11 Surprising Facts About Tax Planning, Investing, and Retirement
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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm sharing 11 surprising facts that you probably don't know about tax planning, investing, and retirement. For example, if you retired in the year 2000 with $1 million, you invested it all in the US stock market and withdrew $50,000 per year adjusted for inflation, you would have been out of money by 2018.

So if you want to learn how that could be and have some educational fun with retirement and investing statistics, today's episode is for you. For all the links and resources mentioned, head over to youstaywealthy.com forward slash 134.

First things first, I just want to say that I hope everyone tuning in this week has a safe and wonderful Thanksgiving. I also want to say that I am incredibly grateful for each and every one of you and thankful that you've supported this podcast, left extremely kind reviews, reached out with your great questions, and just continue to follow along and share it with people in your life.

It means more than you might know. In fact, I'm going to share a bit of a personal fun fact here before we get into today's show. And that is in early 2019, I told a few close friends and colleagues that I was going to shut this podcast down. I just, I couldn't seem to find my groove. Listenership was at a standstill and I was just beginning to dread recording the episodes every single week.

Ultimately, as you guys know, I'm still here. I decided to ditch what the so-called podcast consultants and experts were telling me to do. And I just made one final attempt to find my authentic voice and find a format that I would look forward to producing every week. And thankfully, I did, because in two short years, the show catapulted into the Apple Top 100 and now reaches close to 50,000 retirement savers every single month.

even more rewarding than these vanity metrics is that I've had the chance to interact with a good number of listeners through email, through phone calls, and even Zoom over the years. And many of you have gone on to put your trust into my firm to help you navigate retirement and do the heavy lifting for you. So thank you. Thank you for giving me one last chance and for going on this journey with me.

Thank you for your trust and support and thank you for continuing to engage with the show by sending me your great questions and also your very honest, candid feedback.

So with that, let's have a little bit of fun today with some little known tax investing and retirement statistics. Sometimes we can get so caught up in the tactics and strategies and the seriousness of making decisions with our money that we forget to just pull our heads out of the textbooks and acknowledge how enjoyable this stuff is.

Nobody forces me to go to work every day as a financial planner, and you probably aren't listening to this podcast because you don't have anything better to do. To some degree, everyone listening has a passion for finance and numbers and enjoys learning about the markets and taxes and retirement. It's amusing and interesting, and from time to time, I don't think it hurts to push aside the tactical,

nerdy action items and just have a little fun. And Hey, you might even learn a little something new that you can take back to your next big financial decision.

So as mentioned, I've gathered 11 surprising statistics and facts about the markets, taxes, and retirement. And I'm going to lean on Nick Maggiuli to help us get started here with stat number one. So Nick shares that if you invested your money from 1960 to 1980, so that's a 20-year time period, and you used your crystal ball to beat the market by 5% per year, you

you would have had lower returns than if you invested from 1980 to 2000, another 20 year time period, but your crystal ball wasn't working so well and you underperformed the market by 5% per year.

As Nick goes on to share, the year you were born matters almost more than anything else. I'll read that stat one more time. If you invested your money from 1960 to 1980 and you used your crystal ball to beat the market by 5% per year, you would have had lower returns than if you invested from 1980 to 2000 and underperformed the market by 5% per year.

Like I said, Nick said that the year you were born matters almost more than anything else. I think I'd take it a step further and say the year you begin investing and also the year you begin taking retirement income withdrawals matter almost more than anything else. Our next stat comes from the book 100 Years on Wall Street, which I'll link to in the show notes, where the author shares that, quote, the earnings of companies in the Dow Jones were cut in half in 1908.

That year, the Dow Jones index returned a positive 46%. So again, the earnings of the companies in the index were cut in half, but the index itself returned a positive 46%.

Credit to Michael Batnick for digging this one up and helping to highlight that contrary to what most investors think, the economy is not the same as the stock market. The collective wisdom of the stock market can lead to prices that feel very disconnected from reality and from the current economic environment, and more often than not, for the right reason.

The next stat is from Peter Lynch, which likely won't surprise many longtime listeners, especially those that have listened to my episode on the world's worst market timer. Peter shares a more simplified version, which says, starting in 1965, if you invested at the peak of the market in each year, your annual average return was 10.6%.

However, if you timed the market perfectly and instead invested at the low point of each year, your average annual return was 11.7%. In other words, the difference between great timing and lousy timing was only 1.1%. I'll read that again for you. Starting in 1965, if you invested at the peak of the market in each year, your average annual return was 10.6%. If

If instead you time the market perfectly, invested at the low point of each year, your return was 11.7% on average. The difference between great timing and lousy timing was only 1.1%.

As I've shared before, time in the market means more than timing the market. And with current valuations starting to spook a lot of retirement savers, I think this stat is a particularly good one to hang on to right now when considering making meaningful changes to your investment portfolio.

The next one comes from CSInvesting.org and says, "From 1926 to 2015, only 42% of stocks generated a lifetime holding period return greater than one month treasury bills." So from 1926 to 2015, only 42% of individual stocks had a lifetime return greater than one month treasury bills.

As a reminder, one month treasury bills or T-bills are essentially cash. So 42% of individual stocks underperformed cash in that study, showing once again how incredibly challenging it is to actively trade stocks in an attempt to beat the market.

The study goes on to say, "The fact that the overall stock market generates high long-term returns while the majority of individual stocks fail to match one-month T-bills can be attributed to the fact that the stock market as a whole has large positive returns more frequently than large negative returns." You've probably heard me say on the podcast before that on average,

The stock market is in the green at the end of the year, every three years out of four. So 75% of the time, annual returns are positive.

The next one on my list supports my rationale for keeping two to five years or more of living expenses in cash and bonds when you're in retirement and starting to take withdrawals from your portfolio. So here goes. The longest U.S. stock market drawdown lasted about 33 months from September 1929 to June of 1932.

During that time, the stock market was down about 86%. And get this, it took 13 years to break even. The second longest drawdown was from March 2000 to October 2002, where the drawdown lasted about 30 months and the market was down about 49% from peak to trough.

And for this one, it took four years to break even. And while 13 years and four years sounds like a long time to break even, just know that the average break even since 1928 is just over two years. So somewhere between that two to five years of living expenses is a pretty good starting point for building that reserve of short-term high-grade bonds and cash. At my firm, we call this your war chest.

two to five years in your war chest, and maybe even more if you feel the need to take an extra conservative approach. Speaking of painful drawdowns, the next stat comes from the Twitter handle ValueStockGeek and shares that the historical worst case for large cap growth stocks was total devastation with a drop of 80% both in the early 70s and again in the early 2000s.

On the other hand, the historical worst case for small cap value stocks, which you all know that I personally like to have in a portfolio, the worst case for small cap value in the study that he ran was 55%, which is only 5% worse than the US stock market as a whole.

So again, the historical worst case for large cap growth stocks was a drop of 80%, both in the early 70s and again in the early 2000s. On the other hand, the historical worst case for small cap value stocks was 55%, which was only 5% worse than the total US stock market. So with your favorite large cap growth stocks, your Apples, your Amazons, your Teslas, all these stocks outperforming everything for the last 10 years or so and experiencing higher and higher valuations,

it might not be a bad time to ensure that you're properly diversified, especially if you're in or nearing retirement.

And speaking of small cap value stocks, let's revisit the stat that I shared at the very top of the show, which was courtesy of Eric Nelson, where I shared that if you retired in the year 2000 with $1 million and you invested all of it in the US stock market through the Vanguard Total Stock Market Fund, and you withdrew $50,000 per year adjusted for inflation, you would have been out of money in 18 years. By 2018, you would have been out of money.

On the other hand, if you took an academically sound approach to investing and you included small cap value stocks and international stocks and other proper asset classes in your portfolio, you would have over $2.5 million to your name even after taking your $50,000 withdrawals that were adjusted for inflation.

Eric used the dimensional equity balance strategy index fund for his analysis to highlight the potential danger of using a market cap weighted index fund like Vanguard's total stock market fund, especially when you're in retirement and starting to take withdrawals from your portfolio.

Really quick, two things that I personally want to note here. One is, yes, Eric used the dimensional fund strategy in his analysis, but I just want to highlight that you would find similar results using other academically sound funds and constructing that portfolio. My takeaway was not that dimensional funds is the best investment solution or that fund was the best solution, but simply to show how making some very intelligent and informed asset allocation decisions

including a healthy allocation to small cap value stocks and international stocks and emerging market stocks. How doing this, especially in retirement, can make a huge impact.

The second thing is, as most of you are probably saying, most people don't put 100% of their portfolio into stocks as they transition into retirement. A more balanced portfolio that included both the Vanguard Total Stock Market Fund and bonds likely wouldn't have been depleted. But still, your asset allocation is wildly important. And I've shared before on the podcast, market cap weighted funds, especially in the withdrawal phase of life, do have some drawbacks that you should be aware of.

Okay, one final investing statistic and then we'll move on to some fun tax stuff. This one comes from Morgan Housel where he shares that the market has declined at least 10% on average every 11 months for the last 100 years.

I'll say it again. The market has declined at least 10% on average every 11 months for the last 100 years. In other words, if you go on CNBC and predict an upcoming 10% decline in the stock market, you should really just be saying that your prediction is everything's going to be normal. And this upcoming correction happens on average every 11 months. Okay. Moving into a few tax planning stats to bring us home today. The first one,

A 2018 study found that after the Tax Cuts and Jobs Act, only 11.5% of taxpayers now itemize their deductions compared to over 30% from the year prior. In other words, about 90% of taxpayers aren't currently getting a tax benefit from their charitable giving because they're using the standard deduction.

The good news, as most listeners know, is that there are more tax-efficient ways for everyone to give money, one of which is the use of a donor-advised fund.

Speaking of giving money, and this isn't so much of a stat as it is a misconception, but a common misconception that I continue to hear right now, almost on a weekly basis, is that if you gift more than $15,000 to someone, that's the annual gift tax limit. If you gift more than $15,000 to someone, a lot of people think that you have to pay taxes on the additional amount that you give. That following...

that filing a 709 gift tax return equals you paying tax on your gift and that's just not true

If you give more than $15,000 to someone, it could be anyone. It could be a family member, a friend, a neighbor. But if you give more than $15,000 to someone this year, yes, you will have to file a gift tax return. That's form 709 that I just referenced. But that gift tax return is just letting the IRS know. It's just documenting that you gave away more than the annual limit that year.

The amount that you give above and beyond the annual limit just reduces your lifetime exemption from federal gift or estate taxes. And that exemption for a single person is currently $11.7 million. So unless you plan to give away or die with more than $11.7 million, you don't really need to worry about gifting your daughter or friend an extra $15,000 or even an extra $100,000 this year.

However, it's important to note that the lifetime exemption amounts can and do change. So it is something to keep an eye on as tax and estate laws continue to evolve. But just know that, yes, you can give more than the annual gift tax limits. It doesn't mean that you're going to have a tax bill that year.

Okay, our second to last stat for the day is each year, about 66% of taxpayers get a federal tax refund. Even more, the average refund is about $3,000 and about half of all refund recipients plan to use their refund to boost their savings accounts.

To translate all this, the IRS is holding on to a lot of your money, our money for most of the year. And that's money that could be in your pocket and being put to work in places that benefit you and benefit your family.

It could have been used to boost your savings accounts well before you filed your tax return and got your refund. You know, getting a refund is always a nice surprise and feels good, but remember that a refund for most people should signal that you could likely get a little bit more efficient with your tax planning. In a perfect world, you would owe $0, but that's pretty unlikely to hit it right on the dot.

Having to owe a little bit of money to the IRS come tax time just means that you got to hold on to more of your money for a longer period of time. Lastly, a little bit of history to bring us home here today. The very first taxes that were implemented in the United States caused a rebellion. It was a whiskey tax and small whiskey producers had to pay 9 cents per gallon in taxes.

while larger producers were able to cut a deal and only pay six cents. As you can imagine, there's a lot of angry people, violence broke out, tax officers were assaulted, and people actually died. The rebellion eventually ended in 1794, and the whiskey tax remained in effect until 1802 when Thomas Jefferson finally repealed it.

Okay, that was fun. I hope you enjoyed listening today as much as I enjoyed putting this all together. You can grab the show notes from today's episode by going to youstaywealthy.com forward slash 134. Once again, happy Thanksgiving, travel safely this week, and I will see you back here next week. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.