Ep. 2016: Five Questions, Clearer Choices

SPEAKER_07 0:02

Bring me the question you carried all week. The one that gets heavy at night. Nothing's too small and nothing's too strange will hold it up to the light. Ask it out loud and say plain. Making money makes sense. Making money makes sense. Talking real money.

SPEAKER_01 0:39

Little mellower intro music for today's QA show.

Friday Q&A Begins

SPEAKER_01 0:45

It's Friday. That means it's QA day here on Talking Real Money. Hey, hey. Hi everybody, welcome to the program. I'm so glad you listen. Both Tom and I are thrilled that you listen and that so many of you listen and have listened for so dang long. I mean listening to me talk about money? 38 years now. Long time. I've been taking questions about money for 38 years. Started when I was twelve. This is the QA edition, which means you have spoken questions at talkingrealmoney.com using the microphone button, which is a lot like the old days when you used to call on the telephone, uh, except it sounds a lot better because even if it's a crappy internet connection, I fix them up. I go on to a uh an AI thing that just it cleans up the call. It doesn't turn you into something else. It doesn't steal your voice, I swear. It just cleans it up. It's just a it's just a tool. We've had cleanup tools for years, and they've been computer-based cleanup tools. This is just a little more sophisticated. And so it really helps to make the question more listenable for the listener, which is what we're trying to do and make this a show for listeners. You don't want it to be hard to hear the question. So send your questions in at talkingrealmoney.com. Just go there, click the mic, record them with your microphone. The better the mic you have, the better the question will sound. And you can get very high quality, inexpensive computer mics these days. The technology is pretty amazing. But I can fix it if you don't. So send those questions in. I'm going for five questions and one comment today, because a few more came in, and I still have four for next week. So a couple of more would help. Six more would help even more. So let's let's hear what you

A Listener’s Paperless Suggestion

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have to ask. And let's start with a comment before we get to questions.

SPEAKER_08 2:52

Hi, my name's Jacqueline, and I'm from Isakawa, Washington, and a longtime listener. I have a suggestion with regard to Tom reading questions from a paper copy that may solve the problem of sacrificing trees. Would it be possible for him to download the questions onto his telephone or computer and read them from there? Just a suggestion.

SPEAKER_01 3:20

Oh, yeah. Um, thank you for that. It it maybe it'll help from another source. Um I he here's it there's the thing. He gets the question originally on his computer or his phone, and then he prints them to paper. So he technically could read them from there. But you see, deep down, Tom's an old soul. And when it comes to technology, even though he knows how to use it, there's just a reluctance to let it win, I think. He's also a stubborn old soul. Uh but you know, your yours is a suggestion that I have made before. Uh, Tom, apparently, when you listen to this with your grandkids. You have a tree lover here listening, so she wants you to save the trees, Tom. Come on. You can do I know it's not much of a tree, and maybe you use recycled paper. I'm not sure, but just a suggestion. No. It's time for our first

Frozen Pension or Immediate Annuity?

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question. Here we go.

SPEAKER_06 4:29

Hey, and Tom and Don. Love your show, listen to your podcasts. I do have a question for you. I understand your hesitance to annuities, but I'm trying to understand if I have a pension that has been frozen from my employer that's only gonna pay X amount per year, and I could get per year by buying an immediate annuity, what would be wrong with that scenario?

SPEAKER_01 5:00

Thank you. And this was an example of why I needed to clean it up. It was really noisy. Um nothing would be seriously wrong with it. An immediate annuity serves a purpose, albeit we don't think as much of a purpose as the annuity salespeople would like you to think. But regular old immediate annuities, they're not big moneymakers for insurance salesmen, not like indexed annuities or variable annuities. Uh, and they do serve a purpose for people who want certainty of income. They want to know that every month they're going to get a check for X amount. But remember, unless you add an inflation writer, which go is going to reduce your initial payment, it's not going to increase for inflation. And if you die, like in the first year, well, you just lost your bet with the insurance company. They get to keep all the money. It doesn't go to your heirs, it doesn't go to your spouse unless you have a joint life deal. So that's the downside. The fact of the matter is they pay probably, you may be able to find one as high as about 7% in income. But remember, part of that is your own money coming back to you. So you can, if you have the stomach for fluctuating payments, uh, you can take regular withdrawals from your investments, which you own, and accomplish the same thing. It just becomes a manual process. As a matter of fact, those who have larger portfolios and who have hired a fee-only advisor, a fiduciary advisor, can use your fiduciary advisor to help you create an annuity, basically, that you own. An investment portfolio. Just this is exactly what the insurance industry does. They build an investment portfolio and then they pay you income off of their investment portfolio. You can do the same thing yourself. You just have to be willing to take on a little risk, which the insurance company's taking on. They understand that, but they also know the odds. They know the odds are in their favor. And a good advisor is going to know which odds are in your favor and play your portfolio to that benefit. So I prefer doing it on your own, but there's nothing wrong with using an annuity for a portion of your portfolio if you really want that certainty of income. And that's what your pension's giving you. It's an immediate annuity, although yours is frozen, so they're not making further contributions to it. But you should get, as long as they stay solvent and the pension benefit guarantee association's okay, uh, you should get a monthly check from what was put into that annuity, and it was your company paying money in, basically doing annuity to give you a pension. That's all they are. Thanks for your question, and let's grab

Converting Mutual Funds to ETFs

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another one, shall we?

SPEAKER_05 7:44

Hi, Tom. I'm calling to ask a question as a follow-up to something I heard in your show a few weeks ago about converting mutual funds to ETFs without tax consequences. I have a Vanguard brokerage account with approximately $1.2 million in it. The uh breakdown is VFIAX at $472,000, VSGAX $362,000, VTSAX $342,000, and VT T VX at $122,000. I don't really want dividend income at this point in time and want the money to grow for the long term as an inheritance. Uh is there any downside to converting these funds to ETFs and will it help reduce my dividend income? One caveat to this is I do need to pull out about sixty thousand dollars a year for the next five years or so to cover some expenses. I look forward to hearing your response and thank you for all you do.

SPEAKER_01 8:48

Well, you're welcome and thanks for calling. And by the way, it's Don, not Tom. Tom's not on the Friday show. It's just me. Uh just little old me. Uh you're you have four funds, three of which can be converted to ETFs. VFIAX is the SP 500, the corresponding ETF would be VOO. VSGAX is the small cap growth index. VBK would be the corresponding ETF. VTSAX is the total stock market index US. That would be VTI. So those would be the ones you could convert to. The VTT VX, which is a target date, doesn't have an ETF. It doesn't have a comparable ETF. So here's the deal. Yeah, you can convert them, and it will possibly save you on capital gains distributions. There's a difference. There are two kinds of distributions from equity funds or from any fund. There's the appreciation realized inside the portfolio when they buy or sell securities. So if they buy a security and then they make a profit on it inside the portfolio, they have to distribute that capital gain to you inside a regular fund. They don't have to do that inside an ETF. So there is that savings, which isn't huge because these aren't highly traded funds, any of these. Dividends is not going to help with a bit. Dividend distributions are dividend distributions. That's the income from the stocks or the bonds in the portfolio. And that must be distributed to you, and it is a taxable event outside of a tax-advantaged account of any kind. So what you could do is for the next five years, whatever dividends are coming out, you just take those and spend those, and then, you know, down the road, oh grind, oh, it's not going to be enough to kick you into higher tax brackets. These things don't pay much in the way of dividends. So I don't see anything wrong with converting the three that you can convert. You're not going to save a lot, but you'll save a little in taxes by uh not having to pay on those capital gains distributions. And every little bit helps, but you won't get a dividend break at all. The only way you get a break on dividends is if it's in an IRA, Roth IRA 401k, 403B, that kind of thing. A tax-advantaged portfolio around them. Thanks for your question. And we still have more to come on the QA edition of Talking Real Money. Here's the next one.

SPEAKER_03 11:18

Hey, Don. It's Will in Wamigo, Kansas, just outside of Kansas City, about an hour and a half.

Starting Retirement Savings at 20

SPEAKER_03 11:24

I am got a question about my daughter, uh, who is 20 and would like to start saving for some retirement. And what funds would be wise for her to start in? Uh, she plans to contribute roughly $100 a month uh to get started.

SPEAKER_01 11:41

I think there's a little bit that dropped off, but you gave me enough to work with. It's fine. It's uh it's gonna be easy to do. Um, somebody that young, uh, one, if it's retirement money as you say it is, then it's a Roth IRA. That's what she does. Set up a Roth IRA with somebody like Fidelity or Vanguard or another discount brokerage firm. And then I would consider one of these two ETFs, either AVGE, the Avantis Global Equity Fund, or DFAW, the Dimensional Worldwide Fund. They're both similarly priced, similar portfolios, aggressive. Yes, they're aggressive, but not crazy aggressive. They're massively well diversified. They give her exposure in the U.S. and overseas. They overweight to small companies into value, which have in the past provided greater growth, have in the past. We don't know about the future. But uh they're both really well-run funds from very reputable companies at a very reasonable fee considering what they're doing. Not as cheap as just getting a Vanguard plain old vanilla index like VT, but you've got a more aggressive tilt to them, which should, should, we hope, we expect, because of the past being kind of prologue, uh, we expect that those will give her, you know, maybe a half a point to a two-point edge on an annual basis. At least that's what we've seen in the past. So that could make a big difference over 50 years, which is really what we're looking at. So if she's doing that and she does something like this, I mean, you can run the numbers, and if if thing if the past is prologue, in a fund like AVGE, putting a hundred bucks a month away for 50 years could be over a million dollars just putting in a hundred a month. And hopefully in the future she'll add more, which hopefully will make her even more comfortable in retirement. Thanks so much for calling. Well, calling for going to the website and punching the record button. And I think we still have two more. Yeah, yeah, there. Look at that. There are two more coming. Here we go.

How CD Ladders Pay Interest

SPEAKER_01 13:49

Here's the next one.

SPEAKER_02 13:50

Hi, Don and Tom. This is Eric from Philadelphia. I just have a quick question about CDs. I've never had a CD before, and I was curious when you're doing a CD ladder, how does the interest get paid out? Is it paid out in a lump sum at the maturation date of the CD? Or is it added to the account periodically? And then when you roll that, say the one year over into a new five-year CD, do you roll over the original principal plus the additional money that was added from the interest so that in theory those each of those CDs will keep growing as time goes on? Thanks so much. I appreciate it.

SPEAKER_01 14:41

Well, the typical way you build a CD ladder to get the best yield is to use a brokerage firm to use brokered CDs, which is what I do. Uh a chunk of my fixed income portfolio is in a ladder of CDs, along with B and D for some of it, uh, my fixed income. And uh the interest does not accrue. The interest gets paid on those CDs through brokered accounts, and I think this is the case across the board. That gets paid in, and then I sweep it into my money market, or I use it for rebalancing purposes. If I need to buy more of something else, I use that cash money now and again when I rebalance to move money around. Eventually I will use that cash money that comes from the CDs and dividends and interest on everything as part of my income stream when I'm taking out my 5% flexible when I retire, which I hope is never. But uh if I do, that's how I'm gonna do that. So that's how it works. It does not accrue. The only way you're going to be able to roll it into your next CD is to look at your account and say, okay, how much interest was paid from this CD, and then add that back into the new CD you purchase. If you're on an automated system, then you're just gonna have to do something manually. And they do have automated ladder creation tools at a lot of brokerage firms. So that's how it works. It doesn't accrue, it pays into your cash account, and then you can sweep that into your money market manually. Well, some do it automatically, and uh and then let the ladder just keep going at the same. It's always doing those $10,000 increments. Thanks for your question. Keep sending them in at talkingrealmoney.com. Just click on that mic button in the corner, and let's grab the last one for today.

Is X’s 6% Savings Rate Worth It?

SPEAKER_01 16:33

Hey, Don.

SPEAKER_04 16:34

It's Mike from Colorado. Hey, I think you touched upon it real briefly, but I just wanted your thoughts on X money. Um, I just got an invitation this morning to apply for that 6% interest APR. And uh it just seems like a no-brainer. Um you don't even have to subscribe anymore to X. You simply have to set up a direct deposit of $1,000 or more, I believe. And uh 6% blows away any standard bank out there realizing it's not gonna be indefinite. But I have a funny feeling that Elon and company are gonna keep it for longer than uh what is to be expected, just because they are they're building this and uh I'm taking advantage of it. What are your thoughts? And uh they also include a 3% um debit card. And um the app is actually very easy to use. Took me about two minutes to apply. I don't even think it did a hard credit check. FDIC insured, and uh I think my my SoFi I'm actually earning four and a half percent on twenty thousand for doing their little subscription service there. Otherwise, you can't find anything close to six percent um anywhere. And it's generally maybe upper threes, low fours, if anything. So let me know if it's something that you think you might take advantage of, pros and cons. Always appreciate your response. Thanks.

SPEAKER_01 18:14

Well, I my my fear, the reason I haven't done it yet, is because I feel like the minute I do it, it then they're gonna turn off the the six, and then I have to move my money somewhere else. So I've kind of just been going, this can't last long, and it's been lasting longer than I thought. It's it's a powerful gimmick. I mean, 50 plus percent more than all the competition.

unknown 18:37

Shh.

SPEAKER_01 18:38

It surely is tempting. It really is tempting. Although I would not put a lot of my money in there. I uh I I I've thought about it. I have to tell you, I keep thinking about it. I may pull the trigger. I've got some cash that's not earning a lot right now, and it was going to go into my bread, which is only at four. Um, and six sure does look attractive, although I would have to pay for the subscription because I'm not doing my direct deposit into this bank. I am not putting my paycheck in there. I have too I'm too committed to the uh the infrastructure at uh Chintsey B of A to go elsewhere right now. I'm I'm a creature of habit when it comes to that. All those bills get paid, everything is done properly, I don't have any problems, I don't know that I want to mess with that, but I am tempted to move some money over there because, you know, well, as we say, we're talking real money. Funny, that's the name of the show. Wonder where we got that idea. Uh, thanks for the question. You know, I'm not opposed. I'm not opposed. Take advantage of people's gimmicks. You take advantage of a sale, you you might use a coupon if it's big enough. Why not take advantage of this? And it's not like I mean, they're not gonna hurt on that 6% because most banks are lending out at far higher rates. They have some pretty good spreads on these rates they're paying. But it it is short-term money, it is immediate money. So they have some risk that there'll be a run on the bank, you know, and they're they're stuck uh without the the assets to lend. But I I know I'm hemming and hawing all over this thing, but sure, yeah, I'm fine. Thanks.

Ask a Question or Meet an Advisor

SPEAKER_01 20:27

Got questions? Hopefully I have answers. I will try to get answers for you if I don't have them. That's what I do every Friday on the QA edition of Talking Real Money. To ask the cues, go to talkingrealmoney.com and click on the mic. You can also send questions into Tom for the uh rest of the week shows. You just click on ask a question and then type it. And then there is the big question area. If you have you don't call me and give me your entire portfolio because without a give and take, without a conversation, we can't just say this is the right path. Every path is specific to the individual. And that's the reason many, many, many, many, many years ago now, we started offering everybody who listened to the show time with a fee-only advisor to have that kind of a conversation, to look at the portfolio and go, I this is great, or aye, this is a mess. Uh, you might want to do this, that, and the other thing, and without that thing that most people fear from what is called a free consultation, and that's the full court sales press. You're not going to get that. There's no charge. We would love to have you become a client, but we're not going to bug you to do so. So go to talkingrealmoney.com, click on meet an advisor, set up an appointment with an advisor, including Tom. It's that easy. And then you can give him a hard time about not using electronics to read the questions. Thanks for being here. I appreciate every single one of you. If you like the show, please follow it on your favorite service that actually does help. I'm not sure how. It's part of the complex algorithm, but it helps the show gain listeners. So it costs you nothing. Try it. Just click the follow button. Take good care of yourselves. I'm Don McDonald, and we'll be back really soon. Talking real money.

Important Podcast Disclosures

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Information presented on the podcast is not personalized investment advice from a fellow wealth. The views and strategies described may not be suitable for everyone. This podcast does not identify all the risks, direct or indirect, or other considerations which might be material to you when entering any financial transaction. We hope you realize that the information provided on Talking Real Money is for informational, educational, and hopefully enjoyable purposes only. The podcast is not trying to get you to buy yourself any financial products or securities. Instead, the program is provided as a public service by Apello Wealth, a fee-only registered investment advisory. See Apello Wealth ADV Part 2 and other website for information regarding Appellos, fees, and services. Apellow Capital L C D B A Apello Wealth is an investment advisory firm registered with the Securities and Exchange Commission. The firm only transacts business in the states where it is properly registered, or excluded or exempt from registration. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. Apollo does not provide tax or legal advice, and nothing either stated or implied here should be inferred as providing such advice. Thanks for listening, and please visit talkingrealmoney.com for more information and important disclosure related to performance of any specific index or fund quoted in this podcast. And the lawyers get richer.