Ep. 1976: Questions Behind the Numbers

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Gold tongue gamblers grasp at the quick coin. Hoping the whole dream that hollows the whole What shall I hold? What the whole world holds.

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When shall I say?

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When the winter comes and not before patient pine grows.

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Plain and unhurry. Don't answers the asking and asks not a queen.

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Talking real money.

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I couldn't help but sing along because that's the one song that is absolutely in my range.

Retirement Goals Check

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And plus, it was just kind of fun to do. If you want to hear it without me in it, it'll be up at talkingrillmoney.com on the song page. It's there somewhere. Well, there we go. That's sort of a new age Viking theme for the QA show this week. Hi, everybody. I'm Don, and thanks for joining us. If you're not having fun with the music, I'm sorry, but many of us are, including yours truly. So I'm going to continue to do that. This is the QA edition of the program, and that means we answer questions. Also, every once in a while we get a few comments, and we've got a couple of those today. Well, comments and sort of a request. An unusual request that I'll save for the end. And today we're going to start with the one AI-generated question that I had that Tom sent to me a while ago. And uh let's see. Yeah, this is this is not one that was uh spoken in at talkingreal money.com using the microphone button in the corner. This one was typed and then narrated by AI.

SPEAKER_01 2:30

And here it is. Hello, gentlemen. I'm a longtime listener and fan. Thank you for all you do for your community of listeners. Unfortunately, I spent much of my adulthood being young and stupid, and I didn't start seriously saving for retirement until I was 30. Since then, my wife and I have tried to become super savers to make up for our past mistakes. We're hoping to get your expert opinions on whether our financial goals seem plausible based on our current outlook. Our retirement goal is to safely withdraw for at least 30 years the inflation-adjusted equivalent of what we currently take home, which is about $13,000 per month. Ideally, we would love to retire before age 65 because of the high stress nature of our jobs. I am 43 and my wife is 45. Our household income is $260,000 per year. We currently have about $750,000 saved for retirement. About two-thirds of it is in traditional retirement plans through work. The rest is in Roth accounts. We expect to receive a pension of about $60,000 a year, starting roughly 20 years from now. We also hope to receive the full Social Security benefits we've earned after paying into the system throughout our working lives, although the political uncertainty makes us nervous. Altogether, we put about $4,200 a month into our retirement accounts, including Roth IRAs and plans we have through work. In addition, we currently save about $4,000 per month for our emergency fund, high yield savings, vacation fund, and other goals. We have one child who is nine years old. He has a guaranteed education tuition account. By the time he graduates, he will have four years of in-state tuition prepaid. We are also guiding and requiring him to participate in the Running Start program, which allows him to take community college courses while in high school. Our investments are primarily in target date funds and VOO with an allocation of approximately 80% to 20%. We expect our home to be fully paid off by the time we retire. It is currently about 40% paid off, and we have approximately $400,000 in equity. Have we made up for our past ignorance? Do our goals seem plausible based on our current setup? We appreciate you both.

SPEAKER_00 5:01

Well uh you're doing really, really well. Pat yourselves on the back. I mean, come on, you started saving at 30, you're in your 40s, you have three-quarters of a million dollars for retirement, you're adding a ton to it. I mean, nice. Based on what you said, retirement around 65 or so looks really plausible. I mean, very comfortable. Early retirement also possible. So uh it really depends on the needs. And you you mentioned that you want $13,000 a month, but why that? Um You say your additional $4,000 that you save comes out of your take home. So that means you're living below that number. Uh may is that inflation adjusted? Again, we don't have a lot of information, but I think you're on a great, great, great, great, great track. Now, um money that's saved for vacations, you that inevitably gets spent. So uh you don't just subtract it. You need to separate what you're accumulating from what you're spending. Uh you also shouldn't, uh subtract your workplace retirement contributions if those were already deducted before the paycheck got into your bank account. So uh but the whole point is to sit down and figure out what your retirement spending might look like, not what your retirement income should be. But based on your experience, what do you think, what do you think your travel's gonna be? Your maintenance, your cars, taxes, health insurance, uh particularly if you retire before 65 and Medicare. Uh and create a budget and then adjust that for, say, 3% or 4% inflation, 4% if you want to be very conservative. And then you got that pension too. So you're expecting 60 grand a year for about 20 years. All right, changes the picture. Is that a future dollar amount, or is that based on today's purchasing power? It makes a difference. Um, because 60,000 20 years from now is worth about 30 some odd thousand in today's money. So find out about the inflation adjustments. Sit down and do a real budget and then adjust that for inflation and include Social Security. Uh do it at different benefit levels depending on when you retire want to retire early or not, although, although it probably makes sense to use other monies if you retire early and still wait to collect Social Security. Um But yeah, I think you're you're on a wonderful track. There's no way, no way to know for sure uh how things are going to be, and that's why you oversave and you're you're doing great. You're saving and maybe oversaving, uh, depending on how your money grows and how much you keep adding to it. But you're in a really good position.

Mortgage Payoff Dilemma

SPEAKER_00 7:59

Thanks for the question. Now, our first one that came in from talkingreal money.com using that little microphone button.

SPEAKER_09 8:06

Hello, gentlemen. My name is Rich from Michigan. I want to thank you guys for your show. It is fun to listen to, and your advice is outstanding. Here's our quick situation. My wife and I are 67, newly retired. We have no debt except for a 30-year mortgage with 28 years left to pay on it. Circumstances got us into purchasing this home two years ago, and unfortunately a 7% interest rate. Now, we owe $300,000 on approximately a value of $425,000. And I really want to pay this down as quickly as possible andor pay it off. I do have currently $100,000 to $125,000 sitting in a Roth account that was left over from when I was working. Our other money is in a different brokerage firm that we use for our income. So my question is, I would like to take this Roth money and attack the mortgage the best way possible. I'm thinking either a refi, which I can only get to about maybe five and three-quarters or six percent, or if there's any other strategy of using that Roth 401k money, which should not add to our income. We don't need it for future living expenses, hopefully, and to get rid of this seven percent mortgage as quick as possible. Thanks for any advice you have, and I really appreciate you guys on the show.

SPEAKER_00 9:52

Thanks so much. Now, the 7% is a hefty guaranteed return. I mean, that's a nice guaranteed return on your money. But there's a downside, and that's the loss of liquidity. You said you don't think you need it, but you might. And if it's tied up in the house, well, it's really hard to get at. Um a refi, if you can refi down a point and a half, well, that might be worth doing if you can shop the costs and keep those low. That might actually be a smarter move because I fear the loss of that liquidity in in the Roth IRA. And it's only gonna make a tiny little dent in it. It's not gonna pay it down. And hopefully, I mean, I hope your Roth is invested in a way that it is likely to make six, seven, eight percent in a well-balanced portfolio. If it's a very conservative portfolio, a bond portfolio, CDs, at four percent, then the seven looks very good. If it has the potential to earn five, six, seven, then refinancing at five and a half or so, that looks even better because it keeps you more cash flush in case of emergencies.

Sell Those Expensive Funds

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Thanks so much for listening. Here's our next question. Hi, Don.

SPEAKER_10 11:18

This is Will in North Carolina, and I have an adult son who is 27 years old. Uh, when he was born in 1999, his grandparents gifted him with four different American funds through their Edward Jones broker in the amount of $2,500. Uh his mom and I continued over the years to contribute roughly $500 per month. In 2012, I realized the expense ratios of these American funds were dragging down his investment returns and switched over to low-cost diversified mutual funds from Vanguard. Uh, he still has those American funds that carry an average expense ratio of a little over 0.6. Uh the value of those funds is now $340,000, and they show an unrealized capital gain of $145,000. He currently makes roughly $110,000 per year. So my question to you is: would it make sense for him to sell these funds, go ahead and take the tax hit and switch over to something like VT or A V G E? Uh look forward to hearing your response.

SPEAKER_00 12:35

All right. I want all of our younger listeners to go back and listen to this question again. $2,500 27 years ago plus $500 a month is now a third of a million dollars in American funds. That doesn't count the Vanguard funds, I think. So holy moly. Uh nice unrealized gain. There have been some capital gains distributions along the way, obviously, on which taxes were already paid. Here's what I would do. Yeah, I think it's worth getting rid of the high expense ratio. And I also think that with the Vanguard funds, it might be nice to add the value and small tilt of AVGE or DFAW, the dimensional version of the same thing. But you've got to do a little tax planning. So what you need to do is sit down, pull out the tax tables, look at his tax situation, and figure out how much he can sell at uh the capital gains rate of, say, 15, it's probably going to be right at 15, without kicking himself up into the higher bracket because it gets added to modified adjusted gross. And see how much he can sell a year and start to sell off uh in a tax-planned way. Pretty simple. If he needs to, he can, you know, check with an accountant for a few bucks and make sure he's done the planning right. But I think that's worthwhile. Do some planning and then get into a less expensive vehicle that may very well offer, well, it certainly offers greater diversity, uh greater diversification. It's a much broader portfolio. And uh hopefully the long-term potential is better too. Thanks for the question. Wow.

Target Funds and Behavior

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Here's the next one that came in, talkingrealmoney.com using the microphone button.

SPEAKER_08 14:23

Hey Don, this is Matt from Utah again. Hey, quick question. So Vanguard produced a study that showed that people who invest in target date funds do like 3 or 4% better than people who don't. And I find that interesting. There's a lot of target date fund haters out there who think they're not optimal, that they don't have enough small cap or value in them, that they're too conservative, too early, that you can't uh choose which how to liquidate them and whether to buy or sell stocks or bonds in retirement, you have to do both. But I find it interesting that the statistics show that people who invest only in target date funds do better than those who don't. I would love to hear some thoughts, some uh inspirations from you on why that might be. And just to dive into that a little bit, I've really never owned a target date fund. I've split mine up, but I find the uh concept intriguing. Thanks. Appreciate all you and Tom do.

SPEAKER_00 15:22

I think maybe you're conflating two different studies because Vanguard did do a study. Uh who did it? Uh a couple of economists worked with them, uh, Olivia Mitchell and Stephen Utkus. And that study did show that utilizing low-cost target date funds can increase your final retirement wealth compared to a non-target date fund or a self-managed portfolio. And I think I don't know, uh, but I believe that that's probably largely related to the fact that people do dumb things and a target date fund makes the process automatic. Um and but the other study, the one that showed a 3% increase in returns, is the Advisor Alpha study that they have done and then redone over the years that has shown that if you have a professionally managed portfolio, a low-fee professionally managed portfolio, you can increase your return by 3% or more a year, the study showed. And that, again, is due primarily to building a more diversified portfolio, but the bulk of it is due to behavior control. The fact that a good advisor is going to keep you from doing dumb things. Target date funds are fine. They're great. They're a one-size-fits-all, disciplined way to create a glide path into retirement that uh makes sense based on ages, but doesn't necessarily based on your needs, risk tolerance, inclinations, et cetera. So, yeah, I don't think target dates are adding three to four percent. If you found a study that said that, send it to me because I couldn't find it. I looked everywhere.

Trump Accounts Explained

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Thank you very much for your question. And now let's grab our next one.

SPEAKER_07 17:20

Hello. This is more of a comment than a question. I'm a longtime listener. Uh recently you had a question from a caller concerning investing $5,000 into their child's IRA. And you it stated that without earned income, he could not uh do a child's IRA. That's not completely correct. The new Trump account allows you to contribute $5,000 per year per child into a Trump IRA, which I think is a good way of starting a savings account, and then when they reach age 18 and start to have an income, they can uh go ahead and transfer that to a Roth IRA. Just my thought.

SPEAKER_00 18:13

Thank you for the great show. Bye. And thank you for sharing that because I completely forgot about the Trump accounts. Um yeah, you can put $5,000 per kid per year into these new tax-advantaged accounts. And then beginning in January of the year they turn 18, the account becomes subject to traditional IRA rules. It grows tax-free or tax-deferred, then it's subject, not tax-free, tax-deferred, then it's subject to IRA rules, including the ability to make a Roth conversion. The um the family's after-tax contribution creates the basis. Uh so that money isn't generally taxed again, but investment earnings and contributions that haven't previously been taxed become taxable when converted. So yeah, don't assume an 18-year-old will pay little or no tax because they can still be subject to the kiddie tax rules, where that could be at the parents' bracket. But it is a, you're right, absolutely right. It's a legitimate opportunity to do some tax advantage planning for kids. And I really appreciate the information and clarification and pointing me in uh in the right direction. Thank you

Converting Brokerage Money

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so much. And now we we have two more things. One is a question, one is not. This is the question.

SPEAKER_06 19:32

Hey, Tom and Don. This is Bill from Charleston, South Carolina. Uh my wife and I are 63 and 64 and retired. We have a traditional mutual fund account from when we bought mutual funds as part of our emergency fund, and we used it to save to pay off our house. It has a little bit more than $40,000 in it right now, and we plan to use it for vehicle replacement or big expenses if and when they come up. It is in VPMCX, YAL, VEV FX, and it has about $8,000 in cash. If I get rid of it, I don't have access to the Vanguard PrimeCap fund anymore. We take distributions from our traditional 401k for living expenses. Would it make sense to do a Roth conversion of the $40,000 over two years and live off the regular mutual fund account for a year while we deplete it? Uh we live in coastal South Carolina, probably the only state better than Florida for retirees. Thanks for the help.

SPEAKER_00 20:33

In that it's not as hot and sticky as here. It's it's close. My wife's family and I used to spend summers at uh Polly's Island between Pauli's and and uh Merle's Inlet. The beach is gorgeous, great beach. But inland gets a little hot sticky. Okay, couple of things. One, you can't convert anything that's not in an IRA now into a Roth IRA. So a brokerage account can't be converted to a Roth. Just can't be done. So that takes that off the table. PrimeCap, who cares? Although, by the way, you can get in. If you left Primecap, they've reopened it. Because ETFs are so popular. Plus, Primecap is actively managed, and Primecap has expenses that uh for Vanguard, for Vanguard are high at 30 basis points. I don't think it's a big deal to lose it, but uh I I don't think it's it's not a fund I would want to own, wouldn't want to pay that extra fee and don't like active management. Uh so let's see, what can we do? Um if you want to do a conversion, the conversion would need to come from your retirement account. So let's just suppose you withdraw 20 grand in pre-tax money from your 401k for spending. That adds $20,000 to your ordinary income. But instead, you convert that from your bro you you you cover the spending from your brokerage account and convert that $20,000. Into a Roth, then you're getting Roth money for the future, which makes a lot of sense. That makes a lot of sense. Now you you're probably gonna have some capital gains taxes from selling the brokerage investment. But again, getting out of Prime Cap, not a big deal. Um do a little tax planning. Really? That's what it comes down to. But you can do it just in a backward sort of way.

Soul Song Finale

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Thanks so much for your question, and thank you all for sending questions in at talkingreal money.com. Well, questions and some comments, and then and then this, which by the way, I could not clean up very well.

SPEAKER_05 22:42

Another day, another market crazy, lost in a speculative frantic maze. We hear the voices wise and bold of the retail retold. Index the sky, let's do the discompound. Don McDonald's talk got the greatest sound. Talking real money, talking real money, talking real money for you and me.

SPEAKER_00 23:09

Okay, I'll give you a seven out of ten with points for effort, but uh, you know, and that's not just because of the tiny quality of the uh of the audio either. Although it did sound a lot like a regular commercial jingle. But anyway, I looked at the lyrics and kind of studied them to see what genre they would fit within, and I came up with this.

SPEAKER_04 23:29

Another day, another mark of craze, who run the through a speculated maze, to do our voice, and neither bought nor stole, the producer, every terror told, indexed the sky, let a discompound. Talking real money, talking real money, talking real money for you and me.

SPEAKER_00 23:50

You see, the uh the the three talking real monies, it's it's more of a soul vamp. So I I kind of went for a uh mid-sixties Memphis soul th kind of thing, you know, like Booker T. Uh uh and uh Sam and Dave, Wilson Pickett. Plus soul phrasing works really well with with with wacky syllable count. So um I did change the one line because it just didn't flow right with with both of our last names. Plus I got rid of our last names. Which made it better. But there you go. That's that's my version. Um if you want to send your own songs, and I'm gonna be more I just did that because it was kind of funny. Uh I'm gonna be a little more particular, okay? But if if you do have your own and you want to send them, just go to the comment button. The comment button at talkingrealmoney.com and let me know you have one, and I'll tell you how to send it to me. Okay? Go to the comment button. Doesn't doesn't mean I'm necessarily gonna play it. I played that only because it was the first time anyone's ever done that, and I thought it was kind of funny. Boy, was it tinny. Anyway, done. We're done for the day. If you have questions, go to talkingrealmoney.com, click the button that says ask a question, or record your question with the microphone button down there at the bottom. If you would like a little help from a fee-only advisor that doesn't cost you anything, you'd have a more complex situation. You want to know if your portfolio is any good, go to talkingrealmoney.com, click the meet an advisor button. There is no cost, there is no obligation, seriously, and they're not gonna try and sell you anything. I promise. Thanks so much for being a part of this week's QA and every episode of Talking Real Money.

Legal Disclosures

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The opinions and views expressed on this podcast were current on the date recorded. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. Although information and opinions given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Information presented on the podcast is not personalized investment advice from Apello 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. Past performance does not guarantee future results, and profitable results cannot be guaranteed. 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 or sell any financial products or security. Instead, the program is provided as a public service by Appello Wealth, a fee-only registered investment advisor. Please see Appello Wealth's ADV Part 2A on our website for information regarding Appello's fees and services. Apello Capital, LLC, DBA Appello 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 requirements. Registration with the SEC or any state securities authority does not imply a certain level of skill or training. Apello 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.