From stock picking to retiring at 30, Rob Berger spills secrets learned in 10 years hosting The Dough Roller Money Podcast. Joe and Big Al talk about market volatility caused by President Trump’s potential tax cuts, health care plan, and proposed budget and they cover 5 “fatal error” type inherited IRA mistakes, the merits of Star Wars merch, Johnny Depp’s compulsive spending habits, and how joining a nudist colony may help your wallet.
- Market volatility (0:47)
- Rob Berger, host, The Dough Roller Money Podcast – Personal finance tips for every generation (09:20)
- Rob Berger, host, The Dough Roller Money Podcast – Retiring at 30 years old (21:39)
- Big Al’s List: 5 Costly Inherited IRA Mistakes (29:20)
- Why Rich Retirees Are So Reluctant To Spend Their Money (45:10)
- What Do You Do When You Have Johnny Depp’s Compulsive Buying Habits? (50:35)
“I know that there’s this view that you can’t beat the market, you can’t pick stocks, and I just don’t agree with that.” – Rob Berger, host, The Dough Roller Money Podcast
Today on Your Money, Your Wealth: from successful stock picking to retiring at age 30, Rob Berger spills some of the secrets he’s learned in his 10 years hosting The Dough Roller Money Podcast. Joe and Big Al will tell you what to do with your portfolio in the face of market volatility caused by President Trump’s potential tax cuts, health care plan and proposed budget, and they’ll cover 5 “fatal error” type inherited IRA mistakes, the merits of Star Wars merch, Johnny Depp’s compulsive spending habits, and how joining a nudist colony may help your wallet. Nope, I’m not kidding. Now, hold onto your earbuds, because here are Joe Anderson, CFP and Big Al Clopine, CPA.
:47 – Market volatility
JA: We had a little volatility in the markets this week, Alan.
AC: We did. Wednesday, the day that the market went down quite a bit, and Thursday it came back up, and Friday again. So there you go.
JA: So, it’s always about uncertainty. I guess what’s priced in now is potential tax cuts.
AC: Yes, potential tax cuts, maybe we change the health care, maybe we get some of Trump’s initiatives through that help businesses become more profitable. So yeah, it’s kind of funny how stocks are priced. And I guess if you look at the market as a whole, it almost kind of handicaps what it thinks the future’s going to be. And when it looks more like we might get some of these Trump policies, it goes up, when it looks less likely, which it kind of seemed on Wednesday, the market goes down again.
JA: Yeah. Thursday it was up a little bit. Then Friday was up, I dunno, another 150 points?
AC: Yeah, Friday it was a fair amount. So just the nature of all of this, let’s just say, just for just for grins, let’s say Trump gets his tax policy approved and in, which means that many of us going to be paying lower taxes. Corporations are going to be paying lower taxes, there will be more corporate profits, meaning more profits to distribute to owners, shareholders, stockholders of corporations, and so, therefore, the valuations of the companies will go up. Our stock prices will go up. As we get close to that seeming like it’s going to happen, then the stock market goes up. And actually, the day it happens, probably the day before, we’re pretty sure it’s going to happen, so it may not even change that much.
JA: Exactly. That’s a really good point because it’s already priced in before. I mean, they’ll sign the bill on whatever day. But the market might not move an inch.
AC: It might drop. I thought he’d sign it at 8, and it took until 4:30!
JA: (laughs) Sure, sure. That’s the same with companies. Facebook’s IPO or a better example would be, I still remember this, when the iPhone 6 came out. Because it was a new design.
AC: Kind of new generation over the 5, and it’s going to do more stuff.
JA: Right. And so we would get calls and it would be like, “Hey Joe, I want to buy. Let’s buy a bunch of Apple.” Like the day before the iPhone 6 is going to come out. And I was like, “well why?” “Well, the iPhone 6 is going to come out tomorrow.” And it was like “do you think that you and I are the only ones that know this? I think there are people sleeping outside of the Apple store as we speak!” Then, of course, Apple has record sales of iPhones the next day, and the market didn’t move that much at all because it was already priced in.
AC: Everyone already expected that. And that’s that’s the mystery out of stock pricing that I don’t think people appreciate enough, because they always feel like, “Oh, I’ve got this tip from my neighbor,” or, “man, the smart guy in finance, he’s always giving me good stock tips” and it’s like, well, it’s the same information that everyone else has. And in accordance with that, the stock price is already fairly reflected, based on the collective wisdom of everybody.
JA: Right. And then it’s a lot different, in my opinion, today than what it was maybe 20-30 years ago.
AC: I agree with that. Why don’t you explain that, because I think that kind of drives the point home?
JA: Because I think we’ve all heard stories of getting the stock tips. You’ve seen movies of people getting the stock tip. Blue Horseshoe says something – what was that, Wall Street? Wasn’t it Blue Horseshoe? Or something like that?
AC: I don’t know. I’m thinking especially movies that are in black and white. They’re just like, you got the stock tip and three days later you’re a millionaire. Which, back then, was like 10 million.
JA: So when you look at it then, the information wasn’t as readily available as it is today. And there weren’t as many analysts. I would say 30 years ago there probably wasn’t a Ph.D. in finance. The Wall Street gurus might have had a bachelor’s degree in liberal arts because there was no such thing. And the information and education over the last 30 years is pretty remarkable. There’s a lot more smart people looking at this, and they’re playing with the same information that’s basically controlling the prices, to make sure that it’s fair in a sense. I’m not saying that there are not mispricings in the overall markets, where all of these analysts that are looking at these stocks, every second of every day, are there mistakes? Of course, we’re all human. But for us to capitalize on these mispricings is something completely different.
AC: Yeah I think another way to say this is, you can buy a stock and make a fortune within a few months. But it’s because something happened to that company that wasn’t expected. It wasn’t known when you purchased it. That’s what we’re saying is, like if you think you’re smarter than everybody today, but all the information is already known, especially with the Internet. Everyone knows everything now.
JA: Right. So it’s, “I work in this industry. I understand this industry.” So we get some of that. “Well, no. I know that this company is strong.” Well yeah. Well so does everyone else. If you know it’s strong, there are other people that probably have that same opinion.
AC: Right. And it’s like I say, it’s already handicapped into the price. So maybe if 5everyone thinks it’s strong, but there’s some doubt. And so, therefore, the stock price isn’t fully there. And again, until you get closer to the event that creates the value.
JA: Right. So expect to see a lot more volatility in the overall markets, because there’s a ton that is kind of waffling. It’s a little bit unknown, and I think when you look at – there’s a lot of fear and greed out there. Especially when you talk politics because people are either so far right or so far left it seems like. And now we’re getting a bigger group of people that is somewhere in the middle. But the statistics show, if your party is running, is the president, you’re much more bullish. Versus if my party was not in the office, I’m a lot more bearish. Which is not necessarily a good or bad thing. It’s just reality because you have a certain perception of what’s going on in the world and the markets and things like that. Our view is that you should be fully invested all the time, but making sure that you’re diversified. Yes, you’re going to see volatility, but you can’t make rash decisions today based on what you think is going to happen in the next two, three, six months, a year. Because we don’t know what’s going to happen. We can guess, we can speculate on what’s going to happen. I think that’s what a lot of people potentially do. I mean, you could say, “I think this is going to happen.” You don’t know for sure that it’s going to happen. So you might place a bet on that. Well, that’s gambling in a sense. It’s not necessarily investing. You might want to take a small portion of your portfolio and do that, but I think overall, most people might get a little bit hurt when they start acting via emotion.
AC: Well, you’re right Joe. And we know that investing by emotion is generally a mistake because your emotions will play tricks on you. The times when you want to buy, emotionally, is when the market is skyrocketing. Which means the market’s already high. And the times when you want to sell is when the market’s crashing. So you’re buying high, selling low, and you’re repeating that process over and over again. When you think about it, there’s got to be a better way. And that’s why we talk about staying invested, having a disciplined approach, rebalancing, which means as certain asset classes do better than others, sell a little bit of the gains in the asset class that does better, buy the ones that have done less well. Rebalance back to what you want to be at, and you constantly have a system that forces you to sell high and buy low.
It’s been three decades since the last major tax reform, but this could be about to change in a major way. That said, the President and the Republican Party are still divided on a number of key policy questions. Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com to download the white paper “Tax Reform: Trump Vs. House GOP” for a deeper look into the proposals. How might income tax, estate tax, and business tax change? Are your tax strategies at risk? Download the Tax Reform white paper to find out more. Visit the White Papers section of the Learning Center at YourMoneyYourWealth.com
09:20 – Rob Berger, host, The Dough Roller Money Podcast – Personal finance tips for every generation
JA: Alan, it’s that time of the show.
AC: Yeah. And I can’t wait, we’ve got a great guest. He has a podcast, The Dough Roller, and I don’t think that means cookies.
JA: No it does not, Alan, it means finance. Now, I’m a huge fan. This is like 10 years, I think, Rob Berger has been doing this, and I’ve been a subscriber for quite some time. Great information. So I’m really excited to have Rob on. Rob, hey, welcome to the show.
RB: Thanks, guys. Thanks, for having me.
JA: Hey, I find your personal story fascinating. Tell us a little bit about that. What was the genesis behind you putting together The Dough Roller?
RB: So, my wife and I and our kids live outside of Washington D.C. I practiced law in D.C. for 25 years, and I retired last year, but 10 years ago, I was kind of bored with the practice of law. It’s not nearly as exciting as what you see on TV. And my wife said, “well, why don’t you get a hobby?” I didn’t know what that meant. I was surfing the net, and I came across the first blog, the first website that I sort of identified on the blog. It was actually 10 years ago this month. And I thought, “that’s what I want to do, I want to blog about personal finance and investing.” And so, I just started writing. No one was reading it. I don’t think my mom read the blog, I mean no one was reading it. And you fast forward 10 years, and now I’ve got a team of about 12 people that help me, and I have a podcast, newsletter, writing for Forbes. So yeah, it kind of turned from a hobby to like a business to a career to a calling, I guess. I quit the practice of law last year, and this is what I do now full-time.
JA: So you’re practicing law. So 10 years ago. Why personal finance? There’s I guess a thousand other more interesting things to probably blog about. Did you always have kind of an inkling, or was there a personal experience that says, “I want to help people do better with their money?”
RB: Well, I always had a love-hate relationship with money, particularly as a kid, just because of financial struggles that my parents went through. And then when I’m a grownup or trying to act like one anyway, I thought, “well, I need to figure this out,” and so I managed the finances in our home, I managed our investments, and I enjoyed doing it. Most, a lot of people hate it or don’t even want to think about it, but for some strange reason, I enjoy it. And so that, and it just kind of made sense. Then I thought I’d put those two things together, and I turned it into a blog.
AC: So why don’t we get into some content here. I know you help people of all ages, so why don’t we maybe go through the gamut. Why don’t we start with kids? What kind of tips would you give to children?
RB: Well that’s a great question, and it kind of depends on the age. Most of the children, I guess teenage years that I talk to, and in fact, I was just talking to my nephew the other day. He’s in high school, and he wants to open up an investment account. And he got some money. He works, not a lot but, you know, a high school kid. And I’ve helped a lot of high schoolers open up their first investment account. And I try to explain to them some basics. What’s an index fund, for example, and how do you figure out how much does an investment cost and why do fees matter? And what’s the difference between a stock and a bond, or stock fund and a bond fund? They get all that. We walk through it, and I’ve helped them open up accounts at Betterment or WealthFront, which is usually what the high school kids do. They don’t have enough maybe to invest in a Vanguard, because of the minimum requirements or whatever. And so I spend a lot of time talking to high school kids about investing. I show them how, if you start young, even if you’re not investing a lot of money each month, man, you give it enough time and it’s going to turn into a mountain of money.
AC: Yeah I think that’s great. We know that the kids don’t really get this in traditional education. And I think the earlier the better. Now, how about like the 20s and 30s. You’re starting your career. What might you tell for that age group?
RB: The biggest question I get from that age group is trying to figure out what their financial priorities should be. Because a lot of them are paying off school loans, maybe they have credit card debt, they want to save for a house, they want to save for retirement, and they don’t know how to tackle all of those things at one time. And probably the biggest question I get is, “should I pay off all of my debt before I start investing?” And I know there are some out there – I don’t know what your views are on that, but there are some that will say, “you should absolutely pay off all your non-mortgage debt anyway before you invest.” And I think that is a huge blunder, and I discourage that. Obviously, dealing with your debt is important, but I think folks ought to be investing today.
AC: Right. You’re probably talking about Dave Ramsey.
RB: (laughs) Well I don’t want to mention it. I didn’t want to mention any names. I’m a huge fan of Dave. In fact, I listened to Dave’s show, let’s see here, 12 years ago. I actually wrote down the piece of paper, it was in 2005, and all his guests were screaming, “I’m debt free,” and it really kind of annoyed me. And I said, “OK that’s it, I’m going to be debt free in seven years. Everything was gone.”And I’ve still got that piece of paper it. It took me 10 years but I got it done. I’m a huge fan of Dave Ramsey, but we don’t see eye to eye on everything.
AC: Yeah, I am too, and just to follow up, I think it’s kind of good that he scares the younger generation into getting out of debt. But there’s really more to it than just that.
JA: I think the problem is that if you don’t have any type of cash reserves or liquid assets, and you’re just putting every last dollar down on debt, then you pay off the credit card, and then guess what? Something else happens, and you have no cash reserves or no other investments to fall back on. And so now you’re back in the credit card debt again. It’s just that never ending the cycle.
AC: Yeah you get into your 40s, 50s and then you’ve got nothing.
RB: Well, and are you giving up an employee match on a 401(k) to pay down debt? And even if you don’t have a match, 401(k)s and IRA contributions, you either make them in a given year, or you lose them forever. You can’t go back three years and say I want to fund my IRA from 2014. You can’t do that. So, you’re losing a lot of opportunities for some really good save saving and investing if you just focus on one financial priority.
AC: Yeah that makes sense. Now, what about our 40s, 50s, 60s? Your saving years, or hopefully your saving years. What would be the advice there?
RB: Actually, the biggest question I get from those, that age group, about investing is, how do I stick to my investment plan when the market goes down 50%, or heck if it goes down 20%. That seems to be the thing that scares the most people, and so I try to work with them on how they can stick to their investment plan, even if we go through another 2008-2009, which we will, we definitely will, we just don’t know when that will happen. That’s probably the biggest question I get from folks. How do they stick to their investment plans?
AC: Yeah, because of the tendency, the market drops and it’s like, well, investing doesn’t work, so I’m not going to do it for a while.
RB: And that’s the end of the irony, the tragic irony, is that’s usually the best time to invest. When people are pulling out.
JA: I guess we could talk for an hour about different investment philosophies. What is your investment philosophy, and how would you help our listeners, in regards to maybe looking at investments and constructing that portfolio?
RB: Right. So my primary investment philosophy is a low-cost index fund approach. The vast majority of our retirement funds are in, in our case they’re in Vanguard, I mean, there are other great index fund providers, but at Vanguard, and it’s a total of six funds, US, foreign, emerging markets, REITs, small-cap value., and I think I’m missing one. Oh, and the bond fund. And so it’s very simple, very easy to rebalance. I think you can get too hung up on the precise asset allocation. There’s plenty of good ones. I mean heck, even a target date retirement fund can be a great great way to go. That’s the majority of our approach. I do own individual stocks, which seems to be totally contrary to what I just said. But I think I can handle the ups and downs. At least, so far I’ve been able to, and I actually think it gives me – ironically, owning a few stocks, gives me pretty good diversity. And then we own some real estate. So we diversify that way. And we keep our debt really low, or we don’t have any debt now, which I think is critical. Do you talk about how to stay in the market when it when it goes south? One way is to have all your other finances in good order. But if you’re up to your eyebrows in debt, and you’re trying to make it up with the equity rich portfolio, when the market’s down 40-50%, it’s going to be really hard to stick to that kind of allocation.
JA: I was at a conference, and Gene Fama was speaking. Are you familiar with Gene?
RB: Oh yeah.
JA: And so, someone asked him, “have you ever purchased an individual stock in your life?” And so he pauses, kind of looks down. He goes, “Yes. Along with 2000 others.”
RB: I know there’s this view that you can’t beat the market. You can’t pick stocks. And I just don’t agree with that. But I do believe that most people will fail at it. And maybe I can be back on the show in 20 years and I can tell you whether I failed at it. (laughs) I think for most people, you should stay away from it.
JA: Well yeah but I think if you have a level of sophistication within your overall allocation, I think it’s extremely probable to beat the broad market index, in a sense. And it sounds like your portfolio, you’re doing just that, of having a little bit of small value in there, a little bit emerging markets… Because we look at portfolios daily, and I would say that most individuals take too many risks in their fixed income or bonds, and not necessarily the right risk, or not enough risk, in their stock portfolio. And if they can allocate that appropriately, I think would achieve a lot better success with less volatility.
RB: Yeah, and probably one of the riskiest investments you can make today is a 30-year bond. And the other thing is, for me, individual stocks only make up right now about 10% of the portfolio. So it’s not a huge exposure.
JA: What are you writing about on The Dough Roller? What’s going on on your blog?
RB: Well, got a great team of writers, with a variety of backgrounds, which is on purpose. And they cover everything that can affect our money. We talk a lot about getting out of debt. We talk a lot about investing, and then we try to give practical tips – how to leverage your retirement accounts, how to use an HSA for retirement, for example, or how to do a backdoor Roth if your income excludes opening up a Roth IRA directly. We talk a lot about early retirement. Since I retired early, seems like something to talk about, so we cover that a lot. We also interview a lot of folks who’ve retired in the 30s and 40s, which some of these stories are just insane, but a lot of fun. So a little bit of everything.
Hey Rob, hold for a second we’ve got to take a short break. Folks don’t go anywhere. We’re talking to Rob Berger from the Dough Roller or go to DoughRoller.net
Nobody knows what’s ahead for investors, but Larry Swedroe’s book “Playing The Winner’s Game: Think, Act, And Invest Like Warren Buffett” offers bedrock investing principles that can help you profit in today’s shaky markets. Right now it’s available for FREE to Your Money Your Wealth listeners, just click “Special Offer” at YourMoneyYourWealth.com to get yours. Learn how to think like Warren Buffett and build a well-designed portfolio based on solid evidence and your highest interests. “Playing The Winner’s Game: Think, Act And Invest Like Warren Buffett” by Larry Swedroe – with a foreword by Joe Anderson, CFP and Big Al Clopine, CPA. Click Special Offer at YourMoneyYourWealth.com to get your free copy.
21:39 – Rob Berger, host, The Dough Roller Money Podcast – Retiring at 30 years old
JA: Retiring in your 30s or 40s. I’m 40. (laughs)
AC: (laughs) You’re already behind!
RB: You’re so over the hill! You missed it!
JA: I know! How do they do it? What are they doing?
RB: Well, are you familiar with Mr. Money Mustache?
JA: Oh sure yeah you gotta live off of like five cents a month.
RB: Well…. Pete’s a good guy, and I’ve had him on my show, and I’ve met him, and he retired at 30. I mean, I think, when people set out to save, let’s say, 50% of your income. If you’re like me, that just sounds insane. But the reality is if you look at your home and the things we spend money on, for a variety of reasons we think it’s going to make us happy, whatever. Probably not so much. I mean, there are certainly needs. But I think the people that have retired early, they know exactly what they want, and what will make them content. And it usually doesn’t involve spending a lot of money. So they’re OK driving around in a car that a lot of people wouldn’t be caught dead in. They don’t care. They’re quite content with that. They don’t need the new car. And they don’t need to upgrade to the McMansion, or whatever. They’re very comfortable in their home. And they love cooking at home. They don’t want to go out to eat. They know they won’t enjoy it. They enjoy cooking good food at home. And I know it’s a little harder than what I’ve just said, but at the end of the day, that’s what they do. And they’re able to save, at one point Mr. Money Mustache was saving 70% of his income. And so, he wasn’t living on much, and it didn’t take long enough to call it quits. He retired at 30.
JA: You know, that’s such a good point. I think we get caught up on this show, in our everyday lives, being certified financial planners, is looking at the investments, and the allocation, and tax savings and everything. It means nothing if you’re not saving any money. That is the driving force, that’s what people can control, is just to save money. And the markets are going to do what the markets are going to do. It doesn’t matter. You just keep plugging away and save that money, then you’re going to achieve that financial success.
RB: Absolutely. Couldn’t agree more.
JA: Yes. I was just thinking when you said if you look around your house, how many bad purchases. Oh my god.
AC: Whaddya got, you got quite a few? (laughs)
JA: I mean, I have really, really bad purchases. I have the replica Darth Vader mask that I probably spent five hundred bucks on. I’m like, what the hell am I doing here? This is the stupidest thing ever.
RB: Now wait a minute. That’s pretty sweet. I would not get rid of that. (laughs) Do you ever go to an estate sale? I tend to go to them. I don’t buy anything typically, but I go to estate sales, and you walk through someone’s house and just look at all of the stuff they’ve accumulated over a lifetime. Then I go back and look at my house and think, God, someday when I’m long gone, they’re gonna have an estate sale and all my crap’s gonna be out there for everyone to see, and it’s just a ton of junk.
JA: Yes. I’m going to be fairly embarrassed. I’ve got a stormtrooper mask too, Rob. You could come over. (laughs)
RB: Now you’re just showing off!
JA: We could walk around the neighborhood. (laughs)
AC: He brings that up every show. He loves that thing. (laughs)
RB: Are you guys old enough? I saw the original Star Wars in the theater with my father.
AC: Yeah. I’m old enough. Yes. I’m older than you are. Joe’s younger.
JA: I was there, but I was a little kid. When was that 1979? 78?
RB: I would say 78, but it was not 80. I was 12.
AC: That was the time when people were seeing it 15 times, and then they were bragging about it.
RB: Oh yeah. It’s like how many times you can ride the roller coaster? It was the same thing. Out of the movie theater, right back in.
JA: If that thing’s on TV? Like on TBS? Boom. Forget about it. Yes.
RB: What did you think of the last one?
JA: I loved it. Which, Rogue One? What, you didn’t care for it?
RB: It was OK. I don’t know. The dish isn’t quite angled in the right direction, let’s call out on the thing… and I don’t know, it just seemed a little goofy to me
JA: I like the back story of it. You kind of get the meat of what’s going on, and I get goosebumps with Darth Vader at the end of this? He just blasted people. I thought it was pretty intense.
RB: The very end of it was quite good, I thought, but…
JA: Yes. Yeah, the last 10 minutes. You just got to sit through some backstory.
AC: Well I think what Rob is saying, and I sort of get it, I mean when you saw the original in the theater, nothing’s going to match that. That’s part of the problem.
JA: Well they’re trying their best. (laughs) It’s a lot better than Jar Jar Binks or whatever those were.
AC: Well yeah that’s true. I agree with that. Although he was kind of funny. (laughs)
RB: It was head and shoulders above Fate of the Furious. So it’s got that going for it.
JA: Well I guess, note to self, bad purchases. (laughs)
AC: You need to save 70% of your income, Joe, that’s the key. Stop spending.
JA: Yes. I’m walking downtown San Diego, you look at this little shop, and then I bought a replica Darth Vader mask and a Bruce Lee doll. (laughs)
AC: So if you if you come into the office next Monday with an old beat up car, I’ll know you’ve taken this to heart.
JA: Yes. I’m Mr. Money Mustache. Watch out, brother.
AC: You’ll be starting your mustache too, right?
JA: Yes, if I could grow one, I’m 40, I shave like once a month. Rob, hey, I appreciate your time. I’m sorry, it took us like a month just to get a hold of him. I’m calling his wife, I’m like “hey where’s Rob,” calling his house, he’s got like 15 weird messages from a guy with a Darth Vader mask on. (laughs)
RB: We had to change our number twice. (laughs)
JA: It was weird! After 25 calls it was disconnected!
RB: I’m sorry I was so hard to reach. Normally it’s not that bad.
JA: Well I appreciate your time and thank you so much. Where can people come and find you?
RB: DoughRoller.net. That’s the place to find me. We have a great Facebook group, by the way, DoughRoller.net/FacebookGroup. Like 2500 people, and sharing stories and tips and stuff. It’s really good.
JA: That’s Rob Berger folks, we got to take a short break. We’ll be right back. Show’s called Your Money, Your Wealth.
Can your portfolio stand up to a stress test? Find out! Visit YourMoneyYourWealth.com and sign up for free financial assessment with a Certified Financial Planner who will stress test your portfolio. Are you on track for retirement? How much money will you need in retirement? How much income can you get from your portfolio? What Social Security strategies are available to you? Are your investments aligned with your goals? Stress test your portfolio: sign up for a free two-meeting assessment with a Certified Financial Planner at YourMoneyYourWealth.com
29:20 – Big Al’s List: 5 Costly Inherited IRA Mistakes (Ed Slott, Investment News)
AC: This is by our friend Ed Slott, and the first sentence of this article, it says, “Inherited individual retirement account mistakes are expensive and often fatal,” meaning that they cannot be fixed like some other IRA mistakes can. And it’s happening more and more often. I mean, IRAs haven’t been around that long, but now people are starting to inherit them, and they’re starting to make lots of mistakes. Once you make a mistake, it causes a lot of taxation and it can’t be fixed.
JA: Well, you look at, the oldest Baby Boomers now are turning 70 and a half. $24 trillion are in retirement accounts, roughly, and a majority of those are owned by Baby Boomers, and as the Baby Boomer generation is getting a little bit older, some of them are dying a little bit prematurely with a lot of money in these retirement accounts. Versus the Greatest Generation, they more or less had pension plans. Or they might have had a stock portfolio and things like that. The IRAs and 401(k)s, they didn’t have enough time to build enough assets in them.
AC: Right. We’re just starting to see this, Joe. And the very first one is, it’s ineligible rollovers, so its spouse beneficiary cannot do a direct rollover. Meaning that a 60-day rollover, where the inherited IRA funds are withdrawn and returned to another IRA in 60 days, you can’t do it. So a lot of you know that with your regular IRA, you can pull out the money, and use it for any purpose. And then within 60 days, you put it back into the IRA. No harm no foul, it’s like it never happened. Realize you can only do that once per year. But on the other hand, when it comes to inherited IRAs, you’re not allowed to do it. And if you do it, it’s a taxable distribution. No way to undo it. That’s what we call a fatal error.
JA: Non-spouse beneficiaries. You’ve got to be careful with what the heck you’re doing there, because the rules change, and the rules will probably change, depending on what happens here. But the distributions, when you inherit a retirement account, it’s completely different than any other asset. And I think we’ll see more problems with this, and I know that you’ve got a list, and I haven’t looked at it. But here’s the issue though. Just think of this, Al. Let’s say that an individual dies. I’m just going to throw out a round number. Million bucks. They got $500,000 in a retirement account. They got $500,000 in a brokerage account. It says a million bucks. So the kids inherit it. And so maybe they set up everything perfectly. It will say whatever the name is, deceased, on whatever date that he died, for the benefit of Junior, and then the other one, it’s just titled. And so he looks at these accounts. And maybe they have the same mutual funds in those accounts, the same stocks, the same bonds, the same cash, the allocation looks the same. It’s on the same statement. But one has a little bit different title on the top of the statement versus the other. And then they say, “I just inherited a million bucks. So now I’m going to buy X, and I’m going to buy that yacht. I’m gonna buy a new house. I’m going to do whatever.” So they take everything out. Well, one account, no tax at all. The other account, they distribute that out? Half. Gone. Fully taxable, and they won’t know that, until the following year, when they get their 1099s.
AC: Right. And they get this income that says $500,000 of income, that sits on top of their other income, pushing them into probably the highest tax bracket. And Joe, that actually is the second mistake is incorrect account titling. And just to repeat what you said, this is so important. The account needs to be titled. This is the example. John Smith, deceased May 25th, 2016, this is the example, IRA, FBO, which is “for the benefit of,” FBO Tom Smith, beneficiary. I’ll read that again: John Smith, deceased 5/25/16, IRA, FBO Tom Smith, beneficiary. It’s in a separate account. It cannot be co-mingled with your IRAs, it has to be a separate account, and part of the problem, Joe, is that a lot of institutions are not putting that name on the statement. So the people that have these accounts are getting confused, thinking, “Oh, this is my IRA, I can combine it with another IRA. And you can’t do that.
JA: Right. I mean we’ve seen that before. Where it’s like, “well here, I got this IRA from mom and dad. Well, I don’t want to have all these different IRAs, let’s just combine them.”
AC: Yeah right. That’s a normal thing, you think, “I can do that.”
JA: Right. Because let’s say if I inherited a brokerage account from mom and dad. And then I have a brokerage account, maybe their money, Smith bought Morgan Stanley, and my money’s at Fidelity. It’s like, “well, I don’t want to have these two different statements, I just want to consolidate to make it easier on me. So I take that brokerage account, put in my Fidelity account, no big deal. But you do the same thing with an IRA, fully distributed, 100% taxable, when you do that.
AC: Yeah that’s crazy. But that’s true. When you put those together, the beneficiary IRA is considered a full distribution. You’ve got to pay taxes on that. Sometimes people, when they get these inherited IRAs, don’t realize you cannot contribute to them. So they think, “well, I can put $5,500 into my IRA.” And once you do that…
JA: Excess contribution.
AC: …then the entire $300,000 must be distributed, and is taxable, in that same year.
JA: Well the example is $300,000 is what the child inherited. They set it up perfectly, it said Joe Anderson deceased on whatever date that I died, for the benefit of Junior. Junior inherits my $300,000 IRA. And then Junior says, “well, I got this IRA. Well, I haven’t contributed yet to an IRA. I got Dad’s IRA here, so I’m going to put $5500 into the IRA.” Guess what. Boom. Blew it out.
AC: $300,000 in the inherited IRA must be distributed, and is fully taxable. This is a fatal error, Joe. This cannot be changed. The IRS has no authority whatsoever to change this. It is what it is. It’s a fatal error.
JA: Right. You’re going to probably spend maybe a couple hundred thousand dollars in attorney’s fees to get a private letter ruling that’s going to still do nothing for you.
AC: You will still lose. Another one would be delaying required minimum distributions, because when you inherit an IRA that’s not from your spouse, so this will be your parents, or your brother or sister or whatever, uncle. Then you have to start your required minimum distributions in the year after you receive that IRA. And the required minimum distribution is based upon your life expectancy. You’re 29 years old. Let’s say you’re 30 years old. And let’s say your life expectancy at that point is 80, just to make the math really easy. So that’s 50 years to go. So roughly one fiftieth of the account needs to come out. And when you’re 30 1/50 comes out, when you’re 31, and so forth. That’s how that works. And the reason the IRS does that is, they don’t want to wait till you turn 70 and a half because they were expecting to get those tax dollars much earlier.
JA: Right. So then though, this happens. Because all non-spouse beneficiaries have to take a required minimum distribution. I think when you hear that term, “required minimum distribution,” it’s like, “OK, well that means when I turn 70 and a half or a lot older than 20 or 30.” But no, if you inherit an IRA. And you need to take that required distribution. Also, let’s say if you inherited an IRA from someone that was already taking distributions, and then they hadn’t fulfilled their distribution yet, that money still has to come out of the account, even though that person is deceased.
AC: We’re working on the 5 Costly Inherited IRA Mistakes. We’re on the last one, which is stretch IRA confusion, which I will get into in a second, but why don’t you explain what a stretch IRA is.
JA: So, when you inherited an IRA. So this is non-spouse. Spouses can co-mingle their retirement accounts, so if I was married and my wife died, I could take her retirement accounts and put them into my account. If I died, she could take my accounts, and put them into her account. When it comes to a non-spouse beneficiary, then it turns into an inherited IRA or a stretch IRA. And where the term stretch IRA comes from, is it’s stretching the tax liability out over the non-spouse beneficiary’s life expectancy. So let’s say, like Al’s example if they’re 30 years old, they got 50 years left of life or whatever. They’re 35 years old, they probably got 50 years of life. So what’s that 85? So then it’s like, you’ve got to take one fiftieth out of the account. They want that account to be depleted. They don’t want you to continue to defer the taxes any more than you’d need to. So they want to have you take those distributions. A lot of times the non-spouse beneficiaries, the kids, or the grandkids, or nieces, nephews, or whoever, they don’t understand the rules, so they don’t take those distributions. That’s a 50% tax penalty on any distribution that is not made. So it’s very important that they understand those rules. So the stretch is just basically stretching out the tax liability over their lifetime.
AC: Yeah that’s exactly right, Joe. And here’s where the confusion is, is that only designated beneficiaries can do the stretch IRA, meaning that – a designated beneficiary is one who’s named on the IRA beneficiary form, not the will., not the trust. It’s actually named on the IRA beneficiary form. And here’s what often happens, people would say, for the beneficiary, let’s just make the estate, for example. And when you make it the estate, then there’s no designated beneficiary. Now you’ve got to look to the age of the person that passed away.
JA: Right, because if they’re over the required beginning date, then you have to follow their RMD schedule.
AC: Right. So yeah, let’s say you’re 30 and whoever passed away was 75, well, you take over that position. So you have to keep doing required minimum distributions as if you were a 75-year-old. Now, if they were under 70 and a half, then you have to pay out the whole IRA within five years. So that’s a big mistake. It’s that whole thing about who you should name as a beneficiary on your IRA or your 401(k), and typically you would want to name your spouse if you’re married, and then your contingent beneficiary would be your kids. You put their names in it, and you can do several – you got eight kids, you can have eight contingent beneficiaries. If you name your estate, then this is exactly what happens: the IRA is going to need to be distributed much quicker than otherwise would be or should be, and therefore your beneficiaries are going to have to pay a much higher tax upfront, number one. And number two is because more has to come out quickly, they’re going to be put into higher tax brackets.
JA: Right. You’ve got to take one-fifth versus maybe 1/50th. Now the non-spouse beneficiary that does inherit- they have full control over the money, so they could take it all out anyway. And a lot of people do that. So it’s like, “I got this, I’ll take it out.” Then they get blown up in tax when they should have just been taking maybe the required distribution, or if they needed a little bit more, they could take out a little bit more. They’re not required just to take the RMD, that’s the minimum.
AC: That’s a really good point because I think a lot of people in the past, that have inherited IRAs, the balances have been fairly small. And so, there wasn’t much pain in taking it out – maybe it was a $10,000 IRA or $20,000, whatever the number is. But, here’s what’s happening now. We’re seeing the Baby Boomers that are really the first generation that used IRAs and 401(k)s. We’re starting to see much more accumulation in these accounts. And now, these rules and things they have to be aware of on inherited IRAs, it’s more important now than ever.
JA: You got to be careful here too. We see this often: I just inherited $300,000 in an IRA from mom and dad. And then they’re like, “Man, wouldn’t it be nice to pay off the mortgage?” So then the earmark that. Anytime you get an inheritance, let’s clean this up, let’s pay off debt. And so they’re taking out massive sums out of these accounts to pay off their mortgage, to pay off credit card debt, to pay off their student loans, to pay off whatever. And then next thing you know, April 15th of the following year. “Wow, I didn’t know it was going to be that much in tax.” And they don’t have assets to pay the tax, but they still have a little bit left in that inherited IRA. So what do they do? They have to go back to that inherited IRA, to take more money out, to pay the tax.
AC: …that will cause more tax next year. And we’ve seen these things just blow up, just because every year you keep going back to the well to pay the tax on the last money that you pulled out. You even have to pay tax on the tax money that you pulled out. Anything you pull out, you got to pay taxes on.
JA: Some of these inheritances are going to be a nightmare.
AC: Right. Something else to be aware of, and that is, the last several years of the Obama administration, they’ve actually wanted to get rid of the stretch IRA. So we don’t know whether that’s going to happen or not now under President Trump, but be aware of that. If the stretch IRA rules go away, that means when you inherit an IRA you’re going to have to distribute the whole thing within a five year period.
JA: Right and that rule changed 17 years ago in like 2000. So prior to that, it was the five-year, you had to distribute within five years.
AC: It was. And of course, the IRA balances were minuscule back then. But now, we’re seeing some pretty big ones, when you add up 401(k) and things like that. So what that simply means, if that goes away, then your kids or grandkids, if you’ve got big IRA balances or 401(k) balances, that would likely put them in very high tax brackets. Just simple example: you get $2 million and you only have one child. So they’d have to take out $400,000 a year, or they could wait till year five but then they got to take out $2 million. You think they’re in the highest tax bracket? Of course, they are. So all this money that you save, it’s like half of it’s going away to the government. And so then it’s like, well what do you do about that? And some people now are looking more closely at Roth IRA conversions, because once you get the money into a Roth IRA, yeah, it still may have to come out within that five year period. But when the kids pull it out, they don’t pay any tax on it, because you’ve already paid the tax on it. So depending upon your tax brackets, and it takes a little bit of analysis, but it’s something that a lot of folks are looking at, even if they don’t need the money themselves. They’re looking at it for the sake of their kids, in anticipation of maybe this rule going away. When you’re doing Roth conversions, it’s not all or nothing, you want to kind of stair step, you want to do a little bit this year, a little bit next year. The longer you have to do that, the more you can get out of your IRA to your Roth IRA without pushing yourself into high brackets.
Your Money, Your Wealth isn’t just a podcast, it’s also a TV show! Check out Your Money, Your Wealth on YouTube to see Joe and Big Al talking about planning for retirement over your entire lifespan, investing biases you may not realize you have, Social Security claiming strategies, and… Pure Financial Feud! Watch clips of the Your Money, Your Wealth TV Show – just search YouTube for Pure Financial Advisors and Your Money, Your Wealth.
45:10 – Why Rich Retirees Are So Reluctant To Spend Their Money – Bloomberg
AC: Joe, I’ve got an article that I thought was kind of interesting. Bloomberg News, this is on May 16th. Why Rich Retirees Are So Reluctant to Spend Their Money. And we’ve seen that too. People that have saved a lot of money, it’s hard for them to all of a sudden turn from being savers to spenders. And here’s a couple little surveys, to kind of tell you what we’re talking about. The University of Michigan did a survey, they found out, believe it or not, that the average American over age 60 cuts their spending about 2.5% per year, which I find an interesting stat because a lot of financial planners say you could probably live on 70% of your income. But the reality is, as an average, we’re cutting spending only about 2.5%. But interestingly enough now, because of that, and the wealthier kind of in that group as well, what’s happening is the people dying with estates, they’re dying with a lot more money than they used to. And here’s another survey, actually the same one, University of Michigan. They said people that died from 2000 to 2002, compared to those who died in 2010 versus 2012. So 10 years later, the latter group, even though it was just after the Great Recession, the financial crisis, their estate values were 130% higher than the first group, which indicates, Joe, that people just are not spending. And one more stat I’m going to tell you before we talk about this: last year the Journal of Financial Planning found out that the wealthiest fifth of the U.S. retirees was spending 53% less than they could have. The poorest 40% were spending more than they should have. No surprise there. And the median retiree spent about 8% less than the safe amount. And this article it, sort of went into, “well why is that? Why do wealthy folks have trouble spending? And they gave a bunch of answers, but to me, they didn’t even talk about the most obvious one, which is, you’re sort of built for saving and being frugal, and that’s how you amassed a certain savings level. And it’s hard to switch that in retirement. Plus, here’s another thing is, we’ve been told never to touch the principal. That’s a common thing of retirees, and so they don’t want to touch the principal. So it keeps on growing because the interest rates and dividend rates are low these days. And so people are ending up giving a lot to their kids, which is fine if that’s your goal. I guess we’re here to say if that’s you, you can spend a little bit more.
JA: Yeah, they’re not going to do it, Al. Because there’s a reason why they have those assets. Because they freak out. There’s a level of anxiety. That’s why they saved so much, to begin with, because they want that sense of security.
AC: Sure. And they know they’re not getting a paycheck anymore.
JA: Right. It’s like, “OK we got to save, we got to save because just in case something happens, if this happens, or whatever. I do not want to be a burden. I want to be responsible,” and everything else. So they save. And so they amass a nice nest egg. And, what did you say, they could spend a 100% more than what they did?
AC: Yeah, that’s the other way – they’re spending 53% less than they could have, which means they can about double their spending and still be fine.
JA: Of course, because they’re savers. I would say the clients that have the most assets sometimes are the ones that are most worried. Because they got a lot more to lose.
AC: Yeah. And interestingly enough, and this article talks about it, they do tend to be more pessimistic, because I think they react more to the news, and they’ve got this nest egg, and now it’s all about, “oh, I got to protect it, I can’t spend it. I got to protect it.” And if you don’t have the money, you don’t worry about it. You just try to do your best.
JA: Who cares. Blow it. Well, we’ve been doing this our entire lives, we’ll make it happen.
AC: You just try to do your best, and the other thing too is, we will talk to some of our clients that have saved a lot. And it’s like they’re spending whatever $60,000 a year or whatever the number is, doesn’t matter. And it’s like, “well, you can spend more.” And they say, “I don’t know what, we have everything we want.” And it’s part of that mindset of, they realize, as we talked to Rob Berger, happiness comes from the non-financial things. And they are happy people in general. Until they start talking about their money, then they get really nervous, because they’re afraid they’re going to lose it.
JA: Yeah. This whole retirement and everything else. People will get by on what they got. That’s just human nature. And so some people are like, “I know I’ve got this Social Security that’s paying my spouse and me $30,000 a year. We’ve saved $50,000. Well, let’s buy a new truck.” Whatever.” But money’s not the end all be all. Al and I know people that have millions that will blow through that money and are miserable. And then we know others that have very modest savings, and they’re the happiest people you ever want to meet.
50:35 – What Do You Do When You Have Johnny Depp’s Compulsive Buying Habits?
AC: Yeah, there’s no question, Joe. And then there’s another article that’s kind of the other extreme, it’s talking about what do you do when you have Johnny Depp’s alleged compulsive buying habits. And a couple things here: He allegedly…
JA: bought a village in France?
AC: (laughs) He generally spends about $2 million a month on monthly bills, and his monthly wine bill alone is $30,000.
JA: Oh, good stuff. (laughs)
AC: (laughs) And in truth he’s not alone. According to the American Journal of Psychiatry, about 6% of Americans are compulsive buyers. So here’s an example, maybe not quite that extreme, but still pretty extreme to most of us. An adviser talked about one woman who was racking up about $12,000 a month shopping for clothes and other things online. And what’s the traditional advice? Well, we got to put you on a budget and this and that, and blah blah blah, which nobody wants to do. So here’s what he did, that I thought was kind of clever.
JA: Brought her to a nudist colony.
AC: (laughs) Where clothes weren’t important? Boy, that’s out of the box thinking. He could have done that. But here’s what he said, is keep doing what you’re doing, but here’s my only rule. You can only buy on Friday. And so she would go all week, and she’d put stuff in the in the shopping cart, but by Friday came along, she didn’t want it, so she kept kicking it out, so it saved her five grand a month. Just that one little thing you know. And here’s another client that spent too much on dinners. And he said no one likes to do a budget. Just do it once a week. That’s your allotment. Once a week. Can you handle that? Yes I can handle that. Can I track a budget? Well, I’m not going to. And that’s what we hear from so many people. I guess it’s just being a little bit more creative on this.
JA: Well, we’re creatures of habit. And so I guess if you’re on Amazon every day, just because, you know, buying things makes us feel better. That’s the nature of it. And if we’re always miserable, you’re spending a lot of money. So you’ve got to change some of the habits that you have, entirely. So if there’s a certain time of the day that you’re on the Internet, well then change the time, even.
AC: Right. It’s an interesting concept. A financial planner, or maybe even better yet, a CPA like myself, would say, “let’s set up a budget, and then every bill is going to go in this budget, and then you can track and see how you’re doing,” and Dave Ramsey, he says pay everything in cash, and you got an envelope system, and as soon as the money is out of the entertainment envelope, you’re done for that month. And it kind of forces you.
JA: I could never, ever, ever do that.
AC: (laughs) Most people don’t want to do that. And maybe that’s not a bad way to go when you’re younger and just trying to learn some of the basics on spending and saving, but the rest of us that have saved a certain amount of money. We don’t want to be bound by those restrictions. It’s not fun, it’s not fun to live on a budget. But sometimes, if you can just think of a few creative things like you said, go to a nudist colony!
JA: Then you don’t need to spend $12,000 a month on clothes!
AC: You don’t need clothes, you just need a bathrobe to get in and out of your car, from your home, right?
JA: I suppose, yeah. Get a couple outfits and that’s about it. Or just live there.
AC: I suppose. Yeah.
JA: That’s your retirement dream, isn’t it?
AC: Well, but then you got to spend a lot more money on sunscreen. (laughs) And dermatology appointments for skin cancer, I suppose.
JA: There ya go. For Big Al Clopine, I’m Joe Anderson. Thanks for listening. Show’s called Your Money, Your Wealth. We’ll see you again next week.
So, to recap today’s show: Having a disciplined investing strategy will help you ride out the market volatility caused by fear, greed, and politics. Saving as much as humanly possible will help you reach the goal of retiring early. Putting inherited IRA money in with your own IRA isn’t literally fatal, but it may make you want to die when you see your tax bill. And if you buy $500 replica Star Wars masks and Bruce Lee dolls, you may not be Johnny Depp, but you might be Joe Anderson.
Special thanks to Rob Berger, host of the Dough Roller Money Podcast for being on the show today, check out his show at DoughRoller.net
Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, this show is about you! If there’s something you’d like to hear on Your Money Your Wealth, just email firstname.lastname@example.org. Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com
Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.