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Published On
April 11, 2023

Should retirement living expenses be drawn from your stable value fund, your CD or money market, brokerage account, or FDIC insured bank accounts? Can you even trust the banks after the recent bank failures? What about sequence of returns risk? Which investments are best for long-term retirement savings when you’re early in your career? Joe and Big Al explain why your strategy for retirement savings and withdrawals should be your first step – before you consider investments, asset classes, or sectors. 

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Show Notes

  • (00:49) Stable Value Fund Vs. Brokerage Account for Living Expenses? (Sharon, Waukesha – voice)
  • (09:08) Sequence of Returns Risk: Should I Save for 5 Years in CD, Money Market or Brokerage Account? (Carlos, Tampa Bay)
  • (15:46) High Income and Tax-Deferred Savings, Low Tax Rate: Where Should I Save? (Josh, Boston, MA)
  • (21:40) Am I Overcomplicating My Investments at Age 35? (Mike, VA)
  • (29:44) I’m 28. Should I Max Out Pre-Tax or Post Tax 457 Plan Retirement Savings? (Michael)
  • (33:55) How Does FDIC Insurance Work? SVB and Signature Bank Failures (Jon, Powhatan, VA)
  • (39:46) Should We Roll 401(k) to Several FDIC-Insured IRA Accounts to Live Off Of? (Joan, Long Island, NY)

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Transcription

Should retirement living expenses be drawn from your stable value fund, your CD or money market, brokerage account, or FDIC insured bank accounts? Can you even trust the banks after the recent bank failures? What about sequence of returns risk? Which investments are best for long-term retirement savings when you’re early in your career? Today on Your Money, Your Wealth® podcast 424, Joe and Big Al explain why your strategy for retirement savings and withdrawals should be your first step before you consider investments, asset classes, or sectors. I’m producer Andi Last, with the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA. Get your money questions answered: go to YourMoneyYourWealth.com and click Ask Joe and Al on Air to send them in as an email, or a priority voice message, like this one:

Stable Value Fund Vs. Brokerage Account for Living Expenses? (Sharon, Waukesha – voice)

Sharon: “Good morning, Joe, Big Al, and Andi, Sharon from Waukesha. First, thank you for your podcast. Again, one of my faves. I’m still driving the 2016 Honda CR-V. Still catering to my two rescue cats, Izzy and Baby, and I wouldn’t turn down a cup or two of red wine. Hey, a couple questions around stable value funds and the use, the purpose of them, I guess. I have a stable value fund. It’s called the annual fixed rate fund in my 401(k). Although really my main question is figuring out where to pull money for living expenses in 2024. I retired at the end of 2021 and I’m currently draining all my cash as I ride out this down market. The cash runs out end of 2023. My annual expenses are about $55,000. I’ve already rolled my 401(k) into an IRA, but I do have some funds in my 401(k), specifically $58,000 in a 2030 target fund, and I have $41,000 in a stable value fund. It’s a stable value fund that I’m really kind of looking at. Current return rate on this fund is 5%, average return rate has been 5% or higher since inception, 1997. Zero fees associated with this stable value fund. I know I’ve asked you a question about this before in the past and you have sounded skeptical, but there are zero fees. Expense ratio as of 2022 is zero, purchase fee none, redemption fee none, 12B fee none, unless I’m missing a hidden fee. So does it make sense to draw down on this stable value fund for a living expenses in 2024? Or it’s just better to tap my brokerage? Is there any value enrolling that 2013 target fund of $58,000 into this stable value fund and building it? Or should I just roll both funds in my 401(k) to my IRA and be done and start draining my brokerage account to cover expenses for the next few years? What are your thoughts really around this stable value fund? What should I do with it? Especially now that savings rates are starting to rise. I currently get 4.2% for my cash savings. Should I be tapping it, keeping it for later, or rolling it into an IRA? Any thoughts? Thanks so much guys.”

Joe: Thank you, Sharon. Sounds like I was back at home.

Al: Yeah, right?

Joe: You could tell that Midwest accent.

Al: You got it. Yep. You heard that too?

Joe: Yeah. You betcha I did.

Al: Yeah.

Andi: Joe.

Al: You betcha.

Joe: Okay. Couple of thoughts. So she’s got multiple questions here, kind of baked into one.

Al: Yeah, she does. They’re kind interrelated, but there’s a few different points we’ll probably wanna make. Maybe we should explain what’s a stable value fund?

Joe: Well, I think before the investment you gotta come up with the strategy, right?

Al: Right. Yeah.

Joe: And so she’s drawing down cash is what she said. Do we know how old Sharon is?

Al: No, and we also don’t know her income, which we kind of need to know that.

Joe: She wants to live off of $55,000 a year. So I don’t know if she’s claiming Social Security or not. I don’t know if she’s got a pension or not. So if she’s drawing cash, maybe she should be drawing cash. She’d be drawing from her 401(k) at least to the top of the 10% tax bracket.

Al: Yeah. Well, right, exactly. I had the same thought, but we really don’t know what her income is, so, so, yeah. So, so the first thing you wanna do is look at your taxable income to figure out what tax bracket you’re in. And the 12% bracket for- I’m assume she’s single, she didn’t mention a husband- is about $45,000 taxable income. Which you always get a standard deduction of- what’s that, about $13,000 ish? So let’s just round it up. So income somewhere around $50,000 for a single taxpayer would put you roughly at the top of the 12% bracket, roughly, right? So, so then the question is, if your income is $40,000, not $50,000, so then you actually wanna take about $10,000 outta your IRA or 401(k) to fill up that low bracket, right? Because you’re gonna have to pay tax on that money anyway. So fill up that low bracket. Now, on the other hand, if she’s getting big pensions, you know, maybe not. Cuz her spendings $55,000 and she’s gotta use cash to pay for at least some of it.

Joe: Right. But if she’s taking, she, it sounds like, all right, I’m depleting my cash and then now I’m going to my brokerage account. And then I’m gonna roll this into the IRA. Oh, and by the way, I looked at this investment. And the stable value fund is getting 5%. Should I take it from there? Well, you gotta look at the taxation of the account, and then from there, you wanna start looking at how you invest those accounts to create the income that you need, especially if you’re retired.

Al: Yes. That is the right flow.

Joe: So high level with the stable value fund- if stable value funds are great, they’re in 401(k)s, it’s kind of like a pooled investment. So if it’s paying you 5%, no fees, yeah, all day long, you probably wanna go into that, especially as you’re transitioning into retirement. So by rolling the money out, can you get something comparatable? Is that a word? Comparatable?

Andi: Comparable.

Joe: Comparable. Comparable. Thank you.

Andi: Comparatable. That works.

Joe: Yeah.

Joe: Yeah.

Andi: It’s Joe’s language.

Joe: Felt like I was in Waukesha for a minute.

Al: You were between comparable and comparable.

Joe: Yes. So sure. In today’s interest rate environment. But she’s got very low fees, no fees, blah, blah, blah, blah, blah. You wanna make your life simpler. Do you wanna consolidate? But I think she needs an income strategy versus an investment strategy. You could buy something very comparable, like a stable value fund and your brokerage account. Right now it’s paying 4.5%, 5%. Can you get something fairly safe close to that today? Probably not as good, but pretty close. Yeah.

Al: Well, even CDs now in some cases are paying over 4% or even 4.5%. So, yeah, you probably can, I think the- my understanding of stable value funds is the same as you. They’re in 401(k)s only, and they have an insurance component. Because then if the market goes down, you still get your same payment and that insurance component does cost money. So, there are fees inside the stable value fund itself. There may not be a purchase fund fee-

Joe: redemption fee-

Al: – or redemption fee-

Joe: -well, B1 fee.

Al: There may not be that, I get that right. But they’re- someone’s gotta pay for the insurance and it’s the people that own the funds. So there, there are fees in- Sharon, in your term, hidden. They’re usually- they’re not hidden. They’re-

Joe: But they’re minimal, but I wouldn’t even care.

Al: They’re minimal and it’s in, what the 30-page summary document that you get. It’s, they’re hard to find is what I’ll say. But yeah. That you’re getting a good rate of return. But I 100% agree with Joe. It’s actually where you should pull the money out first, and then secondly, how you should be invested. And if you really are getting 5% or more, then that’s a great place to be. Now the stock market over the last 100  years, S&P has earned almost 10%. Now, we haven’t seen that the last couple years. But just be aware, when you have a stable value fund you’re giving up some upside. In the market, but what you’re getting-

Joe: – is safety.

Al: -The safety which is not bad.

Joe: Yeah. Risk and expected return are related. I love 5%, especially for someone’s transitioning into retirement or in retirement.

Al: Me too.

Joe: It sounds like she’s not a huge spender. $55,000 a year. She’s probably saved a couple of nickels. So, we don’t know what her fixed income sources are, so how much of the portfolio that she needs, and we don’t know how big of a portfolio that she has. I know she’s called in or wrote us in the past and we could probably do some research, but that’s unheard for us.

Al: That’s too much work. We just take ’em off the cuff, spit ball as we say.

Joe: So hopefully that helps. Yes, stable value fund, 5%. Put more money into it. Keep it in there. Draw it out. But look at your tax bracket before you start taking it out.

Sequence of Returns Risk: Should I Save for 5 Years in CD, Money Market or Brokerage Account? (Carlos, Tampa Bay)

Joe: “Greetings Andi, Joe and Al. I’m 49, my wife’s 48. I’m hoping to transition to semi-retirement part-time work at age 55. I’d like to save for about two to 3 years in cash by the time I’m 55. Yet whether the potential of sequence of return risk scenario like many newly retired may be facing today. Traditionally, I’ve heard you discuss using an after-tax brokerage account for the cash bucket. My question, based on what I’ll need the money in 5 to 6 years, would it make sense to keep the money in cash in a CD currently earning between 4% and 5%? Or a money market versus risking the cash invested in a brokerage account? My wife and I should have enough in retirement, 401(k)s, IRAs to supplement the part-time income at age 55. My drink of choice, Cuba Libre. We have two awesome rescue dogs, shepherd and terrier mix. Kids are awesome too. And they’re almost launched. Thank you in advance for your spit ball.”

Al: Yeah. So kids are almost launched, age 49, 48. Yeah. You start thinking maybe I don’t need to work anymore. Let’s think about retiring and if you can retire at 55, fantastic. That’s a great goal.

Joe: All right, so I’m not sure the question- is he talking about okay, when you’re 55, again, you have access to the money in your 401(k)s. If you separate service from that employer at age 55.

Al: Yeah. Without penalty.

Joe: You would have tax, but there’s no 10% penalty.

Al: Yeah, ‘cuz the normal rule of  IRA, you have to be 59 and a half years old to take the money out without the 10% penalty. Now when it comes to 401(k)s, as you said, Joe, you have to be 55 years old or older when you retire. But let’s say you’re 55 and you retire at that point. So you’ve separated from service, now you have access to the 401(k). You will pay taxes on it like any time. But there’s not that penalty. So 55 you would have access to it. And the bigger question is what- kind of similar to another one we did today-

Joe: Where’s the money gonna come from? Not what the investment’s gonna look like.

Al: Right, exactly. And so first of all it’s like where is your money right now? And then you gotta figure out, what’s the strategy to pull it out? Because based upon your income and based upon the tax brackets is gonna determine where you pull the money from. To give you an example, so for a married couple, the top of the 12% bracket is almost $90,000. Let’s just say that, taxable income. And so if your taxable income is $70,000, then you probably want to take $20,000 out of your IRA, 401(k) because it’ll be taxed at a very low rate. And if you manage your withdrawals, thinking about your tax bracket all the way through your retirement, you’ll end up with a lot more dollars to spend because you’ve been smart on how you’re taking it out.

Joe: Okay. So because here’s what he’s thinking it sounds like anyway, from the email, it’s like, all right, well here I need cash on hand and same with the other question from Waukesha is like, okay, stable value fund versus my brokerage account versus cash, well I drained all my cash. So they’re thinking of it as investment versus as an overall strategy. So you first gotta be looking at how much money do you need to live off of? And second, what is your part-time income going to be? So what is that demand for the portfolio? And so your part-time income most likely is gonna be taxed at ordinary income rates. So let’s say you wanna live off of $100,000 a year and $50,000 is gonna come from your part-time income, so you need to pull $50,000. All right, well, the top of the 12% tax bracket is $70,000 plus your standard deduction of $90,000. So you could still pull money from your 401(k) and be still in a very low tax bracket, or you convert. So you have to look at what the- how much money you have, what the fixed income sources are, what your tax bracket is, and then from there you can start getting into the strategy of your glide path into CDs or a stable value fund, or cash itself or a money market.

Al: Right. And so yes, once you figure all that out, then it’s like, and then where are your assets? Then you can figure out what the right investment strategy should be. And by the way, I don’t think we’ve ever recommended keeping all your cash in the brokerage account. It depends on what if you have just enough for an emergency fund. Sure. But here’s the truth is by the time you get to retirement, you’ve gotta figure out where you gonna pull the money from. And if you’re gonna be pulling the money from your IRA, you wanna make sure you have safety cash or bonds in your IRA or 401(k) so that you don’t have to worry about the market tanking, while you’re trying to pull money out. And so how much you keep in safety, well, that depends upon your withdrawal strategy. Because we like to say that you wanna have at least 5 years of withdrawal money in safe assets in whatever pool that you’re talking about. And here we’re talking about 401(k), IRA, and then you can invest the rest. And some people, if they’re really conservative, maybe 10 years, right? 10 years of cash or bonds inside whatever retirement account, brokerage account, Roth IRA, depending upon where you pull the money from. And for those that are fortunate to have money in all 3, and they need to withdrawal from all 3, you’re gonna have to have safety in all 3. Now, you do want cash in your brokerage side and your non-retirement side for emergency cash. But other than that, just make sure you have some safety in the accounts that you wanna pull from.

Joe: Yeah, and I think our definition of safety is cash, CDs, short-term bond, treasuries, you know, short duration, very, very high quality.

Al: Agreed.

Joe: Alright, thanks for the question, Carlos from Tampa Bay.

What’s next for stocks and bonds? Will the Federal Reserve finally tame inflation? Should investors worry about regional banks? Register now for our free market update webinar, Wednesday April 26th at noon Pacific, 3pm Eastern with Pure Financial Advisors’ Executive Vice President and Chief Investment Officer Brian Perry, CFP®, CFA. Brian will explain the market volatility we experienced in quarter one of 2023, and the outlook for the financial markets in Q2 and beyond. Click the link in the description of today’s episode in your favorite podcast app to go to the show notes, then click on the webinar banner there in the free resources section to register for this free market update webinar.

High Income and Tax-Deferred Savings, Low Tax Rate: Where Should I Save? (Josh, Boston, MA)

Joe: Got Josh from Boston, Massachusetts. “Hi, Joe, Big Al. Love the show. Listen to it every Tuesday on my way to work. Amazing how you guys have that old time radio feel.” Oh-

Al: Yeah. Old time.

Joe: Yeah. Old time. Big Al’s old.

Al: I was gonna say we’re old timers, but-

Joe: We got that young time.

Al: -what I really meant is, I’m an old timer.

Joe: Well, we’ve been doing this show for close to, what, 20 years?

Andi: 400 years.

Al: Yeah. It’s been, yeah, more than 15, less than 20, but somewhere in there.

Joe: Yeah. That’s what close to means.

Al: Really? Is that what it means?

Joe: He needs the exact minute-

Al: I need it to 17 and a half? 18?

Joe: “I used to listen to Don and Mike and the Junkies. They were big talk radio shows in DC in the early 2000s. Takes me back to those days.”

Al: Oh, well, good.

Andi: Hopefully that’s a good thing.

Al: I didn’t- we weren’t aspiring to that, but I’m glad to hear that if you like them and you like us, that’s a good thing.

Joe: I gotta start listening to Don and Mike and the Junkies.

Al: I think that’s- they’re probably long gone. You have to get the archives.

Joe: I suppose, back in the 2000s.

Al: Yeah.

Joe: “My question is, I have access to a Roth traditional 403(b), and I figured I knew which one to contribute to, but after receiving my tax refund this year, I’m not so sure. 41, married, two kids. My wife’s  stay-at-home mother and doesn’t draw an income. My W2 last year was a total of $306,000. Due to my two kids, widened tax bracket from filing married and deducting mortgage interest, my effective tax percentage was 17.9%.” Oh, look at Josh doing some math.

Al: Did the math, and that’s usually taking your total tax and divide that into taxable income. That’s where that number comes from.

Joe: Oh, the effective rate.

Al: Effective rate.

Joe: Very impressive. “Marginal tax bracket is in the 24%.”

Al: Yeah, that’s your highest bracket. That’s the one you use for planning, which I we’ll probably get to in a minute.

Joe: “I received 10% gross match from my employer into a 401(a). Current retirement account is $170,000. My current 403(b) is $120,000. My 401(a) is let’s see it $120,000 in the 401(a), sorry, $120,000 in a traditional IRA. $24,000 in a Roth, $70,000 in the wife’s old 403(b). All in all, about $500,000, most in tax-deferred accounts. Unable to convert my traditional to Roth due to the erroneous tax hit.

Andi: Enormous.

Joe: Oh, that is enormous error on my part.

Andi: Enormously erroneous.

Joe: It’s totally erroneous-

Al: -and enormous error.

Joe: Yeah. I thought I was killing that word too, like, “–from the pro rata rule.” All right. Not necessarily.

Al: Yeah, I disagree with that too, but we’ll get to that.

Joe: “Given my already large tax-deferred balances and my relatively low effective tax rate, does it make sense to switch my contributions to the Roth 403(b) even though my income is higher than is recommended? Thanks. I also have a 2021 BMW X3 for the family car. And get to and from work with a 2020 Hyundai Kona. Drink of choice is a little scotch, neat.” Josh.

Al: You can picture that, right?

Joe: Yeah, he’s listening- he just wants to- Don and the Junkies back.

Andi: Don and Mike were shock jocks, by the way. So he’s comparing you guys to shock jocks.

Joe: Perfect.

Al: All right, great. That’s- was that our goal?

Joe: It was. Now we lived it. Now we can retire.

Al: We made it. Finally.

Joe: Yes. Okay, so he’s in the 24% tax bracket. The guy makes $300,000 a year. Effective rate is 18%. But okay- he’s got a 401(a) and then he’s got a 403(b) and then he is got $120,000 in an IRA. Then he’s got $24,000 in his Roth and his wife has $70,000 in a 403(b).

Al: So just call it $25,000 is in a Roth, $475,000 is in deferred.

Joe: So he could convert his wife’s 403(b).

Al: Yes. And not have any pro rata rule. He could convert money from his IRA. I don’t know if he has basis in his IRA, but there’s no pro rata rule. He’s just gonna be taxed at 24% on the amount that he converts.

Al: And if there is any basis, it’s taxed less.

Joe: Correct.

Al: Yeah. And if you go to Roth, we know it’s taxed at 24%, which I’m gonna say, and you’re gonna agree with me, is a good rate. So go Roth.

Joe: Go Roth. You’re 41 years old.

Al: Right. Your income’s probably gonna go up and so the top of the 24% bracket for a married couple is about $360,000.

Joe: So he’s got room. I would convert and go Roth.

Al: I’d get to the top of the 24% bracket and I would start by changing your contributions to Roth number one, and number two, start converting your wife’s old 403(b) so that you can do the backdoor Roths, cuz she’s got a lesser amount than you.

Joe: Yep. I love it. Yeah. Start building the Roth. You’re 41, you’re gonna work for another 20 years. He’s already making bank, $300,000 at 40.

Al: That’s amazing.

Joe: This guy’s killing the game in Boston.

Al: Right. That’s for sure.

Joe: So good for you Josh. I know you have an enormous and erroneous tax bill, but I think you go Roth.

Al: I think you’re in a good bracket.

Am I Overcomplicating My Investments at Age 35? (Mike, VA)

Joe: We got Mike from Virginia. He goes “Hey Joe, Al, Andi. Love the show. Been listening to it for a couple of years. Keep up the fantastic work.” I was just with my cousin Mike from West Virginia.

Al: Oh, okay. Close.

Joe: Very close. “I’ve been listening to it-“ Okay- I lost my place. “I’m 35 years old and live in Virginia, working for a tech company as a senior project manager.” Okay. Congratulations. Sounds like very important work.

Al: It sure does.

Joe: Senior project manager.

Al: Senior.

Joe: A lot of projects going on in that tech company. “I’m married, have a daughter, two and a half years, another child on the way.” Congrats. “I’m making a base salary of $217,000 and bonuses paid out quarterly, depending on the utilization, so max compensation can go up to $255,000. Have $122,000 in cash, $150,000 in my brokerage account, $75,000 in a Roth, $2600 in 529s, putting in a couple hundred bucks a month, and about $160,000 in my 401(k) plan, mix of pre-tax and after-tax converted to Roth, $26,000 in an eTrade account-” That’s for his RSUs and probably stock purchase plan.

Al: Yeah. Probably. Yep.

Joe: “- $10,000 cash in a little Treasury I bonds.” No one’s asking about the Treasury I bonds. That was last year’s.

Al: Yeah. Now that CDs are better. You ___ put $10,000 in I bond anyway.

Joe “I’m seeking your spit ball advice on whether or not I’m on track with my investments. Currently in my 401(K) pre-tax and after-tax, I’m 100% in the S&P 500, contributing 10% pre-tax and 12% to after-tax Roth. My brokerage account got a mix of-” some Vanguard funds it looks like here. Little Triple Qs. He’s got Google, Apple, Microsoft. He’s got total market. He’s got some other stuff. I don’t know what XLU is. “Am I over complicating my investments or should I simplify? My aim was to fund numerous sectors to offset market downturns, but may have overthought it.” Well, of course, because you are a senior project manager.

Al: Project manager. And that’s what he does. He thinks about this to make it work.

Joe: Yeah. This is your project. Yeah. Yeah. You acted as a senior project manager with this. Yeah. I think it’s overkill a little bit. Couple things.

Al: Yeah, I got a couple things too. But you start.

Joe: Okay, so he’s 35 years old. Is he on track? Well, that’s kind of the first step of your process is to say, okay, I’m making $250,000 a year. He’s saving- I don’t know, is he maxing on his 401(k)? Let’s say he spends $150,000 a year. You got two kids. Do you wanna increase your lifestyle when you’re retired? Do you wanna decrease it? What does this look like? Do you wanna maintain? You gonna stay in Virginia? You gonna move somewhere more expensive? Less expensive? I don’t know. So you, there’s no planning in any of the questions, right?

Al: It’s what investments?

Joe: It’s like, well, how are my investments? I got Microsoft. You like Microsoft? Well, sure. I love Microsoft. Yeah, I like Google too. Yeah. I like all your Vanguard funds. But let’s start with the planning first to determine what the portfolio should look like. What target rate of return do you need? You know, if you wanna go all stocks, then yeah, I think you have- 35. You can have maybe 90% stocks, 100% stocks. You probably want a little bit of fixed income just to help you rebalance. If the stock market goes down, bonds usually go up or cash goes up. That gives you a little bit more cushion to buy more stocks when markets are down. But to be honest I got a couple of bucks and, we’ve been doing this show for 20 years. Our firm manages $5,000,000,000 and I have 3 mutual funds. You know, I got a total stock market fund, I got a total international fund and I got some fixed income. So you could keep it as simple as that and I bet ya, you know, you’re going to get a really good target rate of return. If you wanna sex it up and buy all these sector funds, by all means, if you really enjoy doing it. But did you overthink it with the amount of money that you have? I think so.

Al: Right. So I’ve got a couple comments. One is at your salary now and the way tax rates are, I’d probably go- I’d go Roth, instead of pre-tax.

Joe: Because he’s 24% or 22% probably.

Al: Either 22% or 24%. Both are good rates. So I would switch to Roth on your 401(k). And second thing is yeah, I think these investments are all fine and some people enjoy picking stocks and tracking ’em. I don’t, it’s not my thing. But here’s the good and bad about picking individual securities and you’ve got Google and Apple and Microsoft it looks like. QQQ. Is that Qualcomm?

Joe: No.

Al: Someone else?

Joe: No. Those are the Triple Qs. It’s a basket. It’s an ETF.

Al: Is it? Okay. All right. So I would just say this, when you pick individual companies, they have the same expected return as any other stock in the market. It’s just that the variability of returns is a lot greater. So you can make a lot more and you can lose a lot more. Now at age 35- is that what he is? Yeah. Then why not? If you enjoy that. My dad lived till he was 90 and he enjoyed picking stocks and so be it. As long as you understand you’re taking more risk by investing in individual securities. I also agree with Joe, you can invest in 3 mutual funds, right? Total stock market. And then you got all the sectors in one fund. You can invest in an international fund. So you got international. By the way, international has underperformed US market for the last decade, but it flops and, you know, 2000 to 2010, it was exactly the opposite, which is why you wanna have some of each, and then you have a bond fund, total bond fund, just so you have some safety. But at age 35, that can be small or even zero if you want. Just let it run.

Joe: Yeah. If you wanna take on risk, go small value companies, you can go emerging market value type companies and you can buy the ETF or a mutual fund that will give you a higher expected return long term. Just because there’s a ton of risk there. And if you wanna put some money in individual stocks at 35, why not? But hold ’em for the long term. Because the best investment you can possibly make is one individual stock or one individual company. And the worst investment you can possibly make is one individual stock.

Al: Because the variability returns. By the way, I have our company manage my funds and I probably have 12 or 14 funds. Just because there’s small company, mid-caps, small caps, growth value, there’s international emerging markets, there’s alternative investments. There’s all kinds of stuff. And if you wanna have a little bit of each of those, great. But you can do this in 3 investments if you want.

Joe: Sure. One last- I’m sorry Andi, we’re blowing this thing up. Instead of going sectors, I like to look at price. So instead, hey, I wanna load up on consumer staples or technology you might wanna look at, okay, growth versus value. So growth stocks, you wanna buy baskets of growth stocks and you wanna be diversified from that by buying value stocks. And growth stocks versus value stocks have to do with price to book ratios. And I’m not going to get too in depth there. But you can look-

Al: But they’re cheaper. They’re on sale.

Joe: Then you wanna go smaller companies versus larger companies. I think that’s a better way to look at diversification versus trying to bet on an individual sector.

Al: Me too.

Joe: All right. Hopefully that helps.

I’m 28. Should I Max Out Pre-Tax or Post Tax 457 Plan Retirement Savings? (Michael)

Joe: Got Michael writes in from I don’t know. He says “Dear Joe and Al. I work for my local city government and I contribute to my 457 deferred compensation plan. There’s some aspects of it that I don’t understand. I want to get your perspective. Some details, I’ll make $38 an hour for gross pay of $3000, 38 hours times 80 hours per paycheck. Contribute $740 per paycheck pre-tax to my 457 plan, roughly 24% of my gross pay. 2022, I contributed a total of $18,800. I believe the max was $20,500. My city’s 457 defined contribution plan does not include an employer match on contributions. No city funds are contributed to participant accounts. I’m 28 years old and I’ve been with my city job for over 3 years. My first contribution appeared on my second paycheck as a city employee. I will receive a pay raise later this month and another one in June. On a personal note, I contribute the max to my Roth IRA as well.” This guy’s a hell of a saver.

Al: Yeah, I’ll say that’s very good. Michael.

Joe: “I am assuming-“ God, you just sounded like his father. Very good Michael.

Al: Yeah. Well, I am-

Joe: Just wanna pat you on the back.

Al: I am a father.

Andi: And this guy’s 28, so he could be Al’s son.

Al: I’m a father of a 32 and 30 year old, so I can relate.

Joe: Yeah. You’re like, oh, I wish my kids could save like you. “I am unsure of the following, whether to increase my dollar amount contribution.” Okay. Like he wants to take advantage of the full- So his pay’s gonna increase- I would just keep the same contribution and then just wait till closer to the end of the year to see kind of where you fall. And then if you need to increase your contribution limits by then to max it out. That’s what I would do.

Al: Yeah. Cause it was pretty close anyway.

Joe: You got it. “I’d like to contribute the max eventually, but I don’t know if that should be a priority right now.” Oh, Michael, I’m so disappointed.

Al: My tune has changed.

Andi: Wow. You sounded just like a father there, Joe.

Joe: You were such a golden child.

Al: What did I teach?

Joe: What happened? Yeah, I get it, man. You’re saving a ton. I would keep what you’re doing now and then just see- same answer to the second question, Al. What do you think about that?

Al: Well, here’s- we want- we would like everyone to aspire to saving 20% of their income.

Joe: And he’s already at 30%.

Al: Yeah. Yeah. 24% plus the Roth. Yeah. We’ll call it 30%. It’s like, that’s amazing. Yeah. You’ll be able to retire early and have a great lifestyle. Yeah. So make sure you enjoy life too.

Joe: And then let’s see. What’s the third one? “Whether to change contributions from pre-tax to post-tax. I believe time is on my side, but I wanna be sure. Am I on the right track? Appreciate your time and feedback. Sincerely, Michael.” I would, Michael, I would go 100% Roth.

Al: Agreed. Because you’re in a low enough bracket. It’s- the tax benefit’s not that great. And to have, what? 30, 40 years of tax-free growth, amazing.

Joe: You’re not gonna think about the tax benefits 30 years from now.

Al: Yeah. You’re gonna be very happy you’ve maxed out the Roth.

Joe: You’re gonna be so happy that you got this giant pool of money that is 100% tax-free. So, yeah. Very good. That’s- Michael’s saver of the month.

Al: Yeah, I was gonna say star of the show.

Joe: Killed it.

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How Does FDIC Insurance Work? SVB and Signature Bank Failures (Jon, Powhatan, VA)

Joe: I got Jon from Powatana.

Andi: I think it’s Powhatan.

Joe: Powhatan.

Al: Pat Pow poin. Yeah, poin. That sounds right, Andi.

Andi: I Googled.

Joe: Virginia. He goes “Greetings.”

Al: When I first read, looked at that, Joe, I thought it might be Powatton.

Joe: Pohatton.

Al: And then I thought-

Andi: I thought it was Powhatton.

Joe: Powhatton. Pohatton.

Al: Yeah. Powhatton sounds right, but you’re saying it’s Pow hotten?

Andi: According to the internet, it’s Powhatan.

Joe: Okay.

Al: Oh, Powhatan.

Joe: “Greetings Big Al and Joe. Hope all of you are not floating away out there in California.” We’ve got some rain out here recently.

Al: We have. It’s been sunny lately.

Joe: Yeah, it’s been nice. He probably wrote this like two months ago. We’re just getting to it. Sorry. Sorry, Jon. “With the current banking scare, I was just curious if you could clear up some confusion about FDIC insurance.” Okay. Banking scare. Should we talk about that at all, or is it like old news?

Al: No, we should. I think everyone needs to understand FDIC insurance rules.

Joe: Well, I understand that, but the banking scare-  how many people do you think really understand how banks make money or, maybe now a lot more people understand that. Because so when you go deposit your money in a bank, they don’t have a big vault with all this cash in it.

Al: Yeah. They use 90% ish to invest in loans. And so they make, they loan the money out at, currently, let’s call it 7%. They pay you 4% or whatever the spread that they want. That’s how they’re making money. And so what happens, I guess we will talk about it. What happens, and we’re not banking experts, but my understanding is, when people hear about an issue with a bank and it’s solvency, then they flock to the bank to pull out cash. And they’ve only got, and I don’t know the exact amount, let’s just say 10% reserves, right? And so if 40% of the account holders want to withdraw their money, it’s a problem because they only have about 10% on hand or whatever the number is. So that’s what happens. It happened to Silicon Valley Bank and others, and I’ve probably way oversimplified it. We’re just being top level, but that’s kind of how this works.

Joe: Well, well look at A Wonderful Life. Remember that movie? Old George and everyone kind of was like, here, I need my cash. I need my money. It’s a run on the bank.

Al: It’s a run on the bank.

Joe: But then I think people freaked out a little bit because first off, Silicon Valley Bank and I’m- we’re high level and I think everyone that listens to the show knows that we’re just talking out of our you-know-what half the time. But a lot of the money that’s deposit there is like VC money. Silicon Valley stuff. And so they’ve had massive, massive, massive deposits and they had all of this cash sitting on hand and they’re like, well, what the hell do we do with all of this cash? We gotta figure something out. So they bought treasuries. But then they were looking for yield and interest rates were at all-time lows. So they went a little bit long on the yield curve, and they bought like 10-year treasuries. So it’s a little bit longer in duration. So when interest rates spiked up, the bond value drops, but it’s still guaranteed if you hold it to maturity. And then you get all these silicon boys out there and saying, Hey, well this is going on with this bank. And all of a sudden they run on the bank and then they’re asking for huge deposits back. And they’re like, guys, what the hell are you doing? You’re killing me. We don’t got it. And it blew ’em up.

Al: Yep. That’s right.

Joe: So yeah. Should they have been more responsible? Absolutely. Should they have risk management kind of in place to take a look at this? Sure. But when you’re getting $95,000,000,000 in deposits a day, it seemed like, it was like kind of a little bit different time in these VC firms, with interest rates so low, it was like, well, what the hell? It’s almost free money. And then interest rates spike up. It’s like, Hey, maybe we need a little bit of cash back. Things are getting tightened a little bit here. Maybe cash flow doesn’t- so I don’t think the whole banking industry’s gonna blow up. But we got a ton of questions that, oh my God, is my money safe? And they had billions of dollars. Most people don’t have like $30,000 in the bank. So FDIC insurance ensures your money up to $250,000.

Al: Right. And I think that the question talks about, is it- so Jon has $750,000 and so should he go to 3 banks? Or if there’s more than one beneficiary, do you get $250,000 per beneficiary? Which usually happens, Joe, when you have a living trust. So you have a living trust- let’s say you and your wife have a living trust and you have 3 kids, and all 3 are beneficiaries. So the way that this works is that the $250,000 FDIC insurance is on each beneficiary, not you, it’s actually the kids. So 3 kids times $250,000, $750,000 is the FDIC insurance on a single account at, well total accounts at this bank, right? Now if you have, and that’s true, if you have 5 or more beneficiaries, so you can get up to $1,000,250. If you have more than 5, then there’s a possibility you might get some protection, it’s a very complicated calculation. I wouldn’t count on it though. So if you have a living trust that has 10 beneficiaries, then you’re probably only gonna get 5 of them, which is $250,000 each. So that’s how it works with a living trust.

Joe: Clear as mud.

Al: I think it’s clear.

Joe: All right. We got Jon. “Longtime listener.  Go Dogs.” That’s the Georgia Bulldogs. In case you’re wondering. Yes, I know that.

Al: Yeah. Me too.

Should We Roll 401(k) to Several FDIC-Insured IRA Accounts to Live Off Of? (Joan, Long Island, NY)

Joe: We got question from Joan from Long Island, New York. “Hey, I’m 64, my husband 61. Both of our incomes have decreased to about half. We have no pensions, but saved in 401(k)s. Since it’s our plan to live off these savings, I’m thinking of rolling it all into several IRA accounts at banks that are FDIC insured. We wanna retire at 65 when each of us qualify for Medicare. Fortunately, we have no debt or mortgage, but New York is highly taxed. Thanks for your insight and laughs. Joan.” Got a question in there, Joan?

Al: Well, I think she’s wants to see if we agree with her thought of rolling all her IRAs into bank accounts.

Joe: Sure.

Al: For FDIC insurance. Well, so I’ll say today, sure. Two years ago when you were getting 0.03%?

Joe: No. Well, it depends on what rate of return she needs.

Al: Yeah. Usually you need more than 0.03% though.

Joe: Probably true, right? It’s like, again you have to do a little bit of planning so when they hear the banks- or you hear this or you hear that- it’s like the soup du jour. You know what I mean? It’s like, oh my gosh, interest rates. Folks, this is not the first time we’ve had interest rates at 7%. Well, stable value funds or, you know, money market accounts paying 4% or 5%. That wasn’t that long ago when- but interest rates were at all-time lows for a very long time.

Al: Yeah. And so we sort of forget. I remember my dad got a CD in the early 80s and it paid like-

Joe: 18%-

Al: – 14%. Maybe 16%, but some ridiculous thing. And he was kind of kicking himself that he didn’t put more money in because interest rates drop, which they generally would when they get that high.

Joe: Sure. So will interest rates go back down? Sure. Will interest rates go higher? Yeah, maybe. I don’t know. But it’s again, you know, when Netflix is up 100%, where do people like to put their money? Or Amazon. Yeah. Or-

Al: And often it’s too late. Yeah. So, another way to think about this is, as Joe said, to just elaborate. So you gotta do a little bit of planning to figure out what rate of return you need in your portfolio to figure out how to invest it.

Joe: And if 4% is the right number, then absolutely you go into 100% guaranteed FDIC insurance products. Because then you all accomplish your goals. But if you need 6%, you’re gonna run short. Inflation’s gonna outpace it. You’re gonna run outta money potentially. So you just have to do the planning to figure out what investment strategy you need.

Al: Exactly. Yep.

Joe: Well, that’s it. All right. Well, very good. Hey, keep your questions coming in. Appreciate everything. I wanna say. Thanks to Big G. Saw him over the past weekend. He covered for you, Big Al when you were on safari or whatever that was.

Al: Okay. That’s good.

Joe: He’s a caddy up at little club in Monterey, and I was able to take the family to Monterey over the weekend and play little golf.

Al: Like it.

Joe: Yeah. So that was a lot of fun.

Al: Super.

Joe: Okay. Well there you have it folks.

Al: It’s a wrap.

Joe: It’s a wrap. We’ll see y’all next time. The show is called Your Money, Your Wealth®.

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