Is Social Security really going to run out of money before you get your due? Is gold a good investment? Should politics affect your stock picks? We drop some truth bombs on these and other misleading (and oft-repeated) money fibs in this episode of Motley Fool Answers (available for free on iTunes and Stitcher).

 

Also in this episode, Carl Richards, the New York Times "sketch guy" columnist, reveals the juiciest parts of his brand-new book, The One-Page Financial Plan (actual size: 211 pages).

Transcript

ALISON SOUTHWICK:

This is Motley Fool Answers. I'm Alison Southwick and, as always, I'm joined by the lovely Dayana Yochim and the handsome Robert Brokamp.

We're going to have fun today, because today we're going to drop some truth bombs on some of the most often-repeated lies about money.

ROBERT BROKAMP:

Kaboom!

ALISON SOUTHWICK:

Then we're going to sit down with Carl Richards, the author of The Behavior Gap. He has a new book out, and we're going to have him tell us about the very best part. It will be a fun show ... or your money back.

ROBERT BROKAMP:

Everything you paid us -- you'll get it back.

ALISON SOUTHWICK:

Exactly. I'm just hoping people aren't like, "I wasted 20 minutes, and my time is worth ...." I don't want to get some lawyer's statement back to me billable by 15-minute increments -- so those are the restrictions that apply.

The point is that you're not getting any money back ...

DAYANA YOCHIM:

... and we're sorry about your 20 minutes. 

ALISON SOUTHWICK:

So you know how when you're at a party and there's this one guy who is like, "You know, the average person swallows like five spiders a night," and it just brings the conversation to a halt? And in the back of your mind you're thinking, "There's no way that's true," but you don't say anything because it's a party and you want to be polite.

Well, guess what? Everyone, including you, believes all kinds of stupid stuff about money, so we're here to help you stop being that guy at the party who's spreading lies ... the spider-eating guy. Don't be the spider-eating-story guy.

So the first lie about money that we're going to talk about is Social Security. We all think Social Security is going to dry out before we get to retirement. Robert, is that true?

Money Lie No. 1: Social Security is going to run dry soon

ROBERT BROKAMP:

It's not true. The thing you need to understand about Social Security is that it's a pay-as-you go program, so the FICA [Federal Insurance Contributions Act] taxes that we pay go pretty much straight to the retirement checks that retirees get. As long as there are people who are working and paying taxes, retirees will get the checks.

Now, it's certainly estimated that we won't be able to cover all those benefits in the future. The Social Security Administration creates a report. It goes to Congress every year. Right now, they estimate that you'll get maybe 77% of your promised benefits by the year 2033. 

DAYANA YOCHIM:

That's like living like a woman. Getting 77 cents on the dollar ...

ROBERT BROKAMP:

That's true! It's the Social Security glass ceiling!

And the report also says that if we just raise the FICA taxes by 3%, all the problems go away. I don't want to pay more in taxes. That's essentially a cut in benefits, right? It just means that you're paying more today. Still, you will get something.

I often tell people if you're in your 40s or younger, assume you're going to get maybe half of what you're promised, just to be safe.

DAYANA YOCHIM:

I think that for some people, maybe it's a good idea to act like Social Security is going to run dry before you're retired, if it makes you start saving more on your own.

Call it the "scared savings plan."

ALISON SOUTHWICK:

[Laughs]

ROBERT BROKAMP:

Yeah, or I would call it "stress test" your retirement plan.

Money Lie No. 2: Buying a house is a good investment

ALISON SOUTHWICK:

Cool. The next one is the lie that buying a house is a good investment.

DAYANA YOCHIM:

All right. Unless we're talking about a rental property, you've got to think of your home as a place that you live, that you decorate, that you throw fantastic dinner parties, and that you eventually die in. 

ROBERT BROKAMP:

It's a big coffin, is essentially what we're saying.

DAYANA YOCHIM:

No. But a house is not a retirement plan, and if you think of it as an investment opportunity, you've got to realize that it's actually kind of a pain-in-the-butt investment.

First of all, it is not very liquid, meaning to get your money out of it and to access any of its value, you've got to sell it, pay to pretty it up, and then pay some pretty hefty transaction costs to get your hands on the money. You can't rebalance it like you can other assets in your portfolio. Like, "Oh, you know what? I think I'm a little heavy in the house" category.

ROBERT BROKAMP:

Sell some of my house and buy some more stocks.

DAYANA YOCHIM:

Right. Anyone want to rent out the garage?

And it's also not cheap to own. You've got to figure in maintenance costs, taxes. 

ALISON SOUTHWICK:

And you're assuming your house is going to appreciate in value ...

DAYANA YOCHIM:

Right ...

ALISON SOUTHWICK:

Which also is not the case.

DAYANA YOCHIM:

Well, yeah. Bottom line is over time, when you factor in all of these costs of ownership, houses just barely keep up with the rate of inflation over a long period of time. So just keep that in mind.

Do not think of it as an investment opportunity, and certainly don't buy a house in lieu of contributing to a retirement plan -- either work or on your own -- because the payoff is just not going to be as great.

ROBERT BROKAMP:

Right. It's sort of how you define investment. If you would define investment as you buy at one price, sell at another price, and then you have cash to use, a house isn't often like that because people are like, "Hey. I made so much on my house." What'd you do with the money? "Well, I bought another house."

DAYANA YOCHIM:

Yeah. Well, the market has gone up just as much.

ROBERT BROKAMP:

Right. And you pay transaction costs. Now we talked a little bit about this in previous podcasts. I do think it's an asset that can be used in retirement if you get, like, a reverse mortgage or downsize, but you don't buy it because you think you're going to double your money over the next couple of years and then sell it. It's just not the same thing.

ALISON SOUTHWICK:

But with renting, aren't I just throwing my money away?

ROBERT BROKAMP:

It depends on the difference between how much you would pay to own the house versus how much to rent. And when you're talking about how much to own it, you have to figure in maintenance and taxes. If renting is significantly less and you use that difference to invest in the stock market, then it's often a very similar type of investment and it could be even better if the stock market does better.

ALISON SOUTHWICK:

All right. Lie No. 3. Politics and world events should influence your investing decisions.

Money Lie No. 3: Politics and world events should influence your investing decisions.

ROBERT BROKAMP:

An interesting thing is that our colleague, Morgan Housel, wrote about this before the last election in 2012, and he cited a study from Edward Jones that said 90% of people were planning to make some change in their portfolio based on the outcome of the election.

What I think is funny about that is if you look at other surveys, people say they hate Congress because Congress never gets anything done. So why would you base an investment decision on people who don't do anything?

But I also think we give too much credit to a single person like the president -- or a group of people like a political party or Congress -- actually having that much influence over the economy. The economy is driven by so many global factors that don't have anything to do with who the president of the United States is, so to make a decision based on who just won that election is probably not going to work out very well. 

ALISON SOUTHWICK:

And you were telling us before the show about a guy who actually invested ahead of Obama becoming president? Maybe he thought socialism was coming.

ROBERT BROKAMP:

Right. He thought that President Obama was going to basically destroy all our property rights, so he sold in 2009. Of course, what happened then was that was the bottom. The stock market has gone up 150%-200% since then. And you'll find people who did the same when George [W.] Bush was elected. It just doesn't work out that way.

And people like Jim Cramer said, when George Bush was elected or right beforehand, that bank stocks are going to do well, because he's going to be favorable to the financial-services industry. By the time George Bush was no longer president, bank stocks were down like 60%. So you just can't anticipate how these things are going to work out.

ALISON SOUTHWICK:

Right. And Obama was supposed to make solar power a priority -- solar stocks were just going to go through the roof. But no, it didn't happen.

ROBERT BROKAMP:

Yeah, and the biggest one, I think, is down like 90%. Something like that.

ALISON SOUTHWICK:

Yeah, so ...

ROBERT BROKAMP:

Don't do it. Vote -- but don't change your portfolio.

ALISON SOUTHWICK:

Right. The next money lie -- keeping a balance on your credit card is good for your credit score. Right, Dayana?

Money Lie No. 4: Keeping a balance on your credit card is good for your credit score.

DAYANA YOCHIM:

Wrong!

I wonder where this myth comes from. I hear it a lot, and I wonder if people think that keeping a balance on the card shows that they're alive and using cards. But this is a myth. You do not have to carry debt to help your credit score.

However, your balances do affect your credit score in this way, in something called the "debt to available credit" ratio. About once a month, your credit card company reports your balances to the credit reporting bureaus, and they look at that amount that you owe compared to your credit limit. It tells them if you're overextending yourself -- if you're close to maxing out your cards -- or if you're being a responsible credit user and keeping your spending well within your limits.

That's what lenders look at in terms of credit card balances, and 30% of your score is based on your credit utilization ratio. Ideally, you want to keep that ratio less than 35%. So if you've got a $10,000 credit limit on your card, you want to keep that balance to less than $3,500 at any one time.

Now, if you're carrying a balance on your card, that is going to affect any wiggle room you have there. Let's say you've got a $3,000 balance on your card. That means at any one time to remain within a safe zone, you've got about $500 that you can spend.

So you don't have to carry a balance to improve your score. 

ALISON SOUTHWICK:

Right ...

DAYANA YOCHIM:

What you do have do, though, is use your card at least occasionally. That gives the lender something to report to the credit bureaus. But you don't have to carry a balance.

ALISON SOUTHWICK:

Pay it off! Use it, but pay it off.

DAYANA YOCHIM:

Right.

ROBERT BROKAMP:

Yeah. So that's probably where the myth comes from. You have to have some credit. You have to have done something. ... But you don't have to have it revolving and going through every month.

ALISON SOUTHWICK:

Our next money lie. Robert, I'm pretty sure that investing in gold is a safe haven and a smart thing that I should do, right?

Money Lie No. 5: Gold is a safe haven and a smart investment.

ROBERT BROKAMP:

Absolutely -- not! 

Anyway, gold has been a means of currency for thousands of years. It's something you can hold and store away in your house, as opposed to a piece of paper that's just floating around and you never know if anyone's going to honor it in the future. I think that's where people think it's a good investment.

The thing is, the returns have shown that it's not a good investment, so if you look back to 1975, gold loses money in more than 40% of the individual calendar years. And even if you stretch that out over 10-year periods, since 1975 it loses money one-third of the time.

So when you think about buying gold today and historically you have a 1-in-3 chance of it being worth less in 2025, is that the kind of investment you want to buy?

ALISON SOUTHWICK:

I don't even really understand -- I mean, I understand the history of gold. People used to exchange gold for goods and services. But gold, itself, doesn't have value. It's a lump of gold. I could turn it into a ring and then it would have value, and someone would want to buy a ring because it has a function ...

DAYANA YOCHIM:

Oh, but the funny thing is when you go to sell your jewelry ...

ALISON SOUTHWICK:

They melt it down!

DAYANA YOCHIM:

Yes. The design doesn't mean anything, unless there's some great provenance or it's by a known designer. They weigh the gold. Then they pay you based on what it says on the scale.

ALISON SOUTHWICK:

It's like there's no value in gold. The only value it has is what some guy thinks ...

ROBERT BROKAMP:

You're just assuming that people in the future are willing to pay more for it. Warren Buffett makes this point all the time. It's not a business. It doesn't increase its profits. It doesn't pay you a dividend. He did a comparison in one of his annual letters a couple of years ago about having all this gold worth this much money.

You could melt it down to a cube that's like 68 feet on each side and hold it for a century. Or you could buy all the cropland in the United States, have 16 ExxonMobils, and another trillion dollars for walking-around money. A century from now, all that farmland and all those ExxonMobils have produced all kinds of food, and profits, and dividends ... but the gold is still just a big cube that's 68 feet on each side. It just doesn't do anything.

ALISON SOUTHWICK:

Is the thinking that if I invest in gold -- and then the world governments collapse and we're all, like, living with shotguns and canned food -- that somehow I will still be wealthy with my mountain of gold? Is that the thinking?

ROBERT BROKAMP:

Yes, that is the thinking. And of course, the counter thought to that is, "OK, so if society is collapsing, why would anyone need gold?"

ALISON SOUTHWICK:

Right. You should be investing in cans of soup and ramen noodles.

DAYANA YOCHIM:

Build your bomb shelter out of gold.

ALISON SOUTHWICK:

The final lie that we're going to drop a truth bomb on, today, and blow up, is that you should take money out of the stock market when you retire.

Money Lie No. 6: You should take your money out of the stock market when you retire.

ALISON SOUTHWICK: Dayana, I'm cashing out when I hit 65. Wait, 67, because that's when Robert convinced me to retire.

DAYANA YOCHIM:

No, Alison!

ALISON SOUTHWICK:

Because we're dropping truth bombs.

DAYANA YOCHIM:

That's right.

ROBERT BROKAMP:

[Snores]

DAYANA YOCHIM:

Well, yes, take some of your money out. Take out the money that you're going to be spending over the next five or 10 years -- the money that you're going to have to pay your mortgage with and that you're going to have to live on. But most of the rest should stay invested, because the average 65-year-old is going to live to be 85 or so, and half are going to live longer than that. That's a lot of years of living ...

ALISON SOUTHWICK:

Twenty years of living ...

DAYANA YOCHIM:

That's a lot of years that you've got to pay to live. That's a lot of years that your money can continue to grow and compound over time, and it's also a lot of years to weather the stock market's ups and downs.

So if you take too much of your money out of the stock market when you retire, your portfolio's not even going to keep pace with inflation, and you're robbing your future quality of life.

ALISON SOUTHWICK:

So when I retire, how much should I keep in the stock market?

DAYANA YOCHIM:

So reading Robert's Rule Your Retirement newsletter ...

ROBERT BROKAMP:

Mm-hmm. Thank you very much.

DAYANA YOCHIM:

... he's found studies that look at safe withdrawal rates for retirees, and those studies indicate retirees should have at least 25% of their portfolios in stocks.

ROBERT BROKAMP:

That's the lower bound. Closer to 50% is probably a good idea.

The good point that you made, Dayana, is that any money you need in the next five years, or so, should definitely be out of the stock market. But once you do that, then it should be closer to something like 60% to 40% or something like that.

Because the inflation risk is the big deal. If you're investing in cash or bonds, you're going to earn 1% to 3% and your portfolio is not going to keep up with inflation at that rate.

ALISON SOUTHWICK:

What should our listeners do when they're at a cocktail party and the spider-eating guy transitions from talking about all the spiders you eat to talking about money and he maybe drops one of these horrible money lies? What should our listeners do? How do they gently correct them without coming across as a jerk? What do you think? Or what do you do? Let's do a little role-playing here. Here we are at our cocktail party ...

DAYANA YOCHIM:

Hi, how are you? It's so nice to meet you.

ALISON SOUTHWICK:

Oh, hey.

ROBERT BROKAMP:

We have great spiders at this party. That's all I'm saying.

ALISON SOUTHWICK:

You know, a funny thing about spiders is that you eat five of them every night when you sleep. Did you also know that (let me see which one) Social Security is doing to dry up before you retire?

ROBERT BROKAMP:

I can understand why you'd say that. It definitely has its financial struggles, but the truth is ... and then I turn on our podcast and play that point that I just explained earlier.

I find people react much better to understanding pros and cons versus being told that they're stupid.

And now a few moments with Carl Richards ...

ALISON SOUTHWICK:

Somehow we're able to convince smart, famous people to sit down with us and answer a few questions, and today that person is Carl Richards.

You would know him by the great cocktail-napkin sketches he did for The New York Times to help explain finance and money, or you might know him for his books, The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money. His latest book is The One-Page Financial Plan: A Simple Way to Be Smart About Your Money and -- spoiler alert -- the book is more than one page.

Dayana sat down with him at FoolFest, last month, to talk about how to tackle financial goals.

DAYANA YOCHIM:

You say, "A great financial plan has nothing to do with what the markets are doing, what your real estate agent is pitching, or the hot stock your brother-in-law told you about. ... It has everything to do with what's most important to you."

But so many people haven't nailed that last part. They have, at best, identified some sort of vague, long-term plan, such as, I'm saving for retirement. That's what I'm going to do. 

How much more specific do they need to be, and what's your advice for helping people find that thing that's most important to them so that they can align their finances?

CARL RICHARDS:

That's a super good question. I think the dilemma is we're not used to having those conversations, so we've got to start there. Like start having those conversations. And you can read plenty about how to do that, but it involves preparing emotionally a little bit -- like figuring out when and where you have those conversations. And be prepared for them to be emotional. That's the first thing. Start talking about money, and, in that process, be prepared for that conversation to be emotional.

Once you're ready to talk about it, then you start learning how to talk about the right things, and the first thing you should learn to talk about is, Where are we going? We spend so much time arguing about how we're going to get somewhere when we haven't even decided where we're going most of the time.

Once you've established you're going to get clear about where you're going, then give yourself permission to guess. I think that's another big thing. We have this off sense of precision, and there's this anxiety wrapped up around I've got to know what my utility bills are going to be 25 years from now if I'm going to do any financial planning.

Just guess a little bit. Be committed -- not to the guess, but to the process of guessing. So guess. Know you're going to be wrong. Believe me, no matter how much research or anxiety or time you put into it, it's still a guess. So just call it what it is. I feel like that releases things a little bit. I don't want to call it a game because it's not a game -- it's serious stuff -- but [calling it a] guess takes a little bit of the false sense of precision and the stress out of it.

So call it a guess ... make your best guess, and then guess again, and guess again. And so we're committed to that process of guessing over time. We will narrow in this huge potential range of outcomes into where we want to be.

DAYANA YOCHIM:

The book is called The One-Page Financial Plan: A Simple Way to be Smart About Your Money. OK, Mr. Succinct. What's the most important single page in your new book?

CARL RICHARDS:

The page I think that's the most important is early in the book, and it's a drawing ... just the word "why" with a bunch of circles around it. I think that's the most important page. It's getting clear about why we're doing these things.

DAYANA YOCHIM:

Why?

CARL RICHARDS:

That's a really good question! No, the reason why is because we aren't used to asking those questions. We're running around doing what the financial pornography network tells us, or what the neighbor tells us, or what the evil brother-in-law ... (I have a great brother-in-law ... so I like to pick on the evil brother-in-law).

DAYANA YOCHIM:

Bash him.

CARL RICHARDS:

... yeah, but it's like getting clear. Asking ourselves why about everything. Like Why are we saving this much? Or Why are we spending this much (or this little) in retirement? Why are we investing this way?

And it's not that we have a good or bad answer. That's the important other piece. This isn't about judgment. Then you get used to asking why and then get used to saying to yourself, Oh, interesting, about the answer. Just noting that.

So we can get clear about our motivations, and the plan becomes really solid. Because once the plan is solid, all this other stuff about what investment to use and when -- that becomes easier. That's why "why" is the most important page in the book.

ALISON SOUTHWICK:

Thanks to Carl Richards for joining us. You can follow him on Twitter, @behaviorgap, and you can get his latest book. Again, that's The One-Page Financial Plan: A Simple Way to Be Smart About Your Money. Well, you can get it everywhere. Amazon. Barnes & Noble ...

ROBERT BROKAMP:

... Carl Richards' house.

ALISON SOUTHWICK:

... Carl Richards' house. Go visit him.

So that's going to do it for today, but I do have an update about loofah. A loofah-related update. As you guys may remember, we talked a couple of episodes ago about The Villages, that community in Florida where swinging seniors like to tell each other that they're ready to swing by putting a loofah on their golf cart antenna. We were a little puzzled why you would do that.

So listener Sean B. shot us an email to let us know that he thinks -- and I think it's a very good theory -- the reason why they do that is because of the movie Caddyshack. There's a scene in Caddyshack that's loofah-related.

DAYANA YOCHIM:

A loofah-centric scene.

ROBERT BROKAMP:

Involving an older woman ...

ALISON SOUTHWICK:

And a loofah. I mean, you can Google it. Just Google Caddyshack and loofah on your own. You're a grown adult. You can do it -- or not. In which case, if you're a kid, don't do it.

ROBERT BROKAMP:

Don't touch a loofah until you're 18.

ALISON SOUTHWICK:

So thanks, Sean B., for helping us solve the mystery of the loofah. I think we're all better people for it. I'm glad we were able to put this one to bed.

OK, theme music written and performed by Dayana Yochim. The show is edited by Rick Engdahl. Our email is answers@fool.com. Please drop us a line and let us know what you're thinking. 

Motley Fool Answers is available for free on iTunes and Stitcher. For Robert Brokamp and Dayana Yochim, I am Alison Southwick. Fool on!

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Podcast buddies and besties Alison SouthwickDayana Yochim and Robert Brokamp, CFP have no position in any stocks mentioned in the riveting text above. The Motley Fool owns shares of ExxonMobil. Try any Motley Fool newsletter service free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.