Paul Merriman

Paul Merriman is a nationally recognized authority on mutual funds, index investing and asset allocation. He founded a Seattle-based investment advisory firm in 1983, but is now retired and devoted to educating investors, through weekly articles on Marketwatch.com. In 2013 Merriman created The Merriman Financial Education Foundation, dedicated to providing comprehensive financial education to investors, [...]


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
September 4, 2017

how to turn 3k into 50M

Investing authority Paul Merriman explains how to turn $3,000 into $50 million and talks to Joe and Big Al about value vs. growth companies, market timing, choosing the right mix of stocks, bonds and other investments, and which stocks don’t beat even Treasuries in the long term. Plus, The 10 Best – and Worst – Places to Retire, Ways to Fund Children’s Education, and how to minimize taxes in retirement.

Show Notes


A word of apology to start this week’s podcast, we had a little technical difficulty with the intro of Your Money, Your Wealth today, as you’ll hear here:

“Believe it or not, literally between what you take out and what you leave to your heirs, you could turn that $3,000 into $50 million. But, that would be making a lot less than (static) has in the past, because (static) has produced about 5% a year more than the S&P 500.” – Paul Merriman

Nah, just kidding, we just want you to stick around to find out which investment nationally known investing authority Paul Merriman says can turn $3,000 into $50 million. He also talks to Joe and Big Al about value vs growth companies, market timing, choosing the right mix of stocks, bonds, and other investments, and which stocks don’t beat even Treasuries in the long term. Plus, The 10 Best – and Worst – Places to Retire, and Ways to Fund Children’s Education in our newest awkwardly named segment, Catch Jason Thomas CFP By Surprise. Now, with no technical difficulties, here are Joe Anderson, CFP and Big Al Clopine, CPA.

1:07 – Are the Days Numbered for the 1031 Exchange & Stretch IRA?

JA: You know Alan real estate prices are up again, and you just informed me that the 1031 exchange might be ixnayed. This is like hot off the press news.

AC: Yeah this is according to Kiplinger tax letter. They’re saying that the days of deferring 100% of the gain through like kind exchanges could be numbered if tax reform does happen. So just as a point of the review, if you own a rental property, and let’s say it costs $500,000 and you bought it for $100,000 years ago. So if you sell it, you have a $400,000 gain that you have to pay tax on.

JA: So it’s depreciation recapture.

AC: Yeah. You bet. So what the IRS says is if you buy another rental property for at least $500,000, you can transfer that gain into the property that you bought. And that’s a 1031 exchange. So you’re not necessarily getting out of the tax, but you are deferring it until you sell that second property. And of course you may know that if you hold that second property your entire life, then your heirs, your beneficiaries, get a step up in basis and in that case actually, nobody pays the tax. So our Congress and Senate is looking for ways to increase the amount of money they take in taxes, to offset lowering the tax rate. So this is something that may go away. And here’s what they’re saying, Joe, in this article, is that the Republican lawmakers are talking about this because it would be, like I said, it would be an offset against lowering tax rates. In 2014, the former House Ways and Means Committee chairman Dave Camp, their tax proposal got rid of this all together. And even Obama’s plan, they proposed the cap of a million dollar gain only – that was the Democratic plan. So in other words, there is support on both sides for at least getting rid of it altogether, or at least diminishing its effectiveness, because sometimes professional real estate investors, they may have an apartment building worth several million dollars and they sell it and buy another one, and they pay no tax.

JA: Why do you think that ever came about? It was like the Starker exchanges.

AC: Yeah. Well, I guess the idea was that you’re just exchanging property with another person. And then it’s like, well no money changed hands so why should you have to pay taxes? I think that’s why it originally came about. The Starker exchange basically paved the way for what’s called a delayed exchange, which is the way most of them are done now. In other words, you sell your property first, and then within 45 days, you have to identify up to three target properties to buy. And six months from the close of escrow, you actually have to buy one of those three. And if you do that, and if you don’t get your hands on the money, it has to go to a qualified intermediary, which is not you. If you get your hands on the money, in other words, if a check out of escrow is written to you, you’ve blown the exchange. It doesn’t work. Or if you don’t identify three properties within 45 days it’s a blown exchange. Or if you don’t buy one of those three within six months, you have to pay that gain.

JA: How about if I pick another one? No, it has to be the three that I chose in the 45 days?

AC: Yeah exactly. So that’s the law. So it’s very specific. So what I tell folks, if they want to do an exchange like that, you ought to pretty much know what you’re doing when your property sells, when the close of escrow happens. And I’ve done it three times myself, and one time happened down to the wire. And that was too stressful. But I did make those time frames. But I would say, at the moment you have your house in escrow, in other words, you’ve sold your rental property but hasn’t closed yet. You’re lookin’ like crazy. And then what I would try to do is buy the property you want to buy within that 45 days. So it’s really clear. That’s what I would suggest.

JA: They absolutely need to identify. But that’s tough too because they could sell before you sell yours.

AC: Yeah that’s why I think it pays to have your ducks in a row, certainly at the time escrow closes. But that is the law. Escrow closes, the money goes to a third party. Then you have 45 days to identify three properties, and then you have another four and a half months after that, or six months from the close of escrow, to actually buy one of those three. Now there are a couple other ways. Like you can identify as many properties as you want, as long as you buy, it’s like 85 or 90% of those properties. I forget exactly what it is. But there are other ways to identify as well. Like if you sold a gigantic apartment, and you want to buy 10 single family homes. So you can identify, I think it’s 11, and you have to buy 10 of them, something like that. So you can do that.

JA: What’s a reverse exchange?

AC: That gets trickier because that’s when you buy first, and you sell second. And that creates a lot more risk for the intermediary,  the exchange accommodator, so they’ll charge you a lot more on that. I wouldn’t necessarily recommend it, It’s better to go in the right order – sell first and buy second. But if you’re in a situation where that’s not possible, there is what’s called a reverse exchange, where you can actually buy first and sell second, but you still have similar time frames to look out for.

JA: There you go. 1031 exchange right off the bat. Just getting into some meat.

AC: Yeah. Because usually, it takes us a second hour before we talk about anything of substance so today…

JA: Let’s get hot, right now.

AC: And I guess talking taxes, Steve Bannon is out, and he had sort of proposed raising the highest tax rate, as high as 44% to offset the cuts for the middle class. And what Kiplinger is saying, is that now that he’s gone, that’s a lot less likely. We’d probably go back to the original idea of taking that 39.6% maximum tax rate and lowering it to, say, 35%, 33% depending upon what actually happens. But I’d say more than likely that’s probably what the Republicans are going to shoot for. But then here’s the challenge, as we just said,  they’re trying to make it revenue neutral so that we don’t go into any more debt than we already are. So then you have to look at getting rid other tax deductions. One of them, Joe, is the mortgage interest. And there’s a lot of talk about that. Not necessarily that it would go away, but they would reduce it rather substantially.

JA: What is it now $1.1 million of debt that you can have that you can write off?

AC: Correct. Yeah so let’s say you have a house worth $1.5 million, as long as your loan is $1.1 million or lower, you can completely write off that interest. If it’s higher than that, then not all of that interest is tax deductible. So they’re talking about, I’ve heard lots of different ranges. The latest one I read is they think they might end up at about $500,000 or $600,000 or something like that so that any debt above that wouldn’t be deductible. So we’ll have to see. And the article that I read, Joe, said that it really didn’t affect that many homeowners. If they did that it would affect those that have the most money, and supposedly the best ability to pay for this. That’s kind of the idea. In my experience, a lot of times in California, those that have this kind of mortgage are stretched thin to get into those homes, and they really don’t have a lot of room. I don’t know about the rest of the country, but I’ve seen that a lot in California.

JA: Well the average cost here is a lot more expensive than most places.

AC: And then I was thinking, to do this fairer, they would have to have a different deductible amount, depending on where you live. Like the HUD loans, it depends on the city that you’re living in as to how much you can borrow. FHA. But I doubt that they’ll do that because that would be a nightmare to administer, but that would be the only way to make it fair. How could you say $600,000 is the right number, then everyone in, let’s say Iowa for example, could probably deduct their mortgage, and half the people in California couldn’t. So we’ll see.

JA: Stay tuned. I don’t know. It’ll be interesting to see what, I mean there’s just a lot of talk now, maybe now the focus is on tax reform because there’s been a lot of talk with a lot of different things, in regard to your overall retirement, that would be eliminated. Net unrealized depreciation is one. That is where you can take your company’s stock outside of your 401(k) plan, move it into a brokerage account. You do pay tax on the basis of that stock. But if you worked for that company for 30 years, which we see a lot of those big blue chip companies, that the match was in the company stock, and so they have a very low basis. But the stock appreciated over 30 years, and they never sold it, or maybe their 401(k) is full of that stock. Where we’ve done that transaction quite a bit is to move this stock into a brokerage account, then they’re subject to capital gains rate versus ordinary income if they kept it in the retirement account. So that could go away, back door Roth IRA contributions we’ve talked about. So that’s taking a nondeductible IRA contribution, and then converting it into a Roth to avoid if your income limits are higher than the contribution limits. So there’s kind of a backdoor way to put the money in, maximizing the amount that you can actually have in a retirement account.

AC: So we get to a certain point and then no more.

JA: Right. You’ve accumulated a couple of million bucks in your retirement account, you can no longer contribute to that account. There’s a lot of talk about eliminating the tax deduction entirely for retirement accounts and making everything after-tax contributions. Because of the billions of dollars, I guess, that the IRS looks at and says, “this is missed revenue.” But they’re missing the boat. I don’t think with any of these strategies… it helps the retiree. There are other areas to go after. When you look at the average balance of a retirement account, $100,000 let’s say, the median is a lot less than that. So half of the population has pennies. A third of the population has zero. And then, let’s go after deductibilities or contributions? I don’t know. I guess that wouldn’t necessarily hurt lower income because they should probably go after-tax anyway.

But yeah Joe and I would say one thing that will affect a lot of people that may go away is the stretch. And I want to get into that next segment because that’s that really is a great tax strategy right now if you understand how to do it how to set up the stretch IRA properly. This is when you inherit an IRA that’s that’s from anyone other than your spouse. And so right now you can still do it. But they’re talking about getting rid of that too.

JA: The stretch IRA is another big one that potentially could leave us.

AC: Let me kind of set the stage which is, when you inherit an IRA from someone other than your spouse, so this is a non-spousal IRA. So maybe this is your mom or dad, you inherit the IRA. Then what happens is, you need to specifically set it up, titling correctly, and you actually want to talk to your custodian on changing the title, and here’s how you’re supposed to do it. This is John Smith, who got an IRA from Laura Jackson. I’m sorry, the other way around. Anyway, John Smith deceased March 14th, 2016, IRA for the benefit of Laura Jackson. So you put the deceased person’s name, the date that they passed away, that it’s an IRA for the benefit of yourself. That’s how you properly title what’s called a stretch IRA, and then you have to start taking required minimum distributions. And those required minimum distributions need to start by December 31st of the year after the person passed away. So if someone passes away this year, you inherit that non-spousal IRA, you’ve got to start taking required distributions by December 31st of next year, based upon your age, generally, although there are some caveats there, but you do it based upon your age, so if you’re 20 years old, and if the table says you’re supposed to live till 80, that means there are 60 years to go. You take the IRA balance, you divide it by 60, and that’s what you need to withdraw. It doesn’t matter what age. In fact, a lot of people don’t realize, they’re younger than 59 and a half, but they still have to take that required distribution.

JA: Yeah. All non-spouse beneficiaries have to take money out of their retirement account. They want to recycle that money. They don’t want to sit in the account, so it can continue to defer for another 10, 20, 30, 40 years. So all non-spouses need to take a required distribution, based on their life expectancy. But the problem is, the titling has to change. Where sometimes you would think it’s like well, it’s a retirement account. Should I roll it into my own retirement account? Because I can take the brokerage account and move it into my own brokerage account.

AC: Yeah that’s the common conception that you ought to be able to do that.

JA: But a retirement account needs to stay in the deceased’s name. So if your parents have retirement accounts, and you are inheriting those, just understand that. Be careful with those accounts, because once you blow that thing up, it’s very, very difficult to put Humpty Dumpty together again. Once that egg is cracked, it’s done. And it’s fully taxable, and it could really blow you up. So be careful, because Al and I’ve seen it so many times, where the titling wasn’t done correctly. Maybe a trust was named as the beneficiary, and then all of a sudden it’s like, what do I do if the trust is the beneficiary? And then now there are multiple beneficiaries, but there was a charity involved or a spouse… With spouses specifically, do not name the trust the primary. Name your spouse the primary. Unless you don’t want the money to go to the spouse, and she or he signs off on it. (laughs)

AC: Right. They do have to sign off on it. (laughs)

JA: Yes, because it gets a little bit fuzzy. You want to make sure because the beneficiary form is one of the most important documents in regards to estate planning because that trumps all other estate planning documents. So if you have a living trust, but you don’t fill out the beneficiary form, then it goes through the estate, it could be stuck in probate, but you have the trust, but you didn’t name….  there are all sorts of things that you absolutely want to make sure that you nail down.

AC: Well you do Joe, and you talked about naming a trust. Let’s say you and your spouse passed away. You’ve named the trust as the secondary beneficiary. So then it’s like, four kids split the trust four ways, except 1% first goes to charity. So you have a non-person beneficiary, which means you cannot do a stretch. As a matter of fact, in that case, the entire IRA needs to be distributed within five years.

So with proposed tax reform, the 1031 exchange and the stretch IRA could both be on the chopping block. To find out what else is being considered, visit the white papers section of the Learning Center at YourMoneyYourWealth.com and download the white paper called Tax Reform: Trump Vs. House GOP. Find out how income tax, estate tax, and business tax may change, and whether your tax strategies are at risk. Since you’re already at the learning center at Your MoneyYourWealth.com, download the free estate plan organizer – it’ll help make it easier for your beneficiaries – spouse, non-spouse or otherwise – to carry out your wishes upon your departure. Find all the relevant information, fill out the forms completely, keep them up-to-date and store them in a safe, easily accessible place for your heirs. Articles, webinars, must-watch videos, and white papers on tax reform and estate planning, it’s all available to you free in the Learning Center at YourMoneyYourWealth.com

16:53 – Paul Merriman – 96% of Stocks Don’t Beat Treasuries in the Long Term

Think Advisor Article: Study Shows 96% of Stocks Don’t Beat Treasuries in Long Term

Market timing and choosing the right investment mix

JA: Alan, we got our good friend, Paul Merriman back on the show.

AC: We do. And I am so excited because we’ve got, I’d say, our short list of people we really enjoy talking to – Paul is right at the top.

JA: Why are you kissin’ ass?

AC: Because I do that every week. (laughs) So the guest will be nice to us.

JA: (laughs) Yeah. Well, Paul Merriman’s been a legend in our business for many, many years. It’s always a great pleasure to talk to Paul. Paul welcome to the show.

PM: Thank you, gentlemen. It’s great to be with you.

JA: I read this study, and I know that you’ve read it. What do you think about this? The study shows 96% of stocks don’t beat Treasuries in the long term.

PM: Just so people understand what that what that means: 4% of the companies that have ever gone public, since 1926, 4% have virtually made all of the real – you know that 10% we always talk about that the market makes? Turns out it’s that very small number of companies that are helping that happen. If you take all the rest of the companies, the 96%, and you look at the average return of that group, it’s the same as T-bill rates. So the thing it teaches us, and I had lunch with the professor who did that, worked on that paper, just to confirm, it teaches us that if we own all of the companies, rather than hiring somebody who’s trying to find the next Microsoft… Remember Microsoft has been a dog since about 2000 if you want to look at the expectations. But if you think that you’re going to find those people, those great companies, that’s fine. But it looks like almost – almost – nobody does. And in fact, you’d be better owning all the companies, rather than any part of them. And that, I think, is magic for people who don’t want to take much risk.

JA: Yeah I agree with you. I knew it was a small percentage that drives most of the returns, but I didn’t know it was that low. 4%. That just seems crazy to me.

PM: And that’s tricky, by the way, because that includes – one of the most profitable companies ever was General Motors. So in that study, a lot of that return came from General Motors. Well, you know the old saw that the idea is you buy and hold an individual stock for the rest of your life, and the longer you own it, the more you’re likely to make. It actually turns out that the longer you hold it, the higher the probability that you’re not going to make much money. Look at Sears.

JA: Right. Kodak.

PM: This is such a reason to own the whole market.

AC: But Paul, don’t you think some people out there try to profess they can pick that 4% so you should invest with them?

PM: Well, those are the people who keep buying lottery tickets, I suspect. But, the bottom line is, there is no evidence, there is no evidence that we can find in the academic research, that somebody knows how to pick those stocks before they become famous. And in fact, there is one study many years ago that Morningstar did, that they looked at successful mutual funds, thinking they probably did something, maybe they overloaded their position with some company that made them famous and made them outperform the market. It turned out that these big performers that these funds had, that made them famous, were not their best picks. They were also-ran stocks that they put into the portfolio because they had to have a lot of diversification. So not even the big winners, turns out, really knew what they were doing.

JA: Well I think everyone has this backwards when it comes to investing. They should be investing for their goals. So what target rate of return do they need to generate to do all the things that they want to do. But that greed factor comes in where they want to get a little bit more return, and then they start doing things that are probably not going to give them the return that they want or anticipate, by picking individual stocks or trying to time the markets. And right now, we hear markets at all time highs, all time highs. Is this a good time to maybe take some chips off the table? What do I do? How do I invest in all time high markets? I mean what advice would you give our listeners with that?

PM: Well, if you’re going to try to pick that point, this is what is called market timing, and I’ve yet to find anybody in this industry, except for people who make a living doing market timing, but except for people who have that bias, almost everybody – in fact all the very famous investors, the Warren Buffetts, the Peter Lynches, the Templetons, these people all claim not to have any idea how to time the market, and believed that it’s all about the long term. Now having said that, these are very wealthy people who can afford to sit around and watch their portfolio go down 50% and wait for it to come back. And a lot of people don’t have that kind of luxury. But those people have got to be smart, and have a significant amount of their money in something that’s going to protect them against the downside. Not a market timing system, but instead, the appropriate amount of fixed income that’s going to protect them, to be whatever their risk tolerance is, so they can get that benchmark return. And the benchmark return, you’re right, is what rate of return do you need to get where you’re trying to go? It has nothing to do with anybody else in the world but you.

AC: I think that’s well said. And what about that? What about stocks and bonds? And how should people go about figuring out how much stocks versus bonds?

PM: Well I have a table that, in fact, I’ve got a number of them now, that people can go to PaulMerriman.com and look under best advice, and there’s a fine tuning table there. And what I do in that table is I show different combinations of stocks and bonds. And here’s what I find so interesting, is every time you add another 10% equities to the bond portion of the portfolio, you add about a half to 6/10ths of 1% to the return. And of course, along with that, and I’ve got it on the table, is how much more money you’re going to lose in the worst of times. I’m 73. I’m 50/50, stocks and bonds. That means I am expecting to lose 20 to 25% of my portfolio in the next big bear market. I’ve signed on for that. My wife has signed on for that. And if I’m not willing to accept that risk, maybe I should be 40% equities, or 30% equities. But if I’m going to wish something is going to happen, that’s a meaningless exercise, because wishing doesn’t do anything. And you guys know as well as I do that all we have to go on is the past, and what the past looks like, and sometimes it’s really bad, and we got to be prepared for it.

JA: (laughs) Well you know it’s gonna be bad in the future. We just don’t know when. And so, I like how you said that. I’m willing to lose X amount of dollars. I signed off on it. I’m anticipating this. My wife signed off on it. So when it happens, it’s expected. Versus being shocked and like, “oh my god, I can’t believe my portfolio did this,” and I think that’s another issue of most investors, where they’re confused maybe, of maybe what type of bonds that they actually hold. Are they long term? Are they short term? Are they high grade? Are they junk? Or what type of stocks do they own? Is it all large growth? Do they have international, emerging markets? And they might not understand how those react in certain market scenarios. And then basically it all boils down to their goals again. How much income needs to be derived from the overall portfolio?

PM: Well I think that if we can get – as you guys know, I’m retired, I don’t do investment advice anymore one on one, but when I did, I sat with every prospect and I said, “OK, I’m going to go through a series of forks in the road, because you’re either going to make these decisions by design or by default. I think by design is better than by default.” And I make them, like you say, “do you want to be all in large cap growth companies? Oh, let me show you a 10 year period where large cap growth companies absolutely stink and if that’s all you had in your portfolio, that you probably would have lost half of your money if you were living on it during that 10 year period. Maybe you would have lost more than half. Now, how would you feel if you added some large cap value to go along with that? Let’s see what happens there.”

So we can make good choices. Because if you don’t ask people to think about more than one thing at a time, they make great decisions. It is when they’re expected to make 20 decisions at one time that their brain doesn’t know how to do that, and they don’t know – it seems pretty simple when you look at it from our side – but they don’t know how to go through those 20 decisions to figure out how to make a legitimate bottom line decision about what’s right for them and their family. And by the way, you guys are in the business now. I think it’s the toughest thing in the business is your sit in with a husband and a wife or a couple. One is aggressive and one is conservative, and you’re trying to go through that decision tree. It’s tough because you’re trying to get two very different people to come up with one answer. (laughs)

AC: (laughs) That’s true.

Have you made those 20 decisions Paul Merriman just mentioned? What are your retirement goals, and is your retirement strategy designed to meet them? Can your portfolio withstand a stress test? Visit YourMoneyYourWealth.com and sign up for free financial assessment with a Certified Financial Planner. Find out if you’re on track for retirement. How much money will you need? What Social Security strategies are available to you? How much income can you get from your portfolio? Make sure your retirement strategy is aligned with your retirement goals. Sign up for a free two-meeting assessment with a Certified Financial Planner at YourMoneyYourWealth.com

27:31 – Paul Merriman – Value Companies vs Growth Companies, How to Turn $3,000 into $50 Million

JA: Welcome back to the program, the show’s called Your Money, Your Wealth. Joe Anderson here, Certified Financial Planner, alongside Alan Clopine. We’re talking to Paul Merriman. Hey Paul, let’s break things down simply because I think we talk about large companies, growth companies, value companies, small. Just give us a rundown. What is a growth company? What is a value a company? So people understand what they’re invested in, or maybe they should venture into another asset class, maybe that they haven’t invested in, or don’t know anything about.

PM: Well, growth companies are the ones most people know because they are successful. They typically are in an industry that is considered to be a good growth industry for the future, and they typically have access to money to grow, and they typically have good management. And there’s a number of keys that can put a company on top, and we can think of Facebook, we can think of Google, we can think of Amazon. Now value would tend to be companies that aren’t as popular today as they may have been at one time. They could be great companies, but let’s call them out of favor for some reason, or just not the cutting edge companies. And that might be Exxon, or that could be AT&T, it could be the Bank of America. That could be any number of decent companies, but they’re just not the powerhouses of today.

And I still think this is fascinating, is that our hearts want to believe that those great companies, like Google and Facebook, that that’s where the big money is going to be made, and that in more doggie, out of favor companies, that they’re not likely to do as well, and why wouldn’t we want to be where the action is? And the academics just turned this whole industry upside down when they did all the research and then were able to put it on the table. There it is. Those out of favor companies: not only do they tend to be less volatile in normal times, but they give, over the long term, a higher rate of return. And people say, “well how could it be that a company that’s out of favor and not as good as another company would make a higher rate of return?” And it turns out, at least what the academics tell us, that this is simply a matter that these investments are, in fact, riskier. And it’s important for investors to understand, they are riskier because those companies, in a catastrophic environment – I’m talking depression now, not just a recession – those out of favor companies tend to pile up bigger losses than those better position growth companies. So there is a condition under which those value companies don’t do as well. But if you look at all the years going back the last 90 years, in most of the years when the market is up, turns out it’s the value companies, not the growth companies, that produce the bigger returns.

JA: What is the delta on that, with your latest research, of over-performance of value companies versus growth?

PM: Well kind of depends on how far back you want to go.

JA: Let’s go 90 years.

PM: 90 years I think is about 2% advantage to value. Oh, but it gets better. I did an article about how to turn $3,000 into $50 million. And this is for a newborn child. And all you do is put that money into small cap value. Not big cap, not large companies, but put that money into small cap value and just, in essence, let it sit there in a Roth IRA when the kid is old enough and workin’ and you can actually match this $3,000 or whatever it’s grown too. Believe it or not, literally between what you take out and what you leave to your heirs, you could turn that $3,000 into $50 million. But, that would be making a lot less than small cap value has in the past, because small cap value has produced about 5% a year more than the S&P 500.

JA: Yeah, if you look at the growth of a dollar – and I use this quite a bit – is that most people’s portfolios, they buy what they know. All we hear is the S&P 500 and the Dow Jones. And so they use that as a benchmark. And we believe that it’s very difficult to time the market. Almost impossible. But it is probable that it could happen. Or picking the right stock. But we also want to make sure that we’re beating the market. I mean, I’m not afraid to say it. It’s like I want to beat the market. But then you look at what market are you trying to beat? Well if you want to compare to the S&P 500, yeah. The small value will crush it. Because if you’ve got a dollar – or let’s say you have $100 invested in 1927, today it would be worth what, about $600,000. You’ve got that same $100 invested in small value stocks. It’s going to be like $7.8 million. I mean it’s $7 million more. So when you look at constructing portfolios, and I think you do a really good job of educating with this, we want to dampen the volatility of the portfolio by maybe having a little bit more fixed income in the portfolio. More bonds, safe, high grade, short duration. But with the stock selection that you’re using, make sure that you understand risk and expected a return and use the right asset classes to kind of boost your return over the long term. I think it’s genius.

PM: Well, and that came right out of the academic community. This whole idea of the advantage of small cap and value. And the advantage of combining asset classes. And for those people who don’t want to take more risk, here’s the beauty. You can build the equity part of your portfolio with about 70% equity and about 30% bonds, and have the same return as the S&P 500, without any bonds. And so, if you can get the same unit of return and take less risk, you’re supposed to do that. Now having said that, and having been on a diet since the fifth grade, I know what I was supposed to have eaten, and I never did. But had I eaten what I was supposed to, I’d probably live another 20 years. As it is, I’m going to pay the price for having done what my heart wanted instead of my head.

AC: Yeah, I think you bring up a good point, which is patience, and doing the right thing. Because sometimes this value premium, it’s not there for a year or two, or even five years, sometimes growth stocks are better than small value over a five year period, six year period. And you have to have enough patience to know that the strategy works, but it may not be every year.

PM: Here’s a number you’ll love. If you look at the return of the S&P 500 versus small cap value going back 50 years, the average difference in return is 17%. That’s huge. If you expect your portfolio to look like the S&P 500, if you happen to be more value oriented, your portfolio is going to return substantially different returns. And guess where the big difference comes? It’s not on the downside, it’s on the up side. But that difference. I don’t mean to suggest that small cap value makes 17% more because sometimes the S&P 500 does better. But they’re very different asset classes in terms of how their prices act.

JA: Paul, where can people find this research, and where can people get more information? You have great stuff out there, you have awesome books, literature, blogs, videos, where can they find you?

PM: Well, PaulMerriman.com. I have absolutely nothing to sell. No advertising. This is the work of a foundation that I set up after I sold my investment advisory firm back in 2012. So all it’s there for us to give people more information. And it doesn’t hurt, even if you’ve got an advisor, it doesn’t hurt to read this stuff to make sure your advisor’s got his or her head on straight.

AC: (laughs) Yeah I think Joe and I need to read it more.

JA: Paul, it’s been a pleasure talking to you. Is Life good? Retirement’s good?

PM: I’m just having a ball, and I was only going to work till I was 85 on this stuff, but I went back and spent an hour and a half with John Bogle back in Pennsylvania in his office. I’m now going all the way. If I can make it, I’m going to work longer than Jack Bogle worked, and he’s 88. (laughs)

AC: That’s great. So we’ll be interviewing you for the next 25 years. (laughs)

PM: God I hope so. (laughs)

JA: That’s Paul Merriman, folks. We got to take a break. The show’s called Your Money, Your Wealth.

Your Money, Your Wealth isn’t just a podcast, it’s also a TV show! Check out Your Money, Your Wealth on YouTube to watch brand new shows on banking on your house in retirement with reverse mortgages, creating income streams in retirement, and the A’s, B’s, C’s and D’s of Medicare – including Medicare mistakes (drop). Don’t miss the Your Money, Your Wealth TV Show – just search YouTube for Pure Financial Advisors and Your Money, Your Wealth. Check back often, we’re always adding new shows!

Time now for Big Al’s List: Every week, Big Al Clopine scours the media to find the best tips, do’s and don’ts, mistakes, myths and advice to improve your overall financial picture – in handy bullet-point format. This week, the Top 10 Best – and Worst – Places to Retire

37:54 – Big Al’s List: Top 10 Best – and Worst – Places to Retire (Wallet Hub)

Wallet Hub Article: Here are the best (and worst) places to retire

JA: What does this gauge it on? Is it weather, is it a crime?

AC: All the above. Well, first of all, it’s the 150 largest cities, so this isn’t all cities, it’s just the 150 largest.

JA: And out of the 150 here’s the top 10?

AC: Yeah here’s the top 10, and it’s basically ranked on things like retire friendliness, availability of health care facilities, recreational activities like golf, museums, and, wait for it… Bingo. (laughs) That’s a big one, apparently, on this list. In home service, the overall cost of living. Number one place to live: Orlando, Florida. Number one, Orlando Florida.

JA: I’ve lived in Oviedo, Florida. That’s right outside of Orlando.

AC: There’s a lot of theme parks in Orlando. So plenty to do I suppose.

JA: I used to live in Oviedo. I went to the University of Florida, which is in Gainesville. But a buddy of mine from high school was going to the University of Central Florida, which is in Oviedo. And I was like there’s no way I’m going to the University of Central Florida. But I lived there for a year to get in-state residency.

AC: Oh you did. Because it was cheaper?

JA: Well, out of state residents tuition versus…

AC: Right. I’m saying cheaper than Gainesville. Or ’cause you had a friend. Got it. OK.

JA: And then I was close Orlando, which is a bigger city and Gainesville is a college town.

AC: And you went to Disneyland got an annual pass and Sea World?

JA: No. I worked at a bar. It was in Church Street Station. It was called Howl at the Moon Saloon. It was a dueling piano bar. Like the Shouthouse?

AC: Yes. I love that place.

JA: Yeah I worked there at night. I also worked at Structure, which is, I think it’s a defunct clothing store. That was the worst experience of my life.

AC: (laughs) What did you do there? Sold clothes?

JA: Yeah, sold clothes. I was on the floor.

AC: Was it suits?

JA: No it was like khakis and shirts.

AC: Some lady comes in says I’d like some underwear?

JA: No, it was men’s clothing. It’s like the Banana Republic. So I was on the floor. I made it, I think, like two weeks, and I couldn’t do it. Because I would be like, “Oh, this vest looks really good with those pants.” (laughs) “Oh, you need mock turtle neck,” or whatever. I was like I can’t do this. So then I worked in the back. I just stocked. Carried boxes. I wanted to do man stuff.

AC: (laughs) I don’t want to be that guy in front.

JA: Yeah and I would have to dress up in all this like Structure stuff, so it was like sweaters and things like that. But it’s Orlando, it’s 100 degrees and I’m sweatin’. (laughs) I had to wear like maroon collared shirts with like a sweater over it.

AC: (laughs) Do you have any pictures of those things? They should go on our website.

JA: No. I’m trying to purge this.

AC: (laughs) all these years later, still there.

JA: And then I work at a country club. So here was my schedule. I would get up at 4:00 in the morning, and I’d work at Ekana Country Club. So it was a nice golf club, close to my house.

AC: Now that’s a manly job. That you felt you had pride in.

JA: Yes. So I’d whip the greens, clean the greens off after they moved them, and then I would do the sand traps and things like that. So that was from 4:30 until probably like 10:00, 10:30 in the morning. And then from there, I’d go home. And then I would change into my Structure outfit.

AC: Mock turtlenecks in the middle of the day. (laughs)

JA: (laughs) And then I would drive an hour to Orlando. I had a 19 like 84 Honda Accord with no air conditioning. So by the time I got to Structure I’m drenched with sweat. So I went out to buy a new shirt once I got there, so everything I earned from Structure, went right back into Structure to buy their stupid clothes.

AC: And then after you wore it once you had to throw it away because of all the sweat.

JA: Pretty much. And then from there, I went to the bar, and I was like kind of a bouncer guy. Like if you wanted a song that the piano guy sang? You’d give that little ticket to me. And then I would go up and put in a dish and say, “oh yeah, she’s giving you 5 bucks. Play a little Billy Joel.”

AC: Got to work up a waiter. You weren’t at that level yet. (laughs)

JA: Yeah. So I did that for a year, and I got my residency and I said, “get me the hell out of Oviedo.” So I moved to Gainesville.

AC: So the second one is right down the road. Tampa.

JA: Oh!

AC: So if you had to pick Orlando or Tampa, what would you pick?

JA: Tampa.

AC: Why?

JA: Because there’s like Clearwater Beach. It’s nice.

AC: It’s on the west coast. The Gulf side.

JA: Yeah. Orlando is right in the middle, so touristy. I’ve never been to Disneyland or World or whatever is there. I went to Universal Studios once with this girl. That was fun. But I like Tampa, Clearwater Beach. That’s nice.

AC: So you picked Tampa over Orlando. Number three is also down the road, on the other side. Miami.

JA: Yeah, Miami is fun.

AC: Yeah Miami is cool. I could live there.

JA: I don’t know if I could live there.

AC: In summer it would be pretty rough.

JA: It’s a little nuts. I would never live in Miami.

AC: I only went there once. It was in August, which is not the time to go. But we went on a cruise to save money because in August they’re really cheap. (laughs) And we were there like two or three days beforehand, and I went on a jog. They got that boardwalk. I went on a jog, and I got whatever distance, and then I was going to turn around. And so I got, I don’t know, mile, a mile and a half, whatever I did, and I realize, first of all, I’m not going to make it back. Secondly, I actually might die on this hike. (laughs) So I ran into a hotel, all sweaty, and sat there for like half an hour. And then Ann called me, “where are you? “Well, I’m at the Marriott.” (laughs) “What are you doing there??”

JA: “I almost died on this jog.” No, I could never live there. Miami’s fun for like a weekend.

AC: Number four is Scottsdale, Arizona.

JA: Yeah, I’m not a big fan of Scottsdale. I was just in Scottsdale recently too.

AC: I like Scottsdale. I mean, not in the summer. Again same, too hot. But the rest of the year is pretty good. Lots of good golf. Golf courses are great. To me I love the green grass against the stark desert, I think that’s a cool look.

JA: Yeah it is.

AC: But you still wouldn’t pick that one. Number five is yet another place you’ve lived. Atlanta.

JA: Atlanta. Hotlanta! Yeah, I lived in The Darlington when I lived in Atlanta, Georgia. Because you graduate from the University of Florida. Is this all the places that I’ve been to? What the hell is going on? I just love living with retirees. (laughs)

AC: (laughs) No wonder you like to help retirees.

JA: (laughs) No wonder why I’m in the profession. I just love hanging out with the retirees. Oh, Atlanta. I thought I was going to make it big in Atlanta because that’s the New York of the South. My girlfriend at the time, she was from Daytona Beach, Florida, and she wanted to stay south, close to the family. And I said, “well let’s go to Atlanta.” She’s like, “sure.” Ugh. I lived in, like, low-income housing. It was awful. Five cops got shot. The day I left, it was craziness. It was right across the street from the Piedmont Hospital, right on Peachtree Avenue.

AC: You got out just in time.

JA: So my brother came. All I had was – I didn’t have a bed. I slept in my suit garment bag because I only had one suit, one shirt, and some crappy shoes and a belt. So that was my work attire, every single day. I lived in low-income housing in Hotlanta. In The Darlington. So I had some stuff. And I drove a Jeep Wrangler back then. No top. Really cool. So I drove the Jeep Wrangler from Atlanta back to Minnesota with my brother. So I have this little car full of all my belongings. So it was in like a bag. So I’m going down the freight elevator. And then this one guy goes, “yeah man, congratulations.” I go, “what?” He’s like, “you graduated The Darlington. Good for you for getting out of here.”

AC: (laughs) You’re one of the few that made it out.

JA: It was like a jail cell. (laughs) What’s next on the list?

AC: Well, we got Salt Lake City.

JA: Nope, never been.

AC: Me, I’ve been. I haven’t been to haven’t lived there. Honolulu. Now there are a million other places in Hawaii I’d rather live, but I love Hawaii. And number eight is Denver. I actually could live in Denver. I like Denver, I like Colorado.

JA: I like John Denver.

AC: You do. (laughs) Yes, I do too. I wouldn’t have guessed you would like John Denver.

JA: Love John Denver.

AC: OK. Wow, me too. Nine is Austin, Texas.

JA: Ooh, I like Austin.

AC: Austin? You’ve been?

JA: I have.

AC: I have not. I keep hearing it’s the place to be in Texas. And then number 10 is Las Vegas. And it turns out, actually, a lot of retirees like Las Vegas, because when you live in the suburbs…

JA: You just smoke cigarettes and gamble your Social Security check away.

AC: No. (laughs) Vegas is a regular town in the suburbs, and then when you want that craziness, once every other week, you can go have dinner, throw a couple of bets down. But I think the retirees, what I’ve heard is they hardly ever go to the strip. That’s what you and I do when we go there. Anyway, that’s my list.

JA: Very interesting. Well, I learned a lot about myself with your list today.

AC: Yeah the first half are all places you know intimately. (laughs)

JA: I’ve actually had residence. (laughs)

AC: You want to hear the 10 worst? Well, we’ll do this quickly. But I’m sure you’re curious.

JA: I am very curious.

AC: Well get to the worst one at the end. Number 141 is Rancho Cucamonga in California. That’s 141. We’re going to 150. And then – actually, the first five are in California. (laughs) So here we go, Fontana, 142. Modesto, 143. That’s Central Valley. Stockton, also Central Valley, 144.

JA: Ooh, awful.

AC: Fresno, 145. (laughs) That’s where my uncle lives, that’s where he retired. Can’t be all bad. Number 146 is Detroit.

JA: Ooh, The D.

AC: Yeah. Usually scores low on these kinds of things. (laughs) Number 147 is Worcester, Massachusetts? Number 148 is a place where my uncle spent his entire career teaching: San Bernardino. Now he lives in Redlands. He’s a Redlands guy. Then we’ve got number 149, Providence Rhode Island. Any guess on 150? The worst place, according to this study, NerdWallet.com

JA: The worst place to retire?

AC: It’s on the East Coast.

JA: East Coast, the worst place to retire. Ever. New York City.

AC: (laughs) That didn’t make the top 10 or the bottom 10. But it’s in New Jersey. Newark, New Jersey.

JA: Why?

AC: Dunno, doesn’t say. Well, actually let’s see what it does say. It says partly because of taxes, higher cost of living, and lesser quality of life. So clearly, they don’t have enough bingo. (laughs)

JA: I guess so. New York is pretty expensive. New York City.

AC: Yeah, well that’s why I didn’t make the top 10, it’s because it’s too expensive. That’s why San Diego didn’t make it either.

JA: What is San Diego?

AC: I don’t know, I didn’t get the list.

JA: Only top and bottom?

AC: That’s all I got.

JA: So our crack research team just did kind of an abbreviated version there.

AC: Yeah. So I don’t know.

I found that list and can tell you that San Diego is the 37th best place to retire. Must be all the bingo halls. You can find that full list too, it’s in the show notes for today’s podcast at YourMoneyYourWealth.com.  While you’re there, check out the white papers, articles, webinars and over 400 video clips on tax planning, investing, retirement planning, small business strategies, estate planning, Social Security, our new Medicare video series, and more. It’s all waiting for you, all free, at YourMoneyYourWealth.com. If you need more help, you can always email us at info@purefinancial.com, or pick up the phone and call us at 888-99-GOALS. That’s 888-994-6257.

50:12 – Ways to Fund Children’s Education

AC: Oh we got Jason Thomas. We’re trying to catch him by surprise.

JA: This is the new segment called Catch Jason Thomas by Surprise. And there’s no surprise at all in this, Jason Thomas! How are you, sir?

AC: Well except he doesn’t know what we’re going to ask him, that’s a surprise.

JT: Well I guess so, yeah. (laughs)

JA: Jason, tell our listeners who the heck you are.

JT: I am the education specialist at Pure. I do some of the videos and teach some of the classes that we have, and I’m up in the L.A. area.

JA: Do you have any credentials that we should be aware of?

JT: Yeah, I’m a CFP® or a Certified Financial Planner, and I’ve been in the industry about 10 years, and I used to teach in programs for people that wanted to get that designation as well.

JA: So you taught advisors how to be advisors, is what you’re saying.

JT: We’ll see if that actually ended up happening (laughs), but yeah, some of those people have kind of stayed in touch with me as they’ve kind of gone along through the industry. But yeah, I started one of those programs at the University of Redlands about four years ago, and it was pretty interesting.

JA: Well, since Deb ruined our segment, I’m going with an off the cuff question for you, because I like the element of surprise with this. With the phone ringing., and then he’s going to be like, “Who the hell is this?” And we’ll be like, Heyy! Jason! You’re live, on the radio.” So what videos are you doing now? Did we get to college funding?

JT: Yeah, we’re in the middle of that one now.

JA: Alright, let’s talk about it. What are some ways that people can fund their children’s education? Go.

JT: Well first is start thinking as soon as possible. And some of the common plans are 529 plans, or college savings plans. You have the option to use your own retirement account if you’d like, and take withdrawals for a child, but that’s kind of a dicey one because you want to make sure that you’re still in shape for your own retirement if you do something like that. A lot of people like savings bonds also. It’s not as likely to get a huge rate of return. But, it’s fixed, and you will avoid taxes on the interest if it’s used for education later on. On the college savings plans, which are probably the most popular option, those 529’s, whatever growth occurs, you would also not be taxed later on, if they’re used for education expenses.

JA: What are the pros and cons of 529 plans? Because there’s a lot of talk of, you should fund a 529 plan for your kid’s education. Why wouldn’t I want to fund the 529 plan?

JT: There are some disadvantages. For example, if the state that you live in doesn’t give you any benefit for doing it, then you would have a less advantageous situation than people in other states. Like California doesn’t give you a tax incentive to do it while some states do. But the upside of that is that you can just buy a plan from any state and choose whichever one has the investments that you prefer, the lower fees or something like that. There are limitations on how often you can mix the investments up inside the account. So they are a little more restrictive than what you would be able to do in, say, your own IRA for example. So you really got to find one that you like it kind of as is, rather than assuming that you’re going to tailor it to be your own thing.

JA: What about prepaid tuition?

JT: That can be an option for a lot of people at state institutions, but not every state has a pre-paid tuition for their State University network. So that’s a state by state basis also, and it kind of restricts the choices available later on. So that is substantially less common and less popular than doing a 529 plan. Basically, the advantage of doing that would be that you’re locking in today’s rates versus tomorrow’s. And we know college costs are increasing substantially more than inflation. So that would be the game plan, but you’re limiting risk and you may not have the option to do it anyway, depending on where you live.

AC: And so what happens in that plan if your son or daughter doesn’t actually go to college?

JT: There are some refunding provisions, but it really depends on the actual state that you’re going to, and you’re probably not going to get as good of a deal on your refunding as what you would be if you were paying for the actual increased tuition over time. And in addition to that…

JA: You’re on the spot, Jason. (laughs)

JT: (laughs) It’s just not something that you really want to be confined to doing anyway. That’s money that you didn’t put somewhere else is what I was going to kind of say.

JA: Are you at lunch or something? Did someone walk by? Or was it a brain fart? What happened there?

JT: (laughs) There was a very attractive individual that just kind of diverted my attention elsewhere to something a little more…. (laughs)

JA: Yes, besides prepaid college tuition. (laughs) So here’s my last question because this segment was supposed to be set up as let’s call Jason on the spot, where he doesn’t know who’s calling him. But here’s what happened. Deb, our producer, called him and said, “Hey, Joe wants to talk to you and put you on the radio.” And so I’m sure you ran to your office and got all sorts of material, where I wanted to see you at McDonald’s. (laughs)

JT: (laughs) I’m going to put that number in my phone to make sure that I’m not surprised in the future, even if the game is kind of improved.

AC: Oh we can use other numbers.

JA: Yeah, we’ve got lots of numbers here, brother. So, Jason, I am not married, and I do not have any prospects of marriage at this point in my life. But let’s say I, at one point, would like to get married and have a child. And I went to the University of Florida. Can I call the University of Florida right now and lock in some tuition for Junior, even though he is unborn, and I don’t even know whose mother is yet? What do you think?

JT: The short answer is I don’t think so. (laughs) They’re going to say we don’t want that future Gator. (laughs)

JA: Oh wow!

JT: No, just kidding. They would be happy to have a future Anderson generation, but as far as the funding of that, it’s a state wide system, so it’s not necessarily a particular state university. So if Florida had one, which I’m not sure they do or don’t, it would be for the overall state education system.

JA: So I would have to go to Florida State?

JT: Well no, you could go to any State University. I think UF is a state university in Florida though, right?

JA: The University of Florida. It’s not the University of Florida State. Florida State is the enemy, Jason.

JT: (laughs) Yeah I know that. I’ve been to Gainesville. I’ve had some fun there, I visited and had a good time at that campus.

AC: So Joe, you what you would have to craft a name for this future kid, like Joseph Jr. Joseph Anderson Jr.

JA: I was going to have Jason Alan Anderson. (laughs) Now I think that’s over with.

AC: Now it’s just Al Anderson. (laughs)

JA: Last but not least, Mr. Thomas, what is the joke of the day?

JT: Oh my, the joke of the day. You might have caught me again. I’m going to give you guys one about a child. You just mentioned having a kid in the future. So, a guy rushes into the delivery room, he’s angry, and he says, “I can’t believe it, this is the ugliest kid I’ve ever seen, you cheated on me!” And she looks up and says, “Not this time.”

JA & AC: (laugh) Oooooooh. (more laughter)

JA: All right Jason, have a wonderful weekend, thanks for participating in Your Money, Your Wealth.

JT: You too, thanks, guys.

Keep an eye on YourMoneyYourWealth.com for more college funding information coming soon from Jason Thomas, CFP. In the meantime, if you or someone you know is turning 65, it’s time to start navigating the Medicare maze, so you can choose the right plan for you, at the right cost. The Understanding Medicare Video Series, featuring Certified Financial Planners Joe Anderson and Jason Thomas – is available now, free and on-demand from the Learning Center at YourMoneyYourWealth.com. We’re talking about the As, Bs, Cs and Ds of Medicare. We’re talking about 11 Common Medicare Mistakes to Avoid, and we’re talking how to Bridge the Gap to Medicare. (drop) Just visit the Learning Center at YourMoneyYourWealth.com to watch the Understanding Medicare Video Series, free on demand.

It’s time to dip into the email bag, with financial questions courtesy of Advisor Insights from Investopedia, and you, the Your Money, Your Wealth listeners. Joe and Big Al are always willing to answer your money questions! Email info@purefinancial.com – or you can send your questions directly to joe.anderson@purefinancial.com, or alan.clopine@purefinancial.com

59:54 – Email – How Can I Reduce Taxes in Retirement?

AC: This was written actually, not to us, full disclosure, it was written to USA Today. They didn’t realize they could write it to Joe and Al I guess. This is Charlie. “I’m 55 and I plan on retiring in the next 10 years. Can you give me any tips on lowering my taxes in my retirement years? Where would you go with that, Joe?

JA: Taxes don’t stop when your paycheck does, Charlie. (laughs) In fact, you have more control over your taxes than at any other point of your life.

AC: Yeah, and why is that?

JA: Because you control…

AC: You control the distributions to some extent. When you’re working, what control do you have over your salary? Well, hopefully, you have a salary, (laughs) and then maybe your employer has a 401(k) or 403(b) or something like that.

JA: Yeah, if you’re an employee, you don’t have much.

AC: Not much you can do. If you have a 401(k), you can decide, do I put any in or I put up to $18,000 in, or if I’m over 50 I can add another $6,000 to that – $24,000. That’s your choice, and that’s it. Now when you’re retired, well you know at 70 and a half you have to take your required minimum distribution out of your IRA. So that’s a known. And whenever you sign up for Social Security, the youngest is age 62, the oldest is age 70. The longer you wait, by the way, the bigger the payment is going to be. So in a lot of cases, it does pay to wait if you can afford it. So those things happen. If you have a pension, that comes to you, there’s not much control there, but everything else. Let’s say you’re spending $100,000 per year, and your Social Security is $30,000. You don’t have a pension, so you need $70,000 from somewhere. Well, you get to decide, do I take that out of my IRA, my 401(k), maybe my non-retirement account. We call that non-qualified. My trust account, or maybe my Roth IRA. I got money in a Roth IRA. You get to decide which ones that you pull from, and generally, you want to have a tax plan to figure out, gosh if I pull it all out of the IRA, I’m in a really high tax bracket, so maybe some of it should come out of my Roth, because that’s tax free. Maybe some of it comes out of my trust account, because I know that’s a lower rate. That’s a capital gains rate on the gains. Plus it’s not even all fully taxable because some of that’s principal. Return of capital to you. And a lot of times, we’ll see people living in the $100,000 world or $150,000 world. But they’re in a very low tax bracket, because of the tax planning they did.

JA: You’ve got to map it out first though. So you can’t do this: “Now I’m retired, where do I go?” Well, you want to make sure that you understand, first of all, the planning. Look a couple of years before you retire. I suppose you can do it when you retire too, but it works a lot better to say, “here’s what I’m spending today. Here’s what I would like to spend in retirement. Yeah, maybe I want to increase that for the first five, 10 years, maybe decrease it,” whatever. Map that thing out. How much is coming in? How much are you spending? How much are you going to need in savings? And then from there, as Al said, let’s say you need $70,000. $40,000. Look at where’s your assets right now. Write it down. How much do you have in tax deferred accounts? How much do you have non-retirement accounts, and how much do you have in Roth? And I would guess that most of you have most of your money in tax deferred accounts unless you’re a client of ours. And then you probably have a lot in Roth. But then you have very little control over your taxes at that point because I don’t think they realize Al, is when you pull money from a retirement account, it’s taxed exactly like your paycheck, except there’s no FICA tax. So you pull $100,000 out. It’s like you earned a $100,000 salary.

AC: Yeah, same tax bracket seems.

JA: Yes. You get the same brackets on state and federal. And then in some cases, you have very little deductions to go against it. So you might even pay more in tax.

AC: Yeah that’s right Joe. I got a little quick example to sort of illustrate this. This is a taxpayer living on $110,000 of income, and let’s just say $20,000 of qualified dividends from their trust account, Social Security $40,000, IRA distributions $50,000. You add that up, it’s $110,000. If you look at federal taxes, it’s about $9,000. That’s the tax on that. And that’s all taxed – well, not all, but most of it taxed at the highest ordinary income rates. Now, you take that same tax payer and instead of $50,000 in IRA distributions, it’s half of that, $25,000 IRA distributions, and $25,000 in Roth IRA distributions. You’re still getting $110,000, but now your federal tax is $3,000. It’s one-third of the other, and then you’re thinking, “Well, how could that be?” Well, first of all, Roth IRA distributions, the $25,000 is tax-free, but it gets better than that, because you have less income, because Roth distributions don’t count as income. About $10,000 less of your Social Security is taxable, because of the way that works. Oh, and by the way, about $5,000 more of your qualified dividends is tax-free as well, because you stayed in the 15% tax bracket. So by just having a little change in how you set up your distribution plan, in this example, you cut your taxes by two-thirds. And this is what we’re talking about.

JA: 75% reduction in your tax bill.

AC: Yeah. 66 and 2/3rds, actually. Close enough. (laughs)

JA: 70%.

AC: But the point is, if you can do this over a 25-30 year retirement, it’s giant. Gigantic. Ginormous?

JA: Ginormous.

AC: Is that a word?

JA: All right. That’s it for us for Big Al Clopine, I’m Joe Anderson, show’s called Your Money, Your Wealth. We’ll see you again next week. Take care.


So, recapping today’s ginormous show: Some of your real estate exchange and retirement savings options may be changing, so make sure to stay on top of the latest tax reform news. 529 plans, your own retirement money and savings bonds are some ways to fund kids’ education. Taxes don’t stop when your paycheck does, you actually have more control over your taxes in retirement than at any other point of your life, and a visit to YourMoneyYourWealth.com for a free assessment with a Certified Financial Planner can help put you on the right tax track. And Orlando, Atlanta, Scottsdale and Miami may be great places to retire, but not if you’re Joe Anderson.

Special thanks to our guests, Paul Merriman and Jason Thomas. Visit PaulMerriman.com to read more from one of our favorite nationally-recognized authorities on mutual funds, index investing, asset allocation and both buy-and-hold and active management strategies. And don’t forget to visit YourMoneyYourWealth.com to watch the new Understanding Medicare video series from two of our favorite Certified Financial Planners, Jason Thomas, and Joe Anderson.

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 info@purefinancial.com. Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors.

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.

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