Do you want to be rich, or do you want to be wealthy? Do you want to be both? Is there a difference? What are important steps that you can take today to grow your wealth? Regardless of your age or where you are in life with saving for retirement, today’s show is for you. Joe Anderson, CFP®, and Big Al Clopine, CPA give you the steps to success to grow your wealth at any age!
Important Points:
- 0:00 – Intro
- 1:52 – Steps to Success
- 3:16 – Asset Allocation
- 5:15 – Account for Inflation
- 6:21 – Download: Grow Your Wealth Guide
- 7:11 – True/False: Most retirees surveyed say they saved more money than they needed in retirement
- 7:41 – Investing Early 8:37 – Missteps and Catch-ups
- 9:43 – $1 Million at Retirement
- 11:15 – Retirement Income and Spending
- 13:49 – Download: Grow Your Wealth Guide
- 14:25 – True/False: If I make too much money I can’t invest in a Roth account.
- 15:32 – Roth Income Limits and Contribution Limits
- 17:57 – IRA Income Limits and Contribution Limits
- 18:40 – Tax-Smart Strategies
- 20:00 – Ask the Experts: My financial planner’s company is no longer supporting Roth 401(k) accounts. I don’t want to transfer the account to another broker. Can I roll that account into one they do support without losing the benefits of the Roth? If so, what kind of an account?
- 21:13 – Ask the Experts: My wife doesn’t work; can I do catch-up contributions for her Roth account?
- 22:00 – Pure Takeaway
- 22:32 – Download: Grow Your Wealth Guide
Transcript:
Joe: Do you want to be rich, or do you want to be wealthy? Do you want to be both? Is there a difference?
Announcer: What does your retirement look like? Are you confident you’re on the right track? Navigating fluctuating markets alone can be confusing. Stocks, bonds, annuities, 401(k)s, and IRAs. Get ready to be informed and empowered by financial experts Joe Anderson and Alan Clopine. Put their decades of experience to work for you. From Social Security to tax planning, they’ll take the stress out of investing in your future and give you the tools and strategies you need to map out the retirement you’re dreaming of on Your Money, Your Wealth®.
Joe: Welcome to the show. The show is called Your Money, Your Wealth®. Joe Anderson here, CERTIFIED FINANCIAL PLANNER™, president of Pure Financial Advisors. I’m with the big man Big Al Clopine. Are you rich or wealthy, Al?
Al: Um, I don’t know. I would like to be both. I’m curious to see the difference.
Joe: Rich or wealthy? Well, let’s see how Americans define it. 37% say, “well, I want to afford the life I want.” How about live a happy life? There’s 30%. 19% meaningful relationships, 10% having a large nest egg, and then 4% having a lot of cash as I’m working. Making a lot of money, Al.
Al: well, I think I want every one of those I think.
Joe: Hey! Well, then you are rich if you have this. That’s today’s financial focus. What do we need to do to become richer? Well, 26% are doing nothing. They’re like, “I’m good,” right, or, you know, “I’ve given up. I don’t know.” Right? 22%. This is Al’s favorite. He wants to build relationships. 20% are paying off debt. These are all really good things. Prioritize your savings, invest, increase your earnings, right? So let’s break this thing down. Let’s get you a roadmap. Let’s get you a guide, a step to success for building wealth. Big Al Clopine.
Al: All right. Steps for success on growing your wealth. So we’ll start out with the big picture, right? What do you need to do, and it’s gonna be a little different for everybody. What do you need to do? Start saving. You got to save to be able to retire how you want to. Make sure you’re taking advantage of all your retirement plans, and let’s make sure you’re not forgetting income taxes. Of course, all the other parts really important, too, but today, we’re gonna focus, Joe, on more the financial part.
Joe: Yeah. Let’s start out with the big picture, right? What are you trying to go to, right? What’s the time horizon? Is it 5 years, is it 50 years, is it 10 years, or is it 10 minutes from now, right? Looking at your time horizon, this is going to dictate everything. A lot of times, people don’t necessarily know when they want to retire. That’s what planning is all about, sitting down and kind of mapping things out. Can I retire? Can you retire tomorrow, or is it gonna take you a little bit longer? So looking at your time horizon, I think, is key.
Al: I think that’s where you start, Joe, because based upon where you’re at, what your goals are, that’s gonna determine what strategies you need to do right now, right? You may want to have slightly different allocations as we go.
Joe: Well, right. Your time horizon is the starting point for a lot of different things, and investing of course is one of them, so if you are in your 40s, you might want to have a different portfolio than someone in their 50s, 60s, and 70s. So let’s give you an example. For those of you that are in your 40s, you probably want 80% to 100% in equities, stock type mutual funds or ETFs or individual stocks, whatever. Maybe 0% to 20% in bonds, right? Because you have a longer time horizon if your retirement date is, let’s say, 65, but if you want to retire at 50, well, this is probably not the right allocation, right? So this is general. In your 40s, you know, you want more stocks and bonds. In your 50s, now you want to tone down that risk, have a little bit more safety exposure in the overall portfolios, and as we keep going through time, in your 60s, maybe it’s a 50-50 split, 60-40, something like that. In your 70s, ok, well, now I probably want a little bit more bonds and a little bit more stocks, but this is all relative based on what your goals are, right? If you’re in your 70s and you don’t necessarily need the money, well, it probably could be 100% equities, as well, because it might go to the kids or the grandkids.
Al: I think another thing to think about when you’re thinking about filling these pies, if you will, there’s equities, and there’s fixed income and short term. Equities is stock, and it’s not just, like, what’s a stock? Well, stock is ownership of a company, but we generally recommend index funds or ETFs, low-cost globally diversified funds, and when you’re thinking of equities, it could be domestic, it could be international, it could be emerging markets, could be small companies, medium, large, growth, value. You probably want to have exposure to all of those and figuring out how to fill those pie slices takes a little bit more work, but right now, we just want to expose you to that. Fixed income–so this is like a bond, which is kind of like a loan. In other words, you’re learning your money to the government or a company. They call that a bond. You get paid interest, and at the end of the term, you get your principal back. There’s all different kinds of bonds, too, so this right now, Joe, we’re just really talking big picture.
Joe: Great explanation, Al. Now let’s talk about inflation, right? We’re seeing a lot of different, you know, headlines today about inflation, so you have to look at inflation, but let’s say you have $100 that you would like to spend today. Well, in 10 years, either that $100 is gonna be worth $74, or you need $134 to purchase that $100 of goods and services given a 3% annual inflation rate. We’re experiencing a lot higher inflation today, so this is the whole purpose of investing is that you have to outpace inflation. The purchasing power of your money has to continue to grow so you can still maintain a certain lifestyle that you’re accustomed to. Inflation is everything, al, right now today.
Al: We’ve had very little inflation for quite some time, but it’s something you have– this is big picture, right? You have to make sure when you’re thinking about retirement, when you’re thinking about growing wealth, becoming rich if that’s what your goal is, you got to factor in inflation because it’s real, it happens. We had very low inflation for probably a couple decades. Now it’s higher. If you look back 100 years, it’s over 3%, and 3%, and probably, what, every 20ish years, things double in cost.
Joe: All right. We got to outpace inflation, folks, so you got to grow your wealth, and how do you do it? You go to yourmoneyyourwealth.com, click on our special offer this week. It’s our grow your wealth guide. Grow your wealth guide. Yourmoneyyourwealth.com. Click on the special offer. You can download it right there on your computer. That’s our gift to you this week. We got to take a break. We’ll be right back with more Your Money, Your Wealth®.
Joe: Hey. Welcome back to the show. The show is called Your Money, Your Wealth®. Big Al. I’m Joe Anderson. Welcome to the show. We’re talking about growing your wealth. Go to our web site yourmoneyyourwealth.com. Go to the grow your wealth guide. Just click on the button to grow your wealth. You can download it right there on your computer. Everything you need to know about growing your wealth, that’s our gift. Yourmoneyyourwealth.com, click on that special offer. Let’s see how everyone did on the true-false question.
Al: True or false? That seems like kind of an easy one. What do you think, Joe?
Joe: 46%. What do you think?
Al: Ha ha!
Joe: True or false? Do you think this is an accurate survey?
Al: I do not. Ha! I have met very few people that say, “you know what? I saved too much.”
Joe: Let’s dive in, Al. Let’s talk about savings.
Al: Saving early is better than saving later. I think we all get this. We got a little chart here. So saving a couple hundred dollars a month. We picked 4%. We want very conservative on this slide, right, but you can see if you start saving at 25 versus 35 versus 45, obviously you end up with a lot more money saving earlier because not only are you contributing more, but more importantly is it’s that compound growth, growth up on growth.
Joe: Right. I mean, if you could just start a little a bit earlier, right, you’re going to have twice at much money. I mean, the math is pretty simple here, but what motivates people to take action sometimes is just seeing the numbers, right? It’s like “oh, there’s always tomorrow.” procrastination is always our worst enemy, especially when it comes to building wealth, losing weight, quitting smoking, all that other good stuff, right? But start today. It’s never too late to start, and sometimes, it’s never really too early to start. Also, you might have some missteps in your savings, right? We look at Linda here. She’s 40 years old. She was saving 15% of her salary. All the way through, 2.8, and then, you know what, life happens, so she cut it half, started to save 6% from age 51-56, and then, hey, she caught back up from 57-67, but she went 20%, right? 2.7 million at the end of that.
Al: I think that’s so important, Joe, because I think almost all of us have missteps and not even necessarily misstep. Maybe it’s intentional. Maybe we bought a home. Maybe it was more expensive. Maybe we had to pull money out for a down payment. Maybe the kids went to college. Maybe they had special sports that they had to pay extra for, whatever it may be. That could be considered a misstep. You know, maybe you lose a job. That would be more of a misstep, but if that happens to you, which it’s true for most of us, then you’re gonna probably have to on the back end in the later years save more to get back caught up.
Joe: All right. Million dollar goal. Who wants a million dollars, right? Who wants to be a millionaire? Well, here’s your strategy. If you’ve got 40 years to your goal, right, you need to save about $522 a month. 40 years to the goal, 522 bucks a month if you get a 6% annual return. All right. Let’s say you take that 10 years out. Now you got 30 years to your goal. Well, you got to double up. You got save about 1,000. If you got 20 years to the goal, now it’s about $2,200 a month. If you got 10 years until you want to retire and you want to make that million dollars, 6,000 bucks a month, 6,000 and some change, so again, the earlier you start, you know, the better off you’re gonna be.
Al: Yeah. No question. I mean, it kind of almost goes without saying, but there’s people that we meet all the time that they’re in their 50s or even early 60s. They’ve saved very little, and maybe you’re not gonna be a millionaire, but if you save and you get really aggressive on your saving, even if you’ve got 5 years, it’s gonna make a difference in your retirement, so I think that’s the key point here is regardless of your age there’s always things that you can do to make your situation better.
Joe: Yeah, but even a million dollars, right, even though that’s a huge, huge number, but if you equate that in regards to income, if I were to ask people, al, “a million dollars. How much income do you think a million dollars could produce on an annual basis?”
Al: Yeah. A lot of people will tell us $100,000.
Joe: $100,000, right, or even more.
Al: Right.
Joe: It’s a lot less than that. So here’s an example. Ok. Let’s say that you’ve accumulated that million dollars. You don’t want to take out any more than 4% out of the portfolio if you’re into your 60s. If you’re in 50s, it’s probably 3%, right? If you’re in your 70s, maybe 4% is the right number, but we’ll just use this as a general rule of thumb. It’s the 4% rule. So I have that million dollars. I don’t want take out any more than 4% out of the portfolio, so that’s 40 grand, ok? So it’s 100,000. If you’re pulling 10% out of your portfolio, this thing is gone before you know it. So that’s $40,000. Let’s say you have your Social Security. Maybe it’s 25,000, maybe it’s more, maybe it’s less, and then maybe you have some rental income, maybe you have a pension, whatever it is. You want to look at your fixed income. So here are the variables to see how much money that you can actually spend in retirement. This is your financial plan. This is your guide to wealth if you can understand a little bit of math. You start out with how much money that you have. In this example, a million dollars. Then you use this 4% rule. So take that–in this example, it’s 40 grand. Second step, add up all your fixed income, Social Security, pensions, real estate income. Maybe even if you still have a little bit of part-time income. Add all that up. In this example, it’s 35 grand. So I take 35,000 plus 40,000. 75 grand. That’s my income. That’s how much money that I can spend given this scenario. If I were to ask people “how much money do you think this person could spend if they got a million dollars plus 25,000, they got rental income, and everything else?” I guarantee you it’ll be a lot higher than this. This is why people go broke in retirement.
Al: Yeah. No question. Because they don’t understand that relatively simple formula, and this is basically just a big picture formula. This isn’t necessarily the exact right answer, but it just shows you if you’re in the ball park. Now if you feel like in this example “no, I can’t. I need to spend 85,000. That’s the least amount I can spend,” there’s always things you can do. Maybe you work a couple of extra years, and so now you’re portfolio’s 1.1 million or 1.2 million, right, so you have more income that way. Maybe your Social Security goes up by 3,000, 4,000, 5,000 a year. Or you get a part-time job, whatever it may be, but there’s all kinds of ways to make this work, but this kind of gives you a big picture where you’re at when you retire.
Joe: Right. If people were to do this, 95% would be in the ball park.
Al: Yes, they would.
Joe: Because they go into retirement blind. They don’t necessarily know. They look at “oh. We got a million dollars. Let’s go. You know, we’re retired.”
Al: Yeah. How many people do you know that come to us and say, “you know what? I know I can spend 80,000. Can we make it better?” we never get that.
Joe: “I got it all mapped out. Can you just verify?” Most people don’t have it mapped out, but you probably do that watch this show. If you want to map it out even further, go to our web site yourmoneyyourwealth.com, click on that special offer. This week, it’s grow your wealth guide. It’s a grow your wealth guide. Yourmoneyyourwealth.com, click on that special offer. That’s our gift to you, and that’s it for this segment. We got to take a break. The show is called Your Money, Your Wealth®.
Joe: Welcome back to the show. The show is called Your Money, Your Wealth®. Joe Anderson, Big Al. We’re growing your wealth today. If you want the guide, go to our web site yourmoneyyourwealth.com, click on that grow your wealth guide. Let’s see how you did on the true-false question.
Al: True or false? Well, you can always invest in the account if you’ve got one, but I think the question is really kind of referring to can you contribute to a Roth if you make too much money because, Joe, there are limits on what you can contribute.
Joe: We want to get a little bit deeper here. So these are Roth contribution limits, right? So you have to have earned income first of all to make a Roth IRA contribution, and what’s the difference between a Roth IRA and a standard IRA? Well, Roth IRA is an after-tax contribution, right, but the money will grow tax-deferred, and then when you pull the money out if you qualify, it comes out 100% tax-free, right. So Roth IRAs are a really great accumulation vehicle, right, and they’re also a really good distribution vehicle because you don’t ever pay tax on the distribution as that money continues to grow and build, but the IRS puts limits on it. So if you’re single, you have to have income first off, but if you make too much, you’re disqualified. So if you make than $144,000 single, $215,000, $214,000 if you’re married, and married filing separately, it’s 10 grand. If you make more than this, you cannot make a Roth IRA contribution. Contribution limits this year is $6,000. If you’re over 50, you get $1,000 catch-up, but if you’re between these two, al, you can make a partial contribution.
Al: Right. So in other words, if you’re under these amounts, 129,000 single, 204,000 married, then you can do the full contribution. If you’re in between the two, it gets phased out, and, like, if you’re halfway between that phase-out period, you could half as much as what the total, but, Joe, I think it’s important there’s backdoor Roths, there’s Roth conversions. There’s so many ways to get money into a Roth IRA that are different than a straight contribution.
Joe: Right. I think there’s confusion because, all right, I make too much money. I cannot put money into this Roth IRA. It’s false. If you have a retirement account, an IRA, a 401(k), any retirement account, you could potentially convert some of that into a Roth IRA. You pay the tax on the conversion, but it’s just like I’m paying the tax here and putting or depositing the money into a Roth, or you could take some portion of your retirement account and convert it into a Roth. Then all of that future growth will grow 100% tax-free. So there is no limitations of income on conversions. There’s only limitations on contributions. Now if you are over these limits, you could put money into a standard IRA and then convert that into a Roth, so multiple ways, again, Al, that you can put money into these accounts.
Al: Yeah, and there’s no question, so when you’re talking contribution, yeah, you have to have earned income or your spouse has to have earned income. When you’re doing a conversion, you don’t need earned income. You can do that at any age. A lot of people think they have to wait to 59 1/2 to do a conversion. That’s not true. There’s no penalty on a conversion, plus if you have a Roth 401(k) option at your work, you can contribute to that Roth 401(k) without regard to your income. You can make way over the limits, and still you could get money into the Roth that way.
Joe: Yeah, and those limits here are 20,500. So if you have a Roth 401(k), it’s 20,500. Then you have a catch-up provision in the 401(k) plan of 6,500, right? If you’re self-employed, you can do a simple plan. That’s 14,000 with another $3,000 catch-up, or you could do a standard defined contribution plan. So if you’re self-employed, you can set up, you know, all sorts of different plans here, and the maximum contribution there is 61 grand.
Al: And this is something that a lot of people don’t fully take advantage of, right? So certainly if you have a company plan, you want to take advantage of the match, right, but you also want to make sure that you’re maxing things out, particularly if you’re 50 and older because many of us, as I just said, there’s missteps along the way, so you kind of need to get caught up. So take advantage of what’s available at your workplace.
Joe: Right. Workplace plans, and then this is the individual plans, and you can do them both, right? So if you have a 401(k), you can contribute to a Roth IRA. So what is the big deal between a Roth, let’s say, and a standard IRA? Well, it’s taxes, ok? So here’s an example. Let’s say you have $100,000, and it’s sitting in your retirement account, and you’re in the highest tax bracket of 37%. Let’s say you have a really good investment strategy or you picked a really good stock and it gave you a 10% rate of return. That’s not all yours, right? You have to give part of that return to Uncle Sam. If I’m in the 37% tax bracket, right, $37,000 goes to Uncle Sam, and I’m left with $63,300, so I did not really receive a 10% rate of return. After-tax return was 6.3%. Let’s say if this $100,000 was in a Roth IRA, right? Ok. Well, I got that 10% rate of return. That 10% is all mine, ok? So I bought my partnership back from the IRS. All future growth is mine 100% tax-free. I mean, this is the power of taxes and tax strategy when you really boil down to it because would you rather have 10% or 6.3%? Of course you would rather have 10%.
Al: Yeah. No question, which is why it’s so important to get money into a Roth IRA. Now of course, this doesn’t include state taxes, and actually, it’s probably capital gain, which is a lower taxes rate, but the concept is if it’s in a Roth IRA and you pull the money out it’s 100% tax-free, which goes a long way in retirement when you’re trying to stretch those dollars.
Joe: All right. Let’s switch gears. Let’s go to ask the experts.
Al: So this is Ben. So that’s kind of an interesting question, Joe. So a company has a Roth 401(k). Now they say no longer. I mean, I’m guessing perhaps that they could potentially keep it in the Roth, but if they say no, you’ve got to distribute it elsewhere. You could then perhaps put it into a Roth IRA, I suppose.
Joe: You could keep it probably in the old 401(k) plan, right, and then they’re starting up a new 401(k) plan it sounds like, and you could keep it there, or you just roll it into a Roth IRA. I mean, the Roth component of that 401(k) plan is not gonna go into any other plan but a Roth, right, so you’re not– because it’s after-tax dollars, after-tax dollars that grew tax-free for you. So if you try to take that money and put it into another retirement account, they’re not gonna accept it anyway, so I wouldn’t worry too much about that, but I would talk to your hr person or your benefits person just to kind of get the fine details there, and then if you’re still confused, you know, just talk to a tax professional or a financial professional just to make sure you don’t screw that up.
Al: So this is George. And the answer is yes, George. So if you have earned income, that will suffice for your wife, as well. That would be a spousal Roth. You could do a spousal IRA. Same exact rules, but that can be done based upon your earned income.
Joe: Yeah. Really good question, George, because most people are not aware of that. So you have earned income, your spouse does not have earned income, it doesn’t necessarily matter that the spouse doesn’t because you do, and she’s a lucky lady because she’s married to you, right? So you can make a contribution for yourself, and you can make a contribution for your spouse, and if you’re both over 50, you can both use those catch-ups as long as you qualify from an income perspective.
Al: So what did we learn today, Joe? Steps to success on growing your wealth. So first of all, look at the big picture, figure out what’s gonna make most sense for you, what are your goals, what are you trying to accomplish. Then set a savings goal. Make sure that you invest it properly, you explore all the options available in your retirement accounts, and don’t forget taxes because taxes will take more from your retirement dollars than you would ever think possible.
Joe: That’s it for us today. Hopefully you enjoyed the show as much as I did. Go to our web site yourmoneyyourwealth.com, click on that special offer. It’s grow your wealth guide today, right? If you want to grow your wealth, get the guide. Yourmoneyyourwealth.com, click on that special offer, and that is it for us. For Big Al Clopine, I’m Joe Anderson. We will see you next time, folks. Have a wonderful, wonderful day.
IMPORTANT DISCLOSURES:
• Investment Advisory and Financial Planning Services are offered through Pure Financial Advisors, LLC. A Registered Investment Advisor.
• Pure Financial Advisors, LLC. does not offer tax or legal advice. Consult with a tax advisor or attorney regarding specific situations.
• Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
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CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
