Announcer:
It’s time now on KROS for Financial Focus, brought to you by NelsonCorp Wealth Management. The opinions voiced in this show are for general information only, and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated, a broker-dealer, member FINRA/SIPC. Investment advisor representative Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. Now, here’s today’s Financial Focus program.
Gary Determan:
Well, I think you’re going to enjoy the program. We’ve got Dave Nelson in studio with us. This is always great.
Dave Nelson:
Well, thank you.
Gary Determan:
But I was talking to you before we went on air.
Dave Nelson:
Sure.
Gary Determan:
Of course, Mega Million is now over $1 billion. Powerball just recently went for $1 billion. If someone were to win that amount of money, what would your advice be?
Dave Nelson:
Well, the first thing is, I think, understanding what they’ll actually get. So, depending on interest rates will dictate what the lump sum is. So, for quite some time, when interest rates were really, really, really low, so we’re going back 18 months ago, give or take, and prior to that for a 10-year period of time where we are 1-2%, the lump sum was probably somewhere in the neighborhood of like 70% of that total. So, if it was $1 billion, you’re going to end up with $700 million. So, that’s the discount of taking the lump sum from the lottery itself.
Then you’ve got taxes to deal with, which is also really important that people need to understand. And depending on the state in which you reside will dictate what that is, but you’re looking at 40%, give or take, I’m rounding things off here, that you’re throwing out the window to the federal government.
And then you’re going to have some, depending on, again, a state, maybe another 5%, maybe 10% if you happen to be in California like the last winner, I think it’s 14% out there.
So, 40%, 14%. 54% of that money is being thrown out the window. So, that $1 billion is all of a sudden looking like $250-300 million. Still a big number, don’t get me wrong. But anyway, people just, “You got $1 billion.” No, you don’t have $1 billion, you got about $300 million. Again, round numbers.
So, you’ve got a couple decisions at that point, and that being probably the biggest thing is that everybody under the sun is going to be attacking you, for money. I think the statistics are that the average person, and I’m not joking when I say this, that the average person is filing bankruptcy. The winner, the lottery winner, is filing bankruptcy, in a period of three to five years on average.
Some succeed, many don’t. And so, we use the example of a pro football player, or something like that. We bought out a practice. It’s been probably give or take five years ago now. And this gentleman’s practice from Dubuque, Iowa, he worked with a lot of pro athletes, and mostly the athletes that he worked with were football players.
And these football players, a lot of them hit the lottery, for them. It wasn’t the magnitude I just referenced earlier, with a $1 billion dollar price tag, but it’s $5 million, $10 million, $20 million. And by time they ended up paying all the tax, and paying all the agent fees, and attorney fees, and all this stuff, they still had a pretty good pile of money, but the bottom line, it was a lot less than what people would imagine.
Then on top of that, many of these individuals were under tremendous pressure from friends and relatives. And that being that many of them came from nothing, and the bottom line is they had pals through the years that they all worked out together, they practiced together. And if one lucky one makes it to the big time, the rule is that you’re going to take care of your pals because they didn’t make it and you did. You’re going to take care of them, just like if the shoe was on the other foot, in theory, would take place.
And in reality, many of those did follow through with their commitments. We had one, literally, that we were working with for a number of years, and he no longer really has any money to oversee. It’s kind of… Not kind of sad, it’s quite sad. But there was 34 cell bills, so cell phone bills. That was one of the items that we were making payments for on his behalf. that all these guys got under this plan, and he had every friend from years gone by that were on the plan. And again, eventually he went broke, pretty much broke. I mean, he’s got a few hundred thousand bucks, but that’s it. And so, it is really quite sad.
So, you’ve got the financial part of it that I think realistically can be handled. In other words, what we try to share with people, whether it’s small amounts of money or large amounts of money, is if you spend a dollar today, you not only lost that dollar, you lost the earnings on that dollar. So, the idea would be to try to keep as many dollars together as long as you can, and in theory, live off the earnings from that dollar.
And so, again, I’ve got $300 million, let’s say, in this example. You take a realistic assumption rate of return today, say 4-5%. I mean, that’s $15 million that is flowing in the door each and every year, and will, basically, in theory, forever, if you just spend the earnings from it.
But that’s pretty hard to do. Because, again, “I want this house. I’ve always dreamt of a place in Arizona.” Or, “I’ve dreamt of a place, and I want to go to Hawaii, and I want this, and I want that.” And, “I owe my parents, and I want to give…” And you start adding up, and it’s millions of dollars that in a very short period of time disappear.
And so, in theory, that’s the big spend, and then we’re going to put the rest of the money aside and we’re going to live off of that, over a period of time.
But that doesn’t happen in the real world. The real world is, you now have some other thing. “Well, I need to upgrade this now, and I need to upgrade that now.” And pretty soon we’re dipping in the principal and dipping in the principal and dipping in the principal.
So, it takes a lot of coaching, and I say tough love. We’re dealing with a gentleman, we’re in the very early stages. He lives in California. Most of the year, he lives in Wyoming. He has a place in Iowa. That’s where we met him. And he’s a billionaire, and the bottom line is, he’s in the midst of a transaction as we speak, that will be $115 million that will go to charity and $350 million is essentially going to go into his pocket.
And what we’re talking to him about is basically these same concepts. This is a very well-educated individual. This is a person that’s had money, continues to have money, and now it’s a situation of how do we handle this going forward?
He’s not a spendaholic, so he will succeed. He’s already succeeded, but he’ll continue to succeed. Whereas, again, the average person that came into $10 million or $20 million or $100 million for that matter that’s never really had money, more often than not, the odds are really stacked against them. So, they need tough love. They need coaching, and they need to be told, “No, you can’t do this and you can’t do that.” And it’s now a question of will they take that advice? Or are they just going to say, “The hell with you, and I’m going to spend what I want to spend,” and pretty soon they’re out of money.
There was a guy out in the Sabula area that bought everybody and their brother houses and cars and whatever, we’re going back probably 20-plus years ago, and eventually ran out of money. And so, it’s just unfortunate to see stuff like that.
And this could be a really good thing. I mean, one of the things I tell clients all the time is, money is either a blessing or a curse. There’s no in between. So, the challenge is to make it a blessing. I’ve said to people for a number of years that I think the greatest thing that individuals could do would be to take the lion’s share of it and set up some type of structured arrangement where that money’s going to go to charity. And the good, warm fuzzy feeling. And again, people that don’t have money don’t understand the warm fuzzy feeling that you get and the comfort in your own skin, that I feel better about myself… Because again, there’s a lot of guilt that comes with money, too. People don’t realize that if I have money and somebody else doesn’t, there’s a tremendous amount of guilt that comes along with that.
And so, again, I think it’s really important to understand there’s always two decisions with this. One’s the financial, and one’s the emotional, and the emotional one is the one that we really spend a lot of time with people.
We’ve got one in the Iowa City area right now that’s give or take $100 million bucks. Again, wasn’t a lotto. This was, I earned it. Female, very successful individual. We’ve been working with her probably now I’m going to say 8-10 years, and she’s coming into an enormous amount of money here in the foreseeable future. And we even had her family. We do coaching, and we bring them on the Zoom call, bring them in, and we just basically tell them the way it is. Oftentimes, they don’t want to hear it, but we’re going to tell them, and we’ll see if they take our advice.
Gary Determan:
We’re going to take a break for the weather here in about a minute. And I don’t want to get too personal, but you grew up a blue-collar family. Dad was a factory worker. You’ve done very well. How have you handled your success?
Dave Nelson:
My wake-up call basically came from a workshop that I attended years and years ago. A minister put it on, and the topic was, God Wants You to be Rich. And so, that was really an eye-opener to me understanding money and what have you. Because I dealt with a lot of guilt myself around Christmastime, feeling I’ve got a few things and other people don’t, and so on and so on. So, I listened to this guy.
And essentially the concept is this: If you’re really good at what you do, and again, without pounding my own chest, I’m really good at what I do, go out and be successful. Make as much as you can, doing it the right way, so that you can give it away. And that’s basically how I’ve lived my life. I enjoy giving away hundreds of thousands of dollars every year, to charities, in our area. It’s a real turn on, and I’m very blessed to have a skill that I could do well.
And then, again, it’s about giving it back, and the warm fuzzy feeling you get from that is unbelievable. And as somebody told me, the more you give, the more that comes to you, and that’s exactly what I’m living, day in, day out. We get phone calls all the time, people that need help on this or that, and it’s just incredible. So, anyway.
Gary Determan:
Let’s break for the weather. It is being brought to you by Kelly Heating and air conditioning.
Andrew Stutzke:
It’s a little cooler temperature pattern expected for your Wednesday, with more clouds and an outside chance of a shower or thunderstorm as we go throughout the day. Temperatures heading for the low 80s this afternoon. Still could see an isolated shower storm this evening, with temperatures dropping into the upper 60s for your overnight lows. I’m meteorologist Andrew Stutzke with Stormtrack 8.
Gary Determan:
Still looks overcast. We’re at 73 degrees. Our update brought to you by Kelly Heating and Air Conditioning.
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Gary Determan:
We’re visiting with Dave. Good thing they don’t hear what we talk about during the commercial. Anyways, you wanted to talk about a recent downgrade the United States got. First of all, who is this group that did this?
Dave Nelson:
Fitch is a big organization, so people are probably familiar with the term Standard & Poor’s. Well, Standard & Poor’s, in 2011, downgraded the US government from AAA to AA+. That’s essentially what took place this go-around.
The concern was, and continues to be, are we able to pay our bills? Well, I guess we are, but we’re not as capable as we were, based on what these organizations believe, as we were several years back.
Many reasons for that. And again, the list is as long as your arm, but the concept basically centers around, we’re spending too much money and we have every year this threat of defaulting on our debt. And so, because of that, countries around the world are looking at us and saying, “Are we comfortable with putting our money there?”
Because we’re the largest bond market in the world, and people that buy bonds… And I don’t know if people really understand this. People use the term sometimes, and I’m not sure they get it. But when you buy a bond, basically what you’re doing is you’re loaning somebody some money in exchange for a guarantee that you’re going to get that money back.
And that could be to an Apple, that could be to many major corporations, General Electric, et cetera. They all issue bonds. So, it could be that, which is defined as a corporate bond. Or it could be a government bond, which is typically the way most people go, because the theory is they’re safe and they’re guaranteed.
The corporation could go broke and I may not get back my money, but the government will be good for it. Well, in theory, the government’s good for it, and always has been. But the concern is, going forward, will they be? And so, these organizations, basically, are paid to analyze these type of situations and to give their opinion. And their opinion is, the United States isn’t as capable today to pay their bills as they were several years ago.
So, the issue now is… And again, it’s turning into a political football. So, the Republicans have taken the position that this is all Biden’s problem because he’s out giving away all this money, the last several giveaways with COVID and what have you. The Democrats will push back and say, “Hey, you knuckleheads are the ones that keep putting up walls, threatening that we’re going to shut down the government.”
And so, again, as David never holds back on, I’m so sick and tired of politicians in the way they handle the situation. And I don’t know about you, Gary, and I don’t know about the listeners out there, if they’ve ever wondered? People that make $200,000, give or take, a year, how they have millions and millions and millions of dollars? It’s fascinating to me as far as how that works.
I mean, how many deals do we have behind the scenes, and how much inside type information are they exploiting for their own benefit? But yet, they hold themselves out in front of a camera as this peer. And, “I’m the only one in the world that caress about stuff,” when in reality, these people are basically abusing the system.
We have Democrats that can’t stand Republicans, and vice versa, and it’s just become just such a mess. And I think even at lower levels, we see it at a state level as well, the hatred that exists today state level, there’s no in my lifetime that’s ever existed like it does today.
Before, I didn’t necessarily like you if you were on the other side, but I’d also be reasonable enough to open up my mind to say, “Maybe we have to compromise. Maybe you can’t get exactly what you want, and I can’t get exactly what I want, but we could compromise.” Today, we don’t have that. We have two extremes. And I know I step on toes when I bring this up, but I wish people would open their eyes to reality.
The reality is that we have some really bad human beings that are out there now that are trying put themselves in position to supposedly help other people, when all they’re doing is lining their own pockets. And it’s quite pathetic.
And so, now here’s one of the revocations of this, and again, the numbers are absolutely staggering. What happens when countries around the world question whether they can buy US government bonds and be paid back? The alternative is that we have to pay a higher interest rate for that. So, we’re borrowing money from other people and other countries, in exchange for what? A higher interest.
Well, we used to have interest somewhere in the $700 billion range. The estimates are now, we’re over $1 trillion dollars a year, and just interest alone. I mean, just stop and chew on that sucker for a while and say, we got problems.
And so, again, “I’m going to dig my heels in because I’m a Republican,” or “I’m going to dig my heels in because I’m a Democrat,” and I won’t open my mind up to reality, and this is what we have. Because we have a lot of stubborn people out there that won’t give into this thing.
Be open-minded. Let’s make some decisions that are good for the country. And unfortunately, there’s some tough decisions that have to be made. We’ve got to slow down our spending, and the question is in what way? And again, Democrats want to protect everything as far as Social security, Medicare, that’s the two biggies. And Republicans are kind of afraid to go too aggressively after that because of the political backlash from older people that vote. And so, we got a mess. And again, we’re downgraded because of that. And interest rates have already gone up like 0.2%, just since this, in a day.
So, this is expensive stuff, folks. And again, I know this stuff is confusing. I do the best I can to try to simplify. But I think if you just focus on an open mind, and looking at the facts, not what you want to be the facts, and turn off the stupid stations that are so extreme one way and the other, and try to look objectively at things, so that we can make the country great again like it used to be years ago. We have screwed things up the last 15, 20 years, and we got to do something about this.
And when I say screwed it up, I want to be really clear here. That’s Democrats and Republicans. So, again, stop digging your heels in. Be open-minded. People call themself Independents. I think roughly 40% of the American public define themself as Independent, which is kind of a joke. Because again, when it’s all said and done, again, people dig their heels into their bias, and we can’t do that.
We’ve got some really bad human beings and the Republican side, and we’ve got some really bad human beings on the Democratic side. Look at quality individuals that have done something in their life that really care about America. Don’t just say it, but they prove it.
Because we got the greatest country in the world, but we got to take care of it. And if we don’t, again, people are going to be paying interest rates just off the charts going forward, and our debt load is going to overwhelm us. Every great civilization throughout history, other than the United States, has eventually collapsed. And we’re heading down that path if we don’t do something about it.
Gary Determan:
So, some of the other countries that people would think of like Japan, or in England, what is their rating?
Dave Nelson:
So, most countries that are out there… Germany has a AAA. They’re the only one that has a AAA at this point in time. Japan, and… I don’t know exactly. Japan, for whatever it’s worth, nobody’s wanted to put a penny there for years. Japan, if you look at interest rates there that they were paying on government bonds, what have you, have been, subzero. I mean, just try that for size, negative rates of return.
So, again, we got something really special here if we don’t blow it. And we’ve got some really massive egos that are out there, people that act like, again, in front of a camera, that they’re really hot shots and they’re going to protect us. Yeah, don’t worry about protecting us, do what’s best for the country, and stop lining your own pockets.
Gary Determan:
Coming up, of course, will be another school year, and I know you talked earlier in the program about how good you feel about giving.
Dave Nelson:
Yeah, you bet.
Gary Determan:
And I would imagine you folks are going to be doing something again?
Dave Nelson:
Again, it’s so crucial, and I don’t mean to get on the soapbox exactly, but I go back to my childhood. I grew up here, for those that don’t know, and went to Whittier, went to Washington, went to Clinton High School. And long story short, I don’t remember ever being the extremes that we have today.
There’s a lot of kids that are moving from house to house and whatever, and oftentimes the stories are just so dramatic. I mean, I’ve been very close to a lot of the people that work at the schools, and they share some of these stories. And the need that doesn’t just take place at the beginning of the year, but during the year, where book bags and some of this stuff was left in a house that they had to get out of in the middle of the night because a fear of I don’t know what, somebody being abused, what have you.
And the bottom line is, again, there’s a tremendous need. And so, I don’t remember that when I was there. The pencils and everything, you seem to get the stuff. You got the milk at lunch, you got the meal there. But today, there’s a lot of that stuff that these kids are short of.
We’re in a different world. And I’ll give an example this morning. So, I try to do 18 miles on my bike every morning. And as I’m going past the old Van’s grocery store that most people around here probably won’t remember, there’s a gentleman walking down there, and the swear words that were flying out of his mouth, and this is a big dude.
I feel like the mayor going around town trying to, as best I can, brighten people’s day. Because you see people in the morning and a lot of times, you just know that they’ve got stress in their life, and they’re trying to deal with it, and they’re out and they’re trying to get a little exercise, whatever. And so I try to, “Good morning, good morning,” type thing.
Well, this person I just had a bad feeling about, and I kind of circled around him, and didn’t get too close. And all of a sudden, the swear words started flying out of his mouth, directed kind of my direction, about “get out of here” type thing. And I thought, wow.
And I’m driving by in the street, and he’s on the sidewalk. And why do I bring it up? It’s that we got, unfortunately, a fair amount of that in our community. And we’ve got people that have drug issues, have some mental issues, what have you. They need help, what have you. And the bottom line is, I think it’s much more extreme than what I remember as a kid.
So, we got to give back. We’ve got to make a difference. And again, thank goodness we have some really good caring people around here. I got the easy job, but that’s just writing the check. The other people are in the trenches day-to-day trying to make a difference, trying to make these kids’ lives better. And again, we’re very blessed to have that, and we’ll continue to do our part, again, which is, “Here’s the money. You make the decisions of what needs to be done with it.” We have no input on that.
A lot of homeless people. The sisters up here in the hill do a terrific job helping support many of the homeless people in this area. And again, so our job is to get some cash to them so that they can do what they do.
Gary Determan:
Always interesting.
Dave Nelson:
Thank you, Gary.
Gary Determan:
Thank you so much. Have a great day.
Dave Nelson:
You too, Gary. Thank you.
Announcer:
Financial Focus is a production of NelsonCorp Wealth Management in Clinton and Davenport. The opinions voiced in the show are for general information only and are not intended to provide specific advice or recommendations for any individual. Any indices mentioned are unmanaged and cannot be invested into directly. Registered representative securities offered through Cambridge Investment Research Incorporated. A broker-dealer, member FINRA/SIPC. Investment advisor representative, Cambridge Investment Research Advisors Incorporated, a registered investment advisor. Cambridge and NelsonCorp Wealth Management are not affiliated. Cambridge does not offer tax advice. For more information, visit our website at www.nelsoncorp.com.