How Thinking You’re Smart about Finances Is Unwise

Paul Adams interviews Roy Rasera

Hello, and welcome to Sound Financial Bites. My name is Paul Adams. I’m the president and CEO of Sound Financial Group. I’m excited about our topic today. We’re going to talk about how being smart about finances could be unwise.

Our guest is Roy Rasera, one our advisers here at Sound Financial Group. Roy moved up from Portland just a couple of years ago, and has been in the business 13 or 14 years, but prior that, had a career at Intel. At Intel, he was an engineer that piggybacked on his 3 degrees from MIT, and he’s also a legitimate member of Mensa. Now, why is all that important and why does it apply to our conversation today?

Well, we find that really smart, really successful people, and Roy being one of them people, tend to make decisions that could actually hurt them financially, that somebody without the success and maybe without some of the mental horsepower would have never have thought to make. It’s almost like they got the opportunity to do a better job of making some mistakes because of the horsepower they brought to the table intellectually, when it came to looking at their finances.

He’s an incredible guy who cares a lot about his family, and cares a ton about his clients is here with us today and we’re honored to have you. Welcome Roy.

Thank you very much.

Roy and I were talking ahead of time, and one of the things that we talked about is distinguishing 3 different levels that either help people be successful or could get them in trouble. We talked about it being clever, being smart, and then having wisdom. I’m going to give you one quick example, and then we’re going through some of the mistakes we’ve seen people make financially, and what that might mean. So, clever it might be, I really research a decision I make, or I really made one great decision. I would give some examples to that. Smart might be I research the heck about every decision that I make, individually as decisions.

Wisdom is when we seek out the council, when we seek out the help from other people that’s really targeted at helping us see how all of those pieces fit together, not just picking one or hoping for one. Could you give us some examples of what you’ve seen in terms of , mistakes, successes, or maybe even a general orientation when they’ve got that kind of mental horsepower?

Well maybe I should start with some of my background and my experience before I even got into this industry. One of the things that I found when I was at Intel, and this goes back to late ’90s early 2000s, is there was a point in time where there was a lot of money coming into tech fields and a lot of expansion there, stock options, all that type of thing was going on. I was in a position where I didn’t know what to do with all these stuff. I was doing all the things that I was told I should do: hold the options because they will always go up and you’ll do great, just on the options alone that you’d get from your company, and max out the 401k because you want to retire there someday. Purchase paid and stock registration plan and do all of these things, okay?

It was like, even though you depended on your income from your place of employment, you also went all-in on any wealth you’d manage to save on your same place of employment. If we all think back to the ’90s, that was just normal that people did that.

It probably can be normal again sometime in the future. For some people it’s normal now depending on what or where their industry is in. At a certain point, I’d decided I needed help, and as most smart people realize, there’s a limit to how much they can do time-wise, energy-wise, mental capacity in different areas of life. I’m not going to go be a brain surgeon. If I need brain surgery, I’m not going to be able to figure that out. Someone else had to figure that out over the last couple of centuries, go through schooling, learn how to do that, and there are brain surgeons out there. I’m not going to be able to do that. People don’t have that orientation around finance, but at some point many people realize they need a really good banker. A really good bank relationship, I need really good mortgage banker. I need a really good investment — real estate investment person maybe. I need a good insurance person.

I was trying to find the right people for myself because I needed a team to work with. I could only go so far as an individual, so as I was trying to find that, one of the people I engaged was a financial adviser. To make a very interestingly long story short, the punchline from the 80-paged financial plan that I got was basically that I could retire when I was 42. So I thought it was great. I should’ve gotten a plan like three years ago.

Everything in the plan happened just as predicted.

Exactly. When I went back to them 6 months later, Intel had changed the way that they were doing their bonus structures, there were more 401k matches, the options had shifted around to different types of structures that are now restricted stocks. Everybody knows all those things, but my living situation had changed. One of my rental properties had some vacancy rights that I hadn’t put into the plan. Gas prices and food prices had gone up faster than I had thought inflation would go. All of these things around me shifted, and I went back I said, “I don’t think this plan is going to work out. What do we do?” They said “Well, for 500 more dollars we can put new assumptions into the plan and print you out a new one.” I said “You have got to be kidding me.” I can create a really good spreadsheet and change the numbers at the top two and have numbers at the bottom come out different too. Why am I paying for this? That was my experience of the financial industry at the time, but I was smart enough to know I needed help, I just didn’t realize that a lot of the help that was out there was also quite limited in terms of wisdom.

Even that was getting as far as smart. It wasn’t necessarily doing a good job of helping you see it at more global picture.

It was the presumption that the world would enfold exactly as it was, the day that I created the financial plan.

So all had to work out perfectly the way the plan was written that day. When one thing changed when you walk out the door, it’s done. Does it work?

Exactly. Like, what if interest rates are zero for a decade? They weren’t when I did that in 2000. What if the market goes down 40%? Which it has maybe twice since then.

Tell everyone about the journey you went on afterwards to find competent help.

I started interviewing. As I realized that this was a limited static snapshot of a future time that would never happen. There was a consolation, a possible future is out there and they print it out one and handed it to me, and I would never get to that star. I would either be way on one side positive or way on one side negative but I never hit that one.

I was working with a client who is a CPA, and it was actually where the consults that help build one of state lotteries. When I went through and talked about all the variables that have to be hit just right, and I named off 10 or 12 variables you have to hit, he sat back in his chair and said, “Did you realize it’s more likely to hit the lottery than hit 12 variables?” And we went from that smart, clever, I’ll figure it out, we just got to get the variables right, to realizing that it had to be something different. I don’t want to take away from this something different you found.

Got it. Well I found that there were basically two models at that time, and I went on a journey of trying to find competent help. As I said I was looking for the banker, the investment, real estate mortgage person, a primary mortgage person, the attorneys, which I find out now. Of course, you need a suite of attorneys, they’re state attorneys in your business, your litigation attorney, your real estate attorney, it’s like such specialization there. But the financial adviser role is one that I interviewed and used partially some.

I went through 15 of them over the next three years. One of the challenges for me was that they were either a variant on what I’d already seen, which was pay us money, what predict the future that will never happen, or they were a variant of roll-over your accounts, we’ve got this great asset allocation model either we beat the market or we do great trading; it was focused only around that one component in my finances. When I asked those people, “I’m looking at evaluating another real estate deal. Can you help me pencil it out, can you help me figure out what’s some of the ripple effects might be from this? Are there two or three back-up systems in case it didn’t pan out the way we think it’s going to pan out?” It was like deer in the headlights, or they’d say, “Go and talk to a real estate person.”

Or they’d say just, “Instead of owning real estate, just invest it with us.”

Well, that was sometimes. Or: “Hey if this cash flows you can put that into one of the many portfolios we have for you.” Another thing that they would come and tell me was, “You need to put money in the retirement plan, in the IRA, and all these places. Open a couple of thousand in this, a couple of thousand of that amount and you’ll have a big pile of money out here someday.” And I said, “Well, let me just walk through something with you. I’m a little concerned that today taxes are historically relatively low income taxes. I think I have the most deductions and likely to have in my entire life.” I can write off my mortgage, I can abbreviate properties, I can write off my business expenses. I get a deduction for having kids, I can write off my contributions to retirement plans.

I’m at a point where I’m hopefully going to progress in my career, so every year hereafter, hopefully my income will be higher. Right now I’m at the lowest income, most deduction, lowest income tax environment in hopefully my life, because probably taxes are going to go up, probably to make more money. If I’m successful by the time I get to retirement, maybe the house has paid off. I’m not working in the business anymore, I can’t write off my business expenses. I can’t write off contributions of 401ks, IRAs because I’m not working, I don’t have earned income. Maybe most of my rental properties have depreciated. God willing my kids have moved out.

I’ve lost almost all of my deductions right at the time when I think taxes may be higher, and my reverse tax planning my retirement strategy here. Is there something I can do to help offset that, or some things that I might be able to use to relieve some of that tax burden that’s going to be forced upon me, when the money from those retirement is pushed out to me. The best answer I had at that time was — if you put more money in, there will be more money to pay the higher taxes to that.

Wow! Out of the 15, that was the best that you? You were actually told, “Hey we understand that it could be a big back and burn on taxes on this. So what you should do is just put more fuel on the fire.”

Exactly, and not just that, but there was also the question of “If I’m reverse tax planning that part of my world, one of the other things that would come up was, you’ll be in a lower tax bracket then,” and I said, “Well why would I be in the lower tax bracket?” “Because you’ll need less income.” “Why would I want less income?” When I’m 63, 65, whatever, and I’m used to 300 or 500, why would I suddenly not want to still have that? Right at the time that my health care cost are likely to go up. My leisure expenses are likely to go up because now I have all these time.

Seven days of weekend.

Sure. House is paid off. Great. There’s a couple of thousand a month that maybe I won’t need, but that’s going to go off to healthcare cost or vacation to see the kids, or the grandkids. All of the things that I would now want to use that money for.

But wait…there’s more?!

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Paul Adams is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Sound Financial Group is not an affiliate or subsidiary of PAS or Guardian.

This podcast is meant for general informational purposes and is not to be construed as tax, legal, or investment advice. You should consult a financial professional regarding your individual situation.

Guest speakers are not affiliated with Guardian or PAS unless otherwise stated, and their opinions are their own. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. Past performance is not a guarantee of future results.

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