Show Notes

• (01:05) In Tough Times Does It Make Sense to Move to Cash in a Retirement Account? (Kevin, Denver – voice message)
• (06:15) Should Market Declines Impact “Old Folks” Roth Conversion Decisions? (Geriatric Anonymous, Missouri)
• (15:39) I’m Expecting a Future Windfall. How Should I Allocate My Assets Now? (TJ, Minneapolis – voice message)
• (23:21) My Financial Advisor Buys High and Sells Low in My Portfolio. What Can I Do? (Nick, Ohio)
• (31:26) Leave Partially Vested Pension to Grow, or Withdraw and Convert to Roth? (Sean, Los Angeles)
• (37:00) What’s the Best Way to Withdraw from an IRA in Retirement in a Down Market? (Ryan, St. Louis)

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Transcription

As bear market territory freaks out some investors, YMYW listeners are a bit more chill as Joe and Big Al spitball on their specific strategies to manage the decline today on Your Money, Your Wealth® podcast 379. Does it make sense to move to cash inside your retirement account? How do down markets impact Roth Conversion decisions for older investors? What should your asset allocation be now, during market volatility, if you’re expecting a future windfall? How should you manage the relationship with your financial advisor if they buy high and sell low in your investment portfolio? Should you leave a partially vested pension to grow, or withdraw the money now and convert to Roth? What’s the best way to withdraw from an IRA in a down market? And in the Derails, can the fellas make it through this episode with a bloody nose AND with COVID? I’m producer Andi Last with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA. Without your money questions we don’t have a podcast, so visit YourMoneyYourWealth.com and click Ask Joe & Al On Air to send them in as an email or a priority voice message:

In Tough Times Does It Make Sense to Move to Cash in a Retirement Account? (Kevin, Denver – voice message)

Kevin: “Hey Andi, Big Al, and newlywed Joe from Minnesota. Kevin from Denver via South Dakota with a question regarding cash inside a deferred retirement account. I recently switched jobs and moved money from the 401(k) to my traditional IRA. When I did that, everything landed in a money market settlement fund. I reallocated most of the cash into similar stock investments in my 401(k), but I stopped short of moving the remaining cash to a bond fund. My desire is to retire in about 4 years. And my plan was to have a couple years of cash to ride out, you know, a market like we’re experiencing today. I’ve got an emergency fund, but I don’t see that as being the same thing as holding cash inside a retirement account to ride out, you know, these tough times. So my question is when if ever, does it make sense to move to cash inside a retirement account leading up to retirement? Based upon my calculations, it would be about a 5% allocation in cash upon retirement. As always appreciate your noodling on my random questions. Peace out, time for a barrel stout.”

Andi: I just wanted to jump in real quick and mention the fact that Joe and Big Al spitball, not noodle- noodling is somebody else.

Joe: Did you hear that Minnesota accent? or the-

Al: Yeah, I heard some. Yep. Or South Dakota. Same, same, right?

Andi: ‘Sota.

Joe: Living in Denver now. What do you think Big Al? 5% is not a huge amount. I don’t think it’s going to make or break. He’s not really trying to time the market. It doesn’t sound like with 5%.

Al: No, but I think he’s asking- right now he’s got a bunch of money in cash, probably more than 5%. He wants to have 5% in retirement. But, the question is, should I just stay in cash or he doesn’t really want to move into bonds and I guess in some ways don’t blame him. Because bonds in the short term haven’t done that well. I guess part of the reasoning behind bonds is they do tend to hold their value like cash and they tend to have a better rate of return, like cash. In market declines, the safer bonds, the short-term bonds, actually go up and helps shelter the blow. Cash doesn’t. It just sits there. But nevertheless, we’re getting this question, which is, should I just skip the bonds and go in cash? And they do roughly the same thing, right? It’s safe money in your retirement account. But I’m in bonds right now because I think that’s the right place to be. They do go up, they do earn more than cash. I think if he’s asking the question, what to do today, I would go into bonds. But I’d have them be safer short term. In terms of in retirement, 5% is fine. I mean, that just some ease of distributions, right? So you don’t have to sell anything. So I’m totally fine with that.

Joe: Yeah. I mean, if you’re sitting in cash with a lot of money and just trying to time it out and ride it out over these tough times is what he’s saying. But the definition of tough times is on the flip side a really good time to invest, right? If he thinks it’s tough times now because the market’s down 20% and so is it better to invest in good times when the market’s up 20%? So you’ve gotta be thinking kind of almost an opposite world, George Costanza, you know, when you invest your money, because I think intuitively we’re really bad investors because I mean, there’s two things that people are doing right now, right? It’s like, okay, do I hold the course? Or do I go in cash or try to time the market to ease the pain that way. Those are two of your options. And they’re both very difficult to do. Because if I just hold the course, even though that’s probably the better option, but you’re seeing your account balance go down 5%, 10%, 20%, whatever the number is, depending on what type of portfolio that you’re in. I mean, that blows people up. They can’t do it. I mean, time and time again, shows that people can’t do it. So then you have a situation where Kevin recently changes jobs. He moves his 401(k) and now he’s got money sitting in cash and he’s like, oh, now it would probably be a really good time to keep it in cash and ride out the tough times. I mean, if I were looking at Kevin’s overall portfolio, I would say what is the appropriate balance that he should have to accomplish his goals and have that invested right now today?

Al: But Joe, he said ‘I reallocated most of the cash into similar stock investments.’

Joe: Yeah. But he’s riding some stuff out in the tough times. I don’t know what that means.

Al: Well, yeah. It either means exactly what you said or it means what I said, I guess we don’t know. My presumption was he had some bonds in his retirement account and he didn’t want to reinvest in bonds because they haven’t done that well lately. So I don’t know. I’m not really sure.

Joe: I think- whatever- we both get a little different color to this question.

Al: True.

Should Market Declines Impact “Old Folks” Roth Conversion Decisions? (Geriatric Anonymous, Missouri)

Joe: We got-

Andi: Geriatric Anonymous from Missouri.

Joe: From Missouri. Okay Geriatric. “You don’t often address us old folks. So this is your chance. I’m 85 and my wife is 72. We have more than enough to live the rest of our lives. Our financial goals are 100% legacy. I’m still working half-time. And my employer allows me to continue to contribute to my traditional IRA, which totals $1,600,000. I also have $500,000 in a traditional IRA and $500,000 in a Roth IRA apart from my employer’s IRA. I have $800,000 in a brokerage account. I’ve been converting my non-Roth IRAs to Roth staying in the 24% tax bracket, about $100,000 a year. After I die, my retirement pension, Social Security and employer RMDs inherited by my wife will activate a widow tax in the 32% range, a substantial portion coming from my employer’s RMD. Should I continue my conversion rate into the 32% tax bracket now and after I retire until I die to reduce the limit of the tax burden on my wife? Should the current stock market decline have any impact on that decision? I have 3 daughters all financially secure who will be the beneficiaries. They’re in their 30s and thus have many years to future accumulate whatever we leave them.” All right, Geriatric-

Andi: Anonymous.

Joe: Anonymous.

Andi: Almost.

Joe: So the widow tax, oh, he must be listening to another podcast or pretty smart guy there.

Al: Yeah, pretty smart guy.

Joe: Basically what he’s saying is that he’s going to have a survivor benefit on his pension plan. He’s got the survivor benefit on Social Security and then the RMDs from all of the retirement accounts, are going to push his wife into a lot higher tax bracket because now she’ll will file single versus both of them filing married. So when they file married, he’s in the 24% tax bracket. But after he passes, she will have income as a single tax filer, but the income is still going to be very high that will push her up into the 32%plus range. So he’s thinking if this money is going to get taxed at 32% when I pass, should I convert to the 32% or keep converting to the 24%? Which is a really good question. Which is a really tough question to answer to some degree, because there’s so many unknowns, right? If he was gonna- if he had a- we don’t know when he’s going to die or when she’s going to die. Those are the key things that we need to give you the perfect answer.

Al: Which of course nobody knows, but the question is a good one. And we haven’t really talked about this in a while with the Roth conversion. One of the reasons you do it is when you’re married, particularly if one spouse is a lot older than the other one and will presumably, you don’t know for sure, but will presumably die before the younger one, then- it doesn’t really matter which one, but the survivor then uses the single tax brackets. By the way, they’re the same tax brackets that married filing joint have. It’s just that you hit these higher percentages much quicker. So for example, the 12% bracket goes up to well over $40,000 for a single, but it’s a little over $80,000 for married and so on. So all of a sudden you pass away, you’ve got similar income, but now the survivor’s in a lower tax bracket. So that’s that higher tax bracket. Thank you. But I would say, yeah, we don’t know enough information. It’s a little hard to say, but if I just spit balling it-

Joe: Would you convert to the 32% or would you keep it the 24%? I guess is his question.

Al: I probably would not convert to the 32% under normal circumstances, however, with a big market decline. And it could go down more, we don’t know. This is the best time to convert. Because stocks are lower and if you can convert now and get that recovery when it does happen in a Roth, and then that’s actually a great idea. So because of that, I actually may go ahead and do that into the 32% bracket because the market’s lower.

Joe: Right. Because let’s say if he continues to convert to the 24%, well, that’s going to change here in a couple of years anyway. Because the 24% is gonna change into the 28%, you know, or it could go to EMT or whatever the whole brackets are changing. Right? The 10% goes to 12%, or the 10% stays at the 10%, 12% goes to the 15%, 22% goes back to 25% and then the 24% tax bracket, it goes to 28%. And then if she’s in the 32% that could push her up to the 39.6%. So, you know, or 35%. So I think we’re still in a low tax environment where I like his strategy. But if he lives another 10 years and he could continue to convert at 24% and then 28%, I think that’s a better deal. Because then his wife’s life expectancy is going to be a lot lower. And then when she has to take those distributions, she might be in a higher tax bracket. But it might only be for a few years, then the kids inherit it. And I would imagine the kids in their 30s are probably not in the highest tax brackets. So we’ve got to look at life expectancy, kind of what the health history is. And then what the kids and the beneficiaries look like in regards to finance. If they’re in super high tax brackets, well then by all means convert to the 32%.

Al: I was just going to agree with you, Joe, that it’s almost more important with brackets the kids are in or at what you think they’re going to be in, in the future to help answer that question.

Joe: Yeah. He’s got a great problem. He’s got a ton of money. A lot of it, unfortunately is in retirement accounts. So this is kind of the whole- why we talk about what we do every day. Is because Geriatric anonymous- anonymous-

Andi: Think “anon.”

Joe: – runs into the tax issue, right? It’s like I did a good job. I did what I was told to do. I saved money in my retirement accounts, my IRAs, my 401(k)s, got a nice pension. And then I collect my Social Security. And now what? He’s going to give 32%, 40% to the IRS of everything that he saved and accumulated, just because he did a really good job of saving. Now all of this money is forcing him out and he’s fortunate enough to have pensions also to boot. Most people won’t have those pensions and won’t be in the same situation where they will be in very high brackets, but they’ll still lose a lot of the money, if they’re great savers, to taxes, unfortunately.

Al: Yeah. I guess another thing is, let’s say he predeceases so his wife inherits the IRA. She can put it in her own name, which means the RMD will be lower because she’ll be at a younger age. So that’s- you kind of need to factor that in too, but you kind of need to know how long she’s going to live after he passes. And you don’t know that. You don’t know when he’s going to pass. So it’s kind of a- it’s just- it’s just spitballing. Because there’s no, there’s no right answer because we don’t have all the facts and no one has the facts and the facts to make the best call. But anyway, I would probably, like I said, I probably would not normally not do it. That’s just me, but I would consider it now because the market’s lower. That’s my response.

Joe: Yup. The market’s down 20%, convert to the 32%, get a bunch of it out. I mean, you could do the appropriate planning and forecast this thing out over the next 20 years to kind of even out the tax. So maybe you don’t go to the top of the 32%, you just put a couple of bucks into the 32%, so you could look at a dollar figure versus maxing out those brackets. So, I mean, there’s different planning that he could potentially do to even out the tax over his life, his wife’s life, and then the kids. So, there you go, talking about the old guys. So don’t say that we’d never done that. Thanks, Geriatric Anonymous.

Visit the podcast show notes at YourMoneyYourWealth.com for our latest webinar and companion guide on Inflation, the Fed, and Market Volatility to find out what money moves should consider right now, courtesy of Pure Financial Advisors’ Chief Investment Officer and Executive Vice President, Brian Perry, CFP®, CFA®. Then schedule a no cost, no obligation, financial assessment to make sure your portfolio is set up to withstand market shocks and turmoil. Pure Financial is a fee-only fiduciary financial planning firm with offices in Southern California, Seattle and Chicago, but no matter where you are, you can meet with our experienced professionals via Zoom right from your own couch. An influx of viewers and listeners are booking meetings with the Pure team, so schedule yours ASAP. Click the link in the description of today’s episode in your podcast app to watch the webinar and to book your free financial assessment.

I’m Expecting a Future Windfall. How Should I Allocate My Assets Now? (TJ, Minneapolis – voice message)

Joe: Go to YourMoneyYourWealth.com, click on Ask Joe and Al On The Air. You can leave a voice message or you can write us an email, whatever your fancy is. But I think TJ left us a message.

TJ: “Hey Joe, and Big Al, this is TJ from Minneapolis, Minnesota. I drive a 2009 Honda accord with 275,000 miles on it. And I drive that sucker into the ground. My drink of choice is either a Dr. Pepper or a Diplomatico Rum. I’m looking for some spitball advice. I’ve got about $1,100,000 in stock market exposure and about $1,000,000 in real estate equity, and I’m 37. 50% of my expenses are covered by my passive income from real estate. My question is about asset allocation. So I’ve got some super fortunate, well, unfortunate things that are going to happen, but I’ve got some windfalls coming my way from life insurance payouts and then an inherited IRA from older family members. And that’s to the tune of about another $1,500,000. I’m planning on retiring from my W2 in two years to prioritize being a good dad and spending time with my kids before I get too old. And I’ve always heard about bond allocation and having that be the conservative part of your portfolio, but in my situation with this upcoming windfall, I’m trying to figure out how I should plan my asset allocation today, knowing that in about 15 years, I’ll get a significant chunk of money in addition to what I already have. So just looking for your guys’ spit ball advice. I looked around, can’t find good answers on this, so hoping you can help. Love the show. Always goes to the top of my list, whenever it comes out, you make me laugh. You add a ton of value. Appreciate you guys a lot. Hope you’re doing well and have a great day.”

Joe: TJ, my man from Minnesota,

Al: Minnesota is right. You guys are- you could bond, right?

Joe: Yeah. Over some Diplomatico Rum. Never had that.

Andi: It looks fancy.

Joe: Oh, very fancy bottle.

Joe: Okay. Congrats TJ. 37 years old, 50% of his living expenses are covered by the passive income from his real estate empire. He’s got $1,100,000 sitting in equities. And he’s curious, he wants to get rid of the W2 job in two years. But the question I guess that I have for TJ, is how much money is he spending? And what needs to come from the portfolio, if anything? Because he’s 37, right? The allocation should be based on what the money needs to do. So at 37 or 40 years old, if it still doesn’t need to produce any type of income for you to live off of, well, then keep it in equities. But if you need to start drawing income from the portfolio, then that’s a totally different story. Then you need to tone down the overall exposure to risk to make sure that he has some cushion or some safety there to create income from.

Al: And we like to tell people to have at least 5 years, if not more, in safe assets like bonds. So even if the market goes down for a longer period of time, you can sell bonds. You can have money that’s not going to go down very much, hopefully will go up a little bit. So your allocation should be goals-based Joe, just like you said. The second thing I would say is, I don’t think it’s ever a good idea to do planning based upon inheritance because you just, you never know. Right? I think it’s best to do planning on your own situation. And then if the inheritance comes through, then I think then obviously you can adjust the plan. I think that’s the more prudent way, because maybe whoever you’re going to inherit this from ends up spending it. Maybe they have 10 years in a long-term care facility where they need to use this money or whatever.

Joe: So the other windfall, that $1,500,000 that’s coming TJ’s way, is that coming now or is that coming in like 15 years from now?

Andi: Looks like in 15 years.

Al: 15 years. And there’s too much uncertainty. So I don’t think-

Joe: I’m going to blow out of this studio right now, because I think I’m gonna get some cash.

Al: That’s right.

Joe: 25 years from now- some old family members kick off. But if they don’t, I’m going to make sure that that happens. Yeah, TJ, I thought he was going to get another $1,500,000 like right now.

Al: No, I don’t think so.

Joe: And so he was going to have $2,500,000 or $2,300,000. And it’s like, okay, now I got $2,300,000. What do I do here? But let’s say he wants to spend- if he only has the $1,100,000 right now, he doesn’t want to- You can’t spend any more than probably $25,000, $30,000 from that portfolio. And so let’s just say it’s $30,000 and maybe you want to go out 10 years. So that would be $300,000 of the $1,100,000 is probably what you want to keep in bonds. If that’s what the spending need is. Because then that’s a 10-year cushion. So if the markets are doing well, then you can feed up dividends and capital gains and so on. If the market plummets like it is now, well, then you just peel off some bonds to get you your $30,000 of income. So if TJ’s living expenses are $60,000, $30,000 is coming from real estate. He needs another $30,000 from the $1,100,000. This is all hypothetical TJ, I have no idea what you’re spending. But if that were the case, then you take $30,000- depending on your comfort level now. Now it’s like your risk tolerance. So maybe go 5 years. So that’s $150,000 in cash and bonds. I’d probably go 10 years. So that’s $300,000. So it’s like, you know, you’re still at a 70/30 portfolio balance, 70% stocks, 30% fixed income, which is still pretty aggressive at 40 years old when you’re going to stop your W2 or, or 39. I think that’s where you still need to be. Because, 15 years, you’re going to get another $1,500,000 and bada boom bada bang, you’re good.

Al: I’m going to make an educated guess because he’s got $1,000,000 of real estate equity. Let’s say it’s in Minneapolis. Let’s say it’s a 5% cap rate. Maybe it’s more, but let’s be conservative. 5% cap rate. So $50,000. So maybe he needs $100,000. So that’s just a guess. And if you need $100,000, you don’t have enough assets to do this yet at your age. So maybe you got to work part-time.

Joe: But if his wife is working, maybe that covers it.

Al: Maybe.

Joe: Maybe the portfolio doesn’t necessarily need to cover any of his income needs.

Al: True.

Joe: The point of I think the discussion is when anyone is trying to figure out what asset allocation they should have in their portfolio, it needs to be based what is the money for? What are you trying to accomplish with the money? Our last- the Geriatric Anonymous guy, he should be a 100% in cash and he’s 85 years old. Because it’s not for him. It’s for his daughters that are 30. And so it’s like, well, but with TJ, who’s 37, he might need a lot more fixed income because we don’t really understand the full picture. So it’s what is the money for? So it’s always starting, okay well, in two years or three years from now, he needs to start creating income. Well, now he needs to position that portfolio today to make sure in 3 years that he’s set up appropriately. So, all right. Thanks for the email or the voicemail, TJ.

My Financial Advisor Buys High and Sells Low in My Portfolio. What Can I Do? (Nick, Ohio)

It goes. “Hello, Andi, Joe, Big Al. Hope all is well. This is Nick from Ohio. Big fan, loyal listener of the show, especially the derails. I’m 47 years old, driving a 2020 Jeep Grand Cherokee. My wife and I have an Irish setter at home.” See picture. Ah, very cute.

Al: Good looking dog.

Joe: “My financial advisor… Fidouchiary–

Andi: Fidouchiary-

Joe: “- loves to buy securities-” Is he calling him a douche?

Andi: Yes.

Al: That’s what it looks like.

Andi: That is the way it is spelled. That’s a new designation.

Joe: Do you think he did that on purpose or-?

Andi: Absolutely.

Joe: – does he not know how to spell fiduciary.

Andi: No, that’s intentional.

Joe: He’s a Fidouche. He’s a Fidouchiary . Ah, that’s funny. All right. “- loves to buy securities at a high price, hold them, ride them all the way down and then sells them at a low price.”

Al: That explains the title.

Joe: Yeah, the Fidouch- “I will be able to tax loss harvest for many years to come. This is a big point of contention with me as, and call me crazy, but shouldn’t the individual have a plan to deal with losses. As I understand, I will have many over the years. However, buying something for $154 per share, and then riding it down to $44 per share and then selling, it doesn’t seem very efficient to any of my buckets. We have never had a discussion on market downturns and/or losses. I’ve been very hands-off and want to have this conversation at our next meeting, but not sure if it’s even something advisors would even want input on.” So he’s got a couple questions here. He’s going to ask for Fidouche. “What kind of percentage of loss should I implement with the advisor before selling?” Okay. “Should I, the customer be setting these rates on losses? Thanks again for all the time and everything you put into the show. Peace. Nick.” Okay. So Nick’s got a broker. Nick’s broker is managing his money and buying individual stocks. And the market turned on some of the individual stocks that Nick’s broker purchased and he purchased them at a $154 a share, and then sells them at $44 a share. And Nick is like, okay, that’s great. Thank you. However, it created a capital loss if it’s in Nick’s brokerage account. So couple of things, sometimes people get confused with losses and if you have a loss in an IRA, it’s just a straight loss. So if he’s managing money in an IRA or your 401(k) or any type of qualified plan, Roth IRAs, the loss is a loss. You can’t take any tax benefit from it. If it’s in a brokerage account, then that’s a capital loss. So he bought it at $150 and sold it at a $50 . Well, he has $100 loss for every share that he owns and that $100 loss will sit on his tax return and will offset any gain that Nick receives in the future dollar for dollar. So his questions are Al, what percentage of loss should I implement with the advisor? So like, does he want to have a stop loss on the overall account? And saying, Hey, I don’t want to lose this much, or is he thinking more what are the barriers from a tax loss harvesting perspective? Because if you’ve got individual securities, it’s very difficult to tax loss harvest. Because I mean, you could buy a falling knife and you know, the company could go bankrupt and the company goes to zero. Tax loss harvesting works a lot better with index funds or ETFs, where you have a big basket of hundreds or thousands of companies that you sell one ETF and buying another, because you know the probability of a thousand companies going to zero is a lot less than one company.

Al: Exactly. And I- because he’s talking about tax losses in terms of harvesting, I think that’s what this question is all about. And I would say just the same thing. It works way better with funds. So, but you have to have an alternative fund that’s similar to the one you’re selling. So you sell fund A, you buy fund B. So you’re still in the market. You will receive the recovery. And if you like fund A better, you just have to wait 30 days to get back into sell fund B, to get back into A. If you’re doing this with stocks, you can do it. It’s just a little more sloppy. Like for example, maybe you got Home Depot that went way down and you sell it and you buy Lowe’s because it’s similar, it’s not the same company. But at least it’s similar. It may have similar characteristics, but you never know because it’s a separate company. That’s the risk that you take. And then in 30 days you could sell Home Depot and get back into Lowe’s if that’s what you wanted to do. But I like doing it way better with funds, it’s way cleaner. And in terms of what percentage loss, if that’s what you’re asking, any loss that’s meaningful to you. If it’s a couple of dollars, I don’t care. But if it’s $1000 or $5000 or $10,000, whatever, whatever’s meaningful to you, go ahead and take that loss, go through the costs for selling, for trading are, is pretty insignificant. In some cases, it’s free, depending on who you’re doing it through. So whenever it’s meaningful, go ahead and take that loss because you’re right, Joe, it’s available for gains dollar for dollar. And if you have more losses than gains, it carries forward to the next year, you do the same computation. If you never have a gain the rest of your life, you at least get to take $3000 against ordinary income. A lot of people get those two things confused too.

Joe: So a couple of things in this volatile market, for those of you that have a brokerage account, you might want to take a look. If you have some losses in some mutual funds, you might want to sell those securities and buy something similar, take the loss, it sits on your tax return that you can offset for gains when the market recovers. So a lot of people have losses in their overall accounts right now. So take advantage of the volatility of the market from a tax perspective. But if Nick, if you’re asking us, I’ve never experienced a loss before, because since I’ve been an investor, the market’s only gone up and now he’s buying stocks and should I put a stop loss, not from a tax perspective, but just from an investment perspective? That’s way out of our league, no one has that answer. No one has a crystal ball. And so he bought that individual security thinking that stock was going to outperform the entire market. It didn’t, it did the opposite. And so it went down and he thought it might go back up and he didn’t want to sell it. And finally, he was like, I got to get out of this thing. And so he sold it. So, I mean, that’s the problem with people trying to time markets and buy individual stocks.

Everyone needs to hear this kind of investing insight, but so much of what’s out there is so boring compared to Joe and Big Al. Tell the people in your life who need some financial direction to subscribe to Your Money, Your Wealth podcast on Player FM for some laughs along with their financial education. YMYW is also now available on Samsung Free, in addition to iHeartRadio, Spotify, Pandora, Amazon Music, Audible, Overcast, Stitcher, Google Podcasts, Apple Podcasts, and pretty much every other podcast app in existence. Click the link in the description of today’s episode in your podcast app to go to the show notes for that Player FM link, to Ask Joe & Big Al your money questions, access free financial resources, and to see that picture of Nick’s Irish Setter. It’s down there in the episode transcript, just before the bit about Nick’s “fidouchiary.” 

Leave Partially Vested Pension to Grow, or Withdraw and Convert to Roth? (Sean, Los Angeles)

Joe: Sean writes in from Los Angeles. He goes, “Hi, Joe and Al, really enjoy your show and insights. Question for insight regarding a former employer pension plan. I did not complete 5 years, which was required to obtain the full pension status. I was there 3 years and I’m vested for my portion of contributions, which now total $31,000. And I left the job in 2015 and accumulate interest now. It is in the UCRP University of California. That makes 6% of interest per year, compound monthly. Here’s my-“ con-can you do that for me, Al?

Al: – conundrum

Joe: Thank you. “I work in a stable job and don’t plan on returning to the UC system yet. I’m 46 years old and was told by age 60, I will have to take a mandatory distribution of the total amount, roll over to another employer 401(k) plan or IRA. This means the $31,000 will grow by 6% per year for 14 more years. My other choice is that withdraw the funds and convert it to a Roth IRA. I’ll pay tax in the 32% range. From the UCRP website, it states if you leave your accumulation in the plan, you may become an inactive member, which means that you retain the right to future UCRP retirement benefits. So if I take it out now, if I ever return to the UC system, I will not have the service credit for the 3 years that I was there. But as I mentioned, I don’t see myself going back. Looking for your insight as to whether I should leave it there or actively take it out and convert it to Roth. The Roth idea came from listening to a lot of your podcasts.” Imagine that. “I drive a 2015 Lexus IS and drink Lagunita IPA.” A lot of Lagunita drinkers in the YMYW posse, here.

Al: There are. It does seem.

Joe: What do you think, keep it in the plan? Take it out to convert?

Al: Well, if he’s never returning to UC, you can take it out and whether you convert or not, that’s a whole ‘nother question. But, if there’s even a chance that he might go back, you might want to leave it in to get your service credits to get more benefits. So, it depends- if he’s worked there 3 years and he goes, I’m never going back, but he didn’t say that.

Joe: He could.

Al: Yeah. He could.

Joe: Not likely. 6%. I think that the bigger answer- question is, is that he’s going to- 6% compound monthly. I mean, that’s pretty good.

Al: Yeah. Well, I assume that means .5% compounded monthly, 6% annual.

Joe: Well sure. Would you give up that guarantee?

Al: No.

Joe:  You know what I mean? Right. 6% guaranteed rate of return that the UC system’s giving him in a retirement account that it can compound over 14 years. He could take that out, convert it into a Roth and invest on his own. And maybe he does something significantly less than that. Maybe he does something significantly more than that, but he’s leaving 6% guaranteed on the table. I kind of like 6% guarantee on $31,000. And then you start doing conversions and contributions with other monies.

Al: Especially right now, given the volatility.

Joe: Or you take it out given the volatility and convert it at a lower cost, or -no, but he’s already got the guaranteed 6%. So that doesn’t work. But then you convert now at lower values and then the recovery happens and he’s got all that recovery in the Roth. What to do?

Al: I wonder if he could convert it- maybe it could convert it in-plan. Keep the plan, maybe they have a Roth option.

Joe: No, no.

Al: No?

Joe: It’s a pension plan. It’s a totally separate plan. It’s not a 401(k)-

Al: Yeah, but he’s making contributions, so-

Joe: With the other monies, he could take other monies and convert or take other monies. But with this particular $31,000, I don’t know. I guess Sean, give us more information. What other dollars do you have?

Al: See, I was thinking-

Joe: You want to get money into Roth, I think there’s better ways to do it.

Al: I was thinking it might be a, like a 403(b), cause he made contributions. So I don’t know. If it’s a pension plan, you’re right.

Joe: The UCRP plan through UC. So if he could roll it out into an IRA, then he converts it to a Roth is what he’s asking us.

Al: Got it.

Joe: And it’s a guaranteed through the UC system of 6%. I like 6% guarantee. He’s 46, what other assets does he have? What’s his goals? What is he trying to accomplish? Right? Yeah. I mean, in a bubble. Sure. I mean, we could make a case for both, Sean. Do it now, the market’s low, you convert, you pay tax at 32%. It’s only $31,000. You pay $9000 in tax. You got $31,000 in the plan, market recovers. And now you’ve got $100,000 in a Roth IRA and boom, there you go. Have a loganita on me. Or you don’t do anything. And you let it sit in the plan and get your 6% over the next 14 years. And then you do other planning with the other income and assets that you have throughout the next 14 years and roll the $31,000- what is that gonna be, Alan? $31,000, 14 years? 6%. So now that’s $70,000 that’s in the retirement account. Roll that out in 14 years and then add that to your nest egg. Or are you going back to the UC system and you’ve got service credits.

Al: All good answers, right?

Joe: We’re just talking, which is kind of shooting the ol’ stuff.

What’s the Best Way to Withdraw from an IRA in Retirement in a Down Market? (Ryan, St. Louis)

Joe: We got Ryan writes in from St. Louis. He goes “I tried submitting online, but it did not appear to go through. So sending it via email. Thanks.” Okay. Well, note to IT, got a little problem with our website.

Andi: They have been told and they keep saying, well, you know, sometimes if people have slow internet connections and I’m thinking, I think it might be the slow website that’s the problem.

Joe: I believe you’re probably right.

Andi: So if you have questions and you can’t get them through the form, you can just email info@purefinancial.com and we’ll make sure that that gets to Joe and Big Al.

Joe: Yeah, he found it.

Andi: He did.

Joe: Don’t know how long it took him. I wonder if he was like, man, I’ll try to send this question like 8 times. And he’s like, screw it. I’m just going to go to info. “Hello Joe, Big Al, Andi. I have not met Andi in person, but can tell from just her voice, she is a beautiful person.”

Andi: Thanks Ryan.

Joe: Oh, wow. What the hell is going on here?

Al: You know, we’ll just exit. We’ll let Andi answer this one because clearly there’s a favorite.

Joe: Oh Ryan, you’re going full court press. Just listened to your voice every week as it comes out. “I cannot say the same for Joe and Big Al as I do not have this power with male voices.” Oh, and he’s a cheeseball too to go with it.

Andi: He can’t tell if you’re beautiful people.

Joe: Oh. Love this guy. “I’ve been listening to the show for about 6 months and love it. Please keep up the great work.” Well, I guess this is the last episode that Ryan listens to. “I have what I think you will consider to be an easy or short question. My father-in-law just retired and he is wondering how best to withdraw from an IRA when in retirement. Do you simply take a fixed amount of monthly at a conservative rate? Or do you keep a safety stock of cash in the account to draw from while the remainder rides in the market? I’m thinking of times like now when the market’s down 20% and systematic withdrawals would hurt your position more while the market is lower than average. If you have a position of cash, you could then buy more when the market is down or build this cash reserve when the market is up. If cash reserve is best, how would you recommend? 6 or 12 months? or more? I drive a 2017 F-150, have a two year old golden retriever named Blazer, my loyal wife, and two twin boys.” Oh, lovely wife. Did I say loyal?

Andi: You did. I think that might’ve been a little projection there.

Al: Yeah, that works though.

Joe: Wow. Big ride from St. Louis. You know, it’s like, yeah, I got my loyal wife as I listen to Andi’s voice. “I love to drink Fantasyland IPA.” Fantasyland.

Al: Never heard of that one.

Joe: “And thanks for your advice.” We don’t give advice here, Ryan. Don’t give advice. What we do is just chat a little bit about people’s financial situation. Okay. So this is- you know, this market downturn, Al. I’m feeling that people are more chill, more confident or more something. You know? Like in years past, and we haven’t seen a ton of them, but you know, people would kind of be freaked out. You know what I mean? We’d get a lot of calls from clients. We have thousands of clients. We manage billions of dollars of assets. And over the years as Al and I -were growing our business, we would get calls and people would be a little bit scared and a little bit freaked out, and then we’d have to talk them off the ledge and so on and so forth. But I think this time around, it’s a little bit different. I don’t- I think either more and more people are getting more educated and like Ryan here is like, okay, we got a market downturn at 2%. So be it. But what should I be doing in regards to distributions? Should I keep this stash at 20%? Should it be a 6 months of income need? 12 months of income? Should I be taking distributions? Where should I be taking the distributions from? It’s not like, oh my God, what is the market going to do? You know, the sky is falling and everything else. He’s looking for strategy that’s really sound, that makes sense for him or his father-in-law, whoever he’s asking this for. Which I applaud. But I digress..

Al: Yeah. I agree with that too. I think that anyone probably in their 40s or 50s and older, they went through the great recession. They saw how this work, that was the worst recession since the depression. And I’ve never been clear on what’s the difference between a depression and recession. And it doesn’t really matter. It was the worst downturn that we’ve had since the-

Joe: -the one Al Capone lived in? The other- ? It was 2000.

Al: I think I read once that our government didn’t want to call it a depression because people would get too freaked. So that’s why it became the great recession. But nevertheless, that doesn’t matter. I guess the point is that the people that are thinking about retirement now lived through this and they saw that you know what, as bad as that was, that came back. So we’ve got some confidence, right? I think the younger generation, if they’ve invested in a 11, 12 year bull market, and all of a sudden it goes down, that might be a little different, because they haven’t had that experience.

Joe: With some of the FIRE folks, that we kind of blew up over the years. How about that crypto-? Remember – ?

Andi: Oh. Yeah. Yeah. Amanda, her name was Amanda. She works- Yeah. I remember the company that she worked for. I’m not sure if she’s still there or not.

Al: How about the guy that leveraged to the hilt to buy rentals?

Andi: That was Qbert.

Joe: Leveraging.

Al: I can predict what’s going to happen there.

Joe: Yes sir. But Ryan- So he’s asking two different questions. One’s a bucketing strategy, one’s a distribution of the 4% rule or whatever. So he’s saying, all right, well, if I take 4% out of the portfolio, or 3%, is that a better way to do it than bucketizing the portfolio. Bucketizing means I’m not going to take a 4% distribution from the total balance and sell all positions within the portfolio. I’m going to have some money set aside in cash to live off of for 6 months, 12 months or whatever that is, as the market then can recover so I’m not selling stocks that are down. I think both are fine, but both are flawed. I think again, I mean, I think the theme of today’s show is like, all right, well, what are you trying to do with the money? And manage the money appropriately towards your goals. And if you have a really sound goal of what you’re trying to accomplish and have a set strategy, a real clear strategy of what you should be doing in good markets and bad, then you’re fine. Then you just kind of roll through it. You just execute on things that should be doing when markets are bad. Right now, you should be looking at Roth conversions. You should be tax loss harvesting. You should be buying equities because markets are down. When markets are up, then you take a look, okay, well maybe I should be selling. You sell high, buy low. So there’s different things and different strategies that you should be doing, given bear markets and bull markets. But as long as you understand what your strategy and plan is and what the money’s for, then you can trigger those executions automatically. You can- or have an advisor do it, or, or have a robo-advisor, do whatever, or set it and forget it, whatever. But, but then these- with times like this, it, it helps calm the nerves. You know what you’re going to do.

Al: Yeah, I think, particularly when you’re in withdrawal mode, you need some growth, but you need a lot of safety because you withdrawing money. Safety is generally bonds. If you want to withdraw from bonds, when stocks are up and stocks, I mean, other way around, withdraw from stocks when they’re up and when stocks are down, withdraw from bonds. Great. If you want to sell a few of your bonds into cash for a year’s cash, for whatever needs you have for the year, that’s a super simple way to do it. But yeah, I guess the main point is have the right allocation for what your needs and goals are.

Joe: All right. That’s it for us. Thanks again. Go to YourMoneyYourWealth.com, click on Ask Joe and Al On The Air. We’ll answer your questions. The show wouldn’t be a show without you all. So keep them coming in and we’ll answer them.

The show is called Your Money, Your Wealth®.

_______

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