Advisor Larry Sprung’s Not-So-Secret Marketing Weapon: Joy

A lot of families do a great job of saving, but in many cases, they have a lot of funds in qualified money, especially IRA pretax money. That’s going to cause a challenge when they retire because then all that income is going to be taxable.

Sometimes they may be invested in mutual funds. If you’re in a high-income tax bracket and own mutual funds, there are a couple of things you have to be aware of.

Such as?

One is that the mutual fund basically dictates when there are going to be distributions [which will generate a taxable capital gain]. You have no control over that [timing]. They control how much the capital gain is going to be as well.

The second thing is that mutual funds will make distributions toward the end of the year, typically in the fourth quarter.

Consequently, we’ve seen families who made large investments into one or more mutual funds in September or October who, when they got their 1099s at the end of the year, found they had these huge taxable distributions in the form of capital gains — but maybe they’ve owned the fund for only two or three months.

How did that happen?

It doesn’t matter if they issue a capital gain in November and you bought the fund in January or October. You’re getting that capital gain even though you owned the fund for only, maybe, a month.

So you have to be very careful: If you’re going to purchase mutual funds, it’s important to know whether a capital gain is being distributed by that fund and when they normally distribute.

You don’t want to buy it and then a week later get hit with a capital gain.

[I’ll note that] we typically don’t use mutual funds; we use ETFs and individual securities, which are far more tax efficient than mutual funds.

You do say in your book: “Many times people in higher tax brackets are better off being in individual stocks and ETFs rather than mutual funds” because of mutual funds’ fees and expense ratios. Please elaborate on the expense ratio aspect.

People [invested in mutual funds often] don’t have a true sense of what their real cost is. [Clients] deserve to understand how they’re being charged and how much they’re being charged.

Please cite a real-life example.

We were working with a family that had assets at a large bank brokerage. When they saw our fee — which varies based on assets and the work we’re doing — they thought we were expensive. I asked what they were paying, and they said 1%.

But when we looked [closely] at the accounts they had, they were paying an advisory fee of 1% but on top of that, they had a portfolio of mutual funds where the average expense ratio was also 1%.

So they were paying [a total of] 2%. But that was never disclosed to them.

Families need to have full transparency and to understand [exactly] how much they’re paying.

“The more time you have before retirement when you begin planning, the better,” you write. How do you motivate people in their 20s to start saving for retirement? They’re likely not thinking that far ahead.

I talk about compound interest. It’s very important and very compelling.

When you’re in your 20s, you think you have no money to invest and decide to wait till your income is higher.

But that kind of rationale doesn’t work because when your income is higher, you may own a house, have a significant other and kids. So you have more pulls on that money.

But at age 20, if you start putting $1,000 a year in [a retirement account] and increase that a little bit through age 45, you’ll have two million bucks. We show people that.

The important piece is to start now because that compounding effect is going to be hugely beneficial.

We have some very young folks in their early to mid-20s that are pumping a lot of money into retirement accounts. They’re setting themselves up to have a very bright future.

What about people whose employers don’t offer a 401(k) plan?

They can set up a SIMPLE IRA or a Simplified Employee Pension Plan or use a traditional IRA and basically accomplish the same goal.

I think people look at things backwards: We pay everybody else, and whatever is left at the end of the month, is for us.

But we’re the most important person in our own lives, and we should be paying ourselves first — whether that’s putting money into a retirement plan and/or an emergency fund.

There should be a percentage of our income that we’re pulling out to pay ourselves first and then use the rest to pay bills.

What do you think of “cash stuffing” — a way to budget by putting cash in various envelopes assigned to categories, like “Rent,” “Groceries,” “Entertainment” and so on?

It’s an old method that has kind of resurfaced because TikTok shed light on it, and some influencers have been promoting it there. So it started trending among young folks.

It’s an OK methodology. I just don’t think most people have cash on hand these days to really follow it to a “T.”

But it’s viable. My father-in-law uses it in a modified way when he visits Las Vegas.

My final question: What did you do today that brought you joy?

I love talking about my book. So you made my day, Jane!

(Pictured: Larry Sprung)