Learn how to craft a retirement plan email question that’ll get you a model retirement spitball analysis. Plus, when should you contribute to Roth IRA, and when and how much of a Roth Conversion should you do? Is it hypocritical to prioritize investment returns over your conscience and values? Joe and Big Al talk ESG, or environmental, social, and governance investing, and they evaluate a strategy to keep taxes low while helping your kids buy a house. Finally, your comments about YMYW.
- (00:49) Retirement Spitball: Are We On Track to Retire Next Year on $84K/Year? (John, Greenville, SC)
- (09:04) Can We Retire in 8 Years at Age 65? (Long, Houston, TX)
- (18:34) Retirement Spitball: When to Contribute, When and How Much Roth Conversion? (Anonymous)
- (27:17) Is It Hypocritical to Prioritize Investment Returns Over Conscience and Values? (Priya)
- (33:20) Comment: Distracting and Flippant
- (34:56) Comment: Awesome, Fun and Very Educational (BCMusicLover)
- (35:49) Will This Clever Strategy to Help Kids Buy a Home Lower Our Tax Burden? (John, Franklin, TN)
- (44:53) The Derails
Free financial resources:
Learn how to craft a retirement plan email question that’ll get you a model spitball analysis, today on Your Money, Your Wealth® podcast 387. Plus, when should you contribute to Roth IRA, and when and how much of a Roth Conversion should you do? Is it hypocritical to prioritize investment returns over your conscience and values? Joe and Big Al talk ESG investing, or environmental, social, and governance investing, and they evaluate a strategy to keep taxes low while helping your kids buy a house. Finally, your comments about YMYW. Visit YourMoneyYourWealth.com and click Ask Joe and Al On Air to send in your questions and comments. I’m producer Andi Last, and here are the flippant and distracting hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.
Retirement Spitball: Are We On Track to Retire Next Year on $84K/Year? (John, Greenville, SC)
Joe: John from Greenville, South Carolina. “Hey, YMYW team. John here from Greenville. Grew up as an Iowa farm boy. Regular listener, great financial info, and always hilarious.” Boom. Thank you. John from Greenville. “Drive a 2006 Hyundai Sontana-“
Joe: Thank you.
Al: Pretty close.
Joe: “- with 240 miles and drink Natty Light.” That’s that Iowa in him. “Retirement pitfall question. I’m 59, making $100,000 a year. My wife is 61, making $50,000 a year. She’ll retire in January 2023 at 62. Trying to get her to work longer, but not happening.” Gotta try a little bit harder there, John. “I’d like to retire at 64 or even 63 if all goes well in the market. Currently have approximately $800,000 pre-tax, $175,000 Roth, $120,000 brokerage, and $20,000 HSA. Current investments are about 70/30 allocation. Saving 10% pre-tax, 2.5% guaranteed employer match, annual variable match based on end-of-year profit, 7% of the 401(k) Roth, maxing out $7000 Roth and $4500 in the HSA. At 64, fixed income will be $51,000 from my Social Security, wife’s $12,000, Social Security and wife’s $14,000 pension. Current income projection need is $84,000 annually. Spitball thoughts?” All right, now we got some information from Greenville. Thank you.
Al: We do.
Joe: Sit back and have a Natty Light. So this is what you do. All right, so he’s figuring out his spending need, which is $84,000. So for those of you that know your spending need, that’s great, you take that number. If you want to retire in 10 years, take $84,000 by a certain inflation rate and inflate the number depending on when you want to retire. So he’s already done that, hopefully. So at 84, his fixed income is going to be $51,000, Al. So if I take $84,000, $51,000 minus, his shortfall’s $33,000. Let’s say wife is going to retire at 62. He’s going to retire at 65. He’s drinking Natty Light. So that means he’s going to live until at least 95.
Al: Because that’s a light beer.
Joe: It’s a light beer. It’s very refreshing. So maybe he takes 3% out, $65,000 plus tax, plus an ongoing cost of living.
Al: Yeah, there’s plenty. Plus, she’s got a $14,000 pension and Social Security’s in the wings, right?
Joe: No, I’ve already calculated that. So he needs $1,100,000 at age 64 when he retires. He’s already there.
Al: Already got it.
Joe: He’s already got it.
Al: You’re right.
Joe: So again, you take your $84,000, you subtract out your Social Security plus your pension.
Al: Got it. Yep.
Joe: That created a shortfall. You need to figure out what your shortfall. Because you have $51,000 from your Social Security, your wife’s Social Security, and the wife’s pension. So $84,000 minus $51,000 is $33,000. Then you take $33,000, divide it into whatever percent, 3%-
Al: To be safe. At this age.
Joe: – that’s $1,100,000. So then you look at okay, that’s your bogey. What do I need to do to get to $1,100,000? Well, you’re right there. You’re saving a ton, and you already have the bogey right now. So, yeah, there’s the spit ball for you. You’re on track. Now, the next step. So that’s the first step. Now, the next step is that okay, well, how’s the income going to be taxed? So then that’s when you start creating your tax strategy. So if it’s all in a 401(k) plan pre-tax, then you say, all right, well, maybe I start looking at getting more money into a Roth account. What tax bracket am I in? What tax bracket am I going to be in the future? If you want to live off of $84,000, you’re probably in the 12% tax bracket. But you do have a lot of money sitting in retirement accounts and your distribution rate is not going to be all that much. So then you’re looking at forecasting your 401(k) at 72 is going to kick out more money than you’re probably spending. So does it make sense to start converting? Or maybe not so much into pre-tax, put more into post-tax? And then the next step from there is to figure out, all right, how should it be invested? What target rate of return are you trying to shoot for? And then what is your withdrawal strategy? What assets are you going to start spending down to create that $33,000 of income. So from a spitball perspective, you’re good from a dollar only. Now you got to create your strategy. What’s your tax strategy? what’s your investment strategy? what’s your withdrawal strategy? God forbid, if you fall over drinking your Natty Light, what does the wife do? Or vice versa? Because now her pension is gone, Social Security is gone. So then you start playing the contingency plan, right? You got grown kids. What’s your estate plan? What is your estate strategy? So I think we get these questions, Al. It’s like, well, should I do a Roth conversion? I don’t know. I mean, there’s so many other things that you should be taking a look at.
Al: Yeah, I think you said it perfectly. So, just to reiterate, so you look at your spending need, what you want to spend, and then you look at your fixed income. In this case, then you subtract the spend from the fixed income. You get a shortfall. You divide that shortfall into what you have and it came out to about 3%. You can go the other way. You can take your shortfall and divide it into 3% to see how much you need since you’re not retiring right away. So that looks great. Most of your income is in a traditional 401(k), so therefore it’s going to be pre-tax. It’s going to be taxed at ordinary income rates. So yes, you want to be thinking about doing Roth conversions, but if you do this right, you may not have to convert tons. You might be able to stay in that 12% bracket the whole time, which will probably become the 15% bracket. But this is where some cash flow planning is in order to figure out how much you really ought to convert. But you’re absolutely right, Joe. It’s not just can I retire. Yeah, it looks like you can retire, but how can you make this even better? Because if you have more spendable money, it’s not what you make, it’s what you keep. Then you can have a better retirement.
Joe: Sure. Yeah. And then we’re getting a ton of questions from all of you over the last couple of weeks. Should I postpone retirement?
The market is down. Maybe I work another couple of years. Well, can I still retire when the market is down 20% or man, the stock market is down, my bonds are down, and should I continue to work? It’s not the point. We’re going to be in environments where things like this happen all the time. It’s what strategy do you have in place? Or what strategy are you going to be putting in place over the next several years so you could be financially independent.
Al: So, in other words, the strategy that you put in place would anticipate markets going up and markets going down. So that right now, when markets are down, you’re not caught in the cold.
Joe: And you’re not freaked out.
Al: You’re freaked out, but you’ve got a plan to ride it out.
Joe: All right, very good. Great question. Thank you for the email.
If Joe and Big Al once a week just isn’t enough for you, get a daily fix: watch the fellas answer your podcast questions every single day and check out YMYW TV on our YouTube channel. This week, what’s on your retirement vision board? If you haven’t yet decided what the retired version of your life looks like, watch the latest episode of the Your Money, Your Wealth® TV show. Joe and Big Al will help you visualize your wants, needs and goals, determine how much risk you can stomach, prioritize tax-efficiency, and put your vision into action. Search YouTube for “Your Money, Your Wealth” or click the link in the description of today’s episode in your podcast app to go to the show notes – you can get to our YouTube channel from there. And hey, on YouTube don’t forget to like, subscribe, and ring that notification bell!
Can We Retire in 8 Years at Age 65? (Long, Houston, TX)
Joe: Long, Houston, Texas writes in. “Love the show. Wife and I both 58. We have been listening to the podcast for a while now. Enjoy thoroughly. I drive a 2006 Lexus. Hand me up, family purchase from my little brother. Got it 3 years ago for about half the price.” Wow, that’s pretty good. “Sorry I don’t drink. But if I do, I’d go with Coors Light. We would find a corner to curl up in a fetal position and Zzzz.” Fall asleep?
Al: I guess so.
Joe: Coors Light doesn’t make you fall asleep but-
Al: Not generally. It would take quite a few.
Joe: No. Just get you fired up. Spitballing. All right. “I do believe that we are on course to retire in 2030 at 65. What do you both think? Here are the numbers. Annual contributions to 403(b) Roth $27,000 until 65. Currently, we are barely in the 24% tax bracket. Both IRAs, 410(k)s equal $1,500,000. The goal is to be converting to Roth at the top of the 24% tax bracket until the year 2030-” So what, that’s the next 8 years. “- of about $110,000. Paying tax on cash that will be saved every year. Current Roth IRA is $125,000. HSA is $30,000. Mortgage will be done in 4 years. Last son graduating from college next year. Woohoo. Outside of that, all 3 sons’ college were paid by the 529 plan we’ve saved since they were born. Major debts left, 3 weddings, hopefully before I retire in 8 years. “At retirement, 65-” so they’ve done some projections here- “- estimated expenses is going to be $130,000 per year. IRA, 401(k), 403(b) balance will be $1,800,000 at an average return of 4%. Roth includes the converted amount will be $1,500,000, average 4% return. HSA, $40,000. His Social Security, there’s a windfall elimination provision in there at FRA is going to be $2500 a month. Hers is going to be about $3000 a month. His pension is $58. Her pension is $800. We will have $200,000 of liquid assets for two years of emergency funds in the process of building this before age 65.” Okay, so let me do a little bit of math here. So we got $5800 a month times 12. So that is going to be call it $70,000-
Al: Plus another $10,000 for her. Pension.
Joe: $10,000. So that’s $80,000.
Al: And we got about, call it $35,000 for Social Security for her, maybe $40,000. Oh, wait a minute. Yeah, she may be taking it 70. Not really sure.
Joe: No, “we’ll be taking his Social Security FRA-“ (calculating)- so that’s $30,000. So now they’re at $110,000. And then whatever hers is, is going to be another $25,000. The fixed income, it looks to me it’s going to cover 100% or very close to. There’s going to be some probably some step or some bridges here.
Al: Depending on when they actually take Social Security. But yeah, that’s right. That’s what the first thing we look at is what’s the spending need versus the fixed income. And usually there’s a shortfall. In this case, there might be a shortfall for a little while, but maybe not necessarily forever.
Joe: Because they’re retiring at 65. So maybe they take Social Security at 67. They may be pushing out to 70. The pensions are going to kick in at 60 for her and 65. So there’s going to be some fixed income when they retire. So there’ll be a step gap of a short distribution and then probably cover it all. So as I finish the email here, it says, “So, from my vantage point, we will need about 1.9% withdrawals from the savings first two years until my Social Security kicks in, in which our SWR-“ SWR? Sustainable Withdrawal Rate?
Al: That’s a good guess. Never seen those initials together.
Joe: We’re getting deep. “- will go down a little more than .6% at 70, when her Social Security kicks in, we’ll have the needed fixed income and we will need to withdraw only to accommodate inflation and emergency. I would love to retire early, but my pension won’t be fully realized until 65 unless I need to continue with these silver handcuffs. In the words of my old oil and gas days, are we digging up the right rocks?” All right, that’s kind of cool. “Also, if we could continue to save after-tax money, I do believe that it will be to our benefit to continue to convert to Roth from 65 to 71. Right? No matter which way I project our future tax, it comes out to be about 22% to 24% if the current bracket hold true. Thus it behooves us to continue to convert to Roth IRAs as much as we can afford to pay the tax with after-tax dollars. Thank you for your spit ball. Keep up the great show. By the way, Joe, 3 weeks ago, my dad sent his hearing aids in for repair. He has not heard anything since.”
Al: There you go.
Andi: Ba dum tss
Al: Where is that drum beat?
Joe: Yeah, he’s a former recovering scout master. He’s got a lot more where those came from.
Andi: Dad jokes. Ya got to love them.
Joe: All right, well, there’s a lot to chew on here. Can I retire early, I guess, is the main question, right? The answer is yes.
Al: Yes, of course. But I don’t know what the changes are going to be on the pension. But based upon what you just told us, at 65, you can retire with a lot more money than you ever need. So, can you retire early? Yes, but we’d have to see- in other words, if your pension is only 5% lower for retiring a couple of years earlier, go for it. You got plenty. That’s what you saved for.
Joe: So, if you retire at 60, let’s say, instead of 65, just get the calculation from your company to see what that pension is going to look like. It’s not going to be your $70,000. It might be $60,000.
Al: And if it still works and you want to retire, go for it. If you want to keep working, by all means, do it.
Joe: Here’s the math again, folks, just so you can do this at home. Is that, all right Long? First thing you’re doing is right on, right? What are you spending? You’re spending $100,000 a year, 4% inflation, whatever. So at age 65, it’s $130,000. Maybe at age 60, it’s $115,000. And then you look at what are your fixed income sources? Maybe you still don’t take your pension until 65, and you retire at 60. You’re going to have a step period where you’re going to have a higher distribution rate from the overall portfolio from 60 to 65 until the pension kicks in. I think you can still do this. You’ve done a really good job of saving, and then you have plenty of fixed income. It’s just running the math.
Al: Right. And what some people do is maybe at 60, 61, whatever, they work part time. They bridge the gap that way. But I think there’s enough assets here, Joe. They don’t really even have to do that. But anyway, that is right. You just have to run the numbers. I’m a big believer in retiring when you want to, if you can afford it, because we don’t necessarily live forever.
Joe: Right. And I think that they’ve done a really good job. They’re planning appropriately. Doesn’t seem like there’s a ton of debt. I don’t know. The weddings, those aren’t going to break the bank.
Al: Traditionally, the weddings are paid for by the wife’s parents, and he’s got three sons.
Joe: That worked out well for me.
Al: Yeah, right. Same with me, too.
Joe: Anyway. All right. I think he’s on track. You’re on track, but they’re not golden handcuffs. Retire when you want to, but just run the numbers. It’s close. I mean, if we’re just kind of back of the envelope here. Again, you’re looking at what your spending need is. You don’t want to take out any more than probably 3% of the portfolio. You got a couple of million bucks. You’re saving a ton of money. So continue to save for the next couple of years, use your same projections and see what that looks like at age 60, then 62, then 64, whatever.
Al: Here’s another quick idea, which is a lot of people, they just don’t want to leave dollars on the table. So I want to work till 65 because I want to get every dollar, and I get that. Is there a way in your current job to maybe work 4 days a week instead of 5? Or in other words, work a little bit less, but still keep your benefits coming, so then at 65, you get your full benefit. In the meantime, you kind of practice retiring a little bit and see how you like it.
Joe: Yeah, great point. Great point.
Retirement Spitball: When to Contribute, When and How Much Roth Conversion? (Anonymous)
Joe: Got someone that doesn’t want to say their name, Al.
Joe: Yeah. Thank you for that. “I love your show. I drive a Ford F150, drink Bud Light and Fireball and have two cats.”
Al: That sounds like you. Except for the cats.
Joe: Except for the cats. “I recently retired at 53 with two adult college graduate offspring and my wife is still working. Here’s my situation questions. For current year, we’re looking at around $85,000 of income between the two of us, $5200 of dividends from real estate investments and $5000 from dividends from our brokerage accounts. My wife contributes $900 per month to our 403(b) and will max out the IRA of $7000. This gets us to about $92,000 of income and $17,800 of retirement tax write-offs, or $77,450 of taxable income. Using the standard deduction of $25,900, this leaves us $32,000 below the line for the 12% tax bracket.” Something’s a little- He’s using some different terms.
Al: Yeah, he is.
Joe: So $92,000 minus $17,800 is $77,450. That’s the adjusted gross income. Then you take the standard deduction of $25,900 to get to $50,000. What’s this $32,000 below the line?
Al: Because the top of the 12% is roughly $83,000 for married. So $50,000 to $83,000 is about $32,000. I think that’s where that comes from.
Joe: Okay. Is that what he’s doing?
Al: I think so.
Joe: “My wife has roughly $40,000 in a regular IRA account and close to $90,000 in a regular 403(b). This will be the first year since we began investing that we qualify for Roth IRA. I’d like to start converting her retirement accounts to Roths to avoid future taxes. We plan to live on cash this year and next. All of her income goes into retirement accounts and health insurance. Also, should I do the contributions now or wait until the end of the year to do the contribution and conversion so that the IRA contribution is tax deductible? Or does it matter? Sorry if that’s a dumb question. Does it make sense to convert all of her IRA this year and then her 403(b) early in 2023, assuming the markets don’t come roaring back in the meantime? With the progressive tax rate, I’m assuming that not all of our conversion this year would be bumped up into the 22% tax bracket, but I’m not sure. We’ve decided that my wife’s IRA, 403(b) and brokerage accounts will be our legacy accounts, along with 529 plans for the grandchildren. So we’d like them to be as tax efficient as possible. She plans on working until 60 because she enjoys her job and will continue to contribute her income to retirement accounts and health insurance. Once she retires, our health insurance will be covered and she’ll receive a small pension. We plan on living on the remainder of our liquid assets, pulling from my IRA, we’ll likely start the SEPP withdrawals in 2024. Cash accounts and brokerage account, which adds up to approximately $2,000,000 and my $16,000 inflation adjusted pension. Our home is paid off, which will be our long-term care insurance. Again, love the show and appreciate any information provided. Sorry if I didn’t include enough details. Will follow up with more if necessary.”
Al: Got quite a few details.
Joe: Yeah, but some were left out.
Al: That’s true too. Well, so let’s maybe summarize. So by Anonymous’s calculation, they have about, let’s just say, $30,000 of room in the 12% bracket, and his wife’s IRA has $40,000. So the first question, should I convert the whole amount? Well, if you do, which is probably still a fine answer, but if you do, roughly $30,000 will be taxed at 12% and $10,000 will be taxed at 22%.
Joe: But I don’t think he can convert it because she’s still an active participant in the plan. She’s putting $900 a month into the plan because she’s 50 something years old.
Al: Does it say- yeah yeah yeah okay.
Joe: I like how he starts with her stuff. We’re going to convert all of this stuff, and then all of a sudden at the end of it, oh, by the way, I have $2,000,000.
Al: Well, she’s got $40,000 in her regular IRA.
Joe: Convert that.
Al: She can convert that. And so, yeah, that’s kind of a no brainer. Even though some of it’s taxed, maybe it’s 22% bracket, that’s still a low bracket. The accounts are down. Now is the best time to convert. So that’s kind of a no brainer. The 403(b), did it say what her age is?
Joe: They’re both 55.
Al: She’s going to work longer till she’s 60. So she’s not 59 and a half. So that may not be available to convert. I agree with that.
Joe: I don’t know. Does she work in a school district, work at a hospital? Depends on the plan, right? 403(b)s are a little bit different than 401(k)s, and we’re not going to get into the nuances there. So you just want to kind of look at the plan doc. Maybe you can do an inner plan conversion. If there’s a Roth 403(b) option, she could potentially take the 403(b) and move it into the Roth. Or just take your own money to convert it.
Al: So he’s got an IRA. Anonymous has his own IRA, right?
Joe: He’s got $2,000,000 in it.
Al: Well, I don’t know- that’s a combination of brokerage, cash and IRA. But anyway, it’s probably a good number. That’s what you ought to convert.
Al: I mean, go ahead and do your wife’s $40,000. That makes sense. Should you do more? Probably. We don’t really know what your tax bracket is now versus the future and what you need to live off of and a lot of stuff to help us figure this out.
Joe: Then if your wife is going to continue to work and then you’re just going to jam all of her money into retirement accounts, but in the meantime, you’re going to do a separate equal periodic payment with your retirement accounts. Doesn’t make any sense.
Al: It makes no sense at all. You’d live off your brokerage account and do more conversions.
Joe: And let your wife- and then live off of your wife’s income. Let yours continue to defer or convert. Because once he start an SEPP, what that means for people that are listening that don’t understand that, is that he’s retiring prior to 59 and a half, and so he needs access to the retirement dollars. He doesn’t want to pay the 10% penalty, which is totally understandable. So the IRS came up with a 72T tax election, which allows an individual under the age of 59 and a half to get access to the retirement funds without paying the 10% penalty. However, you have to take a separate equal periodic payment, which you can’t turn off until 5 years, until you turn 59 and a half. Which sucks.
Al: Yeah. And it’ll probably be a lower amount than you want anyway.
Joe: Exactly. Or if you want it and then you’re like, okay, well, there are 3 ways that you can calculate it.
Al: It’s not like you can just go in and say, okay, I need $50,000 this year. That’s not how it works. These are equal periodic payments.
Joe: Sometimes what we’ve seen is people split their IRA. So this is the IRA. I’m going to take X amount of dollars and put it in this IRA and do the SEPP on that versus the whole amount. Because if he’s retiring at 53 or needs the money at 53 or 54, that’s 6 years that he’s going to have to take the same periodic payment. And if it’s on the full IRA balance and the market is down like it is now or gets volatile, it’s hard to get caught back up. So I don’t really care for his strategy all that much. I think he needs to kind of fine tune it just a smidge.
Al: One other quick thing. Do the contribution now. Don’t wait.
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Is It Hypocritical to Prioritize Investment Returns Over Conscience and Values? (Priya)
Joe: We got “Hello, Joe, Big Al and Andi. Hope all of you are doing well, enjoying the summer.” This is our friend, Priya. We haven’t heard from Priya a while.
Al: I remember.
Joe: “I have a conundrium-“
Al: – conundrum-
Joe: Yep. “- and would like to hear your thoughts on the following. There are so many experts, including your show, suggest to just that for an average investor like me to pick a few funds, maybe an index fund or some low cost ETFs to invest for the long term. I follow this process and I do own the SMP 500 Index fund and a few other Vanguard broad market ETFs. By this, the individual investor has no control over what stocks will be owned in the fund. Does this mean for the sake of investment returns, do we have to ignore our conscious and values?” Getting deep here, Al.
Al: Yeah, right.
Joe: “If I’m an investor who supports green energy, anti-gun laws and humane animal treatment in my day-to-day life and maybe contributing to those causes, but at the same time invest in a broad fund like BTS Ax, which holds gun companies, big factory farms, fossil fuel companies, et cetera, then am I a hypocrite? or am I overthinking this? I’d like to hear both of your answers.” Feel like I’m on the stand.
Al: What say you, Mr. Anderson?
Joe: Yeah, we’re not getting political. A lot of really crazy, stupid stuff going on in the world. But Priya still “enjoys listening to our podcast every week while walking her dog, watching our TV shows on YouTube, drinking Watermelon Frescas-“
Al: – Agua Frescas.
Joe: Got it. “As a throwback to your old shows, can you bring back Big Al’s List segment? Thanks.”
Al: I’ve been meaning to do that.
Joe: No, it’s never happening. For some reason, that show keeps popping up with you saying like, here’s the best states-
Al: Oh, I know.
Joe: That was years ago. That one guy was like, this is the worst show in the world.
Al: No preparation. You got a Keplinger article. You just read them off. I go ‘oh yeah, I did actually’.
Joe: That’s exactly what that show was. So yeah. All right. Priya, you could go ESG. If you don’t want to go in the broad based market index funds, then I would go with something that kind of suits your values a little bit more if you don’t want to invest in some of the companies that are in the S&P or a broad base index fund.
Al: Yeah, so ESG, environmental, social and governance. So there’s all kinds of funds that really try to figure out how to take care of people like you. Now, since you’re Vanguard, I happen to call up something just for fun, and I’m not recommending this. I’m reading something that I found. Let me be very clear. Vanguard FTSE Social Index Fund. So let’s see. So they have environmental screens that look at water use and pollution. They have social screens that cover labor standards, health and safety records, community impact. They look at governance from corporate risk to anticorruption standards. Any firms involved in coal, tobacco, weapons systems, components for controversial weapons like landmines, chemical weapons, are automatically excluded. There’s all kinds of funds like this. So pick one of those. And then if you really want to get deep, there’s funds that just do green energy or whatever is important to you. So just dig a little bit deeper. You can still have a good, great diversified portfolio, low cost. Vanguard is the one I picked because you were at Vanguard. But you can go to Schwab, you can go to Fidelity, you can go virtually anywhere and find similar funds.
Joe: Sure. And I think the technology is only getting better for firms that can do like direct indexing, for instance. But you can create your own screens.
Al: That’s true too.
Joe: Everyone has – It is so hard with ESG sometimes.
Al: It’s very hard because everyone has a little different idea-
Joe: – different opinion or different idea. So then you get the big company saying, here, this is our belief system. And then you’re like, okay, I like 80% of this, but I hate the other 20%. So then you’re kind of stuck in the same situation.
Al: So that’s why you can go granular and invest in real specific funds, but then you’re not as well diversified. So that’s the downside of that.
Joe: So then if those companies go under- but what we found too is that when people have a value-based system approach they’re investing, they stick with their investments longer.
Al: Yeah, good point.
Joe: Which could be good or bad.
Al: Could be- both.
Joe: If you have lack of diversification and you stick with your investment strategy and a lot of those companies don’t necessarily do well and they could go out of business, well, then that’s not very good.
But if you’re in a broad based, diversified portfolio with hundreds of different companies and you’re still very secure within that organization, when the market drops 20%, you’re not going to sell.
Al: Yeah, that’s true. The way I would think about it is look for a good ESG fund or funds so you have a few different ones, potentially. And if there’s certain causes that are near and dear to your heart, have some of your investments maybe laser focused on that thing. Let’s call it green energy, for example, but don’t have your whole portfolio because then you’re not diversified like we talked about.
Joe: Very good. Yeah.
Comment: Distracting and Flippant
Joe: Speaking of that one-star review, we got another great one-star review this week. Appreciate you give us the good stuff here. This one was called ‘Distracting’. We’re very distracting, Al.
Al: Okay. All right.
Joe: “I followed and unfollowed this show twice.”
Al: Try it. Gave up. Try it. Gave up.
Joe: It’s like I just can’t get enough.
Al: It’s better than I thought.
Joe: There’s something there. There’s got to be something there. Let me try it one more time. No. This show sucks. It’s awful. God. “I tried to like the podcast-“ well, thank you, “- but the flippant language of the host was so distracting to the subject being discussed.”
Al: So just to be clear-
Joe: I’m not sure what it is.
Al: – I looked up the word flippant-
Joe: Yeah, I would need to Google that, too.
Al: Yeah – to make sure I knew exactly. So ‘lacking proper respect or seriousness.’
Al: Well, that’s our show.
Joe: That’s – 1000%. So how could you even try to like it when the whole premise of the show is just to try to have fun?
Al: Well, I’ll tell you, almost every other show is like what you just described.
Joe: There’s thousands of them.
Al: And they’re pretty dry.
Joe: Oh, they’re boring as hell. And the information is so self-serving to-
Al: That’s true, too.
Joe: – the organization.
Al: But maybe they’re more serious than we are.
Joe: If you want to fall asleep, I don’t know.
Comment: Awesome, Fun and Very Educational (BCMusicLover)
Joe: Anyway, but we got a good one. “Fun and very educational.” This is by MCMusicLover or BCMusicLover.
Joe: BCMusicLover. “This podcast is fun to listen to because it doesn’t get into the weeds. It’s not only fun, but easy way to get educated on a full and wide view of personal financial topics and approaches. While it’s not advice, it’s not approaches, opinions and things to consider are provided in a fun and easily understandable way, making this a must, in my opinion.” Yeah, we have flippant language, too.
Al: I guess BCMusicLover is okay with that.
Joe: People that listen to this and then you hear some of the questions, it’s like, wow. You kind of got to be like, all right, yeah, let’s have fun with this.
Al: Of course.
Will This Clever Strategy to Help Kids Buy a Home Lower Our Tax Burden? (John, Franklin, TN)
Joe: “Hello gentlemen. I’ve written in a couple of times-” this is John from Franklin, Tennessee. “Hello, gentlemen. I’ve written in a couple of times with questions over the past couple of years, and you are always so helpful that I’m back again. Thank you for all the education you provide to all of us here in podcast land. I never miss a show and look forward to it on Tuesdays. On your last podcast, you answered a question regarding assisting a child with a first home purchase. I’m starting to think about the same thing. I wanted to ask a slightly broader question on the topic. My wife and I are 48 and are situated well for retirement with roughly $1,500,000 in tax-deferred, $3,500,000 in brokerage accounts, and a paid-for home, roughly $2,500,000. We are in a position to help our kids with initial home purchase and I would love to figure out the smartest way to do that. As you might expect, I’m fully invested. Not a lot of idle cash sitting around. But obviously I would access the brokerage account with no problem other than the cap gains tax that would come along with that. My question is, if you were in my shoes, what options would you consider for freeing up money for a starter home purchase? One item to consider is my paid home has a big indebted cap gain tax awaiting for me. We have about $1,000,000 in the home. So capital gain will be about $1,500,000 or about $1,000,000 of taxable capital gain after the $500,000 exclusion. If not for that, I think we would probably downsize and free up $1,000,000 at least in the next 5 to 7 years. We’ll likely retire at age 55. But now I’m wondering if we should maybe consider staying put much longer than expected. Maybe forever.” It’s your forever home. Franklin, Tennessee.
Al: That’s a long time.
Joe: Yeah, forever. How do you plan for forever? Are we being flippant again, Al? Stop with your flippant attitude. Be flippin’ serious.
Al: I’m not. I’m just listening.
Joe: Maybe forever.
Al: It’s like when you get a buy a pair of jeans or something and it has a lifetime guarantee and then you realize lifetime means like a couple of years.
Joe: So he wants to “wait till death because of the step-up in basis, if that’s even a possibility for us. Should we consider something like a home equity loan to pull out a bunch of that equity to pay for a home for my son? Let’s say $400,000, $500,000 just for illustration. Is that crazy? It sure feels off script to me. The guy who has been totally debt free for over 20 years. At this point, I’m leaning towards purchasing the home in full, structuring as a loan to my son and then using the annual gift exclusion in order to pay the loan back. I think that allows me a gift of $64,000 to my son and his wife. Would prefer to do it that way versus using up some of my lifetime exemptions since I have no idea how much money this money will grow between now and I meet my demise.” But, John, you’re living forever. “The idea of paying estate taxes just makes me nauseous. Thanks for your time. I look forward to your thoughts. And if you don’t mind, I’d appreciate if you guys can quickly bring the bear market to an end. Work on that for me on your spare time.” No problem, John. We’ll get this bear market right back in its cave. I don’t know, what do you think? So home equity. He wants to pull out $400,000 or $500,000 and buy the house outright for his son. He wants to structure a note.
Al: Yeah, I don’t like either of those ideas. So if you’re used to being debt free, stick with debt free. And plus, you don’t need to buy a home for a kid and then just slowly gift it to them. Have them have some skin in the game. In other words-
Joe: What if he doesn’t want them to have skin in the game?
Al: Well, I’m going to go there first, and then I got to come back to that.
Joe: Got it.
Al: Because I have a thought about that, too. So first of all, I don’t really like the idea of parents just providing a home for their kids because they have no skin in the game. It doesn’t mean near as much to them. I’m all for a parent providing a down payment. And it could be a decent size down payment. You could set up a loan. You could just do a gift. And you’re right. You could do $64,000 a year. You could do $100,000 loan and forgive some of that loan the first year and then the rest of the second year. Those are all possible. I would rather have my kid, in my case my two sons, have skin in the game so that they pick the house they want that they can actually afford. I’ll help them with down payment. By the way, this hasn’t happened yet, but this is my plan. And then they’ve got to have the income to be able to qualify for the loan. I don’t want to cosign. They need to be able to do that. Then I think that’s very responsible. Now, -I’ll let you comment if you have any comments-
Joe: No. I’m good.
Al: Okay. On the other hand-
Joe: Thank you for letting me comment.
Al: Yes, I realize I was going on to the next point. Because I’m very kind.
Al: And not so flippant.
Joe: I appreciate it. You flippant….
Al: So on the other hand, if you want to just give it to your kids and I don’t know your situation, maybe your parents did something similar, and if that’s how your family wants to do it, let’s go off of that premise for a little bit. What you suggested is a way to do it.
Joe: So he’s got a bunch of equity tied up in the house. Let’s start there. How does he unleash it? Would you take a note? He’s 48, right? So he’s not 68. So it’s like, all right, well, does it make sense to take $400,000, $500,000 out? Maybe it did, I don’t know, 6 months ago when interest rates could have been, should have been, right? Because if he’s never going to sell the house-
Al: All right, so let me-
Joe: How do you unlock some of that equity?
Al: My current age, in my 60s, the answer is no, no way. But my 40s, maybe. It depends whether I could afford it. Whether I felt like I could afford the mortgage payment. It would also depend upon if I was really serious about selling the home, because then when I sell the home, I just pay off the mortgage. And by the way, if you do want to sell your home and I get that you got $1,000,000 taxable, but you get $2,500,000 out of it. So you’re only paying tax on $1,000,000. I don’t know what- you’re in Tennessee. I don’t know about the state taxes there. Federal tax, let’s call it, worst case, 25% of $1,000,000, $250,000 tax is a lot of tax. However, you’re getting $2,500,000 to do with whatever you want to, to be able to live the retirement life you want and buy the home that you want. It’s not necessarily that bad of a way to go. So in other words, if you end up selling the home, you’re going to have to pay off the mortgage anyway. So maybe you just take some of those proceeds that you would have got later. That’s kind of my thinking there. Even in my late 40s, I still would like to have my kids have some skin in the game.
Joe: Sure. Let’s say he takes $500,000 out, the mortgage payment is going to be $30,000. Maybe he buys the house and then has the kid pay him something.
Al: Yeah. Set up a note. He could do that.
Joe: Right. And then if the kids can’t afford the note, and then that’s when the gifts come in to cover the mortgage payment. So here we’re going to give you $15,000 apiece to cover the $30,000 mortgage. I’m just using 5% on $500,000 on the 30-year note. The payment is about $30,000. But the risk is all on dad here, on John. But I mean, that might be fine too, because then you just kick the kids out of the house. I don’t know. If they don’t pay anything.
Al: And that’s your house.
Joe: Yeah. That’s your house. Do what you want.
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