VORB Goes Bust & I Bond Updates

Our 2 Cents – Episode #134

VORB Goes Bust & I Bond Updates

Richard Branson’s Virgin Orbit (VORB) collapsed last week and Steve and Gabriel are here to discuss what lead to its demise, and the inherent risks involved with picking individual stocks. Plus, they’re sharing details on I bonds, answering listener questions, and more on today’s show!

  1. VORB Goes Bust:
    • Everything has pros and cons and a proper place in your planning, but we like to take a Core + Satellite approach when considering investment options.
    • How does the collapse of VORB showcase the risk of speculative investing?
  2. The “Mansion Tax”:
    • Los Angeles recently introduced an extra tax on homes sold over $5 Million and $10 Million in the county.
    • We’re discussing why making smart tax moves can have a major impact on your wealth.
  3. I Bond Updates:
    • I bonds gained popularity last year, but what are they? And how are the interest rates calculated?
    • There’s been an update to the fixed rate component of these bonds, what does that mean for investors?
    • There are limits on how much you can buy, we’ll share how it works.
  4. Listener Questions:
    • “I’m retiring in about five years and I’m currently maxing out my 401(k), but not adding any other savings. Should I be saving anywhere else even if that means putting less in my 401(k)?” – John
    • “I have a REIT that I purchased several years ago and it’s done nothing but lose money. I’m told that I can’t cash it out but I got a letter from a company offering to buy it from me. Is this worth exploring?” – Amy

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Podcast Transcript

Announcer: You are 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 and financial news, trends, strategies, and more.

Gabriel Lewit: Hello everybody. Welcome to Our 2 Cents. This is Gabriel and Steve, and we are excited to have you here today, of course, as always, and welcome to April.

Steve Lewit: Welcome back from your vacation.

Gabriel Lewit: Thank you very much. I came from a lot of snow in Utah, Park City to be precise. In fact, they’ve had more snow there than they’ve had in the last 40 years, and came back here and then there’s no snow. All gone. Which is nice, actually. So hopefully you guys had a chance to get out there, enjoy some maybe spring break vacations, hopefully somewhere nice and enjoyable, wherever you went. Snow, sun or shine.

Steve Lewit: You’re not supposed to take a vacation from the cold to go into the cold. I couldn’t quite understand that.

Gabriel Lewit: Well, the problem is they don’t offer skiing in Cancun.

Steve Lewit: Oh, you went there to go skiing?

Gabriel Lewit: That’s the problem. Water-skiing, I suppose. But no mountains out there with snow.

Steve Lewit: Folks, what you don’t know is Gabriel was a snowboard instructor, he was really very good on it, who almost killed himself in a halfpipe.

Gabriel Lewit: That was only like six dozen times.

Steve Lewit: All right.

Gabriel Lewit: Nothing to be.

Steve Lewit: I’m glad you made it with your jaw intact.

Gabriel Lewit: Well, I probably have concussions. Who knows?

Steve Lewit: Oh, is that what it is?

Gabriel Lewit: That explains it all.

Steve Lewit: That explains everything. Now I understand.

Gabriel Lewit: Well, yeah, I only had a couple of helmets that were cracked and a few goggles that were cracked in the days, a couple broken bones. Nothing major.

Steve Lewit: I’m not saying a word because your mom and I were pretty, “Uh, is he going to be okay?”.

Gabriel Lewit: Hey, I wasn’t doing back flips and corkscrews and all sorts of other craziness. Just getting a little air out of the halfpipe. Nothing to see there, folks.

Steve Lewit: All right, let’s get some air out of this show.

Gabriel Lewit: All right. Well, yeah, we’ve got a number of topics here lined up for you today, a range of different items, if you will. So we’re going to go ahead and just talk about some of these things here, starting with, actually one of my favorite things to do, and yours too, Dad, I know this, is monitor the news for examples of individual stocks that go bust.

Steve Lewit: Oh yeah, I do.

Gabriel Lewit: Because one of our philosophies, of course, for investing is that you should be cautious of how much you put into individual stocks, which we call satellites, which is actually very appropriate for what we’re going to talk about here today. I’ll get back to that in a second.

Steve Lewit: Explain satellites first before we talk about launching satellites.

Gabriel Lewit: Very brief review here. One of our investment philosophies here at SGL Financial is what’s known as a core/satellite approach. By the way, folks, Steve is, he knocked over his coffee this morning reading his notes, and we had to clean that up before the show, and he, just as we were talking here, knocked over his water. Fortunately, that was capped. That would’ve been a bad way to start the show.

Steve Lewit: I don’t know what’s going on with my hands this morning.

Gabriel Lewit: I think I know what it is. Since you knocked over all your coffee, you didn’t drink the coffee.

Steve Lewit: No, I did.

Gabriel Lewit: So now you’re not quite as awake. Yeah.

Steve Lewit: Huh. That must be it. I’m going to have a sip of coffee. Okay. Hold on. Listen. You want to hear me slurp?

Gabriel Lewit: Of course. Who doesn’t? So, okay, going back to what we were just talking about here. Core/satellite, just as a quick recap, I don’t know if we’ve ever done a deeper dive on this on the show. If not, we should do one. But is our philosophy for investing where core should be the general, as it sounds, core of your portfolio, meaning, in our mind, something that is non-speculative, that’s the biggest driver. And non-speculative means that it makes it more predictable, less risky, and something that we can count on for the future, which of course, as planners, makes a lot of sense. Are we going to give you a plan for the future that is speculative, that may or may not work out, that has a low probability of success and a high failure rate?

Steve Lewit: Yeah. Imagine if we gave you your plan and said, “We love this plan. We hope it works out for you.”

Gabriel Lewit: Yeah. So generally speaking, non-speculative makes sense. I always have trouble with that word, speculative. Okay. Because if you’re trying to build a reliable, predictable plan for the future that you feel good about, we can’t have a high level of speculation risk inside of those investments. So really what we have is a whole core investment menu of items we can choose from that fall under that category of being reliable, predictable, and something that we can count on.

Steve Lewit: At different levels of risk.

Gabriel Lewit: Right, still at different levels of risk, conservative, moderate, aggressive, but we can always feel good about them given time and how they work. Now, satellites, on the other hand, we call them, so we call this a core plus satellite investing approach. Satellite investments are things that are more risky, our speculation-based investments, things like cryptocurrency, option strategies, hedge fund strategies, selling short, flipping real estate, if you’re trying to flip versus a long term rental property.

Steve Lewit: Did you say gold?

Gabriel Lewit: Gold. Individual asset classes is more speculative. Individual stocks is one of the biggest ones there.

Steve Lewit: Definitely.

Gabriel Lewit: And there’s many examples of people out there that say individual stocks is basically akin to gambling. And I’m going to give you an example of that here today, which is part of why we like to emphasize this, because I think once you really embody this approach and really understand it, it just makes a lot of sense.

Steve Lewit: Yeah. I just want to clarify one thing you said, I’m not sure if I heard it incorrectly or distorted in my own mind, but the core satellite can have… When we say it is predictable, that it’s predictable. You can still be very aggressive in the core/satellite. What’s predictable about it is that it’s based on diversification. There’s a goal for growth. We understand what the risks are.

Gabriel Lewit: The chances of it going belly up and losing all its value is pretty much nil.

Steve Lewit: Which is very different than satellites which are highly unknowable.

Gabriel Lewit: Correct. And so we’re going to give you an example of that and we always like to pick on individual stocks from time to time, because of course everybody wants to find the next Apple, or the next Tesla, or the next Amazon. And it sounds so easy in hindsight, you look at the next up and coming company and you buy it.

Steve Lewit: Sure.

Gabriel Lewit: That’s simple. So let’s look at one of these up and coming companies that launched about a year ago, again with my analogies here, literally launched. Katie, can you pull up the chart here for us? Producer Katie’s got it here. So back in 2021, Virgin Orbit Holdings, a component of Virgin Holdings by Virgin Galactic, is another sister company. Virgin Orbit was literally and figuratively launched as a company, and their goal was to compete with SpaceX and to literally launch satellites. Funny, this is why I like this analogy, launch satellites into orbit.

Steve Lewit: It had a different target market than SpaceX. They were in a smaller, I don’t want to get into the details of it, but they were competing with SpaceX in a different target market. And the key here is that England, United Kingdom, this was their flagship getting into space company. So everybody was like, “Wow, this is going to be great.”

Gabriel Lewit: And now folks, remember, let’s say sometimes we have clients come to us, “Hey, well, what’s the next hot IPO? What’s the next X, Y, or Z we should get into?” And knowing that these are very risky, imagine you said, “Okay, in 2021, we’re going to buy here Virgin Orbit for $10.” Or what did it launch at, Katie? It looks like $9 and 67 cents per share. So let’s say you went out there and you bought a thousand shares, ready to rock and roll. You would’ve gotten to a high of about, let’s see, $10 and 31 cents, and it has since-

Steve Lewit: And then-

Gabriel Lewit: Crashed back to earth.

Steve Lewit: The rest of the story, it did not get into orbit.

Gabriel Lewit: It did not go into orbit.

Steve Lewit: Like their first launch did not get into orbit.

Gabriel Lewit: It did not go to the moon, as they like to say, to the moon in investing. So here’s what happened. Virgin Orbit, okay, not Virgin Galactic, but Virgin Orbit, as of I think Monday of this week has declared bankruptcy and the shares are now worth $0.22 per share, or a loss of 97.71% since inception.

Steve Lewit: You have $0.22, it sounds good but that’s 22 cents.

Gabriel Lewit: 22 cents. Yes. I was making it sound better, I suppose.

Steve Lewit: You were making it sound-

Gabriel Lewit: 22 cents.

Steve Lewit: A lot better than it is. There are no dollars attached to this stock right now.

Gabriel Lewit: And so why are we sharing this with you? Well, we like to share examples of the risks of investing and letting you know out there that when you buy individual stocks, it’s a wild west.

Steve Lewit: It’s a big win. Big lose.

Gabriel Lewit: Okay. It’s speculation. And sure, there’s many stocks that you, maybe Virgin Orbit here, you bought at 10 and it went to a thousand, it could, or went to 500.

Steve Lewit: Well, we have clients that bought Apple years ago and made a killing on it.

Gabriel Lewit: And the story here sounded great. Here’s a company, the future is space, the future is satellites, big backing, the only one in Britain, not a lot of competition, launched by Virgin, sorry, Richard Branson, billionaire. What could go wrong with this stock?

Steve Lewit: Guy’s got all the money in the world. He can raise money anywhere. Until his rocket ship did not get into orbit, and then nobody wanted to have anything to do with him.

Gabriel Lewit: So that’s all we wanted to say here. I don’t want to kick this can too much here, but the point is this, any individual stock, yes, when you concentrate your risk inside of it, has the ability to have a higher, more exponential like returns than a index fund or a diversified portfolio. But remember, it also has the opposite potential, which is the potential to crash down to zero with all of your money concentrated inside that one stock.

Steve Lewit: Yeah. Now, there are stocks, Gabriel, that are more conservative, that have histories of earnings and so on,

Gabriel Lewit: Yeah. Of course, you can go out there and buy Walmart and you can buy the Dow. But again, I’m talking specifically about concentrating risk in individual stocks on the hopes that you’re going to make it big.

Steve Lewit: Yeah. I was talking, I had a client yesterday in that is going to, they’re going to retire in five years. Five years, that’s correct. And they’re behind on accumulate. They’re done a great job, they put their kids through college, they’re hard workers, they earn in good income. But now, in the next five years, they have to accumulate a lot of money. And the approach they’re taking is, well, we need to take more risk to get there. And that’s great, you could win big, but if that works against you in five years, you’re not going to retire. You’ll be working the rest of your life.

Gabriel Lewit: I had somebody who was interviewing me last week that said, “Well, don’t you guys make individual stock picks? Find the best companies out there and tell us what those are so we can buy them?” And I said, “Well, frankly, we’ve used a more diversified core approach that’s less risky because of examples like these,” and I gave it to him. He’s like, “I guess that makes a lot of sense.” And again, folks, that’s not to say that you shouldn’t have any exposure, but just like they say when you go gambling at a casino, only bring money that you can afford to lose, that’s the idea behind core satellite. If you can’t afford to lose it, don’t go being very speculative with it.

Steve Lewit: Well, I had a client, I don’t know, two, three weeks ago, who said, “I’m going to buy some crypto, I’m going to buy some Bitcoin,” and he can afford it. I said, “Go for it,” and we can help in different areas of speculation, which is the satellite part of the core/satellite approach.

Gabriel Lewit: And then you get into, do you really need to? Is the juice worth the squeeze on being speculative in the first place?

Steve Lewit: It’s just fun. It’s like spending more money on a car than you should.

Gabriel Lewit: Yeah, exactly. And I know you know more about that than we’re letting on here with that statement.

Steve Lewit: Yeah, I just bought a car paying through my nose.

Gabriel Lewit: Well, because of interest rates, your lease was coming due and interest rates are killer.

Steve Lewit: Don’t buy a car now if you can not buy a car, folks. The deals are terrible.

Gabriel Lewit: Yeah, exactly.

Steve Lewit: My son is smiling at me. I told you it was an irrational business decision, but I just like the car and I don’t like my car anymore. It’s very simple.

Gabriel Lewit: All right, well, hey,

Steve Lewit: Folks, throughout my life, the one bad, not the one I’ve made others, but the ongoing recurring bad business decision I make is I lease my cars, so I get a new one every three years. It’s like I’m Steve rent-a-car. They love me. They love me out there.

Gabriel Lewit: You do like your cars.

Steve Lewit: I do.

Gabriel Lewit: No doubt.

Steve Lewit: I do.

Gabriel Lewit: All right, so that was our topic there. And of course, if you’ve got questions on individual stocks, questions on ones you’re holding, ones you’re thinking about, how it compares to other investment ideas, we’re always here to help guide you through that. You can call us any anytime, (847) 499-3330, or go to sglfinancial.com, click Contact Us, and we will always be here to talk to you. But with that in mind, let’s switch gears. Got another topic here lined up for you.

Steve Lewit: I love your, “Now let’s switch gears,” we’re talking about cars, let’s switch gears.

Gabriel Lewit: I think that was inadvertent. I think that was just a transition phrase that I happened to use that worked out very well in this scenario.

Steve Lewit: You’re right on target.

Gabriel Lewit: Thank you.

Steve Lewit: Two for two so far.

Gabriel Lewit: Yes. Satellites literally were satellites today. Okay. So we’re going to drive on over to Los Angeles. See what I did there?

Steve Lewit: I heard it. That was amazing.

Gabriel Lewit: And we’re going to go, and for purposes of our show here today, we’re going to go buy a house from somebody that is now going to be taxed with what they’re calling the mansion tax.

Steve Lewit: Now, this does apply to a smaller group of the population.

Gabriel Lewit: We just thought this was interesting, we’ve all spent too much time on this.

Steve Lewit: It’s fun to see how the ultra-wealthy are getting taxed.

Gabriel Lewit: So, in Los Angeles now, the super-rich are rushing to sell their properties. Why? Because they, starting on April 1st, which was a couple days ago. Well, actually they were rushing, I suppose…

Steve Lewit: They’ve rushed.

Gabriel Lewit: They’ve rushed.

Steve Lewit: They’ve rushed.

Gabriel Lewit: Well, because there’s now a mansion tax on sales of more than 5 million of an extra of 4%, and then a sales tax of 5.5% on property worth more than 10. So if you’re a poor, rich millionaire, I don’t mean poor, but like poor guy.

Steve Lewit: Well, the fact is 4 million dollars in California is not a mansion.

Gabriel Lewit: Well, 5 million.

Steve Lewit: Well, it’s still not a mansion. It’s a beautiful home.

Gabriel Lewit: But the point is, if you sell your property, 10 million dollars, you’re going to have to cough up in a tax an additional $550,000-

Steve Lewit: That’s amazing.

Gabriel Lewit: To sell that house. And of course, the rich 10 million dollar house owners there are not very happy with that.

Steve Lewit: That’s correct.

Gabriel Lewit: Okay. So if you are very wealthy and you’re thinking about buying your mansion in California, this is just something important for you to be aware of.

Steve Lewit: Yeah, talk to us first.

Gabriel Lewit: But it’s interesting though because-

Steve Lewit: Well, it’s a trend, Gabriel. Look, the Biden administration is talking about raising taxes on the… Everyone’s after the wealthy. And I’m not going to make a comment whether I think that’s a good thing or a bad thing, but it is a targeted population that is where the government and all the local tax authorities are looking, let’s tax these people because they have a lot of money. Now, the other side of that is that they earned a lot of money because they worked hard, or they were smart, or they were creative, and why should they be taxed? But that’s the argument.

Gabriel Lewit: And so this, of course, my connection to what we do here is tax planning, very important. There’s obviously ways of… Well, this one, not a lot of ways around it if you didn’t sell before the deadline, but there are of course, lots of ways to try to reduce taxes if you feel, regardless of your wealth level, that you’re getting taxed more than you should, then we can help with that. That’s a big part of what we do.

Steve Lewit: If taxes go up locally with our new administration that has already promised to raise taxes, there’s nothing we can do about it.

Gabriel Lewit: You’re talking about Chicago?

Steve Lewit: I am.

Gabriel Lewit: The mayor?

Steve Lewit: The mayor. I didn’t want to get into politics here today, but…

Gabriel Lewit: Well, yeah, Lightfoot’s out, and who’s the new guy? What’s the name?

Producer Katie: Brandon Johnson.

Gabriel Lewit: Brandon Johnson? Yeah, that’s right.

Steve Lewit: Yeah. So he is advocating huge tax increases. And what I-

Gabriel Lewit: Well, that sounds fun, right?

Steve Lewit: Yeah. But what I think is said, just on an aside, what I think is said is I believe there are 5 million voters in Chicago, and I think he was elected based on 500,000. Some very, very low turnout.

Gabriel Lewit: Well, yeah, a lot of people only voted for the presidents. They don’t get involved in a lot of other stuff.

Steve Lewit: But it’s the smaller parts of government that actually run stuff.

Gabriel Lewit: Well, usually the more unhappy people are, then the more they’ll turn out to vote for somebody else, which is I think generally what happened here. Most people didn’t like Lori for varieties of reasons, but anywhoos. Okay. Well, that was all we wanted to say about that, mansion tax.

Steve Lewit: Let’s drive on.

Gabriel Lewit: Yeah, let’s drive onto our new topic here, which we’re going to return to the world of I bonds.

Steve Lewit: Oh, okay. I like I bonds.

Gabriel Lewit: I bonds. So I think producer, Katie, you’ve got up there on the screen a little bit of data about I bonds here. Now, if you’ve never bought an I bonds, how do you do? So first and foremost, you go to the page I’m looking at right now in front of me, which is treasurydirect.gov, and then you’ll click on savings bonds and you’ll click on I bonds. And once you’re there, this is where you would purchase one. You can’t buy it through an advisor like us. You got to go directly there.

Steve Lewit: Yeah. We have clients that say, “Hey, can you buy me some I bonds?” And the answer to that is…

Gabriel Lewit: No, we cannot.

Steve Lewit: No, we cannot.

Gabriel Lewit: We can help you buy yourself some I bonds, which is sometimes a very good idea.

Steve Lewit: And we do.

Gabriel Lewit: And we do. Yeah. So right now, folks, I bonds are paying 6.89%, but what we’re going to do is dive into a little bit of how these work. They were most popular in the news about six months ago when you may or may not have heard that they were paying an eye watering 9.62%.

Steve Lewit: Yeah, it’s like, how many can I get?

Gabriel Lewit: Yeah, well, we’ll talk about that here just as a review in just a second. And so I bonds are basically made up of two components. You’ve got a fixed rate plus a rate that changes with inflation, and you add the two together, and that’s going to be your current stated rate.

Steve Lewit: Okay, so on the nine point, what was it, 64?

Gabriel Lewit: 62.

Steve Lewit: On the 9.62, Gabriel, what was the fixed rate?

Gabriel Lewit: The fixed rate was zero.

Steve Lewit: Zero.

Gabriel Lewit: And the inflation component basically stated rate, based on the inflation rate at the time, was 9.62. So zero plus 9.62 equals?

Steve Lewit: 9.62.

Gabriel Lewit: You got it.

Steve Lewit: Oh, God. I passed.

Gabriel Lewit: Gold star.

Steve Lewit: Now people think, well, that’s going to be for 30 years, but it-

Gabriel Lewit: Is not.

Steve Lewit: It gets evaluated every?

Gabriel Lewit: Six months.

Steve Lewit: So, in this six months comes up?

Gabriel Lewit: On April 30th

Steve Lewit: And on April 30th, what is the inflation?

Gabriel Lewit: I don’t know yet.

Steve Lewit: But it’s not going to be 9.64. 62.

Gabriel Lewit: Well, so the current inflation rate on the last round that is now currently, you could buy this today is, again, 6.89 is the total rate that you get, but the inflation component is 6.49. So here’s what happened. After the last round, the government changed the formula just a little bit where the fixed rate component was no longer zero, the fixed rate component was 0.4%. So people that are buying right now are going to get a 0.4% plus the inflation component, which was 6.49, for a total of 6.89%.

Steve Lewit: But the people that have the old bond that they bought at the higher rate.

Gabriel Lewit: At 9.62.

Steve Lewit: Have no fixed.

Gabriel Lewit: Have no fixed component. And when the new inflation component resets here on May 1st, the old people are going to get, let’s say the inflation component resets to six. The old people that had 9.62% I bonds will now get six.

Steve Lewit: And the new people will get?

Gabriel Lewit: The new people will get six plus 0.4, or 6.4%.

Steve Lewit: Exactly.

Gabriel Lewit: So, what’s funny about this is a lot of people felt like they missed out on buying the 9.62. And ironically enough, if you keep these long enough, the new ones at the lower rate will probably outperform-

Steve Lewit: Are the higher rate.

Gabriel Lewit: Will probably outperform the old ones.

Steve Lewit: Because that 0.4 is guaranteed for a lifetime.

Gabriel Lewit: For the lifetime of the I bonds.

Steve Lewit: Exactly.

Gabriel Lewit: Okay. So even if the inflation component dropped to zero, people that buy the I bonds today will get 0.4, people that bought the old I bonds will get zero.

Steve Lewit: Yeah, it’s complicated folks. Gabriel and I were discussing this.

Gabriel Lewit: The two of us.

Steve Lewit: The two of us, the two cents, were discussing this, I got him all frustrated because I said, “What? How does that work again?”. Yeah, I kind of got-

Gabriel Lewit: It is a little confusing.

Steve Lewit: I kind of got confused in my head and so if you are interested in I bonds or you want an explanation of how they work, I can now explain it to you accurately. Just want you all to know that.

Gabriel Lewit: Well, so what’s interesting here is, again, you mentioned that people inadvertently thought that that 9.62% was locked in for forever. It is a variable rate that resets every six months. And so if inflation comes back down to a more reasonable level.

Steve Lewit: 2%.

Gabriel Lewit: These aren’t going to be up at sixes, sevens, eights, nines for forever. But it’s still a good opportunity if you compare it to a savings account, you are currently getting likely a higher rate using these. Now the limit, however, is $10,000 per year, per person. So you can’t go in and chuck a hundred grand into here in one fell swoop.

Steve Lewit: That’s correct. That is correct.

Gabriel Lewit: A little bit of… There’s ways around that a little bit. If you’re interested, we can guide you through it. But just something to be aware of it, there is some limitations to it. And you’ve also got to keep the money in there for at least a full year and there’s a slight early withdrawal penalty if you take the money out, I think it’s before three years.

Steve Lewit: I thought it was five.

Gabriel Lewit: Might be five years.

Steve Lewit: I think it’s five years, yeah.

Gabriel Lewit: I got to double check on that part. But that’s the gist overall and if you’re at all interested, you can always give us a call. We’ll help you out.

Steve Lewit: Yes, we will.

Gabriel Lewit: All right. Well, very good.

Steve Lewit: And now we are orbiting to what topic?

Gabriel Lewit: We’re rotating around to…

Steve Lewit: Client questions?

Gabriel Lewit: Listener questions.

Steve Lewit: Oh, good.

Gabriel Lewit: Yes, indeed.

Steve Lewit: I like those.

Gabriel Lewit: All right. So we’ve got two here for us today to chat through. First is John. John, you emailed us and said you’re retiring in five years, you’ve currently been maxing out your 401k. But your question is, should you be saving anywhere else other than your 401k, even if that meant changing how much you were adding to your 401k?

Steve Lewit: Could you repeat that?

Gabriel Lewit: He’s only saving in his 401k.

Steve Lewit: That’s all he’s saving?

Gabriel Lewit: Mm-hmm.

Steve Lewit: Well, John.

Gabriel Lewit: Maxing it out.

Steve Lewit: I don’t know how to answer it. I would say, of course, if you can save more, save more, it would depend.

Gabriel Lewit: Well, he’s asking if it means should he diversify where he saves? I’m paraphrasing.

Steve Lewit: Well, here’s where my head immediate went, Gabriel, it said, look, you’re retiring in five years. We need to know what you spend and what your income is going to look like in five years. That’ll determine how much you need to save between now and five years. You might have enough savings now to cover your retirement, which means you can spend money or save it. So the first question is, do you have enough money saved? The second question is, should you save in different places? Generally, I’d say absolutely.

Gabriel Lewit: Yeah. So that’s, John there’s a concept called tax diversification, which means when you go to take money out of your investments, having accounts of different tax types is very valuable. So if you have it all in a pre-tax 401k, let’s say for simplicity, it truly was all your savings, then you only have one tax type, which is pre-tax deferred IRA money and no other tax types. So Dad, if that was the case, how does that impact somebody in retirement?

Steve Lewit: Well, think of it this way. We’re in an economic condition now where the government is looking for money, they can’t get it. So if you think taxes are going up in the future, all that money that comes out of a retirement account is a hundred percent taxable. So if taxes go up, you’re going to pay through the nose.

Gabriel Lewit: And if you have no other sources of tax types, then that’s your only option for money and you pay what you pay and you get what you get.

Steve Lewit: Yeah, so the other tax types are capital gains or ordinary income, just regular…

Gabriel Lewit: Which is just how pre-tax IRAs get taxed.

Steve Lewit: [inaudible 00:26:20] or tax-free. So in a perfect world, we’d like to have three buckets from which we can draw from in any particular year so we make the wisest decision.

Gabriel Lewit: Yeah. So to quickly answer your question, John, if you can, map out a plan that shows you exactly how much you need, as Steve said, and then we can look to see if you have no other tax diversification of any kind, it’s generally a good idea. If you’re under certain tax brackets, Roth would make a lot of sense for you. There’s quite a few different options available to you. And generally speaking, we like that idea.

Steve Lewit: Does John say how old he is?

Gabriel Lewit: He did not.

Steve Lewit: He did not? Nope. All right.

Gabriel Lewit: I assume, well he said retiring in five years-ish, so probably, I don’t know, 60-ish. I’m just-

Steve Lewit: Yeah, if you’re 60, a younger person retiring rather than somebody a bit older.

Gabriel Lewit: Yeah. John, if you’re well under 60 then definitely is the answer to your question because you can’t access your 401k funds until you are 60. So if you’re retiring and you’re 55, or you’re 50, you need to have different tax types available to you.

Steve Lewit: And you have lots and lots of options the younger you are.

Gabriel Lewit: Indeed. Okay. Our next and last listener question here for today is from Amy. And Amy says that, again, paraphrasing here, bought a REIT a couple of years ago, it’s been losing money, and I’m being told that I can’t cash it out, but I did get a letter from another company offering to buy it from me at a certain price. Is that worth it?

Steve Lewit: How do you say? Well, I can’t say. The problem with many REITs is that they’re still paying a return, Gabriel, on the REIT, they’re getting a nice return. But you can’t get your principal out, and you may never get your principal out, and there may come a point when you don’t get the interest that they promised either. So the question is, if I buy it out at that price, can I do better than I’m doing in the REIT or have more peace of mind because some REITs, that money is gone.

Gabriel Lewit: Yeah. I had a client who came to me, this was four or five years ago, and he had a REIT and had lost half its value and he was like, “Let’s get rid of this thing. I’m done with it. I just want to put in something else.” And we called the REIT company together.

Steve Lewit: Yeah, good luck.

Gabriel Lewit: And they said, he was very surprised to learn this, “Yes, you cannot redeem this until death.”

Steve Lewit: And the question is-

Gabriel Lewit: And he did not expect that. So lot of times these REITs, I don’t know how they get sold because we don’t sell individual REITs, but they’ve got to be just misleading people because every person that I’ve had that’s come to me with an individual REIT has always disliked it afterwards and not been happy and hasn’t been able to access the money, is frustrated by the offers they’re getting, or non-offers. It’s really, it’s like a rodeo.

Steve Lewit: It is like a rodeo and if you read the first page of a REIT-

Gabriel Lewit: Prospectus.

Steve Lewit: Prospectus, just before you buy a REIT, read the first page, and you won’t buy the REIT.

Gabriel Lewit: Well, yeah, folks, that’s not to diverge from, Amy, your question. But yeah, we don’t see many advantages with buying an individual REIT, if anything, a REIT fund, that’s fully liquid.

Steve Lewit: Yeah. I have a client that’s getting an 8% guaranteed return, well, guaranteed, and has been getting it for a long time, can’t get his money out. And he had a lot of money in the REIT so, if it lasts, it’s like buying an immediate annuity and losing all your principle.

Gabriel Lewit: In some ways, if you can’t access it, is it really there?

Steve Lewit: Exactly.

Gabriel Lewit: Yeah. So Amy, to answer your question, that’s a hard one because we don’t know all the specifics. You’ve been saying it’s the principal’s losing money, I don’t know if it’s still paying you a yield or return, but by and large you do a cost-benefit analysis with the price that you’re getting from the buyout and if it’s more important to you to have that money liquid and make more somewhere else, then yeah, it might be a good idea.

Steve Lewit: And Amy, if you send us the offering, we’ll give you a second opinion on that if you would like.

Gabriel Lewit: Yes, indeed.

Steve Lewit: We will love second opinions.

Gabriel Lewit: We shall.

Steve Lewit: And we have lots of-

Gabriel Lewit: We’ll give you our 2 cents.

Steve Lewit: And we have lots of them.

Gabriel Lewit: All right, our friends, we have had fun with you here today. Hopefully you enjoyed the show. And of course if you’ve got questions, you call us anytime. (847) 499-3330. And if you’ve got questions, email us info@sglfinancial.com. We’ll answer them on an upcoming show episode.

Steve Lewit: And wishing you all happy holidays.

Gabriel Lewit: Oh, yes. Well.

Steve Lewit: Big holidays happening here. Let me see. Sunday. Yeah.

Gabriel Lewit: Passover, right?

Steve Lewit: And Good Friday.

Gabriel Lewit: Good Friday. Yeah. And a very happy spring and April, now that we’re… I think warmer weather is ahead this weekend too.

Steve Lewit: And a happy rest of your life. We’re just wishing a lot of happy.

Gabriel Lewit: And a great century.

Steve Lewit: Have a great century, everybody.

Gabriel Lewit: Have a great day. We’ll talk to you on the next show. Stay well.

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.

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