabriel, because producer just gave me the real numbers.
Gabriel Lewit: John?
Steve Lewit: John, yes. Our producer, John, just gave me the real numbers. In 2023… In 2032, and I got them wrong. He wrote them down and I read them wrong. In 2032, $63 trillion.
Gabriel Lewit: Well, so it’s actually 2036, but that’s okay.
Steve Lewit: What’s that?
Gabriel Lewit: 2036 is estimated, the CBO, the Congressional Budget Office is estimating that the gross national debt will rise to, at the current rate, $63 trillion in 2036.
Steve Lewit: John and I are going to have a conversation after this.
Gabriel Lewit: Yes, you two need to work on your-
Steve Lewit: Podcast here.
Gabriel Lewit: You need to work on your preparation, sir.
Steve Lewit: I do.
Gabriel Lewit: Okay, so get with it.
Steve Lewit: Right.
Gabriel Lewit: All right. But anyways, these are some pretty staggering numbers, folks, and that’s really all we wanted to update you on this today. We don’t have a solution, nor does it seem anybody does.
Steve Lewit: Well, I’d just like to say this. It’s not the debt that’s the problem, it’s the interest on the debt that has to be paid.
Gabriel Lewit: You do say that every time. It’s literally like a talk track button. If you say national debt, Steve says, “And then I want to say…”
Steve Lewit: Because everybody forgets that.
Gabriel Lewit: Yeah. Well, that is very much a concern. Okay, so yes, typically rising large amounts of debts in the trillions is generally considered not a good thing. I’m understating that a little bit. But what will be done about it is out of your hands, it’s out of my hands. Will remain to be seen, but all we can do is hope for the best.
Steve Lewit: It feels like it’s in nobody’s hands right now.
Gabriel Lewit: Yeah, but now you know. So that’s news for you to use here with whatever you’re going to do with it. Also, news for you to use in case you were wondering, Costco is planning to get into the Medicare marketplace. They have decided they’re going to enter into the world of Medicare Advantage plans, which means as you’re going to buy your chicken, your eggs and your cheap hot dog-
Steve Lewit: And your car and your boat and everything else.
Gabriel Lewit: Your gas and everything else, you can buy a Medicare Advantage plan.
Steve Lewit: Cool.
Gabriel Lewit: Although we don’t really believe you should have Medicare Advantage, we think a Medicare supplement’s the better choice for you. But yeah, that’s interesting that they’re getting into that market. I guess it’s only a matter of time because they’re in just about every other market. Vacations, gas, Medicare, food.
Steve Lewit: Those peeps know how to make money.
Gabriel Lewit: Well, they certainly have a lot to sell.
Steve Lewit: Oh man, they’re amazing. They’re amazing, yeah.
Gabriel Lewit: So just interesting but keep an eye out for that. And yes, if you have questions on Medicare and whether or not you should go a Medicare Advantage plan or route or otherwise, let us know. That’s an area that we can absolutely assist you with.
Steve Lewit: Can you imagine being at the checkout, Gabriel, and saying, “Oh, by the way, I’ll have one of those Medicare Advantage plans?”
Gabriel Lewit: “Yes, sir. It’s $5.99.” No, it’s not quite that simple.
Steve Lewit: “Here you go.”
Gabriel Lewit: “And with your Costco discount card.”
Steve Lewit: Yeah, right. Exactly.
Gabriel Lewit: Anyways, well, you can get your prescriptions there too, so I think that’s going to all go full circle. All right, one last smaller tidbit here and then we’ll get into our main focuses for today’s show. But many of our clients, whether it’s kids or grandkids, they’re sending their family member, the younger generations off to college, those college-bound kids. And just last week, we were talking a little bit about essentially financial habits and financial literacy and things that we feel are lacking here currently in the country.
And so this article here is talking about some lessons that every parent should teach their college bound kid. And I thought that was great timing just based on what’s going on and everyone sending their family members off to school here. And so what can you do as a parent or a grandparent if your kid or grandkid’s going off to college? Well, you can talk to them about some basic budgeting lessons. Hopefully you don’t just give your kid just a blank credit card, check-
Steve Lewit: Well, it’s a big question.
Gabriel Lewit: To just go spend unfettered. I don’t think that would be really teaching the right levels of discipline or habits.
Steve Lewit: It’s a big question. What do you say about money to a young adult going to college? Do you give them money, do you give them a budget? Do you make them work? What kind of conversation are you having with your child?
Gabriel Lewit: Yeah. There’s a lot that we could talk about here, and I don’t want to spend too much time on the show here, but Steve, you hit on all of the key things. First, you have to decide who’s paying for what. Is your child going to chip in? Are you going to, quote unquote, force them to get a job and help pay for their college? Are you giving them a free ride and having them focus on their studies? And then how do they pay for all the things that they want to do when they want to, quote unquote, go to the bar? They got to pay for that.
Steve Lewit: What’s the plan when they call you and say, “Hey, mom and dad, I ran out of money.” What’s the plan?
Gabriel Lewit: Well, exactly.
Steve Lewit: Do they suffer for two weeks and learn how to budget? What do you do?
Gabriel Lewit: Yeah, so you might want to think through this if you haven’t already. Maybe you already have a system in place. If you did, would love to hear how you’re handling it. But yeah, especially if it’s a freshman, you probably are going to need to have these conversations. “Son, here’s your $400 a month spending money for groceries.” I don’t know if that’s enough. Maybe it’s $600, right? Maybe you do come up with a budget. Whether you give them on a prepaid debit card that you refill, there’s all sorts of options these days that weren’t around when I was a kid.
Steve Lewit: Yeah, I like that. I like to give them a sum of money and say, “Look, this is your money. You have to figure out how to spend it.” Then they need to go out and open a checking account, a savings account, which, they don’t know how to budget it. They don’t know how to balance it. They don’t know anything about this stuff that we think they should know, but they don’t.
Gabriel Lewit: Yeah, so you could give them a simple budget.
Steve Lewit: A simple budget.
Gabriel Lewit: You could also give them a credit card and maybe one that you can monitor.
Steve Lewit: With a low limit on it.
Gabriel Lewit: Low limit but get them starting to use it and paying it off reliably each month.
Steve Lewit: Must be paid off each month.
Gabriel Lewit: You could have them take a little bit of their money every month and invest it and have them buy a couple stocks or index funds and then take a look at their investment accounts.
Steve Lewit: Yeah, after you explain to them what a stock is.
Gabriel Lewit: Yeah. I have one client who’s like, “My daughter would never do that. She’s just out, she’s with her sorority and she’s out having fun.” But folks, that’s the whole point. You don’t want them coming out of college for the first time and not knowing what any of this is. Give them a head start for four years and get them going on some of these small habits they can start to build and compound.
Steve Lewit: It’s kind of a change of headset, what I think you’re saying, Gabriel. You’re sending them to college, they ought to learn, but here’s a chance to reach out to them and get them to understand responsibility, which is a lifelong lesson of managing money.
Gabriel Lewit: Absolutely.
Steve Lewit: Yep.
Gabriel Lewit: Yep. Well, if we can help you with this, I mean, I know there’s not necessarily a single right or wrong answer here, but we do have some best practices on that front. You can, of course, call us and we can talk about that anytime. Plus, any other financial questions you might have. And you can reach out to us here at 847-499-3330. That’s our phone number.
Steve Lewit: Well done.
Gabriel Lewit: Of course. You can also email us info@sglfinancial.com.
Steve Lewit: And there’s more.
Gabriel Lewit: There always is.
Steve Lewit: You can write us a letter.
Gabriel Lewit: You could. That’ll take longer, okay.
Steve Lewit: Forever.
Gabriel Lewit: All right, let’s get into some more meatier stuff, huh? What do you think?
Steve Lewit: Media or meatier?
Gabriel Lewit: Meatier.
Steve Lewit: Meatier.
Gabriel Lewit: Like more meat on the bone.
Steve Lewit: Put some meat on the bones there, my son.
Gabriel Lewit: All right, so let’s talk about seven key market indicators that are telling investors right now, certain things.
Steve Lewit: Yes.
Gabriel Lewit: Okay, market indicators. Now, do you like market indicators?
Steve Lewit: No.
Gabriel Lewit: I think they’re okay.
Steve Lewit: Well, they are what they are. They’re not predictors, they’re indicators. An indicator just says, “This is what happened.”
Gabriel Lewit: They indicate things.
Steve Lewit: They indicate.
Gabriel Lewit: Yes, they do.
Steve Lewit: Yeah.
Gabriel Lewit: Okay.
Steve Lewit: But most people interpret the-
Gabriel Lewit: But what they indicate, nobody knows.
Steve Lewit: Well, they’re facts. What most people do is take the fact and convert it into their idea of the future.
Gabriel Lewit: Yeah, so let’s take a look at some indicators. And some of these, you may pay attention to, some of them you may not, but I think they’re helpful. Gold remains expensive.
Steve Lewit: Yes.
Gabriel Lewit: So, it’s fallen from its prior high. I had a client the other day say, “Does that mean it’s a good time to buy gold again?” And I showed them the 13 year chart where once it started falling from the previous peak and it took 13 years just to get back to break even. And I said, “So either buy it and plan to hold it for 20 plus years, but if you’re trying to buy it now because it’s going to spike back up, no, that’s not the way you typically want to approach that.” So it is obviously falling, but there could be more downside risk ahead.
Steve Lewit: Yeah. And as an indicator, it kind of indicates the value of the US currency.
Gabriel Lewit: Yeah, can.
Steve Lewit: Can.
Gabriel Lewit: Yep. Interest rates remain elevated.
Steve Lewit: Yes.
Gabriel Lewit: The Fed did not lower them; they are still generally considered high.
Steve Lewit: Yeah, long-term interest rates are a problem.
Gabriel Lewit: Yep. So what does that mean, what does it indicate?
Steve Lewit: It indicates that long-term-
Gabriel Lewit: You’re the economist here. That’s why I’m prompting you on this one.
Steve Lewit: When long-term interest rates rise, investment slows. When investment slows, the economy slows. When the economy slows, not good things happen.
Gabriel Lewit: Can, I would say in front of all those.
Steve Lewit: Can, yeah.
Gabriel Lewit: Because the economy at the moment hasn’t really slowed that much.
Steve Lewit: But it has.
Gabriel Lewit: But the whole idea is that we don’t want it to run away too hot and then inflation creeps up, right?
Steve Lewit: Well, The Fed just took steps to buy back old debt and drove the long-term interest rates down by, I think, a half a point. It was a pretty… They’ve done that often before.
Gabriel Lewit: Yeah. Now, high interest rates also has the benefit of making bonds more appealing.
Steve Lewit: Yes.
Gabriel Lewit: Whether it’s treasury bonds or otherwise. So you can get some treasury bonds, four and a half percent nearly, for five years, 10 years. I think some of the 30 years are right around there too, or even up to 5%.
Steve Lewit: Yeah. And if they get higher, what happens is money leaves the market to go into guaranteed interest rates and then the market starts to suffer after that.
Gabriel Lewit: Yeah. And the market hasn’t suffered yet either, though. That’s why we said these aren’t pure plug and play, one indicator cause effect type connections. But yeah, bonds, some people are still very unhappy with bonds, but they’re unhappy with their old ones that lost value when the interest rates rose. But this would be the time to buy them when they’re high-
Steve Lewit: Yes.
Gabriel Lewit: Not when they’re low. So like everything, you want to buy high and sell low.
Steve Lewit: Yeah. Folks, when interest rates come down, the value of bonds goes up.
Gabriel Lewit: Yep. So not only do they start with higher yields, but their value will increase as well. Another indicator here, US stocks are still considered very highly valued. I show a chart to many of my clients to indicate this. It’s the price earnings ratio or Shiller Price Earnings Ratio. The price of stocks relative to their earnings is at all-time highs.
Steve Lewit: Highest ever. It’s more than elevated, it’s excessively high based on history. And what’s driving that is AI and tech. They just won’t slow down.
Gabriel Lewit: And that is an indicator that the market could, being the keyword, be overvalued and likely is overvalued. But whether or not that means it’s going to go down in the near future is still undetermined.
Steve Lewit: Well, tech is driving the market and keeping the market afloat. So it’s a matter of whether tech can sooner or later deliver some earnings on the debt that they’re accumulating, because the debt is enormous and there’s no earnings.
Gabriel Lewit: Yeah, because the price earnings ratio is price divided. So the price could stay the same and if the earnings go up, that ratio goes down. Doesn’t mean the market’s going down when you look at that graph.
Steve Lewit: But the more they borrow and there’s still no earnings, then the PE goes up and makes it more tentative, to be kind.
Gabriel Lewit: Yes. Building a house on paper walls instead of brick walls, perhaps.
Steve Lewit: Well, you can’t build a house on paper walls. How about sticks? How about sticks?
Gabriel Lewit: If you stapled or glued enough pieces of paper together-
Steve Lewit: No, no, no. That’s a stretch.
Gabriel Lewit: You certainly could.
Steve Lewit: That is a silly stretch.
Gabriel Lewit: You could take your reams of paper like we have for the printers here and you could build a brick house out of that.
Steve Lewit: All right, let’s get back to work.
Gabriel Lewit: Just to clarify, just a little bit.
Steve Lewit: Just clarifying.
Gabriel Lewit: International diversification still matters and international stocks generally are, again, lower evaluations than US stocks, making them, again up, compared to US. Generally a little more attractive than they have been historically.
Steve Lewit: Yep. That’s why, folks, in a good portfolio, at least we think, you’re well-diversified between the US and foreign, because when US grows, it gets more expensive. Foreign, the opportunities are overseas to buy at a lower price level.
Gabriel Lewit: Yeah. Now this one, which I didn’t independently verify, but this is from a Kiplinger article and a CFA saying, “Oil remains relatively low, price-wise.”
Steve Lewit: Still.
Gabriel Lewit: Although people are complaining about the pump still, it has room where it could get worse.
Steve Lewit: It’s the kind of oil that’s available. And if this war keeps up, it will get worse.
Gabriel Lewit: Yep. The housing market is still elevated.
Steve Lewit: In spot. Yeah, overall, I’d agree.
Gabriel Lewit: Yep, it is a market. I always like to say a housing market is a market, meaning prices go up and down on various factors.
Steve Lewit: But housing as an indicator is quite important. What I’ve noticed in the recent data is that housing starts. New housing has slowed down.
Gabriel Lewit: Not around here.
Steve Lewit: Not around here.
Gabriel Lewit: Every plot I can imagine has been bought and is being turned into townhouses around here.
Steve Lewit: But every other place in the universe, the earth, Mars, Jupiter, it has slowed down.
Gabriel Lewit: Yeah, the Mars housing has slowed.
Steve Lewit: It has slowed, yes.
Gabriel Lewit: It’s pretty much zero.
Steve Lewit: It’s zero.
Gabriel Lewit: Okay, same with the moon.
Steve Lewit: It hasn’t changed much.
Gabriel Lewit: Yes. So I guess in that sense, it hasn’t slowed at all. It stayed flat.
Steve Lewit: That is true. You could build a paper house on Mars, though.
Gabriel Lewit: Sure. Bitcoin is still attractive, price-wise.
Steve Lewit: Well, Bitcoin just-
Gabriel Lewit: If you believe in it, just spiked up a little bit the other day.
Steve Lewit: Just took a jump, actually.
Gabriel Lewit: All right, so people tend to really poo-poo on it. “Oh, this thing doesn’t do anything right.” But it’s going to, I think, be here for a while. We still believe in it long term.
Steve Lewit: So, what is Bitcoin to you, Gabriel, as an indicator of what?
Gabriel Lewit: Well, it’s an indicator of something.
Steve Lewit: To me, it’s not much of an indicator.
Gabriel Lewit: It’s an indicator of what people want to pay for it.
Steve Lewit: Exactly, so I don’t see that. If I’m looking at the health of the US economy, I’m not looking at Bitcoin as an indicator.
Gabriel Lewit: It’s from the article.
Steve Lewit: Who wrote this article?
Gabriel Lewit: Amy CR, not CFA, okay.
Steve Lewit: Well, Amy, I don’t know why-
Gabriel Lewit: I don’t know what the indicator is, but it is an indicator.
Steve Lewit: Well, it indicates the health of Bitcoin.
Gabriel Lewit: Yes, it sure does, it sure does. Okay. Well, anywhos-
Steve Lewit: I’m going to write an article.
Gabriel Lewit: You sure could, if you want to become a publisher.
Steve Lewit: Where was that published?
Gabriel Lewit: That was Kiplinger’s.
Steve Lewit: Really?
Gabriel Lewit: Yeah, it was a good Kiplinger, a good jump. Well, folks, we have to source our content from somewhere. I got to get ideas from various places here and there. High and dry, wherever the road takes me, I’ll find some story to talk about.
Steve Lewit: You always make it so.
Gabriel Lewit: Alrighty. Well, because it is the season here, folks, we’re going to round out our show here talking about why paying more in taxes today could leave you wealthier tomorrow, AKA, what we call in our parlance, a Roth conversion, all right.
Steve Lewit: Love those conversions.
Gabriel Lewit: It is the time of the year to start really thinking about these if you haven’t already. Many of our clients, we’ve been exploring these throughout the year, but this is the time where we really start to dig into these deeper.
Steve Lewit: And the reason we wait until later in the year, folks, is because you have to know your actual income for the year. Otherwise, you could push yourself into a new tax bracket or a higher earner bracket and things like that.
Gabriel Lewit: Yeah. I mean, technically you could convert at any time.
Steve Lewit: Sure.
Gabriel Lewit: And there are advantages to converting earlier in the year. And if you misjudge your income and you need to take a withdrawal, you could take it from the Roth IRA that you just recently converted. But yes, to your point, most people have a better sense of what they have gotten for income, wages, bonuses, rental income, whatever it is.
Steve Lewit: Dividends are a big problem.
Gabriel Lewit: Dividends, interest. All of this is clearer in October and September than it is in January, February for the year.
Steve Lewit: Definitely.
Gabriel Lewit: It allows you to make a little bit more accurate assessment of whether or not a Roth conversion’s good for you. Now, going back to what I led in with this, why is paying taxes now potentially better for you? Because most people would say, “Steve, I don’t want to pay taxes now. That’s a terrible idea. Why would I want to do that?” So what would you respond to that question?
Steve Lewit: I always say, “Well, look, you have an option. You can pay them now or you can pay them in the future. Taxes today are at the lowest rate in history, so why wouldn’t you pay them now?”
Gabriel Lewit: And what do they say to that?
Steve Lewit: “Well, I just don’t want to pay the taxes.”
Gabriel Lewit: Well, I’ve found, I have to give some examples, which I’ll give here on the show here today that really help illustrate this. Let’s say that thought ran through your head. “Why the heck would I want to pay taxes today?” Well, again, as the article implied, to be wealthier tomorrow. So let’s talk about why that would be the case. Well, first question I always pose is sort of rhetorical. I’ll say, “If you had $100,000 today and you’re in the 22% tax bracket and you needed to buy a new car, how much of a car can you buy? What dollar amount car can you buy with your $100,000 traditional pre-tax IRA and your 22% tax prayer?
Steve Lewit: And you had no other money.
Gabriel Lewit: Forget all other money for a second.
Steve Lewit: You just had an IRA.
Gabriel Lewit: You have a statement with an IRA with $100,000 in it.
Steve Lewit: Yep.
Gabriel Lewit: And you want to go buy a car with after-tax dollars. How much car can you afford?
Steve Lewit: $78,000.
Gabriel Lewit: That is the correct answer. Why is it not $100,000?
Steve Lewit: Because I don’t have $100,000 in the account.
Gabriel Lewit: But your statement says $100,000, Steve.
Steve Lewit: Let me put it this way. My statement says I have “100,000 in the account, but the reality is that I have $78,000 in the account and the government has $22,000 in the account.
Gabriel Lewit: Once I walk through this, I start to see light bulbs going off in people’s eyes and in their heads. Because what they’re realizing is, “Yes, my statement says I have $100,000, but to use that $100,000, I’ve got to withdraw it from that IRA. When I withdraw it from that IRA at 22% in taxes, $22,000 of that goes to the federal government, leaving me with $78,000. I can buy a $78,000 car.” Or said differently, “My $100,000 IRA is really not worth $100,000, even if it stays in my investment account. It is worth $78,000, whatever it would be worth if I were to withdraw it.”
Steve Lewit: Yet, logic does not trump emotions. And emotionally, people want to see $100,000 in their account, not $78,000.
Gabriel Lewit: That is part of the issue, yep. They feel like they have more money, but that’s the myth I’m trying to dispel.
Steve Lewit: I get it.
Gabriel Lewit: But then we start talking about some of the other situations, which you so eloquently stated, we are in low tax brackets right now. So let’s say you did not do a Roth conversion. And folks, a Roth conversion is similar to my other example, except for you’re not taking the money out. You would convert $100,000 at the 22% tax bracket.
Steve Lewit: So, you would pay the tax.
Gabriel Lewit: You pay the taxes now and you would now have $78,000 in a Roth IRA.
Steve Lewit: That you could do anything you want with.
Gabriel Lewit: That’s going to most likely just sit and grow for the rest of your life, 100% tax-free.
Steve Lewit: And go to your kids.
Gabriel Lewit: And go to your kids and beneficiaries, 100% tax-free, okay?
Steve Lewit: Could you say those last words again?
Gabriel Lewit: 100%.
Steve Lewit: Yes.
Gabriel Lewit: Tax-free.
Steve Lewit: Tax-free.
Gabriel Lewit: Meaning free of taxes.
Steve Lewit: Yeah. And folks, where do you want-
Gabriel Lewit: 100% of them.
Steve Lewit: If you had a choice, where would you want all your money today? In what bucket, the pay taxes bucket or the tax-free bucket?
Gabriel Lewit: Now, I’m going to ignore for a second something called a required minimum distribution, which you have to eventually take on your pre-tax IRAs. To just give a simpler example, let’s say your $1 million, $100,000 grows to $1 million in the future when you pass away. So your IRA grew from $100,000 to $1 million and then you pass away. Okay, so let’s say you had a million dollars and you pass away and you leave that to, you have one kid, Johnny.
Steve Lewit: Johnny just got $1 million.
Gabriel Lewit: Did Johnny get $1 million?
Steve Lewit: No, johnny got $780,000.
Gabriel Lewit: No.
Steve Lewit: Well, no, he gets $1 million, I’m sorry.
Gabriel Lewit: Yeah.
Steve Lewit: Yeah. But Johnny now-
Gabriel Lewit: Now Johnny’s going to do what? He’s going to say, “Ooh, ooh, $1 million, new house.”
Steve Lewit: Well, not only that, he’s got to take the money out-
Gabriel Lewit: Well, what most beneficiaries do is they cash stuff in. I hate to say it folks. They don’t talk to their advisor if they even have one. Johnny’s going to cash that $1 million in and he’s going to buy a house.
Steve Lewit: The average inheritance, Gabriel, is spent, the last data I saw, in seven months.
Gabriel Lewit: Okay, so let’s say he did that.
Steve Lewit: Yeah.
Gabriel Lewit: What is he going to pay in taxes?
Steve Lewit: 37%.
Gabriel Lewit: 37% on most of the money. Okay, so he’s going to net out of that, let’s call it, it’s not going to be on the entire amount. This get a little into the weeds, but let’s say he nets out of that.
Steve Lewit: $630,000.
Gabriel Lewit: $630,000.
Steve Lewit: Right.
Gabriel Lewit: Is that good? Not bad.
Steve Lewit: Well, he’s better off than he was.
Gabriel Lewit: Well, he certainly is not going to complain.
Steve Lewit: But he’s not nearly as better off as he could be.
Gabriel Lewit: Let’s look at the Roth conversion one, so you had that $78,000. I actually don’t have the math in front of me here, which, I should have been prepared for this. But that’s going to grow for the same amount of time. When we do the math, what you’re going to find, it’s going to be worth a lot more than the $630,000 that Johnny would have received. Because whatever that grows to, let’s say it grew to $800,000 because it’s a little less than the IRA, he’s going to then be able to withdraw that all 100% tax-free. So it doesn’t matter what tax bracket he’s in or what dollar amount he’s withdrawing, because whatever he withdraws is going to be tax-free. So he’s going to avoid those high tax brackets on large withdrawals when he inherits the money. And the net-net on this folks is it comes out further ahead after taxes.
Steve Lewit: Yes.
Gabriel Lewit: So, it’s a little bit of, again, short-term pain, long-term gain. Why paying more in taxes today could leave you wealthier tomorrow. That’s the concept here that we’re talking about and why Roth conversions can be helpful. The other thing is, what if the tax brackets increase? 37% is the rate Johnny would pay today. What if tax brackets go up to 45% or 50% on those really high, big withdrawals? What’s happening is you’re subject to the future unpredictable tax code leaving money in the IRA, the tax-free Roth IRA.
Doesn’t matter if they raise rates to 80%, all that money in the future would again be tax-free. You’ve already eliminated it from the tax system. So there’s lots of advantages of these Roth IRA conversions, but generally when they’re done right, what they do is a little bit of short-term tax pain today to create greater after-tax wealth in the future for either you or your beneficiaries.
Steve Lewit: Now, here’s the-
Gabriel Lewit: To summarize that very succinctly.
Steve Lewit: Well summarized, succinctly. The myth we need to bust now, Gabriel, is that, “Oh, but I’m going to lose all the growth on the interest that I give the US government.”
Gabriel Lewit: Yeah. I don’t have visuals to share with you here, but I have one side by side if you ever want to see it that is doing this exact example here, where you take $100,000, you convert it today. That grows at 7.2% for 20, 30 years, money doubles. We could use some examples. Versus if you keep the IRA and that grows at the same rate and then you withdraw it, because of the differences in tax rates, you come out again, much further ahead with the Roth IRA because you’re giving more flexibility to take larger lump sum withdrawals than you are with the regular IRA that gets you penalized the more you take out.
Steve Lewit: Yeah, so if you look at the numbers, folks, if you take your tax bracket today and taxes don’t change over time, you’ll pay the same amount of taxes in the future, you’ll net the same in the future as you would if you pay the taxes today. You do not lose anything by not having the interest.
Gabriel Lewit: That is if you could take it out at the same tax rate.
Steve Lewit: Yes. I’m saying if everything remains the same.
Gabriel Lewit: But the problem with that logic is that if you have much larger balances in the future and you go to take them out, you cannot take them out at the same tax rate.
Steve Lewit: Absolutely. But what I want, the point I’m trying to make-
Gabriel Lewit: You don’t lose money because you’re earning interest on a lower balance.
Steve Lewit: I’m making a point here.
Gabriel Lewit: Right, is what I think you’re trying to say?
Steve Lewit: No, I’m trying to say you do not lose anything. Everyone feels, “Well, I paid the interest so I lose all the growth on the interest,” and that’s not true. And I can prove it.
Gabriel Lewit: The math does prove it out, but yes, you’re not worse off by having a lower balance in your Roth IRA than you are a higher balance. You’re actually better off.
Steve Lewit: It’s just another reason people delay taking Roth conversions because they think, “Well, I’m going to lose all that interest and the growth on the interest,” and no, you’re not.
Gabriel Lewit: Nope, nope, it’s a fallacy thinking. Unfortunately, it’s very prevalent, but data and science and numbers will prove that wrong. Now, does that mean you should run out and do a Roth conversion? I always like to do the other side of this. No, because there are times where you will be in a lower tax bracket in the future than you are today when you convert. And it does not always mean you should 100% go rushing to convert everything.
And there’s a lot of nuance to Roth conversions, but ’tis the season, as we talked about, and let us help you with them, right? If you’ve ever heard about these, if you ever thought about these, if you’ve ever wanted to talk about these, we are here to help and you set up a time to talk to us. And let’s work through that together, save you money on taxes and create greater wealth to put in your pocket or little Johnny’s future pocket down the road.
Steve Lewit: You know what you just reminded me of?
Gabriel Lewit: What?
Steve Lewit: Christmas is coming.
Gabriel Lewit: Don’t say that. Bears season’s coming. Let’s go there first. I did see the first Spirit Halloween store sign up just this morning.
Steve Lewit: Yeah.
Gabriel Lewit: I’m like, “What the heck? It’s not even September.”
Steve Lewit: I’ve seen little ads that say, “Get ahead of yourself.”
Gabriel Lewit: All right, folks. Well, call us if we can help you with any questions or Roth conversions in specific, 847-499-3330. You can also email us, info@sglfinancial.com. And of course, you can go to our website, sglfinancial.com and click Contact Us. Well, have a wonderful rest of your weekend. If you’re a Bears fan, go Bears. Preseason game this Saturday. And I can’t wait for that, I love Bears football. Otherwise, root for your team. Go team and have an awesome rest of your week. We’ll see you on the next show.
Steve Lewit: Stay well, everybody.
Gabriel Lewit: Bye now.
Steve Lewit: Bye.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at 847-499-3330. Or visit us on the web at sglfinancial.com and be sure to subscribe to join us on next week’s episode. Investment Advisory Services are offered through SGL Financial, LLC, an SEC Registered Investment Adviser. Insurance and other financial products are offered separately through individually licensed and appointed agents.
