Are you thinking about boosting your financial situation in 2024? Pure’s Financial Planner, Bill Hodapp, CFP®, CPA, AIF®, discusses strategies aimed at refining your budgeting, optimizing tax management, and elevating your investment approach for the year.
Outline
- 0:07 – Intro
- 1:45 – Personal Finance Goals
- 3:15 – Creating a Budget
- 5:21 – 50/30/20 Strategy
- 6:03 – Review and Manage Debt
- 7:11 – Taxes (Tax filing deadline: April 15th)
- 9:12 – Tax Diversification (Tax-free, taxable, tax-deferred)
- 18:16 – Questions
- If I do a Roth conversion this year, can I still contribute money to my Roth?
- I have $480,000 in my Traditional IRA, can I convert the entire thing to Roth IRA?
- 19:19 – Portfolio Revamp
- 20:26 – Maxing the Match
- 21:55 – Cash Flow example
- 25:30 – Investment Growth – the power of comping growth
- 26:02 – Investing Basics
- 27:00 – Investment Choices
- 27:17 – Cash Alternatives
- 27:43 – Bonds
- 28:07 – Bond risks
- 29:53 – Stocks
- 30:24 – Types of stocks
- Common & Preferred
- 30:47 – Avoid market Timing
- 32:53 – Asset Allocation
- 33:57 – Portfolio Diversification
- 34:13 – Questions
- My portfolio is 70% stocks and 30% bonds in my traditional IRA, brokerage account, and Roth IRA. Should it be 70/30 across all three?
- What do you think of investing in Trust deeds making consistent 10% or more annually?
- 35:51 – Estate Plan Considerations
- 38:40 – Questions
- When I start RMDs at 73 for me, how long do I have to take all my money out of my Pre Tax IRA? I actually have a TSP as I am Federal but how long can I keep it in after RMD has started?
- When mixing an RMD and a Roth Conversion, it is clear that the RMD amount may not be used for the Conversion, but does the RMD have to be completed before the Conversion is performed?
Transcript
Andi: Hello and welcome to this webinar on Getting Your Finances in Shape. Bill Hodapp will be your presenter for today’s webinar. Bill joined the Pure team in 2021. He’s a CERTIFIED FINANCIAL PLANNER™ professional and a certified public accountant. Bill, I want to thank you so much for taking the time to share your knowledge with us today. This is a big topic.
Bill: It is, Andi. Definitely a lot to cover getting your finances in shape. Hopefully, if that was a resolution for 2024, you haven’t given up yet. Andi, are you ready to get your finances in shape?
Andi: Let’s do this, Bill. I’m ready.
Bill: Let’s go. All right. We’ll start off here. Where do we start? Big topic, as Andi said. First place is educating yourself and you’re here today. So that’s a win right there. You’re taking a step in the right direction. Next thing from there is really getting your goals together. You know, what short term goals do you have? Are you saving for a home? Are you saving for some other financial event coming up? Maybe it’s a wedding. Maybe it’s a new car. What long term goals do you have? Of course, those are things like retirement. Could be buying a second home. Those type of goals. And then next you want to do your budget and not only your budget. And here’s where some people fall short. They put that budget together and then it goes in the corner. So when you’re thinking about your budget, what you really want to do is also track your expenses along with it. What I typically do is I look at about 3 months at a time, compare that to the budget, see where I’m at. We’ll get into that more. And then, of course, you want to build into that budget, not only your expenses, but saving towards your goals, taking advantage of employer sponsored plans is going to be important. No discussion about getting your finances in shape would be complete without talking about investments and some of the risks that go along with that. So we’ll cover those as well. So let’s jump into some of the details here. When you think about goals, of course, those are going to be different based on your age. So for people in their 20s and 30s, and maybe even their 40s, well, it might be common to be paying off student loan debt. You’re getting settled in your new career. Maybe you’re saving or buying that first home, getting your family going. And then as you get into your 40s and 50s, that’s likely going to change. And the focus will become if you have children, of course, raising your children, continuing to save or actually now pay for college, preparing your estate planning documents tends to become more important as you start to have others relying on you. And then, of course, insurance coverages and, you want to make sure that you have the proper coverages in place for risk management as you continue to grow your wealth. So let’s take a look at, actually let’s continue on that topic on goals. So as you get into your 60s, well now retirement’s getting to be in focus and obviously you want to reap the reward of your hard work. You want to be able to tap into those assets that you’ve accumulated. And so, big thing is how you create, how do you create that retirement paycheck, right? Your paycheck is going to be gone. Now you need to recreate that. How do you do that? And those tend to be some of the focus items of your 60s, but whatever age group you’re in, whatever your goals are, you need to prepare for them. And the sooner you start, the better off you’ll be. First thing is creating a budget. And so we want to think about the different components here. First, you want to look at what’s coming in. That’s your cash flow, your cash inflows. So if you’re working, it’s likely salary. You might have rental property, so you have rental income, you also might have some interest or dividends coming in. For those of you that are retired, well, then that may be Social Security, a pension, you’re drawing from your portfolio. And of course, you could have some interest or dividends. Rental income as well. And then you want to look at your outflows. These, of course, are your expenses. Could be mortgage payments, retirement savings. We’ll show you some details here in a moment. And then another piece that’s really key that a lot of people miss is budgeting that goal into your monthly savings or your monthly budget. So, of course, you’re going to have your expenses, but if you don’t make saving towards that goal, you know, if you’re trying to do a regular routine, it’s going to be an afterthought and what’s left over.
And sometimes nothing’s left over. So be sure to build that into your monthly routine. And then you want to make sure that you’re, you know, sticking to that strategy and reevaluating along the time. We have some statistics here up on the screen, 52% of people plan to focus on saving towards long term goals,
48% plan to focus on saving towards short term goals. If we take a little bit of a deeper dive here into budgeting, we’ve got a hypothetical example here, individual or a couple making $8000 a month. When you think about, I get this question a lot, Bill, how much should I save towards my, you know, emergency fund, short term goals, long term goals? Rule of thumb is about 20%. You can see that on the screen here, so that would be $1600 on your monthly budget. And then you want to break it down into needs and wants. Your needs, a good rule of thumb is about 50% to shoot for there and then for your wants, about 30% on your wants, and that would round out your budget. If we break this down further, your needs, 50% would consist of things like housing, food, utilities. Then you get into your wants, clothing, dining out, vacations, and savings. We’re not suggesting put savings last. That should actually be first, but you’re going to want to break that down too, because make sure you have a proper emergency fund. Of course, you’re going to want to save for retirement, but what other goals do you have? Whether it’s saving for a wedding or you’re saving for college education, whatever that goal is, make sure that’s routinely part of your ongoing savings and budgeting program. So that’s a little bit about creating a budget. Reviewing and managing debt- so for those of you that have debt. How do you tackle this? Well, rule of thumb is, ideally, you don’t want your debt to be more than 30% of your gross monthly income. If you do have debt, how do you go about paying that down? Well, what I would recommend first is scheduling that out. Whether it’s credit cards, whether it’s student loans, list each one out, the balance that you have, the interest rate, and the term, of course, the number of years. And then what you can do from there is focus on paying off the smallest balances that have the highest interest rate. That way you can more quickly free up cash to then use it for something else, maybe paying down other debt that you have. You could also look at refinancing it. Perhaps you have interest rates that are higher and interest rates have dropped. That’s another way you can save some money. And then, you just want to make sure again that you’re factoring that into your monthly budget and not leaving that as an afterthought. So that’s some hints there on paying down debt. When we think about taxes, we can’t think about getting our finances in shape without talking about taxes. We’re going to dive into that more here in the next slide. But for this part here, there’s a couple of things that are important. When I think about taxes, one thing that comes to mind right away is thinking about deadlines. So we’re all aware of the April 15th filing deadline. What I see amongst folks that come to us is as they’re transitioning into retirement, it’s not uncommon to have a mishap with respect to paying their taxes. What do I mean by that? Well, they’ve worked for years. They’re used to having the withholdings from their paycheck. Their paycheck stops. So do the withholdings. So there’s some options as you head into retirement. You can have withholdings from your Social Security. If you have a pension, you can have withholdings there. But the other way to do it is through quarterly estimated payments. Now when we say that, it’s not quite quarterly, so this is important. The first payment due of every year is April 15th, unless it’s on a weekend or a holiday, June 15th, September 15th, and then January 15th of the following year. So you want to make sure that you get those on your calendar.
The IRS has a calendar that you can find on their website for important tax deadlines. If you put that in your Google or browser search, and when I looked last, it was still in draft form, but it’s a good starting point to take a look at that for your important deadlines there. And then you want to make sure too, if you’re already retired, of course, creating that retirement paycheck. And how you do that is going to be important because the different accounts that you pull from, and we’ll talk about this, have different tax consequences. So structuring that property- properly, excuse me, so you don’t create more than a liability, than you need to is going to be important. So talking about taxes, this is one of my favorite and perhaps one of the most important slides that we have up here, and this is called tax diversification. And think of it this way, there’s a couple key things here. One is that taxes will be one of the largest expenses you have over your lifetime. It’s just a fact, whether you’re still working, whether you’re already retired, taxes will be one of the greatest expenses that you have over your lifetime. Next is how you save while you’re accumulating while you’re working will in large part determine how you’re taxed once you’re retired. So let’s take a further look. The top bubble there is tax-free. You want to think Roth IRAs. How are those taxed? When you pull the money out, it’s taxed at zero. So how do you get money in there? That’s after-tax money you put into an IRA. It grows tax-free and then it comes out tax-free as long as you meet the rules. Next on the bottom left is the taxable pool of money. These are stocks, bonds, mutual funds. Think of brokerage accounts. They’re not Roth accounts. They’re not retirement accounts. They’re brokerage accounts. Those are taxed differently. If you put money in and it grows and you sell something at a gain. If you’ve held that security more than a year, you’re taxed at long term capital gains rates, which are favorable rates that are less than ordinary income tax rates, typically zero to 20%. For most people it’s about 15%. Then if you have interest or dividends, well it depends. Interest income is taxed at ordinary rates. Dividends, if they’re qualified, you get the lower long term capital gains rates. But if they’re ordinary dividends, then unfortunately you get the higher ordinary rates that we’ll talk about in a minute here. The last pool of money is tax-deferred. So for tax-deferred, this is your IRAs, your 401(k)s. Think about you put money in, it comes right off the top of your paycheck, and then when you take money out, it grows tax-deferred in between, when you take money out, it’s taxed at ordinary income, which is the highest rates that we show on the screen here, from 10% to 37%. So if you think forward to retirement, where would you want most of your money? Well, I think it goes without saying, the top pool there, the tax-free pool, why? Because it comes out at 0%. Where we see most people saving the bulk of their money is into the bottom right, the tax-deferred, and that of course has the highest rates. Let’s focus there for a minute. Think about a simple example. If you put $10,000 in as you’re saving for retirement, and let’s just make up a 25% flat tax. Well, it saves you $2500. Now that money grows for years and years, it becomes $100,000. You go to take it out. It’s assumed the same tax rate of 25%. Now you have a $25,000 tax bill. So yes, that’s right. The IRS is really your partner in that tax-deferred pool. So whatever you’re accumulating in there, you really have to think you probably have about 30% less than you actually have on your statement when you factor in federal and state taxes. So what are some other challenges about that tax-deferred pool of money? Well, as you may know, at a certain point, and it’s called required minimum distributions, the IRS is going to force you to take that money out. They’ve given you an upfront tax break. You’ve had tax-deferred growth. Now they want to tax that. It used to be age 70 and a half. Then it was 72. We had another law change about a year ago. And now for people born between 1951 and 1959, it’s 73. And if you’re born after that, it’s actually 75. That’s when you have to pull that money out. You know, something I hear a lot from folks that we talk to is that they say, gee, Bill, yeah, I’m, saving mostly in that tax-deferred pool of money, but my tax rates are going to be lower at retirement.
Right? Well, for a lot of folks that we talked to, we found out that not to be true. They’re usually in the same, sometimes even a higher bracket if they’ve done a really good job at saving. Let’s illustrate here. So if we take that tax-deferred money, let’s say a couple’s accumulated $2,000,000 and they go to retire and they’re taking their required minimum distributions at age 72 or 73 or 75, whatever the rule applies to them is. And when you look at the life expectancy tables and you convert that to a percentage, it’s about 4%. So $2,000,000, 4%, $80,000. Now they waited to full retirement age, and maybe they’re hitting max on their Social Security. We’ll use round numbers. That’s going to be close to another $80,000. So they’re at $160,000. Then maybe they have some rental income, some interest in dividends. Next thing you know, they have $200,000 in income. Let’s assume a standard deduction of about $30,000 that would leave them with $170,000 of taxable income. That’s going to put them in the 22% bracket. And guess what? All those items that I listed are all ordinary income. Sure, if you have a rental property, there are some deductions there, but whatever the bottom line profit is, that’s subject to ordinary income rates. So that’s all ordinary income. So what are some ideas and strategies maybe, on how to possibly reduce taxes as you retire someday? Well, what you’ll want to do is start to fund some of the other pools, that we see up here. So Roth IRAs, how do you get money into Roth IRAs? One way is to make Roth contributions. And of course, you’re probably aware there’s phase outs for adjusted gross income. So based on your income, you may or may not be able to contribute to the Roth.
Now there’s a work around, it’s called a backdoor Roth, and you’re doing in two steps what the government won’t let you do in one. You put money into an IRA that’s non-deductible, there’s no income limitations, and then you convert it into a Roth. That’s a way to get money into the Roth if your income is too high. But another way is through Roth conversions. So this is where you’re taking money from the tax-deferred pool down in the bottom right, and you’re converting it up into the Roth pool of money. And so for that, you’re going to pay taxes. That’s the downside, but the good news is you’re moving money up into that tax-free Roth, never to be taxed again, all future growth is tax-free. The money comes out tax-free. And then when you think about end-of-life type of planning for estate planning purposes, there’s some further challenges with that tax-deferred pool of money. Because unless it’s going to a spouse or non-spousal beneficiaries, when the money comes out of that tax-deferred pool, it’s taxed to those beneficiaries.
Well, under the old law, they used to be able to take it out over their life expectancy. We had a change a few years back and now it’s over a 10-year period. So what we see a lot is that, folks pass away, their children are in their peak earning years. So they’re already filling up the lower brackets or in the mid-brackets or even the higher tax brackets. Now all of a sudden they get that mom and dad’s IRA forced out to them over 10 years. That stacks on top of their regular earnings, and all of a sudden they’re in the higher tax brackets. And so there’s some legacy planning there, where converting to the Roth, there’s still required minimum distributions when the beneficiary gets the money, unless it’s a spouse. But, there’s no tax consequences because it comes out tax-free. And then don’t forget about the taxable pool of money. It’s a great way to save. In addition to putting into the tax-deferred IRAs or 401(k)s and putting into the Roth, because again, not as good as the Roth, but still better than ordinary tax rates. So funding those brokerage accounts is a nice way to save extra money as well to further diversify. So the idea at the end of the day is to be able to develop all 3 pools. That way you can control your taxes when you go to take money out. Simple thought there is if everything’s in tax-deferred, then everything coming out is ordinary income. Well, what happens when you’re retired? Maybe you need a new car, you need a new roof. You don’t want to take out a loan at that stage of life, so then you have to pull more money out of your tax-deferred account. As you do that, the taxes need to be paid on that money that you pulled out, and then you pull out more money to pay those taxes, and it just keeps snowballing. So you want to have income tax diversification. Big key, as you’re saving for retirement and once you get to retirement. Andi, any questions for us?
Andi: Yes, we do have a couple of questions that have come up on this topic. And actually, I wanted to mention as well, for those of you who are asking, yes, this webinar is being recorded and you will receive an email when it’s available for you to watch on demand. We expect that to probably be in the next couple of days. So first of all, Caroline, she’s 58 years old, she says, “If I do a Roth conversion this year, can I still contribute $8000 to my Roth?”
Bill: Yes, you can. Definitely. Two different, two different requirements there, two different rules.
Andi: Excellent. And then Andrew says, “I have $480,000 in my traditional IRA. Can I convert the entire thing to Roth IRA?”
Bill: You can convert the entire thing to Roth IRA, but you want to be very careful because as we know, the tax rates are progressive. They- think of a stair step, they start at 10%, go all the way up to 37%. So if you’re in a low-income year, it may be a good year to do a larger Roth conversion, but you have to be careful because you’ll start to jump into higher and higher brackets. If you have working income and you’re trying to do a large Roth conversion, again, could be challenging there. Excuse me. You just want to be very careful and you want to map out what tax bracket you’ll be in and perhaps consider doing that over multiple years.
Andi: Okay. Yeah. If anybody else has any questions, just go ahead and type them into the Q&A, and we will get to them as we have time. In the meantime, back to you.
Bill: Sounds great. Thanks, Andi. All right. We’ll keep going here. Well, as we said, no discussion would be complete without talking about your portfolio. And so there’s definitely a few things you want to consider. You want to be able to view it holistically. I know it’s easy in this day and age to have accounts spread out all over the place. You might have your current 401(k), a 401(k) at a prior employer, a 401(k) at an employer before that. It’s really hard to get your arms around it. So you’re going to want to be able to try to consolidate those accounts or at least find a place where you can view those holistically in one spot so you can monitor those and really take a look at your overall allocation and how that lines up with your goals. We’ll talk more about that. And then, you want to take a look at what you’re paying for expenses, too. We know those cut into returns over time. So lowering your administrative expenses is going to be a good way to make your resources go further. And then, preparing taxes is certainly easier when you have fewer accounts and getting those 1099s. We’ll talk about distributions from funds, and that’s going to be important for people that are retired and where and how much they’re taking for their distributions. Some interesting numbers here, maxing the match. So for those of you that are still working, very important to take advantage of your employer sponsored retirement plan, and especially when you have that match. So, survey was done here, 52% of people were contributing above the match, 17% at the match and then 31% were actually below the match, so leaving money on the table. That’s free money that you want to be sure to take advantage of. We put together a little illustration here. So starting balance is zero. And then if we take a look at considering an annual salary of $80,000, A rate of return of 6% with a contribution period of 20 years. Well, on the left-hand side in this example, this person is contributing 2% to their plan and there’s a 1% match. You can see we ran the numbers for you. It comes out to about $155,000 at the end of those 20 years. Well, if you take that same example and you increase those contributions to 6%, which increases the employer match to 3%, well, you end up with about $465,000 at the end of 20 years, you know, about triple your money. So bottom line here is, take a look at your retirement plan, make sure you understand it. Absolutely take advantage of that match because it’s free money. Wanted to talk about cash flow for a minute here. Again, whether you’re still working and saving towards retirement, or you’re getting really close, or maybe you’ve retired recently, it’s important to look at not only how you and where you’re going to take your distributions from, how does Social Security really come into all this and you and how do you maximize this? And what’s the impact on, you know, maybe delaying Social Security. But in our example here, we have John and Sally, they’re age 57. John has a income of $150,000. Sally’s is $125,000. Jointly, they’ve saved so far $1,000,000 in their 401(k) accounts. They have a savings fund of $50,000. They’re spending about $140,000 a year, and they’ve taken a look at their budgeting moving forward in retirement and figure they can live on about 80% of that. That would be the $112,000. We’re going to assume an 8%- or excuse me, a 6% rate of return and inflation being 3%. We can see here if they retire at age 62 and up until then- so remember, they’re age 57, retiring at 62 in our example here. In this first example, they’re saving $5000 each per year for those remaining 5 years that they’re going to work. When they retire at 62, they start taking Social Security early. It’s $25,000 a year each. Well, if you look at the cash flow graph here, we can see that when we factor in the assumptions that we made, the money’s going to last at age 82. You might be thinking to yourself, well, gee, I was hoping it would go a little bit longer.
Well, what can you do there? Let’s take a look and just tweak this a little bit. Now here they retire at 65. So they work a few years longer. You’d be surprised what one, two, 3 years makes with additional savings and delaying pulling from your portfolio, as well as taking from Social Security. So here they are the retiring at age 65. They’re contributing $30,000 a year instead of $5000. I know what you’re thinking. Hey, Bill, that’s a big jump. It is. For a lot of people, though, that and folks that have children, not uncommon to really have some nice additional free cash flow later in their working years as they’re empty nesters. So $30,000 a year savings, right? Here they’re retiring at 65. You’ll see the little blip on the graph there. That’s because they’re retiring at 65, but they’re not pulling from Social Security until 67. So the little downturn is because they retire at 65. They delay Social Security to 67. They’re taking from their portfolio a little bit there, and then their assets start to grow again, after pulling initially once Social Security kicks in. But look at the difference. In the first example, they were at $25,000 of Social Security per year for the rest of their lives. Now by delaying from 62 to 67, they’re getting that full retirement age amount. In our example here, $36,000 a year. Pretty nice increase for the rest of their lives. Look at the bottom line. Money lasts until age 94 here. So definitely a consideration there. You really want to map out how much you’re going to be drawing, when that’s going to start, when you’re going to retire, should you work a few years longer if needed and then when you take that Social Security. As we get into investments more, we put this example together for you, just the power of, compounding interest here and compounding growth. So here we have an example. Someone starts with $38,000. The rate of return is 6%. If they do nothing else and they grow that at 6% a year and their investments in 30 years, they’ll have almost $220,000. So not bad. And then imagine adding to that account every year. And you can see how that can really start to turn into a nice number. When we think about some of the investment basics, really the starting point for that is developing a clear understanding of your goals. Right along with that is your time horizon and risk tolerance. So, of course, if you’re saving for a goal that’s 1 or 2 years away versus saving for a goal 30 years away, you’re going to likely invest your money differently. You’re- the feelings that you have about risk and the risk you’re willing to take will likely be a lot different in those situations. So remember that savings is good into the bank. Investing really provides you with that more accelerated growth. Of course, there’s additional risk that comes with that as well. But having that additional growth for long term savings really starts to pay off as we showed in that last example. And then, of course, you’re going to want to understand and manage the risk when you’re developing your investment portfolio. So a few different major asset classes that you can put your money in. Of course, one is bank accounts, cash alternatives. We’ll talk about that here. And we’re going to cover all of these, bonds stocks, and then pulling that all together in the form of an asset allocation that’s appropriate for the goals that you have, whether they’re short term or whether they’re long term. We take a look at cash alternatives here. Those are things like high yield savings, CDs, money market accounts and money market mutual funds. And so those are some different types of cash alternatives. And when we think about bonds. The way I want you to think about bonds is bonds are a loan. So a government or a corporate entity, if they need money to finance their company or for the government, what they might do is borrow. So they issue bonds, investors buy those. Essentially, they’re lending the government or the corporation money in exchange for a regular interest payment and their principal back at the end of the term. That’s called the maturity date. As we go a little bit further into that, there are risks with bonds that you want to consider. And so when you think about bonds and the risks there, the longer the term on the bonds, the greater the risk. Think about interest rates. Generally in a regular interest rate environment, and now we’re a little bit different because our yield curve is inverted. Interest rates are projected to go down. So rates in the future are less. If you look at CD rates or, treasury bill rates, they’re less than they are now. Typically, they’ll be more. There’s more risk that interest rates will change over longer periods of time. And then the other thing is credit rating. So just like you and I have a credit rating, so do corporations and governments. And so if you go with a shorter length on the term of the bond and a higher credit rating, that’s going to be lower risk. If you go with a longer term on maturity and a lower credit rating, that’s going to be a higher risk. The other thing to keep in mind is there’s an inverse relationship between risks and, or excuse me, between interest rates and the value of bonds. So if interest rates go up, the value of your bond comes down. Why? Because someone buying a bond can buy the new bond coming out at a higher rate rather than buying your current bond that’s paying a lower rate of interest. So therefore if they were to buy yours, they would offer you a discount. Remember, you can’t go back.
You cannot go back to the corporation or the government to cash in your bond. You would sell it in the market. And so you just have to be cognizant of what interest rates are doing if you have a cash need that comes up unexpectedly. Okay, the other thing would be stock. So bonds are basically loans. Stocks represent ownership. And so although cash is usually the interest rates are nice, the cash balances are stable. Typically, if you’re saving for a long term goal, you’re going to want some higher growth rates than cash can provide. So that’s when you start thinking about stocks. When we think about stocks, there’s really two types. There’s common stock, and there’s preferred stock. In both situations, you own part of the corporation. The common shareholders have the voting rights and the preferred shared holders have a preference when it comes to dividends. So you want to factor that in too as you’re building your portfolio. Let’s take a look at some of the risks and the things to avoid. First one would be market timing. So when you invest, we know if you look back at the markets and all the charts that we all see, the markets have gone up over time. And of course, past performance, no guarantee of the future, markets go up, I like to say, but they don’t go up in a straight line. And so it’s very tempting to try to get in and out in and out. In other words, time the market. Well, we have some statistics here, some information that’s important to consider. And we don’t recommend that, of course. So if you look at the S&P 500 from 2001 to 2020, if you stayed invested, your average annual return would have been 7%. If you missed- this is almost hard to believe, but if you miss just the 10 best days during that period of time, your return drops to below 3.5%, less than half. If you miss the 20 best days, you’ve wiped out nearly your entire return. And then you can see 30 best days. Now you’re talking about a negative rate of return. See, the idea is, that’s why you want to take some time up front, identifying your goals, time horizon, risk tolerance, designing that portfolio according to whether you’re trying to meet a short term goal or a long term goal, and then staying invested. Here you can see, take a look at market fluctuation, excuse me, and this is about a 65 year period here. As I said before, the markets go up over time. They just don’t go up in a straight line. But even this, you look at this and you say, okay, well, there’s some pretty big volatility in certain years and there are, but when you think about it, there’s about 12 or 13 down periods here over about a 65-year period. At the end of the day, that’s about 20% of the time. So 80% of the time during this period, markets were up. Again, it pays to stay invested over the long term. Then once you have an understanding for stocks and bonds, as I mentioned, you’re going to want to develop a proper asset allocation. And so what that means is based on your goals, again, time horizon and risk tolerance, then you have to decide, well, how much stocks, what percentage of stocks should you have? What percentage of bonds should you have? And then there’s different types of stocks. There’s large company stocks, there’s domestic stocks, there’s international, there’s growth-type investing. There’s value type investing. Get into bonds. There’s government bonds, corporate bonds, short term, midterm, long term, there’s cash, there’s commodities.
You could even put real estate in there. So having the proper allocation is super important as far as achieving your goals. And studies have shown that your asset allocation is actually the number one determining factor of your long-term rate of return. The next piece that you want to integrate with that is diversification. And so when you think about diversification, you want to think about within each of those asset classes you want to have more than just one security, so you don’t want to just own one or even two or 3 stocks or bonds. You want to have 20, 30, maybe 50 or more, so that you’re properly diversified, not dependent on one company or one sector or one industry or a region. Even just on the U. S., you want to consider global.
Andi: Bill, we got a real quick question.
Bill: Andi, it looks like you might have another question for me?
Andi: Yes. Shannon would like to know, “My portfolio is 70% stocks and 30% bonds in my traditional IRA, my brokerage account and my Roth IRA. But should it be 70/30 across all 3?”
Bill: Great question. And we didn’t talk about that. If we think about that income tax diversification slide, one thing that you’ll want to consider is, and I like this question a lot, the pools, of course, are taxed differently. So although you might have one overall allocation, what you want to do is consider splitting that up. And what I mean is, for asset classes or investments that you think are going to grow at the highest expected rate. Well, you’d probably want to be taxed at the lowest tax rate. Therefore you would consider those in your Roth. Conversely for investments that you feel that may grow at the lowest rate of return, you probably put those in your tax-deferred pool of money. That was the bottom, right? Because you’ll pay the lowest taxes there- excuse me, you’ll pay the highest taxes. You want your lowest rate return. And then over in the taxable pool of money, that’s where you would put other things that hopefully investments you would expect to own for more than a year and take advantage of those capital gains rates.
Andi: Excellent. Mark would like to know, “What do you think of investing in trust deeds, making consistent 10% or more annually?”
Bill: One more time on that one, Andi?
Andi: “What do you think of investing in trust deeds, making a consistent 10% or more annually?”
Bill: Yeah. And so you’re talking about and, yeah, and first trust deeds and real estate investing. I think it has a place there. Again, I think what you want to do is stay diversified, and make sure that you’re using all the asset classes.
Andi: All right. We are coming up on time here. So I’m going to go ahead and throw it back to you. And we’ve got a couple more questions, but I’ll save them towards the end.
Bill: And one thing I just wanted to cover at the end here is estate planning considerations, an often-overlooked area when we’re meeting with folks. And I think you want to make sure that you definitely have a plan in place and think about those that come after you. If you don’t have your wills, your trust, your power of attorney for health care and financial, boy, there’s no other way to say it, there is a big mess to clean up. Not only that, you can end up paying unwanted taxes. Because what happens is, if you don’t have a trust set up, then assets like your home, bank accounts, or unwanted costs or taxes, if you don’t have those, then your house is going to run through probate, your brokerage accounts are going to run through probate, there’s court fees there, there’s attorney fees there, and so obviously that’s going to bring down the value of your estate. We talked about the different documents there and where do you get started as we’re wrapping up here on the comments is first make an inventory. That’s important. So sit down, make an inventory of your assets. That goes along with creating the net worth statement. Think about do you have any special needs amongst your family? And certainly you want to account for those. And then, you- What about your beneficiaries? What do you want this to look like? Not only do you think about beneficiaries within your estate plan, remember your retirement accounts have beneficiaries as well. So you want to do a periodic beneficiary review to make sure that money is going to go where you want it to. Andi, with that, I’ll send it back over to you before we get into questions.
Andi: If you schedule a free financial assessment with one of the experienced financial professionals at Pure Financial Advisors, they’ll take a deep dive into your entire financial picture. They’ll stress test your retirement portfolio. You’ll learn not only how to choose a retirement distribution plan that’s right for you, you’ll learn how to minimize risk and maximize return. You’ll learn to legally reduce taxes now and in retirement, and you’ll learn how to maximize Social Security. And you’ll learn how to protect yourself against market volatility, rising inflation, rising healthcare costs. This is a no cost, no obligation, one on one comprehensive financial assessment, and it’s tailored specifically to you and your needs and your risk tolerance and your goals. Pure Financial is a fee only financial planning firm and Pure Financial is also a fiduciary, meaning that we are required by law to act in the best interest of our clients. We’ve got several offices around the country, but you can meet with any one of our experienced professionals like Bill online via zoom, just like this, no matter where you are. Getting back to the questions that I had, Antonio said, “When I start RMDs at age 73, how long do I have to take all my money out of my pre-tax IRA? I actually have a TSP as I’m a federal employee, but how long can I keep it in after RMDs have started?”
Bill: Yeah, great question, Andi. So what happens is there’s a life expectancy table that you use that the IRS issues. So each year the factor changes, forcing you to take out more and more. If you convert that factor to a percentage, it’s about 4% when you start. Eventually it works its way to 5%, 6% and even more than that. So it’s designed to be able to take out over your lifetime.
Andi: Okay, and then the next question came from Charles. He said, “When mixing an RMD and a Roth conversion, it’s clear that the RMD amount may not be used for the conversion, but does the RMD have to be completed before the conversion is performed?”
Bill: Yes, you’re going to want to make sure you do that RMD first, absolutely, before you do the conversion.”
Andi: Okay. And then Jean says, “I already have a will, do I need to have a trust as well?”
Bill: Yeah. Get that question a lot. Yes. It’s a good idea to have a trust as well, because unfortunately the will is not going to avoid probate. So your retirement accounts annuities, those will pass by beneficiary designation. But when you think about if you have a home, if you have bank accounts, brokerage accounts, those don’t have beneficiaries on them, that will go through probate if you only have a will.
Andi: Thank you all so much for joining us. Bill, thank you very much for your time.
Bill: You’re welcome.
Andi: All right. Have a great day, everybody. We’ll see you at the next webinar.
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