Flood of Questions

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We're gone to a really great financial future. Tom and Don are talking real money.

Introduction to Financial Futures

The 5% Withdrawal Strategy

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My how quickly the week passes. Hey everybody, Don McDonald here for another exciting Friday QA edition of the Talking Real Money Podcast. Thanks for being here. Thanks for listening. Thanks for finding the podcast. All of you who have found the podcast, holy mackerel. Lots of downloads since we went away from radio and just a podcasting. So thank you all for doing that. Please keep telling folks to do the same thing and listen to the podcast on whichever podcast service you or they use. It's easier to teach them if you teach them to use the one you use, but however it works for you. And thanks for all the questions, too. They've been coming in hot and heavy, which allows us to do six question episodes or six question and comment episodes over and over again, which I think is just more fun because it's more stuff. So glad you've been calling in those questions or speaking in those questions at talkingrealmoney.com on the contact form. Of course, Tom would prefer you type them. I like it when you speak them. So thanks for doing that, just like this. Hi Don.

SPEAKER_03 1:21

In recent podcasts, you have mentioned that you will likely use the 5% withdrawal approach when you retire. Can you go deeper into why, the reasons why you like that approach versus, say, the 4% plus inflation? When I look at it in the way I understand it, you take 5% of your portfolio each year, portfolio goes up, you have more money to spend, goes down, you can have less money to spend. But when I compare that to, say, the 4% plus a 3% annual inflation, that gets to 5.1% for year nine. So I guess with the 5%, you have more money to spend in the early years, but then it seems like after years nine that you're not keeping up with inflation. So so I guess you know, a little bit more into why you prefer that uh approach. Um, does it, for example, allow one person to use a more conservative portfolio? Um, so it's a risk um tolerance approach that's um and doesn't run out of money. I know you've mentioned that, I believe you mentioned that you aren't really interested in legacy, and it seems like this approach, um, although we'll never run out of money, you're leaving a lot of money on the table.

Tax Efficiency in Brokerage Accounts

SPEAKER_01 2:39

Yeah, I may say that, but the reality is that that's the way I'd like to do it. If I could figure out a way to do it, that's what I'd do. But I can't figure out a way to do that reliably. And you mentioned the biggest reason why I prefer the flexible rule. You can't run out of money. It's almost impossible. And and we've run this through Monte Carlo simulations hundreds of different ways. Hundreds of different ways. And if you are at all concerned that you might run out of money before you run out of life, then the flexible is the preferred solution. And I don't mind it because I know, as most of you know, that our incomes fluctuated throughout our working lives, and it was amazing how well we adjusted to that. We we're here today because of our ability to be flexible, to adjust. And that's why I like it. I gotta tell you, I I might go a little above five if need be, but uh, I'm not gonna go much above it because the whole point is I just don't want to run out. And uh matter of fact, I just ran a couple of really simple ones just before I started uh recording this answer. And if you ran the 4% plus inflation versus the 5% flexible, and you started with a million dollars in the year 2000, wow, if the market had done just a little bit worse in 2008 or 2000, 2001, uh, the four percent rule would have been very scary. It was frightening enough. The flexible withdrawal scenario at 6040 would have taken your income for a while down to around$40,000 a year, 38 to 40 instead of 50 for a while, but it grew back up again. Um, but your ending balance after 30 years or 24 years, 26 years would have been about one and a half million versus possibly less than a million with the 4% rule. So it's like your your assets were dropping over 26 years. That can be a little scary. That's why I kind of prefer the flexible, but it does require flexibility in your life. If you want a fixed income, yeah, go with the 4% plus inflation, but don't fudge on that one. Don't say, oh, well, I think inflation was higher, or I think I can go to five, because in some bad markets, that can cause that kind of rigidity can potentially cause big problems. That's the reason. Thanks for the question. I appreciate it, and here's the next one. Hi, Tom and Don.

SPEAKER_04 5:34

Um, this is Nick, and um I have a question regarding my brokerage account. I have uh a total bond, Admiral Share, and a total uh market, stock market, Admiral Share with Vanguard. And um I'm just wondering if it's gonna be tax efficient if I change this to uh both of them to EPF. Um and is there any charges if I do this on Vanguard? Thank you very much for your advice.

SPEAKER_01 6:01

You will probably see a modicum of increased tax tax efficiency. Tax deficiency. Hey, same thing. You'll probably see it increase just a little bit if these assets, of course, are held in a taxable account. In a non-taxable account, it's just just not going to matter. Uh so it makes sense in a taxable account to particularly convert to VT, the total market index, because you won't realize or they won't they won't send out realized capital gains along the way as they buy and sell within the portfolio, which they don't do much. You don't have a lot of realized capital gains in Vanguard's total stock market funds anyway. The bond market fund, less of an issue because most of what you make and you should expect to make from a bond market fund is just income. There should not be any expected capital gains. The only way you ever get capital gains on a bond fund is when rates are falling. And that's a temporary state of affairs. Usually it wasn't from golly, the 1980s till the 2000s, but uh usually that is not the case. And that's why we enjoyed such wonderful returns on bonds and suffered such a hangover when rates went up. But those kinds of returns should not be expected. It's only the income you should expect from bonds. So yeah, it's easy to do with Vanguard. As a matter of fact, they can sweep it right straight into the ETF without any cost, transaction fees, or taxable events occurring. Another nice benefit. Thanks for your question. And here's our next question that came in at talkingrealmoney.com on the ask us a question form or the contact form or whichever one you used. There are choices.

Managed Futures and Their Risks

SPEAKER_06 7:47

Hey, Tom and Don. Got a quick question for you. So some people say that adding managed futures, long-term treasuries, and gold increases the safe withdrawal rate in retirement, and not necessarily good for an accumulation portfolio, but for a decumulation portfolio. And some of the sites like Testfolio and others support this. I would love to hear your take on that. And just it seems like you're not in favor of that. I would like to hear your argument as to why when it seems like the math allows you to have a higher withdrawal rate with those. I'm very skeptical of that strategy just from a personal standpoint, but know that the risk parity guys are a big fan of it and think that it sounds. So I'd like to hear your argument for or against that. Thanks so much.

Employer 401k Contributions

SPEAKER_01 8:38

Well, my first thought, and it's this has always been my first thought, is that these types of strategies are uh they're a means by which an overpriced advisor is trying to make themselves appear worthwhile for their high net worth, complex portfolio clients. Because the reality of these is, well, has been different than the pitch. And let's just look at real-world examples. I mean, long-term bonds, for example, they can be stock market volatile, not 2008 stock market volatile, but I mean, look at one of the very best of the uh the bunch, the the Vanguard Long-Term Bond Index, which is just like BT, except it's the fund version. And in 2022, that fund lost over 27% of its value. In 2024, it lost money. In 2021, it lost money. Other bond funds did too, but this one beat the tar out of them. Sure, in a bad stock market, maybe it does better, but it's volatile. And you're just adding another level, another degree of high volatility to a portfolio. And when it comes to managed futures, well, first off, if you can get into managed futures funds, and there are some from AQR, for example, they're very expensive. I mean, the AQR Managed Futures Fund runs about 1.2% per year. And again, you've got some pretty scary volatility along the way. You've had some really good years like 2022, 35% return. However, over the last 10 years, the average annual return for that fund has been four. I don't understand why we want to stretch for what shows on paper to possibly be fractional, fractional additional returns, and yet you have to pay up for it. You have to build a far more complex portfolio, and the reality has been far different than the pitch was ten years ago because we were pitched these ten years ago and we decided it wasn't worth the effort when Tom and I started Vestry. We just didn't want to bother with it. It wasn't it was too expensive and and and it didn't look like it had the potential to add enough to make it worthwhile. It's it's just window dressing around the around the frame. I don't see why they're I just don't believe they're worth bothering for, oh, I don't know, somewhere around 99.9% of portfolios. Maybe for that one tenth of one percent, but for most people, why? I'm not for them. Never will be either. I mean, they're gonna have a good year someday, and the stock market will have a terrible year, maybe. Possibly. And those who bought into those futures contracts in that one great year are gonna be bragging about it. But the reality is these are hedging tools. They're not money-making tools. They're not designed to grow wealth, they're designed to kind of protect you. They're they're expensive insurance policies, in other words. Not for me. Maybe for you. That's up to you. Now we've got another question coming up. Look at that. They just keep coming at talkingrealmoney.com. Thanks for those.

SPEAKER_07 12:14

Hello. I understand that employer 401k matches are always made into traditional accounts rather than Roth. Is that because of IRS rules about how employer contributions must be treated? And why isn't there more flexibility for employers to offer Roth matching? Thank you.

SPEAKER_01 12:33

You're absolutely right. It is IRS rules. You see, the IRS doesn't want you getting a double tax benefit. There is uh there's no tax on the employer matching contribution. So therefore, they want to make sure that you eventually pay the tax on that. So you get tax-deferred growth on the employer match, but you don't get tax-free growth, and that's because there weren't any taxes paid on it to begin with. You see, if you put the money in your Roth 401k, you paid the taxes on that money before you put it in. The employer doesn't, so therefore, or and you don't, so therefore they want them at the end. That's why it goes into the irregular. It's a tax rule. Thanks for the question. It was a good one. Here's our next one.

The $1,000 Government Account Debate

Conclusion and Final Thoughts

SPEAKER_00 13:19

Hi, Don, and maybe Tom now too. I'm calling about uh the um third rail of politics that we don't like to talk about and we don't have to talk about because I'm not um trying to uh approach this from a political standpoint. I heard you talking, uh answering a question uh recently about the um thousand dollars that uh is called the Trump account. And I understand that the knock on it is that you have to pay tax or the recipient will have to pay tax on it as opposed to 529s. And I'm I'm a I'm a believer in 529s. I like 529s, I've got them for four grandchildren. So uh you don't have to convince me of the of the wonderfulness of 529s, but I am hearing from people that have different opinions than mine that there's no reason not to get$1,000 of free money. Yes, it will be taxed, and I assume the earnings on it will also be taxed, but so will all other earnings, and this will be money that you didn't have to really earn, you just had to be born. So could you give us a little more detail about what you like or don't like about the um the free thousand dollars from the government? Aside from any political concerns, just from a financial standpoint, what do you think about it in a little bit more detail than just the fact that it will be taxable income? Thank you.

SPEAKER_01 15:09

It's so hard to avoid getting political when they get called Trump accounts. Anyway, um Okay, it's free money. I know you want something more complicated, more complex, but there is nothing more complex than that, really. It's free money for kids born in a three-year window. Why? Don't know. I truly don't see what the benefit is. We've got other tools, like you mentioned, 529s to save for kids, for their school, for their trade school, for even their Roth IRA in the future. So it's a great tool. It's a better tool, in my opinion. It's great. Uh we've got when they get a job, we've got regular old Roth IRAs. Better tool. Yeah. Money can't be touched until the kid's 18. Then when it comes out, if it comes out, it gets taxed as ordinary income, just like a regular IRA. That's how it works. You can add money to it. Why would you want to when you have other options? I guess if you've run out of all the other options, then maybe. Uh the the there are restrictions to what the money can be invested in, and I'm not sure how those are going to be interpreted, uh, because they do say index funds can't be inactive, so that's gonna probably exclude Avantis and Dimensional. I I don't know that for a fact, but it sounds like it. Um yeah, I mean, they can the money can be used for anything after 18. I I guess that's a benefit. And yeah, you're gonna get taxed. It's free money, so you get taxed on it later. It's not as good as a Roth. It's not as flexible as a 529. But yeah. By any other name, it's still free money. So I guess if I if I had a one or two brand new not yet born child, I I'd probably take the free money. I mean, why wouldn't you? Thanks for the question. And remember, you can ask questions of us at talkingrealmoney.com on the uh the with a little button that says ask a question or contact us or whichever one you press, and then you just record it using your voice and your microphone on your computer or your phone or whatever. And here, ladies and gentlemen, the last well, okay, not really a question, the last spoken words of the day, except for mine at the end. Which I guess is gonna be long. Here we go.

SPEAKER_05 17:57

Hey Tom and Don. Listening to today's uh today's tax day, today's podcast. And you keep searching for a term for these new uh accounts, and I would like to suggest that you call them 530A accounts. That looks like their official tax code name.

SPEAKER_01 18:20

That makes as much sense as anything. I guess they must come right after 529, the education accounts in the tax code. So 530, sure, let's call them 530s or 530A's or whatever we want to call them. And I personally just call them silly, but you can call them whatever you want. And again, it's a thousand dollars of free money. Take the money. Your kid can maybe do something good with it in the future. There we there we did it. Another QA episode, all done. Thanks for listening to it, and thanks for telling friends about it, and thanks for sending in your questions at talkingrealmoney.com. And if you have a really complicated question, the kind that does not lend itself to a podcast, we thought about that. We thought about that a long time ago when we started this. We went, how can we help everybody, even if they have really complex stuff like, here's my portfolio, I have it in 33 different funds, and we don't have time to do that on the on the podcast, and it's gonna bore people. Well, you can bore one of our advisors at uh Apello Wealth. They would be thrilled to be bored because, well, I don't know if they'd be thrilled, but they're happy to do it because we want to help everybody get this money management stuff right, and they're gonna do it for free, no obligation, no high pressure sales pitch. Seriously, no pitch. You're not gonna get sold. Just go to talkingrealmoney.com, click the button that says meet an advisor, set up an appointment, even with Tom, and uh we'll try and help you out as much as we can within a limited amount of time. If you need our help full time, you have to hire us. I think that's fair. And again, send those questions in at talkingrealmoney.com on the ask a question button form thingy, and keep listening and keep telling people about the podcast because we want to continue to be here for a very long, long, long, long, long time. Talking Real Money.

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