Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
June 22, 2021

As you age, your portfolio grows, but your time to spend it shrinks. So from a financial perspective, what is the ideal retirement age? Plus, if you aren’t seeking FIRE (financial independence, retire early) but instead have achieved FAHR (financial abundance, happily retired), should you do Roth conversions to the top of the 37% tax bracket? Should you stop investing and start saving cash as retirement approaches? If you’re maxing out your retirement accounts, is it a good idea to now take advantage of a deferred comp plan? Is participating in an employee stock purchase plan (ESPP) putting too many eggs in one basket? And finally, how should you pay for long-term care insurance?

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Show Notes

  • (01:01) Financially Speaking, What is the Best Age to Retire? (Phil, Alabama)
  • (05:55) $13M Portfolio: Should We Convert $1M to Roth? (George, Ledbetter, TX)
  • (13:37) Should I Stop Investing for Retirement and Build Up Cash? (Kerry, KS)
  • (18:08) Should I Save to Deferred Comp Plan? (Adam, Franklin, TN)
  • (28:34) Is Participating in My Employee Stock Purchase Plan Putting Too Many Eggs in One Basket? (Mike, DC)
  • (36:45) How Should We Pay for Long-Term Care Insurance? (Mike, AR) 

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Cracking the Financial Code at Any Age

WATCH | YMYW TV – Cracking the Code: Succeeding Financially at Every Age

YMYW TV: Cracking the Financial Code: Succeeding Financially at Every Age

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As you age, your portfolio grows, but your time to spend it shrinks. So from a financial perspective, what is the ideal retirement age? That’s Joe and Big Al’s first question today on Your Money, Your Wealth® podcast  331. Plus, if you aren’t seeking FIRE (financial independence, retire early) but instead have achieved FAHR (financial abundance, happily retired), should you do Roth conversions to the top of the 37% tax bracket? If you’re close to retiring but don’t have much cash, should you stop investing and start saving? If you’re maxing out your retirement accounts, is it a good idea to now take advantage of a deferred comp plan? Is participating in an employee stock purchase plan putting too many eggs in one basket? And finally, how should you pay for long term care insurance? Go to YourMoneyYourWealth.com and click Ask Joe & Big Al On Air to send in your money questions, comments and stories for the fellas to riff ons. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Financially Speaking, What is the Best Age to Retire? (Phil, Alabama)

Joe: We got Phil writes in. He goes “Hey Andi, Joe and Al, this is Phil from Alabama. An alumni of podcast 315.“

Al: Wow.

Andi: That’s a ways back.

Joe: And we have alum?

Al: Apparently, each podcast, we have our alums.

Joe: Alums.

Andi: Who made appearances.

Joe: “Your previous second opinion on advice I received from a prospective advisor was invaluable. I want to ask you a follow-up question on the topic that I don’t recall you discussed before. The question is, from a purely financial standpoint, is there an optimal age to retire? That is a point where you have the best blend of money and time. I’m in above-average health and legacy planning is not a factor. Since I only need about 2% to 3% of my portfolio annually, it should grow significantly over time. Of course, each year I wait to retire, life expectancy decreases. So as portfolio increases and life expectancy simultaneously decreases, is there an optimum intersection between life and money?” Is there a crossroads here, Al?

Al: Gotta be, gotta be a crossroads.

Joe: “I’ll be 69 this year and I’m still working, but I believe I have overshot my target. Is it time to turn in my Honda CRV around? Any insight would be greatly appreciated.” All right, Phil from Alabama. So what do you think there, Big Al?

Al: Well, I think, Phil, if you can tell us exactly when you’re going to die, I can actually compute the optimum crossover. But not knowing that, it makes it a little more difficult. But I would say this, Phil, if your distribution rate right now is 2% to 3% of your portfolio, now’s the time. In fact, you probably could have done it a little earlier. I think if you’re, I’m going to say 65, and the reason I picked that is because you’re Medicare age, so you got most of your health insurance covered, if you’ve got a 4% distribution rate or less, I think it could work. Unless you tell me that I’m ultra-healthy and I’m going to live to 105, then you might want to work a little bit longer. But that’s such a hard thing because no one knows exactly how long they’re going to live.

Joe: So you would be strictly financial, of course.

Al: I think that’s what he’s asking.

Joe: So your opinion is based on a distribution rate. So that’s how you would find the optimal. And what that means is what percentage that you’re taking out of the portfolio each year. So Phil here says, I can pull 2% or 3% out. Anything under 4% at 70 years old, you say is good.

Al: Is good. Yeah, I think- I actually think you could do- I think you can even do 4% at 65. And that might be kind of pushing the envelope, maybe. because we’re living longer. But that’s to me, that would be a rule of thumb. So if you’re 69 and it’s 2% or 3%, I think you’ve already missed it. I think you could have retired a little bit earlier.

Joe: But there’s a lot of assumptions you’re running there too. We would have to look at what the portfolio is. If it’s in one individual stock, you’d-

Al: If it’s in cash, then you’re going to run out.

Joe: Right.

Al: So you got to work till 77. This is general. You could mathematically compute it if we knew what the rate of return in your portfolio was and we knew how long you’re going to live, we could figure this out.

Joe: I think that’s what financial planning is, isn’t it? Is what he’s asking us. He wants us to do a financial plan in one answer.

Al: With a paragraph.

Joe: Yeah. Keep it short and free.

Al: So I’m going to say and you’re right, this isn’t advice. This is just an opinion. Just a discussion. But I would say my analysis and what little I know is, Phil, you can retire.

Joe: Yeah, I would agree with that. If you’re only pulling 2% or 3% of the portfolio, you’re 69. Maybe he’s still holding off on Social Security. If you take Social Security at age 70, then that rate of distribution would probably be lower. Even if he’s in ultra-great health, which I think he said he is.

Al: Sometimes I think- what about this one? Sometimes when you work longer, you’re more stimulated professionally, you actually live longer. So there’s not necessarily a direct correlation. And you work longer so you’re going to have less years in retirement.

Joe: Yeah, that’s true for some. Not for all. Hopefully that helps, Phil. Let’s see-

$13M Portfolio: Should We Convert $1M to Roth? (George, Ledbetter, TX)

Joe: We got “Howdy, Joe, Al and Andi, this is George from Texas. Ledbetter, Texas.”

Al: That’s a great town name, Ledbetter.

Hie: He’s a golf instructor. Ledbetter. “I look forward to each week’s YMYW. Because y’all are not only informative, but also darn hilarious. I often listen to you while I’m driving my orange… Kubota- Kubota tractor around the property. Or while lounging on the front porch with the warm breeze in my face and my faithful dog, Cletus, besides me. Hope this paints the resec- ”

Andi/Joe/Al: – requisite-

Joe: – picture.” Yes, it did.

Al: George, I got it, I can imagine.

Joe: I can. Just hair flowing.

Al: Yeah, right there with you.

Andi: And Cletus.

Al: So now I feel like I can answer a question.

Joe: Right?

Al: Yeah.

Joe: You’re with them, sitting on the porch, with George.

Al: I can just picture it.

Joe: “Here’s the situation, I’m 61 yo, married, 3 kids. Instead of a millennial seeking FIRE, I’m a baby boomer Texan who has already achieved FAHR, said with a drawl. FAHR- I don’t know, is that a drawl?- Financial Abundance Happily Retired. Net worth is $13,000,000, which includes $2,000,000 homestead; $3,000,000 taxable brokerage account; $1,000,000 cash; $2,000,000 of IRA; no kidding $5,000,000 in Roths.”

Al: Geez. He’s pretty good.

Joe: It’s pretty impressive, George. Just writes in to brag while he’s sitting on his porch with his dog, Cletus.

Al: What do you bet his name really isn’t George?

Joe: I could care less what his name is. “No single stocks, just globally diversified mutual funds and no debt, not even on the tractor.” Very cool. “The majority of the $5,000,000 Roth assets come from a one-time conversion of $650,000 back in 1998 when you could spread the tax over 4 years. Haven’t converted anything else until a couple of years ago because one, conversions were income limited until 2010; and two, we’ve been in the highest marginal tax rate since. Now that we are retired and have flexibility, it seems time to convert more. With our heavy cash position, we could convert to the 37% bracket and actually put that cash to good use. I’m thinking to convert $1,000,000 of our $2,000,000 qualified plans to Roth maybe over two years, leaving the remaining $1,000,000 to grow and then convert more slowly over time. Is the high one-time tax of $350,000 or $400,000 worth it before the IRAs grow even larger? Thanks.” All right, let’s unpack this a little bit. So thanks for the question, George. $5,000,000 in Roths from a $650,000 dollar conversion in 1998.

Al: Yeah, that’s pretty good.

Joe: Spread the tax over 5 years back then. I remember that. It was when I first got in the business.

Al: Were you working then? Or were you still in college?

Joe: 1998. That was my first year.

Al: First year. Got it.

Joe: I graduated in ’98.

Al: Got it.

Joe: First year in business. 1998.

Al: Got it. Very cool.

Joe: So OK, $650,000. And what rate of return is that? What did you buy? Apple?

Al: Well, if you figure it would have doubled twice, that would have been at $2,600,000, so it was more than 7%. We’ll put it that way.

Joe: So we’re missing a couple of things from George. He’s in the 37% tax bracket. He’s got $2,000,000 in qualified plans. Does he convert more? He’s retired. So but the only thing I’m curious about is, is his fixed income giving him the 37% tax bracket. Does he have other income? pensions? or defined comp? or deferred comp? to get in the 37% tax bracket? Was it the dividends? Is it real estate? What’s pushing him up to that bracket?

Al: I think what he’s saying, the way I read it, is if he does, if he converts $1,000,000 in two years, it’s $500,000 a year, that pushes him into the 37% bracket. Right?

Joe: OK, well, then maybe you’re reading it right.

Al: That’s what I’m thinking. And if that’s the question, should I convert- ? So I got an IRA of $2,000,000 and I want to convert $1,000,000 of it over the next two years. $500,000 this year. $500,000 next year-

Joe: He’s 60 years old. He’s got 10 years to convert the $2,000,000 out.

Al: Exactly. The highest you would probably go, assuming you’ve got almost no other income, is the 24% bracket. That’s a nice low bracket. And then instead of two years, maybe you do it 4, and pay much lower taxes. You don’t have to run a race in this. It’s a little bit more like a marathon. Do a little bit this year, a little bit next year, a little bit next year. And you end up in a much better situation.

Joe: I would- here’s what I would do. I would look at what fixed income sources George has. So I would look at what my pension is, if I have one, what my Social Security is, things like that. And then what’s his living expenses? Because he can have plenty of income from all other assets sources, right? So let’s say that $2,000,000 grows to $4,000,000. So that’s $80,000 roughly required minimum distribution once he reaches the appropriate age. So that $80,000 plus what other fixed income sources, what tax bracket is that going to be? Then you can back the numbers out that way to say, I wouldn’t want to convert anything higher than that tax bracket.

Al: And that is the best way to do it. What I’m suggesting is simplifying even more, saying I’m thinking with the assets that you have, 24% is a good bracket. So go all the way up to the top of that, which for a married couple is about, what, $300,000, $320,000? Somewhere in there.

Joe: It’s a big number.

Al: If your fixed income is $100,000 right now or whatever your income is, then do another $200,000. If you’re in fixed income is zero- but you can have some interest, dividends on the non-qual- so it’s not going to be zero. But anyway, you get the idea. As long as your taxable income- actually it’s $329,000. If it’s below $329,000 for 2021, 2 0 2 1, then you’re going to be in the 24% bracket or lower.

Whether you’re in your 60s, 50s, 40s or younger, decisions you make today will affect your financial security for years to come. Download “Cracking the Financial Code at Any Age,” a free guide that will walk you through financial strategies and actions to take in your 20’s, 30’s, 40’s and 50’s to overcome previous missteps and set yourself up for a more successful retirement. This is the companion guide to the YMYW TV episode on the same topic, and both are waiting for you in the podcast show notes at YourMoneyYourWealth.com. Just click the link in the description of today’s episode in your podcast app to get there. Spread the knowledge! Share this podcast with your friends, family and colleagues!

Should I Stop Investing for Retirement and Build Up Cash? (Kerry, KS)

Joe: “Hello YMYW crew. I’m 58 and plan to retire in 4 to 5 years. I have $760,000 in my retirement accounts, 401(k), IRA, Roth IRA, invested in 100% stock S&P 500. Only have $4000 in cash. No chickens.” That’s pretty good. “I have enough cash on hand to start retirement. Should I stop investing now, currently 50% of income, or about $15,000 per year, and build up my cash outside of the retirement accounts? Or should I continue investing and gradually transfer some equity holdings to cash inside my retirement accounts? If the latter, at what rate should I transfer? For example, if I should transfer $100,000, should I do it all at once? Or $20,000 a year over the next 5 years? How many years of expenses, minus any planned Social Security, should I have in cash when I start retirement? Appreciate your using my case to educate your audience since you cannot offer advice. Thanks.” OK, so what he is asking or she is asking-

Al: – he-

Joe: -he- well yeah, because Andi looked him up-

Al: And he gave us a little clue here.

Joe: – looked him up, Google Earth-

Al: He put Kerry (male).

Joe: This is his submission? Oh got it.

Al: So he actually wanted us to be clear.

Joe: Oh, thank you. Sorry, Kerry. So he’s 58. He plans to retire in 5 years. So he’s thinking, OK, I got everything in stock. When should he start transferring the money into a more conservative portfolio? He wants to retire in 5 years. The answer’s today, Kerry. He’s 58, wants to retire in 5 years. You’ve got enough to retire right now. He’s continued to save. But you want to start maneuvering your assets right now as if you’re going to retire tomorrow because you don’t want to wait until the day before you retire, because there could be a 20%, 30% correction in the overall market. And then now you’re down $200,000-some odd. And guess what? You can’t retire. So if you’re ready to retire in 5  years, I look at it as in that 5 year zone, that’s when you really want to set your portfolio up appropriately. How many years of cash do you need? I wouldn’t say cash. I’d say safer investments. And maybe you look at outside of like, what is your distributions? What you need to think of. And I think Kerry’s doing that. He’s like outside of my Social Security, how much money that I need for my portfolio? How much of that shortfall should be in cash? I would say 6 years to 10 years, depending on your risk tolerance. But he’s got a huge appetite for risk. So I might even say 5 or less, 3 to 5 years, not in cash though. I would go bonds, short-term bonds, treasuries, government, things like that, where you can get maybe a little bit higher expected return. Buy the mutual fund, short duration. So you have the liquidity and then maybe you keep a year in cash.

Al: Yeah, I agree with that. So bond funds. As opposed to a bond. And you’re right, bonds will pay more than cash and they give you some downside protection. What I mean by that is when markets correct, people- there’s a flight to safety and people tend to invest more in bonds, which often have them increase a little bit, while stocks are going down, helps kind of cushion the blow a little bit. And I would say exactly the same as you. Once you know what the portfolio should be, you make that change now. You don’t have to just ease into this.

Joe: Yeah, don’t ease into it.

Al: You make it now and you want to retire 4 or 5 years from now. You are pretty aggressive. We’re going by that because you’re 100% stocks. That sounds aggressive. So maybe even like 3 years of fixed income for the next-  just start in that direction and then so that you have- So if the market’s down when you retire, you’re not caught-

Joe: You’re not caught with your pants down. What’s that saying? Warren Buffett. You know, when the tide is out, you see who’s naked.

Al: Yes. Said differently, but that’s the gist of it.

Should I Save to Deferred Comp Plan? (Adam, Franklin, TN)

Joe: “Hello. YMYW- oh, YMMW- ” “Hello YMMW-”

Al: Your Money, Money Wealth.

Joe: “- Your money- ”

Andi: Your Money, My Wealth!

Joe: My wealth. “- fantastic trio. Thanks for your continued outstanding service to us all who lean on your podcast for great advice and a few good laughs. I’ve written in before, so I’ll spare you all the typical pet/car details and get right to my question. I’m 47 years old, married, substantial savings in both pre-tax $1,500,000 and a taxable brokerage account $3,500,000, so in good shape for general retirement, maxing out tax-deferred options, 401(k), HSA, etc. as I have concluded that current tax deduction at my income level are more appropriate than Roth. However, I have a bit of a curveball being thrown into the mix and I could use your help thinking it through.”  OK, Adam. From Franklin, Tennessee. “I have access to a deferred comp plan through my employer, a massive insurance company, that allows me to defer as much of my salary bonus as I want and avoid taxes on it now, but rather pay the taxes on the income when I draw it out. The pay-out options are pretty flexible. I can choose to begin drawing it out in a certain age or the year following my separation, whenever that is, likely 55. And I could choose 5, 10, 15 year payout options. I do not have a traditional pension. So I was thinking that this might be a good opportunity to move some income out of my current tax bracket, 32%, and into a likely lower tax bracket, given my lack of pension income. At 55, there would leave me 10 years or so I might start drawing Social Security. So if I defer, let’s say $500,000 between now and age 55, I would be drawing roughly $5000 per year from 55 to 65. And on top of the roughly $50,000 of dividends and interest that would put my annual taxable income right around $100,000, which would leave me in a much better tax bracket than my current. I can also invest, on paper at least, since there are no true investments, but rather book entries that the company carries as a liability- ” Wow, this guy’s technical.

Al: He is.

Joe: Franklin. Look at the big brain on Frank. Or Adam. Whatever the hell the name is.

Al: I think it’s Adam.

Joe: “- these deferred amounts into the same investment options as my 401(k), good, low expense, stocks, bonds, funds. The other factor that is pushing me in this direction is that I think I’ll have a hard time drawing from my investment assets after retirement because I’m a saver by nature. So my inclination would be to live dirt cheap since I would have no income. If I go this route with a deferred comp, that would make me feel much more like a normal income stream to me. And I think I would be much less of a pain in the rear for my wife.” Forget about it. You are a big pain in the ass. Oh gosh.

Al: That answers your question. Do what your wife wants because you want to stay married. You’ll live longer. And be happier.

Joe: ” –  and much more likely to continue our current lifestyle spending, which is not extravagant in any way.” Of course, it’s not extravagant. I mean, you got- you’re 47 years old. You got $5,000,000. Liquid.

Al: You did something well.

Joe: So here’s what I’m thinking. I spend about $8000 a year and my wife is about to kill me.

Al: And she’s not OK with that. Believe it or not.

Joe: I wonder if Adam Franklin from Tennessee or Adam from Franklin, Tennessee, his wife, knows what he’s got stashed away for their retirement.

Al: Ooo, that’s a good question.

Joe: I guarantee it’s-

Al: I’m thinking it’s not- she doesn’t quite follow it like he does.

Joe: Yes. I mean, he watches it to the penny. You could tell he’s got a big brain.

Al: He’s got all the strategies down.

Joe: He’s tight. You know, they’re really not mutual funds. It’s just a journal entry of a debt obligation to the company.

Andi: Has he told us yet whether he’s an engineer?

Joe: I don’t know. He’s probably an underwriter.

Al: An underwriter, probably for the insurance company.

Joe: Exactly.

Al: Yeah. So he knows numbers.

Joe: Yes. So the question is, does he do the deferred comp? I would say, well, here’s a strategy that I’m going to throw out there, Adam. Is there’s pros and cons of deferred comp and let’s not – oh, we could talk about the pros and cons of the deferred comp later, but let’s just talk about putting money in a pre-tax environment now by deferring it to a later date. Does that make sense at age 45? And I think the answer’s yes. A couple of reasons is you have zero money in Roth and you think that you’re- you’re in a high tax bracket right now to put any money in a Roth. You have $3,500,000 into a brokerage account. Is there a way that you can start moving some of this $1,500,000 that you have in a pre-tax account into a Roth account at a reasonable tax bracket? And the answer is maybe. We’ve utilized this strategy in the past is that we would have individuals max out their deferred comp for a year or two. So let’s say Adam makes $500,000 a year. We’d say, you know what, Adam put $500,000  in the deferred comp plan this year. Let it go. And we have a 15 year payout on that, $500,000, and now his income is zero. So then what do you do with that income of zero? You do a Roth conversion to the top of the 37% tax bracket or 32% tax bracket that he’s in already. So it’s just basically taking the money, a large dollar figure and putting it into the Roth IRA and having that compound for him, 100% tax-free.

Al: OK, I like it. I think I’m going to tackle it just slightly different. But I think the same analysis. I like the deferred comp plan, Adam, probably in your situation for a few reasons. One is you’re in a very high tax bracket. So basically you’re allowed to defer as much of your compensation probably as you want to, and then get it out over a 5 year period, 10 year period, 15 year period in the future. You’ve already identified the problem here. The problem is it’s not really a retirement account, per se. It’s a liability of the company. If the company goes bankrupt, then you’re out of luck. It’s- you just gave away your compensation. But it’s an insurance company. And I’m taking your word for it that the insurance company is strong. So probably in 7 years when it’s built up and could have pay out another10 years, a lot of insurance companies are pretty strong. That’s not a guarantee. But that’s your risk. The fact that it sounds like it’s a pretty strong company and you’re 47, not 27. So you’re getting close to retiring. If you weren’t going to retire till 67, I would say I don’t know, 20 years of deferred comp and then another 10, 15 years payout, is that insurance company going to be strong for 35 years? I don’t know. There’s a little bit more risk there. But in this particular case, I kind of like it. And then to me, the ancillary part, as you just mentioned, Joe, is if you defer enough to get in a low enough tax bracket, then you can actually start converting some of the $1,500,000 and put yourself in a much better spot. So, yeah, I like it.

Joe: Because one of the things that we see is that he’s fully funding the $1,500,000. He’s going to continue to fully fund that over the next 10 years. He’s going to retire at 55. He could take the 401(k) out at age 55, but I doubt he would do that. He’s scrimping pennies. He doesn’t want to touch the brokerage account because he’s a saver. The biggest problem with savers is that they’re terrible spenders.

Al: I know. They can’t spend. And so I kind of like the idea of having an income stream so that your wife won’t kill you because-

Joe: He’s forcing himself to spend. That’s how crazy this guy is. Is that great savers are awful spenders. But I’m telling you this, Adam. Why are you saving all this money if you’re never going to spend it? Do you want to give it to the government? You have to start taking a look at there’s a reason why you’re saving this capital and you can enjoy it. It’s OK. But I guarantee you, he’s the type that he will get anxiety. He will feel bad if he splurges on anything.

Al: Yeah, we’ve seen it a lot. And it’s very hard to change that mentality when you’ve got plenty to all of a sudden start spending.

Joe: Right. It will never happen.

Al: Yeah, probably not. I should mention the deferred comp plans are not very common. So if you’re listening, thinking, OK, I’ll see what I can do at my company, it’s unlikely that you have a deferred plan at your company. But if you do and it’s a strong company and you’re close to retirement and you’re in a high tax bracket, yeah, I’m all for it.

You know why we call Joe and Big Al’s answers on the podcast “spitball analyses” and “suggestions”? It’s because are probably a lot more moving parts to your financial situation that the fellas simply don’t know, and wouldn’t know with out a much more in-depth analysis. Decisions that impact how and where you save, when you retire, how much you spend in retirement, how much tax you pay, and how you look after your family shouldn’t be left to a few minutes of spitball analysis on a podcast. This is the rest of your life we’re talking about here! Before you move forward with just a spitball idea of retirement, why not schedule a thorough one-on-one financial assessment with a CERTIFIED FINANCIAL PLANNER professional on Joe and Big Al’s team at Pure Financial Advisors? There is no cost and no obligation. Pure Financial is a fee-only fiduciary registered investment advisor, and they don’t sell any products. Pure is based in Southern California but can create a comprehensive financial plan for you no matter where you are in the country. Visit YourMoneyYourWealth.com and click Get an Assessment to schedule your free financial assessment at a date and time that’s convenient for you.

Is Participating in My Employee Stock Purchase Plan Putting Too Many Eggs in One Basket? (Mike, DC)

Joe: Mike from D.C. writes in. “Hey, Joe and Al. Big fan of the show, you guys helped me answer a backdoor Roth IRA question about 10 months ago. And I was so happy to hear it on your podcast. I’m currently working for an employer that gave me $88,000 in RSUs vested over a 4 year time period, 25% a year. Basis, $205,000 and I’m contributing 10% to my pre-tax 401(k) and 5% to my after-tax. The company just opened up the offering period for an ESPP plan at a 15% discount. I believe the stock price is a little over-valued, so hesitant on participating. Do you guys recommend investing in these plans? Or is that too many eggs in one basket? Or should I just focus on maxing out my 401(k) Roth and invest in ETFs with the money that would be going to the ESPP. Keep up the great work. Thanks, Mike from D.C..” So Employee Stock Purchase Plan is what he’s referring to.

Al: As well as Restricted Stock Units. So let’s talk about the acronyms. RSU, Restricted Stock Units; ESPP, Employee Stock Purchase Plan.

Joe: RSUs are grants, they’re stock grants that employees get if they do a good job. Mike must be killing it.

Al: Yeah. So typically you get a grant and at the point of the grant it doesn’t vest. So it’s not taxable. And in this particular case, it vests over 4 years. So 25% of that RSU, restricted stock unit, becomes taxable when it vests. But it vests actually at the value on that day, not at the original grant date. So in some cases where people get restricted stock units, they actually do- I’m going to get technical now- they file an 83B election, which basically says I don’t want to pay the tax in the future.

Joe: I just want to pay the tax on it.

Al: I want to pay it now because I think the stock’s going up. And so you’re allowed to do that within 30 days of receiving that grant. So for those of you that do work for high tech companies, which this, ADBE, is a high tech company.

Andi: It’s Adobe.

Al: Correct. So that’s a common practice. Now, in some cases, companies require you to pay for RSUs, but in many cases they don’t. So that’s that one. But that wasn’t the question. The question was, should I do the ESPP? And generally these are stock plans where you can buy company stock at a discount. You can get them at a 15% discount. Adobe’s a public company. Is that a good deal? Maybe. Now if you’re not terribly bullish on the company, then maybe it isn’t that good. But that’s the idea. It’s to entice you to buy in at a discount the company’s stock. So you’re basically, you buy it for $100, but it’s really worth $115 or whatever the math is. And then so you’ve got some instant equity. But if you don’t feel that good about the future, then you wouldn’t necessarily do that. So I’m not going to evaluate whether Adobe’s a good buy or not. That’s not what we do. We like to be invested in the entire market. But I will say, Mike, if you’re a little nervous about how the company- how it’s- maybe it’s heavily- it’s highly valued, and you’ve already got RSUs in the company, you’ve got a salary in the company. You’ve got a lot of eggs in one basket. So maybe you just skip it, maybe just invest on your own in the 401(k).

Joe: I would look at what the rules are in regards to what the sell restrictions are. In most cases, you’re going to have to hold the stock for a certain period of time because you’re buying it at a discount. So you could just buy it and sell it and pocket the cash the next day.

Al: You could, but if it’s more than- if it’s less than a year, it’s ordinary.

Joe: True, but you’re still- it’s free money.

Al: It’s free money. So yeah. If you can, if you’re able to.

Joe: But I’m not familiar with their executive plan. But I agree with you, Mike. I agree with you, Alan, is that he’s got a salary there. He’s got RSUs there. Does he want to continue to have more of his nest egg invested within that overall company?

Al: I wouldn’t be surprised if he has company stock in the 401(k). Yeah, that’s common, too.

Joe: Sure. You know, these are really great plans, though. Because these are huge organizations that are trying to make the exact sort management or, you know, whatever level of, you know, authority that Mike sits, to feel like an owner. To get more skin in the game, so they offer these ESPP plans, hey buy our stock, have more wealth in the stock because you’re going to care more about what the company does. You’re not going to douche around because your wealth is- I don’t know if that’s a word.

Al: Is that a word? I followed what you meant.

Joe: Yeah. I was going to say something else, but I decided to clean it up at the last second.

Al: That was the clean version?

Joe: That was.

Al: I’d hate to see the bad one.

Andi: Let’s say mess around.

Joe: Mess around. That’s what I meant to say. Is now it’s like my wealth is correlated to the productivity of the overall organization. So of course, I’m going to do everything that I can to be as efficient as I can, work as hard as I can, try to be the best employee because my wealth is directly tied to the overall performance of the overall company. So I like that because there’s alignment there. But then you also have to look at diversification. You have to look- even if it’s overvalued today. I mean, you’ve got to look at the long-term here. You’re buying it at a discount for the long term. So hopefully that answers your question. One thing I do have is why are you putting in 5% after-tax and 10% pre- or maybe you’re maxing your plan out at 10%?

Al: Maybe.

Joe: Could be?

Al: Maybe because he’s got a high salary.

Joe: Maybe he’s making $200,000 a year, 10% is $25,000.

Al: And he wants to get more in which then he can later roll into a Roth.

Joe: I would do more after-tax. So the super garage door Mike from D.C.. So instead of going the ESPP plan, I would put as much as I can in the after- tax and convert that to a Roth. That’s what I would do. And if I still have extra cash left over and if I don’t have any other non-qual, I would do the ESPP, hold on to it for a couple of years, then sell and diversify. Because then that would build all three pools. Because when you’re looking at building wealth, you want to make sure that you have your tax-deferred pool or the IRA 401(k), you have your tax-free, which is the Roth, and then you have your taxable or brokerage account. This would accomplish all three.

Al: Well, there you go. So I will say that in many cases with restricted stock units, people end up selling them as soon as they vest because they can’t afford to pay the tax money on what they’re worth. So that’s a way to build up non-qualified accounts. ESPP would be another one. I don’t know. I’m all over ESPP if I’m bullish on the company, I’m less all over it if I’m not as bullish. So that’s my feeling.

Joe: Yeah, because we’re not big fans of holding individual stocks I guess.

Al: And that’s the risk in that. And of course, you heard this 1,000,000 times. Don’t put all your eggs in one basket. The truth is, if you find the right basket, put them all in.

Joe: Put every damn egg and borrow eggs and steal eggs and put them in that basket.

Al: Here’s the problem. You don’t know what the right basket is until time happens and then there’s clarity. But right now and looking towards the future, you never-

Joe: The wealthiest people in this country have put all of their eggs in one basket-

Al: – and got the right basket. Exactly. So diversification-

Joe: – is not going to make you ultra-wealthy.

Al: No, it helps you keep your wealth. And it’s a great investment strategy if you don’t have or don’t think you know the right basket. But a lot of times people think they have the right basket and it goes up in flames.

Joe: That’s right. They have a bad basket.

How Should We Pay for Long-Term Care Insurance? (Mike, AR)

Joe: We got Mike from Arkansas. “Hi, guys. Look forward to your podcast each week.” Of course you do. You live in Arkansas.

Al: What does that mean?

Andi: What are you implying, Joe?

Joe: Nothing. “I know you love- ” short-

Al: – Brevity –

Joe: Short. Thank you. Something short.

Al: You know what the word means, just don’t know how to pronounce it.

Joe: Exactly.

Al: Got it.

Joe: I’m tired, Al. I’m tired.

Al: And we haven’t even got the first sentence out.

Joe: I know. It’s terrible. “So right to the point. I retired 1-31-21. My wife has been on disability for the past 10 years. This coming August I will turn 63 and she will turn 60. My wife is on disability because of MS. Her MS is progressive and we expect in the future she will require long-term care. She was diagnosed in her mid-40s, but before we looked into the LTC insurance and of course now she’s uninsurable. Here’s a rundown of the assets- ” Let’s see, they got healthy balances here. Mike’s got $1,700,000; wife’s got $800,000, that’s 401(k)s. IRAs another $100,000 for Mike; another $20,000 for the Mrs.. Roth IRAs, Mike’s got $80,000; wife’s got $60,275 in cash and $1,600,000 in non-qualified brokerage account.

Al: So I added it up, it’s $4,600,000.

Joe: Thank you, Al. That’s pretty good.

Al: You’re very welcome.

Joe: Johnny on the spot there. “I plan to start Social Security January 2022; wife is getting Social Security disability now and combined it will be $57,000 per year. We have no debt and the annual expenses are around $55,000 a year. My wife qualifies for Medicare and switched to that this year prior to my retirement. When my COBRA runs out, I will have a year on the exchange before I join Medicare. My question is about paying for long-term care. Since we have about 60% of our assets in pre-tax accounts, if I draw funds from those to pay for long-term care and we deduct the cost of care as a medical expense? or can we? That offset would help somewhat with the tax hit we will have as draw on those funds. I’ve read that long-term care cost is deductible if you are there for medical reasons. I don’t know the particulars, but feel in our situation it will qualify. The average cost for care in our area is about $75,000 per year. I ran some calculations and it looks like we won’t run out of money. Just wondering what the best strategies are to deal with this situation. Thanks, Mike. I live in Arkansas. Drive a 2019 Outback. No pets.” Answer the question, Al. Let’s talk about long-term care.

Al: OK, so it’s a great question and it’s actually one I’m surprised it doesn’t come up more. So medical expenses are obviously deductible on your tax return as long as they’re over 7.5% of your adjusted gross income. That’s the current rule. And when it comes to long-term care, if it’s a requirement for medical reasons, generally from a doctor’s letter or something like that, but then it sort of depends upon the type of care. And there’s different levels. There’s independent living. There’s assisted living. There’s like skilled nursing or nursing homes or whatever you want to call it, that the skilled nursing undoubtedly would be 100% deductible. The other two, there may be partial, but I’m guessing because he’s asking she would only go if she really needed it. So it would be skilled nursing and likely it would be fully deductible. I guess if you go-

Joe: Would it matter if she went to a facility or she stayed at home?

Al: It doesn’t really matter as long as it’s for medical purposes.

Joe: The care’s the same.

Al: Exactly. So the official answer is that you can’t do two out of X number of living- like, for example, you can’t-

Joe: – activities of daily living.

Al: Thank you. So like you have trouble eating or you have trouble bathing or you have trouble dressing, things like that.

Joe: Transferring-

Al: Transferring-

Andi: Toileting-

Joe: Toileting-

Al: Toileting. I was going to avoid that one. But- all good.

Joe: Got it.

Andi: It’s one of the 6 activities.

Al: You’re right. You’re right.

Joe: Is it 6 or 8?

Al:  I don’t know. But I think if you can’t do two of them, you’re-

Joe: – you’re done.

Al: You’re in for the deduction.

Joe: Got it. But we would suggest that Mike would withdraw from the retirement accounts.

Al: For that purpose, sure.

Joe: For sure.

Al: Because it’s deductible in all likelihood. If you really want to know Mike for sure, you go to IRS publication 502, which is riveting material on this. But just if you want to know.


More riveting material on the movie Castaway, Adam from Franklin, Tennessee, email formatting, and Arkansas gold and baseball in the Derails. 

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