Stormy Q&A DAY

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You're gonna do a really great financial future. Tom and Don are talking real money.

SPEAKER_01 0:11

Well, today's episode may have a little bit of natural ambiance due to the fact that uh here in Florida uh it's becoming the rainy season. And right now outside is uh raging a uh pretty decent decent that was punctuation, decent thunderstorm. I don't know if you could hear that or not because of the mic pointing at my mouth, but uh so we're doing this in the middle of a thunderstorm. Welcome to rainy central Florida. It's a brief

Rainy Day Q&A

SPEAKER_01 0:43

thing. I like them. They're like nature's air conditioning. It gets up to in the summer it can get up to, you know, 96, 97 with 90 plus percent humidity, and it's just oppressive. And then one of these afternoon storms pops up and it drops the temperature down to the 70s. So, you know, by by the time one of these runs through, it's actually pretty darn tolerable. So I'm looking forward to that immediately following, and immediately following this exciting QA episode, because yes, it's Friday. That means I answer those questions that you sit in at talkingreal money.com. And uh the some of these questions, we have a few that were done with our old system. So they're a couple weeks old, but recently I put the podcast, not the podcast, the website up on a new service. I put the podcast on a new service too. And uh it's just a cleaner, more podcast-centric website than what we had before. I like it. I think it looks good. I think it's easy to listen to episodes, and I think it's also easier to ask questions because they have the recorder built right into their system. I don't have to pay somebody else for it. It's a really nice setup. And you can also ask those uh typed-in questions, too, that Tom gets, and sometimes he turns into a live call with you guys that we use on the Monday through Thursday podcast. It's booming out there. Uh it's raining pretty hard. I can hear it even through all the semi-soundproof material I have here in the uh in the studio. So, anyway, you sent a bunch. Thank you. They've been coming in at a really nice clip. And so today we're gonna do let me see, um, we got five questions. So let's get to the first one,

UTMA Gain Reset

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shall we?

SPEAKER_00 2:35

Hi, Tom and Don. This is Catherine. I have a nine-year-old godson. I opened an Utma account for him. It has about $3,500 in it. Uh the purpose of the account is to be a teaching tool and then to ultimately roll those funds into a Roth IRA. I was thinking about um selling a portion of the investments in the account in order to recognize the gain and reset his cost basis. Um as his earned income stays below $1,350, that he won't have to pay taxes on that money and then to rebuy those investments and let them grow and until he does have a part-time job and we can start moving that money into the Roth IRA. Wanted to get your thoughts on this plan. Thank you so much.

SPEAKER_01 3:25

I I think highly of it. I I love the idea of you helping him out. Um, I think it's a it's a great learning tool. How to properly harvest capital gains, there's a powerful learning tool. And you mentioned uh you can't put it in the Roth until he has income, taxable income. Uh so that's something you can't do right away, which you understand. And you also, I hope, understand that a UTMA, a uniform transfer to minors act account, uh, is uh you can control it as the custodian up until age of majority, which is 1821, most places, um, and then it becomes theirs no matter. So even if you wanted to put it into a Roth, if they were past 18 or 21, they can do what they want with it. But I think you're setting a great example. So yeah, keep doing that. That's lovely. What a good thing to be doing. And your plan makes sense to, you know, to reset the the the cost basis. So I'm all for it. I don't see any problems. By the way, though, you might want to check because the the thresholds can change from year to year. So if you're not doing it this year, the threshold may be different next year. I don't know. Tax laws change. Just always check. Thank you so much for your question. And now we're off to

What A Financial Plan Includes

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the next one.

SPEAKER_05 4:47

Hi, Don. You and Tom talk a lot about the value of a having a plan for retirement. And that that term comes up about as much as Avantis and Dimensional. Um, but can you actually talk through what are the elements of a plan? We don't hear that, we don't hear an example plans, sample plans, or anything like that usually on the podcast. But can you walk through a hypothetical plan so we kind of hear the elements of it? Enjoy the show.

SPEAKER_01 5:17

Thanks. This would be a much better question for Tom than me because he does these actively all the time. But I I know the process. I've been involved in it. Uh just don't do them actively now because I'm Mr. Podcast Boy. Uh, but basically, it's a pretty straightforward process. It can take some time because there are a lot of moving parts involved. For example, generally we're going to start out with what's your situation now? Your current financial picture, um, your income, your expenses, your assets, where they are, your debts, uh, what kind of insurance you have, your tax situation, uh, benefits that might come in from your employee, uh, your estate planning documents, uh, where your accounts are, all of those things. I mean, it's like a it's a it's a paperwork-intensive, question-intensive process just to get the present picture. Then it's about what do you want to do? What are your goals? When do you plan to retire? What uh does your spending look like? What is your situation with family and kids and others who might be dependent upon you? Uh are you leaving a legacy? Are you giving to charity? Are you gonna travel? Uh whatever it is there. That is a huge involved process there. But you can see why they're not cheap already. There's a lot of planning that has to go into it before anything happens. And then uh you start looking at where are your cash flow sources, what kind of emergency money do you have, uh, what happens if you lose a job? How do you manage whatever debt you might have? Do you have any big upcoming expenses? Uh it's boring stuff. But uh that's important. Again, that's preliminary. Then we have to talk about worst-case scenarios, which a lot of people don't like doing. Um do you need life insurance? Is there a need for it? Are there others dependent upon you? What about disability insurance? Uh you covered for liability if somebody sues you. What is what is your plan for long-term care? And what are your options and what are they gonna cost? Uh health insurance, what are those gonna what what are those costs gonna be, and where might you have holes in your health planning? Uh the catastrophic part of the process. Then this is the part that most people think is the financial plan. But there's more time spent in the preliminary than actually probably in this, although it's pretty pretty involved. This is the actual asset allocation, diversification, determining your risk tolerance and risk needs, the thing we call risk profile, uh a rebalancing strategy, finding ways to reduce costs, uh efficiently managing it from a tax perspective, what we might expect doing Monte Carlo simulations, managing, talking about your behavior and your psychology. Uh it's more involved than a lot of people think. And then we get to retirement planning. How much do you need? What's withdrawal rate is reasonable? When should you take Social Security? Do you have any other sources? Are you gonna do Roth conversions? What's gonna happen with RMDs? What about sequence of returns risk if the market goes down? Uh a lot of math. Then tax planning. This is your tax strategy. Uh which accounts are you gonna draw from first? How are you gonna manage your capital gains? Are you gonna use charitable gifting as a tax plan? Where are the assets located? Managing your bracket in the future. How is that gonna go down? This can be a very, by the way, this part can be massively valuable and it's something most people don't do well and don't like doing. Uh then, you know, we can talk about your kids, uh education and things you might spend money for them, because surprisingly, even adult children can be expensive. Ask both of us. Um and then you we start doing the work if you if you actually hired us. Then you open the accounts or the advisor, the planner helps you open the accounts, get your beneficiaries updated, uh work on the estate documents, do the regular rebalancing, uh etc. So it's it's less about the paper and more about the process. But that's a 10,000-foot view, not a 40,000 foot. It's closer to the ground. But that's pretty much the process, and it's many, many, many hours of work, both on the part of the client and on the part of the planner and the paraplanners involved. So I hope that answered

Investing For Longevity

SPEAKER_01 10:15

your question. Thanks so much for that question, and let's get our next one.

SPEAKER_04 10:19

Okay, hi, Tom and Don. Uh I'm watching videos with Charlie Munger and and uh talking about what's going to happen in your fifties. Anyway, uh what they're talking about are things that you guys have already taught me. And I I just think I'm a cut above um maybe what other people have learned in their existence. Uh you guys are the reasons that I ever got involved in it in the first place. Um anyway, so I really want to I really want to give you guys kudos for that. I think I'm gonna be fine in my retirement based on based on your guys' principles. Anyway, what I'm wondering is is about uh the longevity. If if I pretend that I'll live, you know, to maybe 95 years, what what are the investments that I should hold? I mean, everything that you guys have taught me means I shouldn't do much of anything. I just need to hold uh what it is that I have. Um and so I guess I guess that's pretty much it. Thank you.

SPEAKER_01 11:46

Yeah, you you're welcome in. You know, really listening to us is is probably a better education than most college investment courses because they focus too much on the gambling and the analysis and less on the practice and the realities. Uh you nailed it. Basically, we say uh uh do this because it's worked for so long, and this is diversifying, but diversifying properly. Diversifying based on your risk profile. Need to take it and tolerance for it. So if you build the right portfolio for your risk profile, then you're not likely to do dumb things when the market does unexpected things and scares the living daylights out of people. It's a behavior modification tool. So here's the trick. You ready? Withdraw slightly less than you expect the portfolio to make. And you will be fine. You'll be fine. If the portfolio makes less, then maybe you take out less in the future. If the portfolio makes a little more, maybe you take out a little bit more, but don't take out as much as it made. Then it doesn't dwindle. It can keep growing. And the key to making it a little more stable is to keep yourself from messing around with it, from touching it, from panicking and doing dumb things. That's why we believe you've got to have that fixed income component. Not for the income, although you can use that income towards your retirement spending, but because of the fact that it's to keep you from doing dumb stuff. So as you said, you know what you're doing. You feel confident in what you're doing. And the funny thing is, is that we've got dreams of historical data saying

Withdrawal Rules Explained

SPEAKER_01 13:45

this should work. We can't guarantee anything. The whole of Western society could collapse completely. Yeah, I don't think that's likely, but could it? Yeah, but if it does, you're gonna have bigger things to worry about than your portfolio. So don't worry about it. You got it down. You've got it. Let's get the next call. Question, whatever we want to call it.

SPEAKER_03 14:08

This is Tommy from Charlotte, North Carolina. I'm 70 years old. My wife is 72, and we have not started taking from our 401 hour race. At what age would the 4% rule change to a 5% rule? I heard something about that one time and just it sounded good to me, but right now we're not having to take any money out for probably for a good while, just I know what's 73 my wife has too, but we we could reinvest that. Just wondered what you think. By the way, I really enjoy the show. Thank you.

SPEAKER_01 14:51

Thank you, thank you, thank you for those kind comments. And um there when we when we talk about four percent versus five percent, we're really talking about the difference between a fixed withdrawal rate and a flexible withdrawal rate. Now, of course, you could take money out at 5% as long as your portfolio makes more than 5%, which if your balance between stocks and bonds, we expect it will. The reason we say 5% flexible or 4% fixed is because we want to be really conservative. We want people to go into retirement with a high degree of confidence that their assets will last them for the rest of their life comfortably. And that's why those rules of thumb were established, their rules of thumb. Can you switch to a 5% fixed and an inflation adjustment? Yeah, probably. But not guaranteed. Well, none of them are guaranteed, but not with as high a likelihood of six of success as the four percent rule. But in your situation, the longer you wait to take the money, the higher you can move in that rate. Because you're you're needing it for less time. It it doesn't have to last as long. So, yeah, I think the five percent rule flexible or the four percent fixed rule can adjust for people who don't retire at 65, who don't start taking money until 75 or 78 or 80. If you don't if you wait until 75, you you basically have to get for most people, 15, maybe 20 years out of your portfolio, and that's about it. So it's none of these things are cast in concrete. They're all flexible. And that's why we like the flexible withdrawal, because in good years you can take out a lot more. Bad years you take out a little less. Thank you for your question. And now we get to the final one. Send yours in. Go to talkingrealmoney.com, click the button in the lower right corner of the screen, and it's so easy to just record it into the mic on your device. And by the way, the mics on iPhones sound so good now. So good. Tom does shows now sometimes, a hundred percent on his phone. And then with the technology I have available to me where I can now with AI improve the quality. Everybody in this episode has had their call quality, their question recording quality improved by an AI process so that it sounds like you're practically here

HSA Inheritance Taxation

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with me on another mic. So here's the last one, and thanks for it.

SPEAKER_02 17:37

Hi, Don. David from North Texas here. To clarify from my last couple of questions, I'm in a Dallas suburb that is small and mostly unheard of. It's easier just to say I'm from North Texas. So I have an HSA with about $20,000 in it. I'm healthy and 66, no expenses on the horizon to use the HSA dollars for. I know somewhere later in life I could probably get sick and need it, but I'm wanting to reduce the value of the HSA and was going to request for withdrawal. Today I can claim well over a year's worth of Medicare Part B premiums and some recent dental care and vision expenses. The HSA is less than 1% of my liquid net worth. Um, my accountant, aka my wife, says that the inheritance rules for secondary beneficiaries are generally worse than IRAs, and since I'm not contributing anymore, this account is not as tax friendly as when you are still working. ChatGPT seems to agree with me saying once you are retired and no longer contributing, the HSA starts behaving much more like a restricted purpose Roth IRA than some magical separate category. I appreciate your thoughts on the topic.

SPEAKER_01 18:54

Yeah, there's nothing particularly special tax-wise or inheritance-wise. As a matter of fact, they're kind of a well, they're a nothing as an inheritance. I mean, if it goes to your spouse, then they can put it in their HSA. If it goes to your kids, they can use it to pay any unpaid medical bills you might have. And that is that comes out without taxation. Uh anything left, though, if it's a non-spousal inheritor, then it gets treated as income in that year. No penalties or anything, but it gets treated as regular income. Um use it. It's money for for using. There's nothing particularly special about it, and um definitely pay anything you can pay medically out of it, absolutely. But uh no, there's no reason to keep it until after your death. Thanks so much for your questions, every one of them. I really appreciate them. And uh please send them in at talkingrealmoney.com. You can type them, just click on the ask a question button, or you hit the microphone in the lower right hand corner and you record them. The recorded ones go to the Friday podcast, the written ones go to the Monday through Thursday podcasts, and can uh end up being a conversation with Tom or me sometimes, more Tom than me, because I'm doing other stuff with the podcast that he doesn't do. So we split the we split the job. And let's see, is there anything else I want to tell you? Yeah, if you want some help from a real life advisor who's a fiduciary and isn't going to try and sell you something, go to talkingrealmoney.com and click on meet an advisor. You can meet with one of our appella advisors, including Tom, and just get some free help if you need it. You're a DIYer, but you want somebody to look over your portfolio. We have lots of people who have us look at their portfolios and go, I didn't realize it was that. I had no idea I was that unbalanced. You could learn something and not get pressured into buying anything or becoming a client. So go do it. All that stuff is at talkingrealmoney.com. We appreciate you listening. Please tell a friend or ten. And uh we'll be back again. Well, let's see, it's Friday if you're hearing this of the day goes up, so we'll be back on Monday. Unless it's a holiday, and then it'll be Tuesday. Either way, we'll be talking real money.

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