Retirement nest eggs have become bigger, but fixed income rates of return are low. How do you create a cash flow? What strategy will allow your investment portfolio to provide income throughout your retirement? Joe and Big Al explain what matters when tailoring your own personal retirement income strategy. Plus, determining in which type of accounts you should have your retirement savings, from where you should withdraw your required minimum distributions, and whether any of it will matter once the robots take over.
- (00:50) Devising a Retirement Income Strategy
- (11:56) Creating Cash Flow in Retirement
- (21:58) Americans’ Nest Eggs Have Become Bigger (Fidelity)
- (29:15) Will Joe Be Replaced by Joe-Bot?
- (37:02) Listener Question: Should My RMD Come from My CD or My Aggressive Funds, and Should I Transfer My 401(K) to a Roth?
I could’ve just said, “you want to have a globally diversified portfolio. You want to look at a total return approach, and then you want to just take 4% out of that total return, and hopefully, over the time, you get 6% and then rebalance. But it’s more to it than that! I think that just sounds generic. – Joe Anderson, CFP®, Your Money Your Wealth
Welcome to 2018! Retirement nest eggs have become bigger, but fixed income rates of return are low. What strategy will allow your investment portfolio to provide income throughout your retirement? Today on Your Money, Your Wealth, Joe and Big Al explain what matters when tailoring your own personal retirement income strategy. Plus, determining in which type of accounts you should have your retirement savings, from where you should withdraw your required minimum distributions, and whether any of it will matter once the robots take over. Let’s find out, here are Joe Anderson, CFP® and Big Al Clopine, CPA.
:50 – Devising a Retirement Income Strategy
AC: One of our listeners asked me this earlier this week, it was kind of like, “well, I’m getting close to retirement, and I want to be able to devise some kind of income strategy to last through my retirement.” And this gentleman was probably in his mid to late 60s and retiring in a year or two. And so the question, basically, was, how in the heck do you devise an investment portfolio to be able to do that nowadays, given the fact that fixed income, the rates of return are very low? And so do you kind of focus there, or do you go for high dividend paying stocks? Or how do you create a cash flow?
JA: Right. We’re also getting a lot of questions about U.S. stocks. All-time highs. High valuations. Do I wait, do I stay in cash? But bonds, interest rates are on the rise too?
AC: Yeah, so aren’t they risky also?
JA: Maybe I just sit on the sidelines? There’s been a lot of you that have sat on the sidelines, probably since before the election. Because there was some volatility going into the election. I think most people thought someone was going to win versus another, and it’s OK, well, let’s just kind of hold off and see how the dust settles. And we’ve had a pretty good run over the last 18 months.
AC: So is it good enough? Should we get out now?
JA: Right, I can’t get it in now, because I’ve been sitting in cash for 18 months. So what the heck do you do with your money, given the environment that we’re in? The simple, real quick answer to all of this is that you need to be invested right now, today, because your goals are not necessarily – unless you need the money tomorrow, for a new house or a new car. That’s cash reserves. But if we’re just talking retirement, and I think that was the question. I’m in my 60s. How do I devise a retirement income strategy? Well, first of all, you need to be fully invested. You cannot time markets, it’s very, very challenging and difficult to do. The best, the smartest people in finance have a very challenging time of timing. What timing is, is that I think now the coast is clear. Now it’s safe to get into the market. There’s never a green light that says “now it’s time to go.” Because as soon as you feel that it is the appropriate time to get in, guess what? Something’s going to happen and the market will blow up. And then as soon as you feel that wow, this is too nice, oh the markets are too high. Guess what, they’re going to continue to increase on you. So no matter what decision, it’s Murphy’s Law. So if we could just bypass that, because that’s really what the question is.
AC: Yeah that is the question, and the and part of that, Joe, is sometimes you get out of the market – this happened to a number of people that I talked to in 2008 – they got out of the market, and the market crashed, and they patted for themselves on the back like they’re as smart as can be.
JA: Right. But they never got back in, or they got back in in 2014.
AC: Exactly, yeah. They basically missed probably the biggest bull run in our lifetime. And the thing is, if you had a globally diversified portfolio, and you were rebalancing, meaning that when the market went down, you actually took some of your bond money, which was stable, and you reinvested that in stocks while they were lower, your recovery time wasn’t that much – it might have been a year and a half, it might have been two years. And that was the worst recession we’ve had since the Great Depression.
JA: So, let’s talk about a few different things. So we got high valuations is what a lot of experts are saying.
AC: Sure. Which I agree with.
JA: So you’re saying, OK markets are at an all-time high. Well sure, if you look at the Dow, you look at the S&P. OK, well yeah they are at a level that they’ve never been before.
AC: Right, if you look at the CAPE ratio and price to earnings and all of these.
JA: Right. So OK let’s look at the CAPE ratio, the CAPE10. So that’s the cyclical average price-earnings ratio over 10 years. Schillers. I don’t know where that’s at – right around 17, 18?
AC: I don’t know. I just know it’s higher than is normal or typical.
JA: So you think about that, if you’re using that as a matrix, you say, OK this is a lot higher, the price-earnings ratio over the last 10 years on average, is a lot higher than it has been before. So is that an indicator for me to get out? Because I think that’s tactical investing. You look at that and say, OK well that’s a good time for me to get out of the overall markets.
AC: But you think about Robert Shiller, two years ago, he was saying it’s too high and get out – and we’ve had a great run since then.
JA: Sure. But let’s think about this logically. The markets, these PE ratios, if you go back to 1928 or whatever when they started taking really good stats, data. What would you agree with this? OK so this is coming from Larry Swedroe, our good friend: If you look today, versus maybe 50 years ago, or 30 years ago, or even 100 years ago. Is it safer to invest today than it was back then, in regards to legislation? Like you have the S.E.C. You have more people investing than the overall markets – it’s not the Wild, Wild West.
AC: Yeah that’s true. And you’ve got more safeguards and security. And of course, it’s never foolproof, and we know that the market can get overblown, and it does correct and we expect it to correct. And as a matter of fact, Joe, that’s really part of this whole thing about investing – the trade-off for getting a higher rate of return is you know it’s going to go up and down, more than you would like to, but that’s what you put up with. And as far as how much you have in the market, and I’m talking stock at this point, versus bonds, which is more safe, the percentage of stocks versus bonds, well that that depends upon your own goals and your ability to handle the risk, because if you’re the kind of person that, if you’re going to lose 20%, you just want to completely get out, then maybe you have too much allocated to stock.
JA: But that’s allocation – let’s just talk fundamentals of just the overall markets. Because people say it’s overvalued. And what are they looking at as a metric of overvalued? And you talked about the Shiller CAPE10. OK, so then what I’m looking at doing, or what I’ve studied, is to say OK, well what’s different today than where it was in the past? Things are completely different today than they were in the past. One is that I think that it’s a safer environment to invest. If I invested 50 years ago, you didn’t have billions of dollars trading hands every single day. So with that, more people are actually investing. The birth of the 401(k) plan. There’s a lot more individual investors playing in the overall market, or investing in the individual markets. If you look at the 24 trillion in retirement accounts, IRAs, 401(k)s, 403(b)s, TSP. Before it was just institutional pension money. So you have a lot more players in the game. You have a lot more dollars trading hands. Because of that, that’s creating a lot more demand, and what has happened to pricing, when it comes to bid-ask spreads, or to just the cost of the transaction has gone down significantly. So if my cost to buy a stock or a mutual fund managers cost to buy a stock, or for me to actually buy a mutual fund, you could go to Schwab and buy an index fund for almost nothing. So that cost is very, very low. So what happens to your overall expected rate of return?
AC: You mean with a lower cost? It goes up because there’s less cost, there’s less drag.
JA: So that’s going to increase. So if you look at, now you have a little bit more regulation that’s a little bit safer. There are a lot more players involved. The cost of doing business is a little bit lower. So that’s going to increase expected return. In today’s environment itself, interest rates are very, very low. Companies are profitable. There’s a lot of cash in companies. And what are they doing with that cash? They’re buying their stock back. If I’m buying my stock back, that’s creating what to the stock price?
AC: Yeah, it goes up.
JA: It’s increasing the stock price as well.
AC: And the reason that happens is that the value of the company is the same. But now you have fewer shares, so the price per share goes up.
JA: Right. And there are two sides of that coin. Because some people say they don’t like stock buybacks because all it’s doing is increasing the CEOs and the executives’ bonuses because they might get paid on earnings per share. Well, if the company is buying their stock back, so if I have a lot more shares outstanding that’s diluting, but if I buy back, so then your earnings per shares are going to go up, even if I didn’t do anything to increase my bottom line. So there are different things going on in the overall environment that are causing stocks to increase. Just because of nature. I could be way off base, some economist is probably saying, “Anderson you’re an idiot.” But I think when you look at this it seems reasonable to me and true. Yeah, are some companies overvalued? Yeah, but how do you profit from it? That’s the question. If you know that the company is overvalued, do you think someone else might know that it might be overvalued as well? The answer is probably yes. So it’s already priced in that particular stock.
AC: So as you’re saying, the market is bigger – more and more people are buying and selling. Plus with the Internet, there’s a lot more information out there. And so the market becomes a lot more accurate gauge of today’s true value. Now, something could happen tomorrow that can change everyone’s perception. And that’s the unpredictable nature of the market. But today’s pricing is fair, based upon everything that’s known today.
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11:56 – Creating Cash Flow in Retirement
AC: So Joe, if we go back to the question that I got from a listener, and a very genuine question. Mid to late 60s have a lump sum really close to retirement. How do I create a cash flow, because fixed income isn’t paying very much? Bonds interest rates are low. CD rates are low. So do I go to high dividend paying stocks, or is there another way, or how should I go about this?
JA: Well I think a lot of times, people will look at yield to create income, and dividend-paying stocks sound like a good alternative. And let’s just explain what a dividend is. You have a company that is profitable. The goal is to create some profits. And if you own a share of stock, you are an owner of that particular company. A fractional owner of XYZ Company, and some companies they take their profits, and they reinvest those profits back into the company for growth.
AC: Right. Like Apple does that.
JA: Sure. And you have other companies that will distribute some of the profits to the shareholders, to the other owners of that company, in a form of a dividend. It’s just called a dividend. So they’re just distributing the profits from the bottom line after all salaries are paid, all expenses are paid, all debts are paid, and everything else, and what’s left is, we have X amount of excess cash. Let’s keep a little bit in the reserves. Then we’re going to issue a dividend of XYZ cash flow, and then you get a dividend.
AC: So the profits go out to the owners, and you happen to be an owner because you own stock in the company.
JA: Right. And it’s great. And then there are strategies that people hear, like well there’s some companies that pay very high dividends. Some companies pay zero dividends. Some companies – I’ve never heard of going to a low dividend paying strategy. But a lot of this is marketing too and sales tactics. But all they’re doing is when they’re distributing cash, what happens to the stock price? It goes down by the amount of the dividend. Which people do not understand.
AC: They don’t. So let’s explain that, because the value of the company is based upon future profits, current profits, current assets, and current assets include cash. And so when you have a big pile of cash, and you give it to the owners, now the company has less in assets, so now it’s worth less, and the stock actually does go down the next day. Now, some of you are going to be saying, but no, because I got a dividend once and the stock went up. Well, that’s because the stock itself would have gone up anyway, just because of market factors. But if the stock was going to be flat, as soon as they pay a dividend, the stock price goes down to reflect that difference.
JA: You put the company in a bubble.
AC: Yes. So it won’t go up or down.
JA: It won’t go up or down. It’s in a bubble. It’s a ten dollar a share stock. They give a dollar dividend. That stock price will go down to $9 a share.
AC: Right. That’s right mathematics of it.
JA: Yes. And so it has to happen.
AC: And it does happen.
JA: But what people get confused on is like you said, Al. It’s like well no, that doesn’t happen to my stock because I got a dividend and my stock price went up. It’s great. I get growth and dividends. Well, let’s say you’re $10 a share, it gives you a dollar dividend, and then all of a sudden the stock price went up to $11 a share. If they didn’t give you the dividend, it would’ve went to $12 a share. It would’ve gone up even more.
AC: Yes, that’s correct. That’s what’s it’s hard for people to realize.
JA: Because stocks are volatile. But people equate the stock dividend to a coupon payment with a bond.
AC: I agree. Yes.
JA: “I want some high coupons in my bonds and high dividend paying stocks. I’m just going to live off the dividends and the interest, never touch the principal.” That’s how people invested 40 years ago. And I think now, the baby boomers, where do you think most baby boomers learned about investing, or about a lot of personal finance? From their parents or their loved ones, or someone that they trusted. Initially. I’m sure your father was big into dividend paying stock. “Well look at the dividend.” My grandfather worked for GE.
AC: He still has – he’s got utility stock and a lot of safety, and that was a great way to do it. But the baby boomers are confused, because now that the fixed income is so low, and it’s hard to find good dividend-paying stocks –
JA: Right, because back then you had maybe an average yield, or a coupon, or an interest payment from a bond, that would pay you 5 or 6%. And then you get some dividends that will pay you 3 to 6%. “Hey, this is really nice, I got a nice cash flow. I don’t have to touch my principal, and the principal I can pass off to the kids and just live off the income.” And then it’s called income, and then people need income. So they’re getting things completely confused.
AC: Right. So what’s the right way to do it then? You only got three minutes.
JA: I will get there. You look at bonds…
AC: (laughs) this is a long explanation.
JA: Well I think it’s – (laughs) I could’ve just said, “you want to have a globally diversified portfolio. You want to look at a total return approach, and then you want to just take 4% out of that total return, and hopefully, over the time, you get 6% and then rebalance. But it’s more to it than that! I think that just sounds generic. That just sounds like any Tom, Dick, and Harry says, “Oh yeah, you need a total return, and you get a globally diversified” – right. But you’ve got to get a little bit more meat, Al. You’ve got to put a precedent down that this is why you want to do this strategy. So let me get back – bond coupon. A bond is a note. It’s a loan. So I’m going to lend Alan $100,000. I’m going to charge him 5% – every year, he has to pay me $5,000 for the use of that $100,000. At the end of the loan, I get my $100,000 back. That’s a note. That’s a bond.
AC: A bond is like a loan.
JA: It is a loan. A stock dividend is not a loan, you own the damn company, and they’re distributing profits back to you, or they’re distributing assets to you. So that stock price will go down by the amount of the dividend. It’s not a note. When I get my coupon payment from you Alan, it’s not now my bond is only worth $95,000 because you paid me five. No, that’s exactly what would happen with the stock. But I’m not lending my money to the company. I’m trying to get more profits because I’m an owner.
AC: And of course the difference is, if I’ve got my company, and you gave me $100,000, I gotta pay you $5,000 a year. I have to pay that to you whether I’m profitable or not. That’s what a bond is.
JA: It’s a contract. I’m first in line when you started going shady.
AC: Now on the other hand if you came to me with your $100,000 and got stock in my company, and I didn’t make a profit, you don’t get a penny.
JA: Yeah. Zero.
AC: And you may not even get a penny when I make a bunch of money because I need to reinvest it in the future.
JA: Exactly. You’re growing. But my stock price is going to go up based on the valuation of your company.
AC: Right. That’s the tradeoff.
JA: And then let’s say you kill it, and you have billions of dollars of profit, but you never give me a dividend, my stock price is now through the roof. If I have the bond, I’m still stuck with the 5%. If you buy the bond and the company does very, very well, they’re not going to say, “we feel good, thanks for that loan. I’ll pay you 10.” (laughs) No, that’s not capitalism. So to create income in retirement, you have to understand all of the different ways that you can create retirement income, and then you have to check it off the list. Is this good or is this bad. What are the pros and the cons? If you truly understand every single strategy, then you can make the appropriate decision, given your situation. How we feel about it is that I don’t want to take a risk in just dividend paying stocks, because you’re leaving 60% of the stock universe off the table. So then you’re concentrated, you’re not diversified. I want to be globally diversified in many different areas around the globe. Small companies, large companies, value companies, growth companies. And my bonds, I’m not shooting for big coupons. I want that to be my safety valve. So I want to construct a portfolio that’s going to give me a certain target rate of return, based on what my cash flow needs are. So what is your income need? Mr whatever his name is. I need 20 grand from the portfolio. How much money do you got? Do you got $2 million? Do you need 20%? That’s pretty easy to do. But if you got $200,000, and you need $50,000, it’s not going to work. So it’s a lot more to it, but I think the problem with some of these shows, and I listen to a lot of them – we’re a really bad show. (laughs) Really bad show. But there are other shows that I think are even worse than ours. (laughs)
AC: (laughs) It’s a low bar in finance.
JA: Right? Because it’s like well, buy some index funds, you’re good. Come work with me. I’ll get ya a nice allocation.
AC: I’ve got the secret sauce.
JA: Charge you a point and a half, it’s all good. There’s my answer. (laughs)
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JA: Hey, what do you got there?
AC: I have, I guess, some good news. Americans’ nest eggs have become bigger. According to Fidelity, the average 401(k) balance is almost $100,000. Actually, $99,900.
JA: The average?
AC: Yeah, the average. Remember it’s been growing over the last few years. It used to be in the $50,000-$60,000 range. Now we’re up to 100.
JA: So what age group? All ages, or all plans that Fidelity manages?
AC: Yeah. All ages, all 401(k) is the Fidelity manages. So they take the total of all the 401(k)s, divided by the number of 401(k)s, to get an average. It includes younger people, obviously, that are just starting out. But a lot of young people, they actually don’t really take advantage of the 401(k)s, which we talked about on this phone – on this show. On this phone! (laughs) You’re listening to this podcast on your phone. Anyway, if you’re a millennial and your company has a 401(k), contribute to it, you’ll probably get a match. In other words, you put a dollar in, your company matches a dollar, at least contribute up to the match so you’re taking full advantage of that. But Joe, when you think about $100,000, if you were to retire today with a $100,000 401(k), what would that mean for you in terms of income that you could expect over your retirement?
JA: Not a lot. Depends on the age, but on average, what, $4,000 a year?
AC: Yes so that it’s the 4% rule. Which came about decades ago. So if you retire at 65, you take out 4% of your portfolio. That’s $4,000. Some people think 3% is a better number. But if you retire older, maybe it’s 5%, whatever, but that gives you kind of a rule of thumb. So you got $100,000, that’s going to give you $4,000 of spendable money for the rest of your retirement.
JA: From your liquid assets.
AC: Yeah, from your liquid assets. So that’s about what $300 a month, little more than $300 a month. Not too much.
JA: It’s frightening.
AC: Yeah. If that’s the average balance. But better than that is the average IRA balance. That’s $103,500.
JA: Huh. That’s interesting.
AC: Yeah, so those are higher still. And I’m not exactly sure why. It may be because some people are rolling their 401(k) to their IRA, which is something that you can do. Many people do, because they have too many retirement accounts, so they consolidate everything into an IRA. So it’s simpler to keep track of. And maybe they have more investment choices in their IRA, but Joe, there are also some reasons why you might actually want to keep it in the 401(k) if you’re retiring.
JA: Well yeah, there’s a few. Depends on what your overall goals are and what you’re trying to accomplish. I guess the big buzzword now is always the fees.
AC: But there are a few things like if you’re still working and you’re 70 and a half, you might want to keep your 401(k) because you don’t have to take a required minimum distribution out of that.
JA: If I separate from service at 55, I have free withdrawals without penalty from my 401(k) plan. But people get confused by this rule, so let’s kind of take a step back. If you are retiring and separating from service at 55 years of age or older from a company that you have an active 401(k), that you’re an active participant in their 401(k), do not rule that money into an IRA, because then you would have to wait until 59 1/2. If you’re 55, you have access to those dollars. You still have to pay taxes on it, but you are exempt from the 10% tax penalty. But if you have an old 401(k) plan, and then you retire at 55, and you want access to that plan, no. You have to separate from service from your active plan at 55 to have access to those dollars. So I’m working for XYZ Company, I separated from service at 55, that company I have access to that 401(k) plan, penalty free.
AC: So I had three other 401(k)s that I decided to keep intact for the company, but I left, obviously, before 55. I can’t take money out of those without penalty. Just the one that was an active plan when I retired, as long as I was at least 55 when I retired. That is a confusing rule. (laughs) I suppose you could – like let’s say you are 55 and you’re planning on retiring. Can you roll your own 401(k)s into that active plan? And so then when you did retire you could pull money out penalty free?
JA: I would assume that would be the case.
AC: I would think so too. And not all plans allow you to do that. But if your plan does, you might want to consider it. On the other hand, kind of the same logic if you’re 70 and a half and you’re working, and you don’t want to take the required minimum distribution, you might roll your old 401(k)s, even your IRAs, into the current 401(k), because you don’t have to take a required and out of that plan. As long as you’re less than a 5% owner. So this doesn’t work if you just decide to set up your own consulting company and you own it 100%. So you have to be actually working for a company, and owning less than 5% of the company.
JA: 401(k)s are exempt from RMD’s if I’m still employed. So people said, “I’m going to start my own business, set up a solo 401(k) plan.”
AC: No, that doesn’t work.
JA: Right. So there’s pros and cons to every financial move. So that’s why it’s it’s challenging, in a sense, on this radio program, because we’ve got to just spin everything out. Everyone has a very specific need, goal, want, asset level, income, want. So it’s devising your own specific strategy, depending on what you’re trying to accomplish. Are you married? Are you single? Are you going to inherit some money? Do you want to leave a legacy? There are so many different variables that you want to make sure that you consider before you just make any move.
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29:15 – Will Joe Be Replaced by Joe-Bot?
AC: Are you concerned that you’re going to be replaced by a robot, Joe?
JA: (laughs) No.
AC: You’re not? Because MacKenzie and Company, they did a study, and they believe that by 2030, as many as 800 million workers worldwide will be replaced by robots.
JA: How many?
AC: 800 million.
AC: Worldwide. Our country has 300 million, and we’re not all working, but that’s a lot of people. There’s what, 6 or 7 billion people in the world. Something like that I think?
JA: So what is that, 20 years from now?
AC: No, that’s 13 years. 2030. You’re going to be in your mid-50s. You might be replaced by a robot. I’m going to be doing the show with a robot. (laughs)
JA: (laughs) Joe-bot.
AC: (robotic voice) WELL AL, WHAT DO YOU THINK OF THE STOCK MARKET? (laughs)
JA: (laughs) I’m sure they’re not going to sound like that, Alan. I think just like it’s just like humans.
AC: But anyway, so here’s what they think. They said that for some industries, an increase in automation won’t mean a decline in employment, but rather a shift in tasks that need to be done. For example…
JA: Oil up the robots. (laughs)
AC: (laughs) Robot technician. You’ll be in great shape. So here’s what they say, they say that any job that involves managing people, applying expertise and social interaction, will still be necessary. Human performance in those areas cannot be matched by a machine. So you manage people.
JA: Yeah that’s my favorite part of my job. (laughs)
AC: As long as you keep doing that, you’ll be OK. However, jobs involving mortgage origination, paralegal work, accounting, back office transaction processing, can easily be wiped out by automation.
JA: Some of this stuff, yeah. if you look at Turbo Tax. How long has Turbo Tax been around?
AC: Oh my gosh. Twenty-five years.
JA: Yeah okay, so that was going to be the end of the accountant.
AC: Yeah, and we’ve still got plenty to do. (laughs)
JA: There’s too much. It’s complicated.
AC: So according to Bill Gates, he says anyone with skills in science, engineering, and economics will always be in demand. He didn’t say, financial planners. We need to switch to economics. Then we can be really smart on the radio.
JA: But why wouldn’t math be in that?
AC: Well, it’s kind of implied, I guess, with science and engineering. Physics. I’m sure that’s all good stuff. But if you’re working at a factory, you probably already got replaced.
JA: When are the self-driving cars coming out? Didn’t Vegas try the self-driving bus, and then, like, five minutes in service, it hit another bus?
AC: Yes. I don’t know if it’s Vegas or not, but yes, somewhere it did. And here’s the problem as I understand it, from self-driving cars, it’s not the self-driving cars. It’s the self-driving cars don’t know how to anticipate what crazy things humans do. If we’re all self-driving cars, or so they say, it would be 100% safe.
JA: I was driving into the studio today and I was at a stop light, and my windows are rolled up, and I’m hearing like just blaring like AC/DC or something. Just hardcore heavy metal.
AC: That was me. (laughs)
JA: And the only thing around me was a school bus!
AC: School bus? It was coming out of the school bus?
JA: Yeah! I look and the bus driver is just like jamming. But then I looked, I was like, “are there any kids on the bus?”
AC: I guess not. That was before he picked them up. (laughs)
JA: Yeah right. (laughs) Or maybe he dropped them off, had to unwind a little bit.
AC: He had to get into the mood of picking up the kids for the day.
JA: Just getting fired up.
AC: Probably, what, Saturday field trip or something.
JA: That’s all you have on the robots?
AC: Yeah, that’s all I have. I’m just cautioning you because by 2030 I’ll be in my 70s. I don’t have to worry about this problem. You got a big problem here. With robots maybe replacing you.
JA: All right, so let’s say that I have three nephews. 6 and 8 and 4. I wonder… Well, I suppose you could be in the arts?
AC: Yeah sure. Well, I don’t know, maybe a robot could draw a painting better than we can.
JA: Well a robot can’t dance. (laughs) Who wants to watch a robot dance? Or sing?
AC: Maybe they’d be really good! (laughs)
JA: I guarantee a robot would be a really good dancer. (laughs)
AC: (laughs) Perfect pitch. All the plays and things that we go to – even sports. Actually, it’s not in this article, but I have heard about people saying we’re going to have to expand the Olympics. There’s going to be human, there’s going to be Robot Olympics, and then there’s going to be a cyber combo. To where people have, whatever, they have augmentations in their body. So we’re going to have three Olympics, Joe. And the robots, that’d be interesting. (laughs)
JA: It’s too much.
AC: (laughs) It’s a little much. And I’ve got two kids, and one is a teacher. I don’t know. I don’t think robots can replace teachers, but I could be wrong.
JA: Yeah they can. I would imagine, right online.
AC: I suppose, the robot turns on the TV and all these lessons are online, maybe.
JA: There are a lot more online universities that don’t have a ton of…
AC: Yeah. The teacher teaches the class once, and then they replay it for decades, potentially, I guess. And my other son is going to be a counselor, and I’m not sure robot would. That’s that falls under a human interaction. I think he’s OK. Yeah, but you…
JA: I’m not worried about it. I’m going to manage.
AC: Could robots do the radio show?
JA: I’m sure they could. Without question. Way better than this garbage.
AC: (laughs) Maybe ten times as well. They would be more succinct. They wouldn’t be talking about robots. They would be talking about, “can you believe what happened? I saw a human today.” They’d make jokes about the humans.
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37:02 – Listener Question: Should My RMD Come from My CD or My Aggressive Funds, and Should I Transfer My 401(K) to a Roth?
JA: So this individual wrote in from Boston, Massachusetts. So he said that by the end of this month, he will be 70 and a half. OK “Most of my money is in the bank, in the CD, and very little in stock, with Fidelity. Question number one: should I withdraw RMD from a CD from the bank? Number two, my money is in very aggressive funds and doing a little bit better now. Should I take the RMD from there? Or three, I’m working in have a 401. Should I transfer to Roth?” So he’s kind of all over the board here. So maybe we should just break this down simply. First off, he’s 70 and a half. You’re required beginning date begins April 1st the following year you turned 70 and a half, and what that means to all of you, is that you have to start taking distributions from your retirement accounts. So any retirement account that you have, that you’re not an active participant in, such as, if I’m still working, such as this individual, has a 401(k), so that individual doesn’t have to take a distribution from the 401(k) if they’re still an active participant in the 401(k), as long as they’re not of 5% owner of that particular company.
AC: Yeah and that is a good point right off the bat, as 401(k), you’re working, if you’re not a 5% owner, you don’t have to do an RMD. And some 401(k)s allow you to roll your IRAs, actually, into them, and you can actually avoid RMD, potentially, by doing the rollover into the 401(k).
JA: So if I’m still working, 70 and a half, I got a 401(k) plan. I have a couple of different IRAs. Just because I’m working and am an active participant in that 401(k), if I have other ancillary IRAs, I still have to take the required distribution from the IRAs, just not the 401(k).
AC: Yeah. And that’s true, even if you have other old 401(k). So old 401(k)s, IRAs, yes. You have to take the required minimum distribution at 70 and a half, but your existing 401(k), you don’t have to. And so that is a great strategy for folks that don’t necessarily need that extra income because they’re working, is if their plan allows it, roll those old 401(k)s and their IRAs into the current 401(k).
JA: So the question then begins with: So he now has to start taking distributions. So he has to start pulling money from the accounts. The reason for that is that the IRS wants their tax money, because you’ve got a pre-tax contribution going in, it’s growing tax-deferred, and then now, once you reach a certain age, the IRS says “all right, start taking some distributions from the account so we can tax you.” So the question is. Well, he’s got CDs, he’s got an IRA with some CDs in it, so a safe investment, then he’s got another IRA with aggressive stocks. He was like, “Man, the stocks are doing really well, because the market has performed, the CDs are giving me whatever, half a percent. Which account should I take the required minimum distribution from?”
AC: Yeah. And that’s a great question. And so presuming he’s got more than one IRA, and when it comes to IRAs, Joe, the tax answer is it doesn’t matter. In other words, you can calculate all your IRAs as if they were a one IRA, and take your required minimum distribution out of whatever IRA you want to pick. By the way, that’s not true of 401(k)s. If you have multiple old 401(k)s, when you retire, you have to do an RMD from each 401(k). It gets confusing.
JA: Right. You could do a full aggregation of your IRAs, and take it from one IRA if you have multiple accounts. But if you have other 401(k) plans, or other 403(b)s, or any other type of retirement account, you’re going to have to take a separate distribution from that. And if you don’t, then you’re subject to a 50% tax penalty on the dollars that you never took out of the retirement account, because you thought you satisfied the RMD with the distribution that you pulled out, maybe from the IRA.
AC: Yeah, and even though you took out enough on a complete aggregate basis, they don’t look at it that way. So some people, they get their old 401(k)s and they roll them into IRAs. So you just have to worry about one calculation – makes it simpler.
JA: Yes. So what say you? Should he take it from the CD, or should he take it from the aggressive IRA?
AC: Well, to me now this gets into a little bit more investment question, and I’m not sure we have enough information to answer that. So I think what I would want to know is, when he’s going to retire, how much income that he needs, how much fixed income he already has from Social Security or pensions. Get a sense of what he thinks his longevity is, whether he’s married or not, whether he wants to increase his spending in retirement or not, or whether he wants to downsize his home. All of these factor into figuring out a correct investment allocation. And the fact that it sounds like he has the most of his money in a CD, I’ll make an assumption here, maybe that he feels like he’s got enough money, he feels like he doesn’t need to be that aggressive, so I’ll make that assumption.
JA: So would you say it doesn’t matter?
AC: I would say, I would like to take a look at what his investment allocation *should* be.
JA: OK, well let’s just assume he’s got the right allocation. Because I think the question is, in real simple terms is that I have an aggressive investment, should I take it from there, or a very safe investment, should I take it from there? And let’s just assume he knows that he has to take a certain amount out. But he’s like I’ve got these two accounts, they’re both IRAs, which one should I take it from?
AC: Well again, I don’t know what the allocation is, but let’s just say the cash is 90%. And the aggressive stock is 10%. I would probably take it out of the cash because at age 70 and a half, you probably will need some growth in your account. And I would actually probably favor a little bit more stock.
JA: How about if it’s 50/50?
AC: 50/50? And if 50/50 is the right allocation? Then you would take half out of one and half out of the other.
JA: That’s what you would do? I think there’s an optimal way to do this. And I don’t know if 50 is optimal. It could be, right? We don’t have a lot of information here. But I guess the argument could be, I want to continue my aggressive growth, continue to grow tax-deferred. I don’t necessarily want to touch that. I would take it from the CDs, take that and pay the tax on it. But here’s another wrench. You could still take the RMD from the stock and not sell the stock. So you’d still have the same allocation. You would just have to pay tax. So I just take the distribution from the stock you put it into a brokerage account. So I’m still holding the stock, and then I would just pay tax.
AC: And you’d do the same with the bank CD.
AC: I have another answer now that I had a chance to think about it. You might want to take it from the stock because the aggressive stock has gone up a lot. And probably he now has a higher allocation in stock than he was comfortable with when he first set up these allocations. So that’s my new answer.
JA: All right. Well, that’s the CPA.
AC: You didn’t like my first answer, but I still liked it, which is, figure out what the most appropriate investment allocation is, and that will help you decide which to take it from.
JA: OK. So there are different rules of thought there. Me personally, if I’m looking at a deferment of taxes. So you have a very safe investment, that’s not necessarily growing, versus another investment that is growing. Wouldn’t you want to have that investment continue to grow in a tax-deferred manner, where you don’t necessarily interrupt that growth? And if he doesn’t necessarily need the money… but we don’t know that answer. If he needs the income, then it’s going to be something completely different. Then you have to create a retirement income strategy to figure out where you’re pulling the money and why and what the tax consequences are going to be, and so on and so forth.
AC: On the other hand you may want to distribute the stock out of Fidelity, to your brokerage account. Keep it in kind. And now you got all future capital gains. So we don’t have enough information. So that’s why we’re kind of giving all kinds of answers because a lot of it depends on circumstances we don’t know.
JA: And I think that’s the problem with individuals listening to programs like ours. (laughs) One approach is the right approach for their overall situation, which is definitely not true. It’s not a cookie cutter answer with anything. I think most of it is the caveat “It Depends.” His final question was, I’m working, have a 401(k), should I transfer to Roth? Who knows. What’s your tax bracket? How much money do you have in qualified plans? What is actually your required minimum distribution? Are you in good health? Are you in bad health? Who’s the beneficiary of the accounts? Are your kids the beneficiaries of the accounts? Are they in a lower tax bracket than you? Are they in a higher tax bracket?
That’s it for us, for Big Al Clopine, I’m Joe Anderson. Have a wonderful weekend everyone. We’ll see you again here next week, the show’s called Your Money, Your Wealth.
So, to recap today’s show: the answers to many of your questions, from how to devise a retirement income strategy, to where your required minimum distributions come from, to whether you should transfer from a 401(k) to a Roth, is often, “it depends.” There are a lot of factors to take into account, but chances are, robots ain’t one of ‘em. At least let’s hope not! Call 888-994-6257 to discuss the specifics of your individual situation with an advisor – a real live one! – from Pure Financial.
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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.