Ep. 2001: A New Millennium of Money Questions

SPEAKER_03 1:07

An homage to my favorite film. And the intro to episode 2001 of Talking Real Money the podcast.

Episode 2001 Begins

SPEAKER_03 1:21

Why did I I was gonna I was gonna give you some uh story, make up a story about how uh I I decided to go with 2001 because, well, think about, remember when we switched Millennium from the old millennium to the new one, and they everybody said it wasn't in 2000, it was in 2001. And that's what I was gonna do. I was gonna give you this whole song and dance about how 2001 is the beginning of the next thousand episodes of Talking Real Money. I don't know if we're gonna make it through the next thousand. I think we might. Um, hopefully we do. But the reality is I mistakenly thought that Columbus Day was a market holiday when it's a bank holiday, but it's not a market holiday. So on market holidays, I don't post shows because of the whole compliance thing, and we all our shows have to be approved. So I usually don't post them. And then I realized it wasn't a bank holiday, so I had it I had an extra show, or I anyway, this ended up being episode 2001 instead of 2000, and we'd already recorded episode 2000, which I thought was 1999. So anyway, I'm all confused. Um, but it all works out. And by the way, we you know, every one of our shows does have to be approved by compliance because we're uh Appella is an SEC registered firm. So uh not that that that the SEC passes judgment, they don't. That's not what they do, but our compliance department says, okay, they didn't say things they can't say, like guaranteed. I mean, I can say the word guaranteed, but you know what I mean. Which makes us actually probably more tightly regulated than most insurance agents. Um, but just saying. Uh welcome to the QA show. I'm Don. Glad you could uh join me today for episode 2001, the beginning of a new millennia. 2000, hopefully we'll make it to three. Uh, and uh glad you could join us. Oh, by the way, I I a little plug. I got a couple of things going on that are outside of talking real money. Um because it's now October, I have started or I have a podcast that's that's totally devoted to scary short stories. It's called Frightly. And uh you can check that out on your favorite podcast service. And I have a favor to ask of you. If you're a litreading listener, lit reading is my sort of broad-based, all kinds of short story show. It's where it kind of catches everything. There are a hundred and some odd short stories there. If you do listen, do me a favor and follow it if you're on Apple Podcasts, because I noticed that I slipped out of the top 200, even though I have more listeners for lit reading than I do my others, and I try to figure out why. And it turns out their algorithm rewards new followers. It's really strange. It's not just how popular it is, it's how many new followers you get, which is why apparently talking real money does really well because we get lots of new followers because people are suggesting it. Thank you for doing that. But check out my short story podcast, uh Lit Reading, Frightly, and many others. And if you want to go to the site for all of them, it's shortstoryversus.com.

Inherited IRA Strategy

SPEAKER_03 4:26

Now, let's get to those lovely questions that you sent in or you spoke in at talkingrealmoney.com, which is our website. Here's the first.

SPEAKER_04 4:36

Hi, Tom and Don. Tom from the Garden State here with a question or two about inherited IRAs. Last year was a bad year for our family, uh, with both my wife's parents passing. We inherited four Vanguard IRA accounts, two of which are Roths. So two standard IRA accounts and two Roth IRA accounts. There's approximately 45,000 in the standard IRAs and 45,000 in the Roth IRAs. My father-in-law, he was an avid CNBC watcher and Jim Kramer fan. So what we inherited was mostly government money market funds and about 30 individual stocks in companies like Apple, Nvidia, Meta, Walmart, etc. My first change was when we inherited was to trade most, but not all, of the money market funds for ETFs such as VOO and VXUS. But now I wish to further simplify by reducing the number of individual stockholdings and moving those proceeds also to indexed ETFs. So question one, what would be the best strategy for selling individual stockholdings? Should I sell the quote unquote losers and hold on to the winners or take the gains from the winners and convert it to the indexed ETFs as soon as possible? Question two, knowing that I need to take annual distributions from the IRAs, but I can wait 10 years to distribute the Roths, should those portfolios look different in terms of risks? My wife and I are in our late 50s and we hope to be retiring ourselves in three to five years. Thank you both for your podcast, and I look forward to your advice.

SPEAKER_03 6:23

Well, thanks for the question, and uh I'm very sorry for the losses. Uh it's the one of the worst things about living is that we die. It really does kind of suck. Uh let's talk a little bit about your your situation. Um first, let's start with the stocks. Uh they're in an IRA, so there is there are no tax ramifications. Why wouldn't you just get rid of all of them? Why would you keep them? Um there's I I it just it's a mess. Why bother? I would get them all into a diversified ETF. And rather than use VOO or VXUS, I would just use VT. It gives you the whole market, US and international, which, trust me, you want. You may not think you you want it, but you want it. And you don't want to be ho wholly in the S P 500 either. I might even add VBR just to get some small cap exposure, but VT is going to give you broader diversification. So I'm thinking that's going to be a better choice. Uh and then, but here's the other thing you need to do. You need to structure this portfolio in a way that will um will work when you retire too. Um you might want to consider looking at this as part of your overall portfolio and how it fits into that picture for your stock and bond ratios. Make it simple on the stocks. Again, broadly diversified something like VT. Then CDs or short-term bonds for the rest are a bond fund like uh BND. Um, but you need to look at it as part of your entire portfolio, not as this extra piece that's sort of hanging out on the periphery, because it's not. It's going to be gradually absorbed into the rest of your life, and to the rest of your portfolio. Uh so yeah, you can uh you can take out those distributions over that 10-year time frame. Um, but I think I want to there's one thing I heard. Uh whether annual distributions are required from a traditional inherited IRA depends on whether their the parents had reached their requirement beginning date before they died. So your annual RMGs generally have to continue during years one through nine, and the account needs to be empty by the year of by the end of year 10. So we need to know if they were already taking distributions. That's important. But otherwise, I'd simplify, simplify, simplify, simplify like crazy. I wouldn't try to come up with some fancy strategy for selling the stocks. Just sell them all because guess what? You're gonna own them in the diversified fund anyway. Thanks so much for your question. I really appreciate you being out there, and let's grab the

Building a CD Ladder

SPEAKER_03 9:13

next one.

SPEAKER_00 9:13

Hey Don, this is DK from Glandora. Thanks for everything you do for the community. I have a question about CDLADA process. Can you tell us how you do it? What is the best approach? Uh what tools you use? And uh, is it better off using Fidelity or Schwab versus looking at various online sites like Marcus, and then do it individually. Is there an automated process we could do? I think if you could explain this, that would be very helpful to us. Thank you.

SPEAKER_03 9:44

Thank you. I use Schwab for my CD ladder. In fact, I use Schwab for all my stuff. Just makes it simple. Uh and yeah, they do have an automated process. Now, I ladder one through five years. There are various opinions on how you should ladder. Some people get into months. I just don't want to get into the weeds. My less than one year money is in the money market fund. That's what the money market's for. It's for those needs when I when I don't have money coming due right away, and I can cover them from that. Then if something else comes up, then I can I could take that next one-year CD, stop the automatic reinvesting, and just take that and add it to my money market for spending needs if I need to. Otherwise, the one year, as soon as it comes due, gets automatically rolled out into whatever the top yielding five-year CD is. So the latter just perpetuates itself. And if it's if it's an automated process, it does make it really easy. Uh, you can do it manually, you can do it either way. But uh once you set it up, it's just an absolute breeze. It's really no more difficult than owning an ETF. Except the nice thing is if you if you're not looking at the prices, you don't feel the fluctuation as much because you know that at the end of a year, you're gonna get whatever you put into that CD back plus interest. It feels psychologically better. That's all. It's a psychological tool, really. Thanks for the question. But yeah, I do it through Schwab. I'm sure Fidelity can do the same thing. A lot of other firms can do the same thing. They're very competitive in these businesses. And by the way, these are brokered CDs. These are CDs that you get from a variety of different banks. That these banks use Schwab or Fidelity or whomever to uh place CDs in the hands of investors, which they find is worthwhile because they don't have to market those CDs on their own. They get sold for them. Thanks for stopping in. Thanks for being a part of the show. Question three,

Roth Conversion Planning

SPEAKER_03 11:48

right here.

SPEAKER_02 11:49

Hello, Don and Tom. This is Gary from Ohio. First of all, I want to thank you for talking real money. It's a great podcast. I find it enlightening, engaging, and entertaining, a rare combination of all three elements. And Don, I want to also congratulate you on your podcast or the release of your book, The Line on Cross. Found it very interesting as a person who majored in history as an undergrad and who also had a descendant who died as a union prisoner at Andersonville Prison. My question today is around the wisdom of a Roth conversion. Here are the facts. I am married. My wife is 70. I'm 69. And as we look ahead, our goals for a possible Roth conversion are legacy, meaning that we'd like to uh set up Roth so that our family benefits when the last of us passes. Secondly, charity. We plan to use a lot of our RMDs for charitable purposes. And thirdly, tax efficiency, uh, trying to minimize as much as reasonably possible the taxes that we pay. Uh we're blessed to have a pretty good income in retirement. We've been both retired five years, um, have an income of about 120,000 as a result of two pensions, uh, two Social Security checks, and we draw just a very small amount from uh one of our IRAs. So I like uh your thoughts about the wisdom of uh doing some conversions. We have uh roughly at current time, we have about uh 1.25 uh in uh traditional IRAs and about $200,000 in Ross. Uh glad for any wisdom or insights you can provide. Thank you.

SPEAKER_03 13:32

Thanks for the call and thanks for reading the book. I'm glad you enjoyed it. It was fun. Uh sad story, and yours is even more sad. Your ancestors. Mine at least survived Andersonville and you know went on to be a teacher for 40 years. But uh it was uh boy, the more I studied it and learned about it, I knew it was brutal, but you can't even imagine how brutal. Um thanks. Thanks for reading the book. All right, let's talk about Roth conversions. Um Roth conversions make sense, particularly for someone in your situation because you're you got a lot of IRA money, you're gonna have a lot of big RMDs. Uh, you you might want to consider when you get to RMD time doing some charitable distributions so that you get that money. You don't have to get taxed on that money at that point when you're doing your charity money. But uh, as far as the Roth conversion goes, you're at the point in life when you need planning. We all reach a point where we need planning, uh, particularly when you've got as much money as you do in a Roth that's gonna hit you for with some taxes. And bear in mind, not just based on your current joint rate, but if something were to happen to you or to her, then as a single taxpayer, your required minimum distributions are gonna be even more painful, or potentially even more painful at the single taxpayer rate. So conversions look even better when you consider that part of the scenario. Uh, you want to be very careful not to convert too much so that you don't kick yourself in, kick yourself into a higher bracket. And also make sure you always pay the taxes out of other money so that money continues to grow tax-free. All the money continues to grow tax-free. But I think you're you've reached the point, particularly when you're doing charitable giving, you're doing some estate planning, you got a lot of money that's going to be subject to taxation. You probably want to sit down with a planner or a CPA or uh a registered investment advisor who is fee only and you know is truly a fiduciary, and uh kind of put this stuff under someone else's management unless you enjoy managing it. In that case, you're still gonna need some tax advice, I think, just to make sure you convert right. So, yeah, I'm I'm I think it's a good idea, and I just think you have to be very tax-wise when you do so. Thanks so much for listening and enjoying the show and your question, and let's get another

Evaluating a 401k Mix

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one. Hello, guys.

SPEAKER_01 16:08

This is David in Florida. At work we have Empower, and I chose the BlackRock Life Path 2045 at 90%, and then a small cap value of fund three at 10%. I believe the expense ratio is 0.36%. And um what do you think? Is this a good strategy? Thank you so much. You have a good day.

SPEAKER_03 16:39

You have done some very good research, because empower can be a very confusing place to invest, given that they offer lots of things, and some of their things are really high expense, actively managed, and not so good. You have actually done a really good job. The LifePath 2045, if it's the one, if it's the institutional class, has an expense ratio of you know just over 10 basis points, or it's actually 0.14%. And a well-diversified portfolio. As a matter of fact, they have more in international equities than a lot of similar funds, which I like. They're uh 85% equities, 15% fixed income, and other stuff, a little real estate thrown in. Uh I kind of like it. And then the fact that you're throwing small cap value in to give yourself a tilt, I think it's wise. And I think a third of a percent for small cap value is a reasonably good price to pay. It's not the cheapest I've ever seen, but it's not anywhere near the more expensive end of the spectrum. It's pretty, pretty reasonable. So this should be a terrific lifelong portfolio. Again, if you're okay with the equity markets doing what equity markets do, which is sometimes go down a lot, but they also have tended to go up a lot at times. So yeah, I think you made a good choice. You've uh got a portfolio that should carry you through for a very long time because you can collide path on the life path. Thanks for the question. We're up to five now? Yeah. Question five. Next.

Buffett Portfolio Debate

SPEAKER_06 18:18

Hello, Tom and Don. My name is Patricia. I'd like your opinion on whether my husband and I are sensibly applying Warren Buffett's investment advice from his 2013 shareholder letter. Buffett wrote that the money left for his wife should be invested 90% in a low-cost SP 500 index fund and 10% in short-term government bonds. Because we are approaching retirement, we have chosen a somewhat more conservative version, approximately 75% equities and 25% short-term government bonds. Our equities are in VOO in our Roth and traditional IRAs, and VFIAX in a Roth 401K. Our bond allocation is in VGSH. What do you think of this overall strategy for people nearing retirement? Do you consider Buffett's advice sound for ordinary investors, or is it too concentrated in large US companies? Are VOO VFIAX and VGSH appropriate funds for following his approach? Finally, does our 75 to 25 allocation seem like a reasonable adaptation? Or would you recommend greater diversification, such as international stocks, smaller US companies, or different types of bonds? Thank you.

SPEAKER_03 19:54

I have always thought Buffett's by the S P 500 advice to be way too simple. Uh I think a wee bit I hate to call him this. I think maybe he's just simplifying things too much. I I don't think it's a good choice. And you have, by the way, two S P 500 funds in VOO and VFIAX. So you're just S P 500. You have no global exposure. And I want all of us to remember the past. 2000 to 2010, we have apparently forgotten that the S P 500 lost money over 10 straight years. If you had owned this portfolio from 2000 to 2010, at the end of that period, you would have suffered a net loss over the entire 10 years. I mean, come on. However, had you invested overseas, you would have made money. Because the stocks, while sometimes they move absolutely in lockstep, other times they don't. They don't move at exactly the same times in the same directions by the same amounts. That's the power of diversification. And you can get that power of diversification incredibly simply at Vanguard. You just buy VT, which is the total market. You get international, you get US. You get a little bit of small, you get other things. Or you could do VT, as I mentioned earlier to someone else, VT and VBR, which gives you US, international, and a tilt to small in value slightly, just a little bit of that. Only because there is tons of academic evidence that points to that adding a bit of return potentially. And actually, it doesn't add to volatility, not because VBR isn't an incredibly volatile fund, because it is. If you looked at VBR by itself and just watched it, you'd be Scared to death. But if you look at it as part of a greater portfolio, small in value tend to zig when large in growth are zagging at times. Again, it's diversification. Diversification bails us out over longer periods of time, we fervently believe, based on decades and decades of data. So the more the merrier, really. The bond fund, absolutely fine. It's a conservative short-term bond fund. Don't have any beef with that. I do think that the that Buffett's advice was it fell way short. I think he was just given a simple answer so that people didn't have to fret too much over it. And he is a big believer in buying the United States, too. But we live in a global economy. We we we're not alone anymore. We we d we can delude ourselves into thinking we can be, but we can't. We gotta live in a global economy, and if you're gonna live in it, invest in it. Thanks so much for your question and for listening to the program. We really appreciate all of you. And now the final well, it's sort of a question plus because it kind of cut off. Well, no, it's one question. I'm just gonna edit it

Kids' Taxable Accounts

SPEAKER_03 23:13

back together.

SPEAKER_05 23:14

I was listening through Monday, the 14th of September episode and the discussion about kids' atmas. I have been contributing $25 a month since each of my kids were born to an Atma that they will give when they graduate high school. This is an addition of their 529s in the ESAs. For the taxable events, the first $1,350 is tax-free and does not require any tax return to be filed on behalf of the kids. The second $1,350, going up to the $2,700 cap does require a tax return to be filed every year. The last couple of years I have done capital gains harvesting to eat up some of the profit that my kids will be taxed on when the cutlets are theirs. This year I had to file three tax returns. Two of the kids' tax returns last year were manual paper-based, since it was their first ever returns and they had to be mailed in. Anyways, thank you for the great shows and have a great day.

SPEAKER_03 24:21

Okay. Um by the way, this is a perfect example of why I run these calls through the AI fixing service. It just fixes the audio. It doesn't store anything or steal anything or steal your soul. Uh, but because that that was that was a hard call to understand before that. It's kind of a miraculous fix. Anyway, so I think what you're asking is whether capital capital gain harvesting. I know that sounds weird. We usually say capital loss harvesting makes sense. And yeah, yeah, it can in this case. It's kind of a weird situation. Uh the first 1350 is unearned income. Uh, there's no cap no federal return required, it's just a freebie. Next 1350 is taxed at the child's rate, which isn't necessarily free, it depends on whether they have other income. Uh so it could be a 0% bracket, and the tax can be zero, but not always, just to clear it up. Once that unearned income exceeds $2,700, the excess is subject to what's called the kiddie tax, and you have to file a stupid form 8615, and you get it gets taxed at the parent's rate. So harvesting long-term gains, taking out gains and putting them under the child's return can be smart. You sell enough of the appreciated investments to use their 0% bracket up. Um so yeah, I think this is good if you're doing and you know, this is all based on you doing this all yourself and because it may be cutting off your nose to spite your tax face if you're paying a tax preparer or something to do this because it's not that much money. But yeah, legitimate, useful. It's kind of a pain to do all this stuff though, isn't it? I mean, our tax laws they're way too complicated for uh for what they are. I don't know why they continue to be so complex. It should be a whole lot simpler. It could be simplified, but you know, you've always got a special interest somewhere that wants their thing. Thank you so much for your questions, all of them. Uh and by the way, if you like what you hear on Talking Real Money, uh I now I realize how important it is to click follow. Click follow on all of the podcasts you love, including my my short story podcasts, lit reading and stuff. Click follow. It actually helps us. I don't know how, but Apple's algorithm says it helps. So follow. Follow, follow, follow, follow. That's from The Fantastics. I'm not gonna sing it. Although I I have been in The Fantastics twice. I've played the old actor and uh uh the boy's father. Community productions. All right, anything else I need to cover? Uh I think not. Okay, we're gonna wrap this one up. I wish you all the best. I hope you have a terrific uh weekend. If you're listening to this one, it goes up on Friday. And thanks so much for being a part of it. I'm Don. And uh we're here like five days a week.

SPEAKER_07 27:54

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