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Lindsey Stanberry

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Joseph Anderson

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Alan Clopine

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Published On

December 26, 2018

What do the increases in the Federal Reserve interest rates mean for the economy and our portfolios – and how can we benefit from the rate hikes? Lindsey Stanberry dishes about Refinery29 Money Diaries. Joe and Big Al answer your money questions on state vs. federal tax deductions, saving for retirement vs. paying debt, and RMDs on an inherited non-spouse Roth IRA. Plus, why did Joe say indexed annuities are some of the worst investments on the planet?

Listen to the podcast on YouTube:

Show Notes

(01:03) 7 Benefits of a Federal Reserve Interest Rate Hike & Thoughts from Our Director of Research
(19:23) Can I Take the Standard Deduction on Federal Taxes and Itemize Deductions on California State Taxes? (video)
(23:06) Should I Save in a Roth Even Though I Have a 401(k)? When Should I Pay Off Debt? (video)
(28:29) Do I Have to Take RMDs on an Inherited Non-Spouse Roth IRA?
(32:13) Joe Said Indexed Annuities Are Some of the Worst Investments on the Planet. Why? (video)
(36:05) Lindsey Stanberry: Refinery29 Money Diaries

Transcription

Happy day after Christmas, Happy Boxing Day and Happy beginning of Kwanzaa and thank you for listening to Your Money, Your Wealth! Hopefully you’re hunkered down next to the fireplace in your new warm fuzzy socks from Aunt Carol, though if you’re in Southern California like us, you might be listening while running on the beach! Anyway, today on YMYW Joe and Big Al do their best to explain what the fed interest rate hikes mean for the economy and our portfolios, and how we might be able to benefit from those rate hikes. Lindsey Stanberry, editor of Refinery29 Money Diaries, will come in from the frosty cold of the East Coast a little later to tell us everything we wanted to know about our finances and everyone else’s, and Joe and Big Al power through your email questions on state vs. federal tax deductions, saving for retirement vs. paying down debt, and taking RMDs on an inherited non-spouse Roth IRA. Plus, listen to find out why Joe said a while back that indexed annuities are some of the worst investments on the planet. I’m producer Andi Last, and here are Joe Anderson, CFP® and Big Al Clopine, CPA.

01:03 – 7 Benefits of a Federal Reserve Interest Rate Hike & Thoughts from Our Director of Research

Joe: First thing’s first, Fed met this week. Market didn’t care for that much.

Al: No not really.

Joe: To say the least. Can you explain what is the purpose of the Fed’s meeting and increasing or decreasing interest rates Alan?

Al: (laughs) Certainly. The Feds… (laughs) I’m sort of prepared. So at any rate, it’s independent of the government, supposedly. But there is interaction between the two.

Joe: Yeah. Well, President Trump tweets and says don’t raise interest rates.

Al: And they say I don’t care. We’re independent, we’re gonna do it anyway. So anyway, the Feds get together a few times a year.

Joe: The Feds? (laughs)

Al: The Fed. (laughs) The Federal Reserve Board. OK. Let me think. We’re stupider than each other on this one. So I’m gonna do my best anyway. The Federal Reserve Board. (laughs) They meet a few times a year up to determine whether they should change the interest rate.

Joe: The Federal Funds Rate. The short-term overnight rate.

Al: Yeah. And that rate is kind of a benchmark for borrowing and interest on savings and all kinds of stuff. So as rates go up it’s not a direct correlation, like home mortgages, but they tend to go up eventually as well. Savings on investments – like a bank savings account will tend to go up as well. And so I think a lot of people are…

Joe: And then on the other side let’s say if you get a credit card. Those interest rates are going to be paying a little bit more, car loans.

Al: Those could go up as well but then it’s like, well, why do we raise rates? Because the stock market doesn’t tend to like rates, although that’s not always true. There have been lots of times the rate has been raised and the stock market goes way up because it shows confidence in the economy and investors like that.

Joe: Right. If there’s cash flow within the overall economy, people can afford a little bit higher rate on their debt. On the flip side, savers are getting a little bit more interest as they are lending their money out to certain institutions.

Al: Yeah. So I actually, interestingly enough, I’ve got an article that talks about seven benefits of a Federal Reserve interest rate hike. It’s not just to make Trump upset. There actually are benefits. The first one is there are higher returns for savers. So, people that have money in savings accounts, they can expect a higher interest rate. The second one, which is something I learned way back in college in macroeconomics is, that’s how you tame inflation. In other words, if you have too low rates, the economy gets overheated. And that’s where high inflation comes into being.

Joe: Well inflation is just the cost of the goods and services that we are purchasing every day increase. But how does raising interest rates then curb inflation, Dr. Clopine?

Al: Because then there tends to be a little bit less…

Joe: Cash flow?

Al: (laughs) I’m not an economist. I don’t know the answer to that question. I just know there’s a relationship between higher interest rate, which cools the economy but also tames higher inflation later. And so, in periods of time where interest rates are kept way too low for too long a period of time, that’s always the danger, is that you get much higher inflation.

Joe: Japan for instance.

Al: Japan or United States in the ’70s. I mean, you were just a little guy. (laughs)

Joe: I just was a gleam in my father’s eye. My mother? I don’t know how that works. Each other’s eyes. (laughs) They were thinking about it.

Al: Anyway. So we had very high inflation. In fact, I graduated from college in late 1979, and we just had a huge period of inflation that continued. And when I bought my first home…

Joe: Inflation, high inflation, and interest rates are correlated.

Al: Yeah that’s right. Exactly. And so when I bought my first home in 1986, the interest rate I paid was 12.5%, which seemed like a decent rate at the time, because it had been 14 or more. And then when I refinanced it to 10% a couple of years later, I thought, “is this right? Is it possible to get a 10% mortgage?” And then I remember hearing my parents used to have a 5% mortgage. And I thought, “well, how is that possible?” And anyway, but I digress. That’s one of the reasons why you raise rates is to keep inflation in check, and don’t ask me to explain why.

Joe: Got it.

Al: That’s what I’ve heard and that’s what people say. There can be more lending, Joe because then banks are actually making a little bit more money on the cost of capital, so they’re more willing to lend, particularly if they’re portfolio lenders. In other words, if they’re bringing in their own money and lending, they can get maybe even a better spread. There’s more income for retirees. That’s kind of like more savings account. You can sometimes have a stronger dollar to boost purchasing power because other people around the globe, it’s perceived as a stronger dollar. Stocks will trade on fundamentals, which basically means they’re not artificially high because interest rates are low. When we have more normalized interest rates they’re trading how they should, based upon how companies are doing.

Joe: So do you think, in the past then, the Fed manipulated the markets?

Al: I think during the Great Recession, they were so freaked out that they kept rates low for a decade. And yes, I think that is a factor in why our stocks are as high as they are right now. One of many, actually. OK. And #7, would-be home buyers may get off the fence, because they’re afraid, “oh, rates are going to keep going up, I better buy while I can.”

Joe: But if you look at the 30 year Treasury it’s lower. It’s actually gone down. So the Fed fund rate, it’s just the overnight rate that banks use. So there’s definitely the trickle-down effect. But I think people hear interest rates go up and then they might freak out. It’s like, “oh, the cost of my debt is going to increase.” Well, if all your debt is on credit cards then yes. But if you have – mortgages are not going to – well, overnight. If you got a quote for a mortgage on Tuesday, and then on Thursday you look, it’s not necessarily… Well, look up financials. I mean, I’m sure financials are just as down as technology. (laughs)

Al: So let me do a little caveat. So the seven things I just went over were from Mark Hamrick. I’m just reading an article. I don’t know this stuff. (laughs) I will freely admit I have a cursory knowledge of macroeconomics. (laughs)

Joe: You’re a CPA.

Al: That has nothing to do with macroeconomics. That’s like money in, money out.

Joe: But what I think is a good thing is that the economy if you look at the numbers, I guess depending on what numbers that you look at. I mean you could go on both sides of the coin. You could say, “oh, we’re going to head to this recession and blah blah blah.” But on the other side, you hear the Fed and they’re saying, “well, you know, the economy’s pretty strong. Unemployment’s pretty low, so why not raise interest rates when we’re in a strong economy?” Because we can’t do it when we’re blown up.

Al: Yeah, and that’s the idea.

Joe: And so now what are we doing? We’re just getting a buffer. So when things do get worse, or bad, there’s something that they potentially can do.

Al: We’ve got some tools to try to stimulate the economy when we need it.

Joe: Absolutely. So I think it’s a really good thing that we’re increasing interest rates, that’s just my personal opinion. And again, I am not an economist! (laughs) But if we’re going to do things that can add a little bit of cushion and tools that when the economy does go down, that they can do something to help spur it. Because Japan, they didn’t do anything. They kept interest rates so low. That’s why you look at the long stint of – Japan’s economy is not great.

Al: It was down for 25 years, I want to say? Something like that.

Joe: Right? And so if they’re acting when things are good but the market is like, “Well what are they going to do? They’re overreacting.” Sure. And so you look at still – Brexit. What the hell, I don’t even know what the hell is going on over there.

Andi: I don’t think they do either.

Joe: I don’t think so either.

Al: They’re trying to figure out how to get out of it, to stay.

Joe: And now they’re like, “well maybe we were kidding. We didn’t really mean it. There was some crazy guy that was kinda leading us. We got influenced.” (laughs)

Al: Yeah right.

Joe: And then what. Then we get some political B.S. going on here, we’ve got to build a wall or else the government shut down. It’s just like these little things just add up to a little bit more of a hornet’s nest and people freak out.

Al: It adds to the confusion and the market doesn’t like uncertainty.

Joe: Yes. But this is not – people are referring back to 2008, which is so stupid to me. 2008 was a crisis. People were writing loans on shell paper. (laughs) People didn’t have income and they had $700,000 in debt. This is nothing like 2008, but I think this is the first time in several years where we’re feeling real volatility in the markets. And it’s like Oh my God here we go again get me the hell out of the market. Oh no, let’s go to cash. Let’s do this!” No! This is normal. And if you’re going to freak out because of this volatility, then you have to A. Re-look at your goals. You have to re-look at what you’re trying to accomplish, because if you go to cash, when are you going to get back in? That’s the problem.

Al: I’m going to get back in when the market stops going down.

Joe: Yes, and then you missed the recovery. Because the sharpest, highest days that happen, let’s say if the market dropped 4% one day. Usually, the best day in the market is the next day or very soon after.

Al: And you’re not necessarily going to react. And that’s the problem, because people think, “OK, I’m going to get out because it seems kind of rough right now.” And then it’s like they never get back in because there will be a bottom at some point, and then it starts going up and there’s always this thing, “This is fake. This isn’t really a recovery.”

Joe: Yeah I remember us talking about that in ’08. The double dead cat bounce and all those other stupid stuff.

Al: Yeah. The W recovery.

Joe: But here’s the deal is that if you can run your overall financial plan and look at all the assumptions that you’re running, with inflation, taxes, your cash flow, what you believe is going to come in as income, and run it at a 2% rate of return and you can still accomplish your goals? Then go to cash. But I bet 95% of individuals cannot do that because they haven’t saved enough. And then most of you have taken on way too much risk to begin with, because we got complacent with a very good market for 10 years, and now a little bit of volatility comes up. Guess what? That return that you just received, you lost 4, 5, 7, 10% of it. Now you’re gonna bail? That whole 10 years of return that you thought you were so good at being an investor? It’s gone. You lost it. Because you got out. You have to man up here and figure out what the hell are you doing with your overall money, and do the right thing to make sure that you have the right portfolio, given what your situation is. Because a lot of times, no one’s really going to give them a hard message that’s totally unbiased about their overall capital. Alan, I don’t care about your money. You care about your money.

Al: (laughs) True.

Joe: Right? But if they have the logic of saying, well if you do this here are the consequences, and you’re fine with that. But it’s so hard to because we’re so emotional with it at the time. “Oh my God I’m down $100,000, I can’t live.” And as soon as I get retired I look at my money a lot more than I should.

Al: Right. And then we make poor decisions and that’s the problem.

Joe: I love this stuff. I can’t wait for it to go down another 10%. Then I’m going to freak the hell out. (laughs)

Al: Then we can have a different show. (laughs)

Joe: (laughs) Right? Complacency, Alan. Are you nervous?

Al: Me personally? No. Not at all. Because in my view, and I completely agree with you, this is how markets work. They go up, they come down. They trend upward in the long term. The thing is, you just need to figure out what your own goals are. Figure out what sort of money you need from your portfolio if you’re in retirement, and then have enough safety in your portfolio, in really safe investments, that you can tap that during market periods like this.

Joe: Jerry Powell – Jerome, chairman. Fifth straight quarter. So we’re looking at, what did we do? 25 basis points? And he said, “it’s appropriate with a very healthy economy.”

Al: Right. That’s their belief.

Joe: Jerome Powell, he’s a pretty smart guy.

Al: That’s what their forecasts say.

Joe: And yes, stocks looked at that and said, “Yeah I don’t care for that much.”

Al: Yeah you don’t want higher interest rates. That sounds like you want a slow down economy.

Joe: So with rising interest rates, we talked, it’s going to affect a little bit of credit cards, car loans. But then that will trickle down to probably mortgages at some point. I don’t know, it’s not going to affect it tomorrow but at some point.

Al: Yeah, overall savings rates should go up over time. Mortgage rates, anything tied to interest will go up as a result of these rates going up.

Joe: But the weeks ahead of that the markets were very volatile because we were feeling that the economy was slowing.

Al: That was the concern.

Joe: But then Jerry Powell comes in and says, “we have a very strong economy so we’re going to raise interest rates by 25 basis points.” So who’s right? Is this the weirdest thing? “So the economy’s good. All right, let’s blow up the stock market.” (laughs)

Al: Here’s what I want to do. I want to read Brian Perry, our Director Researcher’s (stumbles) note because I think it’s really good.

Joe: What was that?

Al: Director of Research.

Andi: The note from our Director of Research, Brian Perry! (laughs)

Al: Can you say what I’m trying to say please? I’m not doing too well today. Anyway, I think this is what people need to hear right now.

“Political uncertainty and concern about slowing economic growth have led to volatility in the financial markets. These volatile periods can create a temptation to try to move in and out of the market. However, in the absence of perfect foresight and timing, this is seldom a good idea. That is because the best days often occur in proximity to the worst days, and missing those best days has a stunning negative impact on performance. In fact, missing just three days each year for the past two decades could have reduced performance by more than 13%!” And it is pretty interesting, and Joe you referenced this – when there are steep declines, you tend to have your best market days right after. And those that get out of the market because they think it’s time to get out, they miss those days where it goes up. So I’ll continue. “So, rather than trying to time in and out of the market, we think it makes more sense to utilize volatility in order to accelerate the use of tax loss harvesting.”

Joe: And rebalancing I think is very appropriate too.

Al: “Ultimately, this practice allows for more tax efficient future income distribution, because it lowers taxes across your lifetime, creating these losses to net against future gains, and puts more money in your pocket. But most importantly, while volatility is an inherent feature of the stock market, it is important to accept that ultimately no one can control what the market is going to do next week, next month, or even next year.”

Joe: Besides Jerry Powell. (laughs)

Al: Yeah except for him, he knows.

Joe: He controls a little bit of it.

Al: So this is what Brian writes. He says, “However, comprehensive financial planning can give you the knowledge of whether you will still be on track to meet your financial goals next month, next week, next year.” And because of that, it comes back to financial planning. Do you have the right portfolio for your goals and for your financial plan? If you do, then don’t worry about this volatility.

Joe: Right, it gains a lot more confidence is the bottom line. I don’t think you can ever get the fear out of you. You look at it, you’re like, “oh my god, the markets are down. Let’s not look at it. Someone told me not to look at it, don’t look at it, don’t look at it.” But then you keep on hearing the doom and gloom and how much the markets are cratering. It’s like, “oh God I got to look at it.” It’s like have you ever got a gunshot wound and they told you not to look at it but you just have to? I’m the only one? No.

Al: Fortunately I haven’t done that, I’m sure you have.

Joe: That’s how this feels like, it’s like, I can’t look, I don’t want to do this. But then you’re just like, “Oh God.” Then you look. “Oh my God.” It’s very very difficult I get it. We’re all emotional creatures. and when it comes to our money we’re extremely emotional about it. It’s like with the brain. All these behavioral finance people, losing money, gaining money, it’s like almost as good or better than sex.

Al: It is for you, right? (laughs)

Joe: (laughs) OK. All right. Anyway, moving on…

So, perfect timing, this week it’s the doom and gloom episode of the Your Money, Your Wealth TV show, talking about Threats to Your Retirement Income. Watch online at YourMoneyYourWealth.com and click “Special Offer” to download our Retirement Income Strategies white paper for free, and subscribe to the TV show on YouTube because the fellas are promising unicorns and rainbows next week. Now let’s get to answering your money questions. Send yours to info@purefinancial.com or click the “Ask Joe and Al on the air” button at YourMoneyYourWealth.com – and check out the fellas’ video responses to these emails in today’s podcast show notes at YourMoneyYourwealth.com.

19:23 – Can I Take the Standard Deduction on Federal Taxes and Itemize Deductions on California State Taxes?

Joe: I like this one. This is from Dimitri in San Diego. He goes, “Hey Joe, where can I get federal and California state tax forms? Can I take the standard deduction on federal forms and itemize on California state forms?” So that’s interesting. And I want to talk a little bit about that. Because there’s the new tax reform. Dimitri’s thinking, “maybe I file the standard deduction because I have certain deductions that I had last year that I itemized, that I won’t be able to do on the federal return. But wait a minute, what does California? Does that conform with the same as federal tax?”

Al: Yeah it’s a great question, and the first one really quickly – all you have to do is type in IRS tax forms, California tax forms, and you’ll find the sites. You can get to any form you want to. A lot of the 2018 forms are already out, but not all of them. So some of those will come later. But the second question, maybe a little deeper question, is itemizing. And so just maybe a little background Joe, so an itemized deduction is otherwise personal expenses that the IRS allows you to deduct against your income, so you pay taxes on taxable income after those deductions. And so typically it’s state taxes, property taxes, mortgage interest, charity, things like that. And so you add all those together and then you compare your total against what’s called the standard deduction and you get to deduct the higher of the two. So this year with the new tax act, the standard deduction is much higher – it’s about twice as much as it was the year before. And so what’s happening is then a lot of people that used to itemize on the federal return because their real deductions were higher will no longer do that, they’ll use the standard deduction. And the question is, do I have to use the standard deduction for state? The answer is no. You can itemize for one and use the standard deduction for another or vice versa. And as a matter of fact, a lot of people will still be itemizing on the state return, because the state of California did not conform to the Federal Tax Act. And that’s typical. The state of California hardly ever conforms to the Federal Tax Act. So when you look at California law, for example, and your state it may be different, may be similar, but when you look at California law where we’re at, it’s a whole mixture of prior federal law, some of which were conformed years ago, and then lots of the new laws were not conformed. It’s tricky, but you think about it, in the federal return, you can only deduct $10,000 for state taxes and property taxes. The state did not conform. Now, you cannot deduct state taxes on the state return, but you can’t deduct as much as you want in property taxes – that’s still true. Miscellaneous itemized deductions are gone for federal purposes, it’s still there for state. So if you have unreimbursed job expenses or tax prep fees or financial planner fees or investment management fees, those are still deductible on the state return.

Joe: So to do taxes nowadays… (laughs)

Al: It’s not as simple as it would seem.

Joe: So this is the old law, but we’re still applying the old law to California – and I’m sure, you have to check your state. Whatever state that you live in, because did they conform or not to conform? Because you could be leaving money on the table there. Let’s say if you do your own return by hand, I guess Turbo Tax would help you with that. But you just want to be careful to make sure that, did my state conform with the tax reform or the Tax and Jobs Act? And what did they or did not conform with?

Al: Yeah, and I had a great point and I just forgot it so never mind. (laughs)

Joe: All right let’s move on.

23:06 – Should I Save in a Roth Even Though I Have a 401(k)? When Should I Pay Off Debt?

Joe: We have Marc from Los Angeles California. He goes, “should I save in a Roth IRA even though I save in a 401(k)? Well, I think there are two questions here Marc – is it “should” or “can”? Should I save in a Roth IRA even though I save in a 401(k)? Well yeah. If you can save as much, as I would say you’d save as much as you can – if you’re fully funding a 401(k) plan, should you save in a Roth IRA? Sure. I think more importantly is that what people get confused on is “can I?” Because I’m already taking advantage of my employer plan, can I still save an IRA?

Al: Yeah. And the answer is yes. In other words, a 401(k) maxes out at I guess for 2018 it’s $18,500, 2019 is going to be $19,000 and it’s $6,000 extra if you’re 50 and older. And so that’s one set of rules. The IRA and Roth IRA rules are completely separate from that, so you can actually still contribute to those even if you do a 401(k). The only problem is, two things, a traditional IRA may or may not be deductible, depending upon your income level, by contributing to a 401(k). Number two is a Roth contribution may not be allowable if your income is too high. So you’ve got to be aware both of those things.

Joe: Yeah. We would encourage both because that will give you a little bit of tax diversification. So you’ll have a little bit in a Roth, it’s tax-free coming out when you retire, and then the 401(k) is pre-tax. So that would be income taxable to you when you pull that out in retirement.

Al: Now let me ask the question a little different way. In some cases, they should save into both, but they don’t have enough resources. So should they do the 401(k) or the Roth or some combination?

Joe: Yeah, the answer is some combination. The rule that I came up with, by Joe Anderson, trademark. And I’m sure no one else has ever thought of this. (laughs)

Al: (laughs) I know I’ve repeated because it sounded good.

Joe: Save to the 401(k) to the match first. First step.

Al: First. So let’s say $4,000 of your salary equals the match. So you do that first. $4,000.

Joe: Yep. Then from there, you stop the 401(k) contributions. Then you go to Roth IRA. Maximize the Roth IRA all the way to the limit. So that would be $5,500. So I’m assuming that we’re under 50. And if you’re over 50 just add a thousand bucks. Then from there if you still want to save money, you go back to the 401(k). Then you max that out up to the $18,500. And then you’re not done yet. Then you look at your tax return and then you see what your taxable income is after you’ve done that savings. And then I would convert if I was in the 10, the 12, or the 22% tax bracket, I would absolutely convert to the top of the 22% tax bracket in this environment.

Al: Got it. I think I mainly agree with that. I would certainly convert if I was in the 10 or 12%. The 22%, I would put it this way – I would likely want to convert, but I would look at other factors.

Joe: Yeah, I mean, if that’s not the, I guess, “for sure.”

Al: (laughs) Just for compliance.

Joe: Yes. Thank you, Alan. 24 you have to look at. 22 I think it’s pretty much, pretty close. It’s a good strategy.

Al: It’s a good strategy for many. Put it that way.

Joe: So yeah that’s the Joe Anderson Rule of Savings.TM

Al: I’ll go along with that. What about if you have credit card debt? What’s your order?

Joe: Keep it. Who cares. (laughs)

Al: (laughs) Get some more?

Joe: (laughs) Yeah. why not? You can do the avalanche or you could do the snowball. I’m more of a snowball kind of guy.

Al: Let me think what I am.

Joe: The snowball is this: you put all your debt, and you look at the balance of the debt. Then you go to the lowest balance of the credit card first.

Al: Yeah. You pay it off to get excited.

Joe: Yeah. Then it snowballs. You’re like “boom.” It’s like you when you start working out, Alan.

Andi: But wait, does that come before or after you’re saving to your company match and all of that?

Joe: Okay, I would go company match first and foremost. Then before I go to the Roth I would maybe snowball a couple of things. And then if I had some cash, then I would go to the Roth. Here’s what I don’t want you to do, is just do one or – you’ve got to do a little bit of all. A little bit of combination of all.

Al: A little combination. I agree with that.

Joe: Because here’s what happens with people that will just all of a sudden focus 100% solely on debt – they’ll pay it off, and then something happens – the car breaks down, health injury, whatever. And then all of a sudden they go back into debt.

Al: Yeah. So they didn’t get anywhere.

Joe: So there’s no liquidity.

Al: There’s no emergency fund.

Joe: They’ve got to build up cash. They’ve got to save for retirement. They’ve got to pay off the debt and everything else. So you have to strategize that way.

Al: So I would say I’m probably more of an avalanche guy.

Joe: Yeah. Because you’re a CPA.

Al: (laughs) So avalanche, if I remember correctly…

Joe: You pay the highest interest rate first.

Al: Yeah. Exactly, the highest interest rate. And I actually kind of like the idea of spreading it a little bit too. So doing a little bit of each. But I would I would definitely focus on the higher interest rate one because then I’d be in better shape financially.

28:29 – Do I Have to Take RMDs on an Inherited Non-Spouse Roth IRA?

Joe: All right, we got Linda.

Al: You like her first sentence?

Joe: “Hi Joe and Big Al, I love your show!” Thank you, Linda. “I was listening last Saturday to the discussion about Roths. I wonder, was that every Saturday? (laughs) “And I was fortunate enough to inherit a Roth for my sister who passed away two years ago, sadly. I have received conflicting information from 3 different CPAs regarding the RMDs and taxes. My sister left this money in the form of a Roth so I wouldn’t have to pay taxes on the withdrawals, but I’ve been told that because it’s not a spouse-inherited Roth, I must take RMDs because I’m 77 years old, and pay taxes on the withdrawal. Do you concur? I would appreciate your information so much. Please keep up the good work while you also make it entertaining.” Linda, thank you so much.

Al: That’s a nice email. And those are good questions that I think a lot of people mix up. So I will say yes to one thing – you have to take a required minimum distribution, even on a Roth IRA, when it’s an inherited Roth that’s a non-spousal Roth. If you’re not the spouse, then you have to take a required minimum distribution. However, it’s at any age – it doesn’t matter how old you are. You could be 20 and have to take it. And the most important thing is you don’t pay any taxes. There is no tax is due on this. So yes, you have to take an RMD, but there are no taxes to pay.

Joe: Roth IRAs, when you are the sole owner of a Roth, there is no required minimum distribution.

Al: Yeah, you’re the one that put the money in.

Joe: If you’re the owner of the account you do not have to take the money out of the account ever if you don’t want to. If you pass away and your spouse is the beneficiary of that, the spouse does not have to take money out of that account ever. If you are a non-spouse beneficiary, which you are Linda, then yes, you have to take a required distribution. All non-spouse beneficiaries have to take a required distribution based on their life expectancy, no matter what their age. That’s what Alan just said. But 3 CPAs did not know this information, which is shocking.

Al: Crazy.

Joe: So yeah they were right. I guarantee you if Linda was let’s say under the age of 70…

Al: They would say, “Oh you don’t have to.”

Joe: They would say you don’t have to take an RMD until you turn 70 and a half.

Al: Yes you do. And that’s true of any inherited IRA or Roth IRA. You have to take a required minimum distribution. And that’s surprising to some people, like their kid, they’re 15 years old. You have to take an RMD if it’s an inherited IRA.

Joe: And unfortunately you cannot put that Roth IRA right into your, let’s say, own Roth IRA. We’ve seen individuals that have done that before, and what that would be, really bad for you Linda. That would just blow up the entire Roth, it would all be distributed out, there would be no taxes on it. But you lost the tax deferment and the tax-free treatment of all future earnings. So yes, you can send this video to the CPAs… (laughs) that did not perform their fiduciary duty. Or maybe they just were incompetent.

Al: Could be, or maybe she just didn’t hear ’em right.

Joe: Oh, look at you stick up for the CPAs. (laughs)

Al: I am a CPA after all.

Joe: I bet those CPAs were wrong. (laughs)

Al: (laughs) That’s you as a CFP would say that.

Joe: Yes, I’m sticking up for Linda because I’m sure she explained it perfectly. She’s a listener of our show, Al.

Al: And she likes our show, so yeah.

Joe: The CPAs blew up.

32:13 – Joe Said Indexed Annuities Are Some of the Worst Investments on the Planet. Why?

Joe: In a recent episode of YMYW – this is Steve from Vista, California. Did he write YMYW or are you just abbreviating?

Andi: No, he did.

Joe: Oh, that’s badass. Thanks, Steve. (laughs)

Al: He’s a fan.

Joe: Yes. YMYW. “Joe stated that index annuities are some of the worst investments on the planet. Why does he believe this?” All right.

Al: Why do you believe that? Or do you believe that?

Joe: One of the worst investments on the planet. The product itself is fine. The sales tactics behind it makes it the worst product. Because if there was more transparency behind the product itself, it would not sell at all.

Al: At all?

Joe: Here’s the rationale behind what I’m saying. The sales tactics of indexed annuities is, “you can receive stock market like returns with zero downside risk.”

Al: Yeah. Which sounds great.

Joe: And then you look at charts, “we’ll look at the S&P 500, look at the up, but then look at these sharp declines. Well, with this product you will never receive any of these sharp declines. We lock in your gains, and you will never lose any money.” What is true about that statement is yes, they lock in gains. You will never lose money in a fixed annuity, it’s guaranteed by the insurer. It’s not an investment, it’s an insurance contract. It’s an insurance policy called an annuity. Why do you buy annuities? To have some sort of guarantees – you’re transferring risk to an insurance company for some sort of guarantee. There is not any chance you are going to get the stock market like returns, because you’re not invested in the stock market. What they’re doing is basically they’re buying zero coupon bonds and buying call options on the bond on an S&P or whatever index that you choose. So you’re not receiving any dividends from the S&P 500. You’re getting certain gains from the S&P. Total gain, but you’re not getting any type of dividend from that, because you’re not invested in it – it’s not an investment, it’s insurance. Plus, you have to look at participation rates. So let’s say that the call option or whatever does 4% but you only have a 20 or 40 or 60 or 80% participation rate, so you don’t get 100% of it. You get something less. Then there are caps. You might get a cap of 1 to 2% per month, depending on if it’s point-to-point on a 12 month, 24 month basis. So you have to read the fine print and figure out what you’re getting. Just buy a fixed annuity or a CD. The commissions are very, very low on those types of products. On an indexed annuity, you will make someone very rich, because they’re lying to you in some cases about how the product actually works. So the product itself it’s fixed, its guaranteed, I like all of that, but I just – the sales tactics behind it is what I don’t care for.

Not that Joe didn’t just make himself crystal clear on this topic, but if you’d like to hear more of Joe and Big Al’s thoughts on various types of annuities, you’ll find all kinds of links in the podcast show notes at YourMoneyYourWealth.com:

Should I Invest in a Hybrid Fixed Indexed Annuity? Podcast #182 – segment 3

Insurance Products: Annuities Podcast #173 – segment 4

Annuity Retirement Pros & Cons – video & blog

Next week, Marcus Garrett from the Paychecks and Balances podcast will give us some Financial New Year’s Resolutions That Really Work. In January, Devin Carroll of the Big Picture Retirement podcast and Social Security Intelligence blog will tell us how sex can save Social Security! We’ll also talk to Chris Hogan, host of The Chris Hogan Show and author of the upcoming book, Everyday Millionaires. Visit YourMoneyYourWealth.com to subscribe and listen for free on demand, and to catch up on transcripts and videos from past episodes. Now let’s talk about everything you ever wanted to know about your finances and everyone else’s with Lindsey Stanberry – she’s the Work & Money Director at Refinery29, and editor of Refinery29 Money Diaries.

36:05 – Lindsey Stanberry: Refinery29 Money Diaries

Joe: So we’ve got Lindsey Stansberry on the line. Did I say that correctly?

Andi: No.

Joe: Stanberry!

Andi: There ya go!

Joe: I’ve got a big fat tongue!

Al: All that practice and it didn’t work out.

Joe: It took four weeks I was practicing your name, Lindsey so I’m very apologetic.

Lindsey: It’s OK.

Joe: She wrote a phenomenal book.

Al: Yes I know, we have it right here.

Joe: Did you take a glance at it?

Al: I did.

Joe: I think you’re lying to Lindsey right in front of her.

Al: I looked at the table of contents. I mean if I’m being honest, I got that far.

Lindsey: That’s pretty good.

Joe: Lindsey, help us out. You work for a company called Refinery 29. I’m a single gentleman in his early 40s. Alan is a very old man in his 60s.

Al: (laughs) Really old.

Joe: And so we’re not too familiar with your company. Can you briefly explain to our audience what you do, what your company does and then we can dive into the book?

Lindsey: Yeah sure. So Refinery 29 is a global media company focused on women’s media. We started as a fashion and beauty website more than 15 years ago now. But these days we cover everything: news and politics, health and wellness, lots of beauty, entertainment. And I oversee the work and money section, which is focused on careers and personal finance. And almost three years ago now we launched a series called Money Diaries, which is a daily financial column where young women share their spending for a week. It’s anonymous, and they go into details like their salary, how much they pay in rent, how much they’re investing in their 401(k), and then they also shared details about their relationships, their jobs, everything you can imagine.

Joe: It is absolutely genius, because I’ve been doing this 20 years, and I read all sorts of financial planning books, and you know, I kind of skim through them because they’re pretty boring and it’s dry, it gets technical, and sometimes it doesn’t get too technical, and it’s just kind of the same-old-same-old. But what I thought with your book – first of all, how did you come up with the idea of Money Diaries? Do people come in, because the diaries that are actually in the book, it feels like I’m doing something that I shouldn’t be doing is reading someone else’s personal diary – which is very cool, by the way. (laughs) But also I kind of feel a little guilty when I was reading.

Lindsey: No, you shouldn’t feel guilty. (laughs) The idea is that we’re really trying to encourage women, and people in general, to be more open about their finances. But then I also think that there’s the element of like, “Oh, I see myself in this.” And so traditionally we talk about money and it’s kind of this crazy, distant, complicated topic. Personal finance I think can be really confusing. But the truth of the matter is is that you need money to fuel the life you want, and having the skills to be able to do that isn’t that difficult. And so, when you relate it to things as simple as buying a cup of coffee, or figuring out what apartment you want to rent, and relating that back to how you earn and spend and save, it really levels the playing field.

Joe: Without question. And I think it’s such a taboo topic to a lot of individuals. It’s like, “I don’t really want to share how much money I make, or how good I am with money, do I own my house, do I rent? Should I be embarrassed if I don’t own a home if I’m in my 30s or 40s or whatever?” And so as you read through some of these diaries, you’re absolutely right, it kind of brings you back to say, “you know what, there are so many people like me.” I mean, I think this first one was my ex-girlfriend, to be honest with you. (laughs) I mean the sense of humor on this person is absolutely phenomenal.

Lindsey: She’s so funny.

Joe: Yes. I was like, “man, I want to read her diary all day long.” But then how you come into it is like, “OK well here’s her life in a snapshot of let’s say a week,” and then you come in and say, “All right, well here’s some solid steps that that individual could take to enhance their life.” And then we get into the lives of like several different individuals. Couples that are maybe one spouse is making more than the other spouse. Hey, how do I afford kids? How do I pay off debt? And there’s every aspect of the financial spectrum that you go through. So just kudos to you just. It was a really fun read.

Lindsey: Thank you. It was fun to write it.

Joe: Well let’s kind of get into the nuts and bolts of some tactics that people can use. Because I think in the beginning there’s this 50/30/20 formula. Can you kind of go into detail a little bit more about what that formula is and how should people utilize that?

Lindsey: Sure. So that the 50/30/20 formula was a concept made popular by Elizabeth Warren and her daughter; they wrote a great financial book more than 10 years ago. And the idea is that you really start thinking about how much money you’re bringing in versus how much is going out. So 50 percent should be going to fixed expenses – your rent, your healthcare, your food, and groceries. 30 percent goes to flexible spending. That’s the more fun stuff – your Netflix account, going out to dinner, new clothes, the things that you don’t necessarily need. And then 20 percent is really supposed to be going toward future you – 10 percent of that to retirement typically, and then 10 percent to, I don’t know, vacation next year. We also think about it as an 80/20 rule, that makes it a little bit more manageable for people who live in cities where there’s a high cost of living. That just combines the fixed and flexible. Maybe your fixed expenses are creeping over to more like 60 or even 70 percent. But the most important thing is that 20 percent is going to some kind of savings, which for most Americans it’s not the case.

Joe: Yeah but I think that’s a good framework because it’s like, “I’m saving a couple hundred bucks to my retirement account. Is that good?” And if someone doesn’t really know how to do calculations to say well compounding, $200, yes, that’s great, but if you’re making $100,000 a year or $80,000 a year, that’s probably not going to be enough to provide you a lifestyle that you’re accustomed to when you need the money later.

Lindsey: Yeah, definitely. But I also think that it’s remembering things like your emergency fund. We did a study at a Refinery29 where we found that one in four women had less than $250 in their savings account, which is really worrisome because if they have a big emergency they’re just not going to have the funds to cover it. And then it’s going to go on a credit card and it just ends up being so much more expensive.

Al: So if you’re living paycheck to paycheck then how do you turn it around?

Lindsey: I think it’s really sitting down and figuring out how much you have coming in and how much is going out and where you’re spending the money. I like to joke that you should actually do a money diary. (laughs) You don’t have to necessarily publish it on Refinery29, but it is a really good exercise in mindfulness. I’m not a big fan of the idea of budgets. I think that saying that $50s this month is going to eating out and $100 is going to buy groceries, I feel like that can be very constrictive. And when you mess up or you overspend, it just makes you feel bad. But if you’re more mindful and you think like, when you go to the grocery store you look at the prices of the food and you pay attention to the total before you swipe. I so often leave the grocery store thinking, “what did I just spend it on and how much was that total?” And I wasn’t even paying attention when I was signing my credit slip.

Joe: You know what I thought another really good idea was, is to calculate your hourly wage. And so let’s say if your hourly wage if someone gets a salary, let’s say you make $60,000 a year, but they don’t really equate that to, “well, how much do I make an hour?” And then you go out to happy hour and next to you know it’s like, “Oh my God, I just spent… three hours of my paycheck on a bar”- was that too much? Why are you…? Don’t judge!

Andi: I was just going to say in your case it might be an entire day, Joe. (laughs)

Joe: (laughs) It might have been a week! I just spent the week’s pay at the bar! And God it was fun! But that hangover is going to be twice as bad, because I’m gonna feel like crap from just a physical standpoint, but then my mental capacity is gonna blow up!

Al: Yeah but do you remember how much fun it was?

Joe: No. In the process. (laughs) But I thought that was a really clever idea to say, well wait a minute here. Do I really need this, or do I really need that? That’s like four hours of work, or that could be a week’s work, or whatever the case may be.

Lindsey: Yeah. And the idea is like no judgment on it. Maybe (laughs) maybe that night over the bar was worth it. Maybe that’s why you work, so you can go to the bar.

Joe: Lindsey, you know me well. (laughs)

Al: It’s like you’ve known him for 20 years. (laughs)

Lindsey: I felt, going into this book, that there’s a lot of judgment around personal finance advice, and we’re made to feel so bad about the way we spend our money. And I think that if you can figure out a way to save and be paying down any debt that you might have, you really should feel empowered to spend the rest of it and not feel guilty about how you spend it. You know, I make the joke in the book a lot that I won’t ever tell you not to buy a latte because I always hated that personal finance advice. Some mornings I just really need a latte. But when you begin to think about how much that costs, if it’s like a $5 a day habit, that equals almost $2,000 before the end of the year and maybe there are better things you could do with that $2,000.

Joe: One of the best, and I have it earmarked here, you see this Alan?

Al: You came prepared.

Joe: I did, yeah, because I really enjoyed this book. Because I learned a lot, actually. Here’s one – “21 questions everyone should ask their romantic partner.” So I’m not…

Al: Oh, okay. Now is this before you become romantic?

Joe: This is how I become romantic, Al. (laughs) This is how the how-to guide. When I go on my first dates, I’m just going to read these 21 questions and it’s gonna be phenomenal.

Lindsey: That would be an interesting first date. (laughs)

Joe: We could film it and then maybe we could put it on your-

Lindsey: Yeah if you would like to if you want to film it and we can run it on Refinery29, please. I would love that. (laughs)

Joe: But I think when it comes to relationships and money, what’s the number one reason for divorce, in most cases?

Lindsey: Right. That is what they say.

Joe: Well yeah, it’s finance in some cases.

Al: No you’re right. There’s other stuff. But that’s probably the most common.

Joe: Right. And so I think people need to know, if you’re going to have a romantic spouse or partner, it would be good to get some of these questions out of the way.

Al: But you have to be careful how you – I mean, you can’t just first date rapid-fire.

Joe: “What’s your FICO score? How much money you got in your wallet right now?”

Al: Right. “What’s your emergency funds?”

Joe: How did you come up with these questions? Because they’re great. And I can throw out a couple here.

Lindsey: Yeah, think about it – money comes up on the very first date, who’s going to pay the bill. And that almost begins the dynamic of the relationship from the very start. And I have talked to so many different women about this. Everyone has very different opinions about it. Some people feel like the man should pay. Some people don’t want to even have the conversation. I think you should talk about it. That’s my opinion. But I think that from there, that builds the confidence of having these conversations about money. And I also think that it’s really romantic to talk about money with your partner, because you’re planning for a future, and that’s really exciting. So I really wanted to take away some of the awkwardness and stigmas around it. That’s not always going to be easy. But if you have a script to take with you, I think that does at least give you an entry point.

Joe: Let me ask you this because you did the research. I go on on a date. And if I go, “Hey, let’s go halfsies on this,” to me, I’ve never done that, I’ve always paid. But if the girl goes to me and says, “you know what, I want to pay half,” and I’ll be like, “No, I’ll just pay for it.” And if she insisted, then I’d be like, “All right, this date was awful.” (laughs) Because that was what I had in my head, it’s like, “okay, if she wants to pay for her half, she’s like, ‘we’ll probably never going to go on another date again.”

Lindsey: I’ve heard men say that they feel like it sends a clear message that you’re in the friend zone.

Joe: Exactly. I don’t like the friend zone, Lindsey. (laughs)

Lindsey: (laughs) I can understand that.

Al: Or if they pay for the whole thing.

Joe: (laughs Yeah it’s like, “I’m gonna pay for this, and then I’m gonna go to the bathroom.”

Al: “Waiter, check, please! Quickly!” (laughs)

Joe: They actually sneak out and pay the check and leave without saying goodbye. (laughs)

Lindsey: That’s one way to do it too. I don’t know, why do you think it’s a bad date if she wants to split the bill?

Joe: Well I don’t know. I guess maybe I’m a little old school in that.

Al: He’s from Minnesota.

Joe: Right. I just feel that, hey, you know, I asked you out, or even if she asked me out – usually that’s the case.

Al: They ask you out?

Joe: Oh, of course. (laughs) I’m kidding.

Al: And then they say, “here’s the bill?” (laughs)

Joe: “I really want to go to this new fancy restaurant and just eat and have you pay.” But if we split the bill. I don’t know, it just kind of feels… I would split the bill with a co-worker or a friend. But if I’m on a date, that would just feel awkward to me, I guess.

Lindsey: And I think that that’s great that you know that. And I think that’s important going into dating, and probably deciding who’s compatible with you, right? You know that from the beginning. And I think that if the woman wants to pay her half, maybe you just aren’t compatible.

Andi: Very tactfully said, Lindsey. (laughs)

Lindsey: (laughs) I mean we don’t talk about financial compatibility but maybe we should.

Al: Well I think Joe is all over it, he’s still looking at the questions here.

Andi: So what are some of the questions, Joe?

Joe: How do you manage your money?

Andi: OK Lindsey, I’m curious to know – did you actually end up asking any of these questions of the man who is now your husband?

Lindsey: I’m trying to think if I can remember them all.

Joe: “Hey, how much money you make?” (laughs)

Al: “Can I see your statements?”

Lindsey: You know how I found that out was we were renting an apartment together. I think a lot of people find that out. You’re filling out the forms and then you’re like, “oh, that’s how much you make.” You know, we had a lot of these conversations about the things that we want to do and how we’re going to afford things. We don’t always get it right by any shot. He’s an extremely frugal person and is also an extremely patient person because I talk and write a lot about his money habits. But yeah, I think that we talked about how much the engagement ring that he bought should cost, and how we were going to pay for that. Yeah.

Joe: So you negotiated that? Isn’t it supposed to be like six times your monthly income or something?

Andi: You are a traditionalist aren’t you? (laughs)

Lindsey: I don’t against that much these days. (laughs)

Al: Yours would be about $2,000. (laughs)

Joe: I’d just go to Ben Bridge…

Al: Get a discount.

Andi: Lindsey, through this whole process of writing these Money Diaries what have you learned that maybe has changed your finances.

Lindsey: I calculated, while I was writing the book, I figured out how much I did spend on lattes this year and that pretty much killed my latte habit. (laughs) It’s like, “All right, $500 at the local coffee shop is too much.” I’ve also learned to just – throughout these conversations that I’ve had, my husband and I are really good savers, and that’s how I fell into writing about personal finance in the first place. I wrote a story for Refinery about how we saved a lot of money to buy an apartment in New York. And I think that everybody has their own money regrets. And now we have a two-year-old, and sometimes I wish that we had traveled a bit more and saved a bit less because it’s not so easy to travel these days. And when I tell people that, they always say, “Well, I traveled a lot, and I wish I own my own apartment.” So you know, it’s interesting. Everybody has their own anxieties and their own stressors, and nobody has this figured out.

Al: And it’s not just what you’re spending. I mean, you can perhaps increase your income by doing something on the side, or improving your career, or even asking for a raise. I mean what do you suggest about that?

Lindsey: Yeah. I really wanted to cover asking for raises in this book, since it’s geared primarily toward women. And we had research that showed that women were not speaking up and asking for raises. And as a result that is having a huge impact not only on their immediate earning potential but over their long-term earning potential. So I wanted to give very tactical advice about how to go in and be positive and have numbers that prove you’re worth to the company. I think important to remind people that as much as we oftentimes at companies talk about that we’re a family and things like that, at the end of the day, you need to prove to your boss why you’re so vital to the company.

Joe: You know, another thing too you wrote about is truly understanding your full compensation package. They might go to another firm that might have a higher paycheck, but all of a sudden, maybe the health insurance is not great.

Andi: Or you don’t have a company match.

Joe: In your 401(k) plan. There are all sorts of different things that come into the full picture and I thought you laid it out really well.

Lindsey: Yeah, I tell an embarrassing story about how I had a very cushy job. My first job out of college, where we got amazing bonuses and fully paid health care. And at one point we had a CSA, community supported agriculture, we got free vegetables every week. And when I changed jobs I got a small raise, but I lost the bonus and the free health care and it definitely had a huge impact on my finances that I wasn’t prepared for. So I just want to remind people, these are things that actually cost money. I think when you’re in your early 20s and in your first career, you’re probably not thinking about that.

Joe: We’re talking to Lindsey Stanberry. Thank you so much for joining us today. The book is called Money Diaries. Lindsey, where can people get it? Can they get this where all wonderful books are sold?

Lindsey: Yeah, wherever books are sold, Amazon, Barnes and Noble, your local bookstore.

Joe: Are you sure they’re at my local bookstore, did you check it out? (laughs)

Lindsey: (laughs) I think so, and if they’re not, you know what, you can order a copy.

Joe: (laughs) And Refinery29.com. Lindsey, thanks so much. This was a lot of fun.

Lindsey: Thank you guys so much. Have a good one. Happy holidays.

Joe: All right you too.

Andi: Thank you, Lindsey.

Joe: All right, that’s it for us. Merry Christmas, everyone – Merry Christmas, Andi.

Andi: Thank you, Joe, Merry Christmas to you – both of you.

Joe: I’m very thankful you’re in my life. Alan, not so much. (laughs)

Andi: Oh ho ho!

Al: (laughs) That’s all right, it’s mutual.

Joe: Yes. All right, we will see you all next year! Thanks for listening. The show is called Your Money, Your Wealth®.

_______

Special thanks to our guest today, Lindsey Stanberry – find her book Money Diaries in all fine bookstores and check out the Money Diaries and all of Lindsey’s other work at Refinery29.com

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