ABOUT THE GUESTS

Cameron Huddleston
ABOUT Cameron

Cameron Huddleston is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. She also is an award-winning journalist with more than 17 years of experience writing about personal finance. You can learn more about her at CameronHuddleston.com. [...]

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Joe Anderson
ABOUT Joseph

As President of Pure Financial Advisors, Joe Anderson has led the company to achieve over $2 billion in assets under management and has grown their client base to over 2,160 in just ten years of the firm opening. When Joe began working with Pure Financial in 2008, they had almost no clients, negative revenue and no [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CEO & CFO of Pure Financial Advisors. He currently leads Pure Financial Advisors along with Michael Fenison and Joe Anderson. Alan joined the firm about one year after it was established. At that time the company had less than 100 clients and approximately $50 million of assets under management. As of [...]

Andi Last
ABOUT Andi

Andi Last brings 26 years of broadcasting, media and marketing experience to Pure Financial Advisors, where she produces the Your Money, Your Wealth® podcast and radio show and creates educational video content. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with a long-running, nationally syndicated financial advice [...]

Published On
November 12, 2019

Cameron Huddleston discusses her book, Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. But first, we talk glide path: should you invest more aggressively through retirement? Which assets should you spend before you take Social Security? What should your portfolio withdrawal strategy be if you don’t plan to retire? And when asked how to pay taxes on a Roth conversion, Joe and Big Al make a suggestion rarely heard on YMYW. 

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Show Notes

  • (00:52) Should I Start Investing More Aggressively Through Retirement?
  • (08:39) Should We Spend Taxable or Tax-Deferred Money Before Social Security?
  • (15:49) I Don’t Plan to Retire. When and How Should I Start Withdrawing Funds?
  • (22:11) Should I Borrow from My Emergency Fund to Pay Taxes on a Roth Conversion?
  • (32:58) Cameron Huddleston: Mom and Dad, We Need to Talk: How to Have Essential Conversations with Your Parents About Their Finances

Resources mentioned in this episode:

LISTEN | YMYW #117 – Using Reverse Mortgages To Secure Retirement with Dr. Wade Pfau

LISTEN | YMYW #168: 3 Ways a Reverse Mortgage Can Supercharge Your Retirement

WATCH | YMYW TV: Banking on Your House in Retirement with Dr. Wade Pfau

Transcription

Today on Your Money, Your Wealth®, it’s time to have “the talk” with your parents about their money, and their wealth. And if you’re the parent, it’s time to get real with your kids. I’m producer Andi Last, and I’ll find out more about that family conversation later in this episode when award-winning personal finance journalist Cameron Huddleston tells us about her book, Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. But first, Joe and Big Al answer your money questions: should you invest more aggressively through retirement? Which part of your portfolio should you spend before taking Social Security? When and how should you withdraw money from your portfolio when you don’t plan to retire? And, when asked how to pay taxes on a Roth conversion, the fellas make a suggestion I personally never thought I’d hear from them. Stick around to find out what it is. Here they are now, Joe Anderson, CFP® and Big Al Clopine, CPA.

00:52 – Should I Start Investing More Aggressively Through Retirement?

Joe: Dale. He writes in from Denver, Colorado.

Al: OK. Love Denver.

Joe: OK. “Thanks for your show. I really enjoy it”. Thank you, Dale. “I’ve been consistently saving for retirement for 25 years and have always stayed on the aggressive side of an equity bond allocation which has served me well. Currently, I’m 5 years from retirement, age 55. Lately, I’ve been learning more about starting retirement with a more conservative amount of equities with more bonds. And as you travel through retirement progressively increase your percentage of equities versus bonds. Since I’m 5 years from retirement currently 90% stocks and 10% bonds in my portfolio of $1,500,000, I have a couple of questions regarding this approach”. So he’s talking about a glide path there, Alan.

Al: Oh yes.  Gotta explain that. It sounds, I don’t know, interesting.

Joe: So he’s 55 and wants to retire in 5 years. Is that accurate? Yes. “So since I’m 5 years-” so he’s going to retire at age 60.

Al: Yep that’s what I get out of that too.

Joe: And so some of the studies are saying once you approach retirement you want more conservative. But then as you age, now it’s kind of the reverse effect by having more equities than bonds. So it’s kind of an interesting way to look at things. Just because of longevity risk is really what this is all about. Like Kitces wrote a couple articles on it. I think Wade Pfau wrote something on it as well. And then they’re looking at he’s going to retire at age 60. And so he’s got a 40-year life expectancy, let’s just assume. And so if he keeps a conservative allocation given certain valuations is that the Monte Carlo of the likelihood of him running out of money is higher unless he adds more risk or tries to increase his expected rate of return over his life. So what he’s asking now is should I be transitioning toward a more conservative approach now assuming I still need another $1,000,000 to retire? So he needs $2,500,000. That’s his goal.

Al: So that means he’s got $1,500,000 currently if I do my math right.

Joe: He’s got $1,500,000. He wants another $2,500,000 with only a modest $50,000 contribution per year. So I don’t know what rate of return would he need to generate, Al. That’s pretty aggressive because he’s 90/10. And then you have to look, Dale, at how much money do you have in U.S. equities versus maybe international equities and emerging market equities? So as Al’s doing some calculations, you want to be more conservative now. You’re kind of in the red zone. But you have an aggressive goal. You need a $1,000,000 in 5 years by saving $50,000 a year.

Al: Right. It’s actually not as bad as you would think.

Joe: What, 7%? 7.5%?

Al: 8%.

Joe: OK so 8% you need on your money over the next 5 years. You got, I don’t know, pretty high market valuations. I’m not saying it’s overvalued, but we’ve had a pretty good run, 12 years in the U.S. markets. I don’t know, can it continue to go another 5? Sure. But do you want to take that risk if you truly want to retire in 5 years? This is where you probably have to save a little bit more money and try to get a lower expected rate of return to get to that $2,500,000 goal. Because the last thing you want to do, Dale, is all of a sudden you lose 30% of that $1,500,000. Now your savings goal is not going to be $50,000, it’s going to be a lot more or your target rate of return is going to be like 12%.

Al: I would agree. I think the fact that it’s a 90/10 equity allocation so that $2,500,000 could be achievable. You could make $3,000,000. You could be at $1,000,000. I mean it’s all over the place with that much allocation. So that’s why folks as they get close to retirement they take their foot off the gas a little bit and that is not necessarily a bad idea. But it actually is, I would say this is kind of the general advice you know to have more bonds as you get closer to retirement. And as a general rule that’s probably okay. But we also know general rules you can sort of throw them out the door because it depends upon everyone’s personal situation. It depends upon what you really need from income from this portfolio. What other income sources you have. When you’re going to retire which you already said age 60. How much you’re spending. What your fixed income is. How your health is, longevity. All these things factor into your allocation. And we’ve seen 60-year-olds with 20% equities and we’ve seen 60-year-olds with 100% equity. So it just depends on your own situation. But I will say when you read a lot of articles out there they’ll tell you to get more conservative as you get closer to retirement and that as a general statement that’s not necessarily a bad idea. But that may or may not be the right answer for you, Dale.

Joe: So he’s got 2 more questions here, Al. He goes “does one just go from let’s say 90/10 to 50/50 at retirement or should it be really earlier? I’m going to answer that in a second. And then three “if you agree with this approach, what would be your definition of conservative? And perhaps a yearly percentage to steer back towards equities?” All right so piggybacking on what Al is saying when it comes to your overall situation is that you’re retiring at 60 so you’ve got to bridge the gap to Social Security unless you have a pension which we don’t know, we don’t have that information. So his full retirement age is going to be age 67. He’s retiring at 60. So he needs 7 years of 100% of that portfolio to create the income for him. So then you look at how much money is he spending? So maybe it’s $100,000 a year. So if I’m looking at $100,000 a year spent from the portfolio and I have 7 years to bridge that gap that’s going to be $700,000 dollars plus tax plus the cost of living that needs to come from that overall portfolio. So you could do a simple present value calculation to say if I need $100,000 income and assume a discount rate of 3.5%, 5%, something like that, something fairly conservative. And then maybe you want to throw another 20% in for taxes and do a present value calculation that could be let’s say $900,000 or $800,000. And what I mean by that is just saying that $800,000 would be safe. So you could pull $100,000 over the next 7 years. That would encompass taxes and inflation for you. And it didn’t matter what happened to the overall market. Does that make sense?

Al: Sure.

Joe: And then when your fixed income Social Security comes in you would want to kind of recalculate that. So I would start getting more conservative now with a true plan to figure out what the portfolio is really meant to do and how much income you need. So just kind of going back to what Al said. It’s not as easy as going 90/10, 50/50 and then sliding back to more equities. It’s all about the demand of the portfolio. I mean what do you want the thing to do?

Al: We have talked to 80-year-olds that are 100% in equities because they don’t need a penny of it. It’s for their kids and grandkids. So it really depends upon your goals. But I would say with knowing what we know and I’ll just take this even one step further, 90/10 is a pretty aggressive portfolio for someone that’s going to retire in 5 years. So if it were me, I probably would take my foot off the gas a little bit. But in terms of an arbitrary 50/50 or whatever, I wouldn’t go there. I would do a little bit more planning. That’s something that you read when you haven’t done any planning. I don’t have anything else to go on like 120 minus your age is how much you should have in stocks right? Forget it, that doesn’t make any sense.

Joe: That’s the stupidest thing I’ve ever heard.

08:39 – Should We Spend Taxable or Tax-Deferred Money Before Social Security?

Joe: So James. He writes and he goes “Hey Joe, Big Al, and Andi. I always look forward to your enjoyable and informative podcast. Keep up the good work”. Thank you, James. “Last week you replied to a question regarding whether to take the 401(k) money first like at age 62 or 65 or take Social Security first say it’s 65 then 401(k) later at 70. Your recommendation was to delay Social Security as long as you can, provided you had other funds to cover your expenses. My question is if my wife and I delay Social Security until age 70 from which funds should we draw from to cover our expenses until age 70? Taxable accounts or tax-deferred accounts? Or a combination of them both? I appreciate your discussion of all the factors to consider. Cheers”. All right. Very good James. Well, there are multiple strategies.

Al: Sure. I’ll start with one.

Joe: It depends on how much money James needs from the portfolio. How much money he has in non-qualified or brokerage accounts versus retirement accounts.

Al: So let’s start with, there’s plenty of money in both accounts.

Joe: Jim is rich.

Al: He’s loaded.

Joe: He’s just, yeah.

Al: So in that case, I would pull money out of your non-qualified accounts, live off of that, your taxable income will be super low. And so now you can do some nice Roth conversions with your qualified accounts and then by the time you hit 70 and a half, your required minimum distributions will be lower because you’ve converted a bunch. And of course, you’ll be receiving Social Security at that point. Then at age 70 and a half you’ve got a lot of tax diversification because you’ve got taxable accounts, you have not-taxable and Roth and qualified accounts.

Joe: So I guess here’s the real crux to this, Jim or James, most advice that you read and maybe that you hear, is going to say take from your non-qualified first, defer your401(k)s or your tax-deferred or qualified accounts as long as you possibly can.

Al: Yeah defer. Defer. Defer.

Joe: Defer. Defer. Defer.

Al: That’s what we hear all the time.

Joe: Pay taxes later. Al and I think that there’s a really good opportunity for a lot of individuals to pay taxes now. And so there’s a 2-step process. We’re telling you to take money from your non-qualified account, but not keep deferring your retirement accounts. So take from non-qualified to live off of. In conjunction we want you to convert the monies sitting in your IRA or retirement accounts into a Roth. So how much do you convert? I have no idea. I don’t know how much money you have. I don’t know if you have other, like a pension or real estate income or whatever. So when you look at it like that, it’s not just, take non-qualified, defer Social Security as long as you can, and defer your retirement accounts as long as you can. It’s not really deferring the retirement accounts. It’s converting the retirement accounts from now until age 70. You want to keep your income low enough to delay the Social Security benefit because you get a lot larger benefit plus no income shows up on the tax return.

Al: It’s a great strategy. And what some people do instead once they sort of understand managing taxes, is they just take it out of their qualified so that they’re managing their taxes that way and that’s okay. But what you’ve done basically is you’ve left money in a non-qualified which is subject to ordinary income or capital gains instead of putting money into a Roth IRA if you’d done it the way we’re doing. And essentially how much you convert is based upon your own situation and tax bracket. So let’s just say by the time you get to 70 and a half with your Social Security and your required minimum distributions you’re in the 12% bracket. That’s one of the lowest brackets right now. Then that’s what you should convert to the top of right now. And for a married couple that would be about $78,000, half of that for a single couple.

Joe: Single couple?

Al: Single person. Thank you. Yeah, I’m tired. And let’s say you’re in the 22% bracket when you do a low computation at age 70 and a half maybe then you convert up to that bracket. And for those of you that are in that bracket, you’ll actually probably be in the 25% bracket when the old tax rates come back in 2026. So you might even think about converting to the top of the 24% depending upon what your feelings are, what’s going to happen with taxes. I can tell you Joe and I believe taxes are about as low as they’re going to go and probably just going to go up from here. So we’re big believers in doing conversions. There’s no way to avoid the taxes on the money in your qualified accounts. But if you can choose when to pay the taxes and at what rates, at lower rates then that’s a good deal.

Joe: You could totally blow out of all of your non-retirement assets to live off of. But if you’re converting at the same time then you turn 70 and a half, now let’s say you have still money in a retirement account and a big Roth account. Well, now you’re golden. So then you take your Social Security at a lot larger rate then you pull a little bit more from your- Now you take your required distribution from a lot lower retirement balance because you converted most of it or some of it to a Roth and then any additional cash flow that you need, you pull from the Roth and it’s zero taxation. So it’s really controlling your taxes long term. So that’s what we would look at. If you don’t have a ton then it would probably be maybe a blend. You know just to try to keep yourself in the lowest bracket possible.

Al: And I was going to say if you don’t have a lot in terms of non-qualified, non-retirement accounts, save enough there so that you at least have emergency funds that you can easily grab and get at. But you may want to use the rest for either living. And of course, you also have to have set aside money to pay the taxes on the conversion. So you have to do a little bit more calculations here to figure out the amount. But if you have plenty of money in all of the above you do what we just said. If you’re limited in non-qualified assets you just have to be a little smarter in how you do it.

Click Ask Joe and Al On Air at YourMoneyYourWealth.com or in the podcast show notes to send in your money questions, comments, compliments, complaints or stories, and the fellas will answer right here in the podcast – make sure you’re subscribed so you don’t miss it when they answer! And you may not know this, but every time we get a new subscriber, YMYW becomes a little bit more visible in all the podcast apps, which makes it possible for us to reach new people and spread financial literacy and hilarity far and wide – so please subscribe and tell your friends to subscribe as well! We do find that once the podcast has gotten you thinking about the unique aspects of your financial situation, it might make sense to meet with a CERTIFIED FINANCIAL PLANNER™ here at Pure Financial to go over your specific needs for retirement in more detail. Click the Free Assessment button at YourMoneyYourWealth.com and come in for a free two meeting financial assessment at one of our offices in Southern California, or meet with a CFP® online via web meeting – either way, they can help you make sure you’re on track for retirement.

15:49 – I Don’t Plan to Retire. When and How Should I Start Withdrawing Funds?

Joe: I’m gonna go to Arizona. We got David writing in. He goes, “Thank you for your podcast. I have benefited from it many ways”. Oh well, glad we could help David. “I’m 66”. Everyone is so formal when they write in. Well it’s like where’s Dave? Or D?

Al: It’s my generation. We’re now elders. We deserve respect.

Joe: James. David. So David says thanks for the podcast – he’s benefitted. He’s 66. “But I plan on working to at least 80. Or maybe 90.”

Andi: “Beyond 90.”

Joe: Geez. Man.

Al: Yeah. That’s great. Someone that loves his job.

Joe: Workaholic. “I have my own company that I started over two years ago and I love what I do and I make over $300,000 per year”.

Andi: I’d keep working past 90 too.

Joe: Let’s do this Dave. Are you hiring?

Al: Joe’s looking.

Joe: “My questions, when and how do I start withdrawing funds from my investments for living expenses? I realize if I work until I die, my plan, I may never withdraw funds. But what happens if due to health reasons I have to stop working someday. I’m very healthy now but you never know. This is my plan and I would greatly appreciate your thoughts on this plan”. Here we go. This is David’s plan.

He’s going to “keep all my investment money in low-cost index funds as I’m working, earning and building my investment retirement accounts, Roth 401(k)s and regular account. Then about 5 to 7 years before I plan on taking withdrawals from my investments transfer about 10% of my stock index investments to a low-cost bond index fund. During that 5 to 7 year time period watch to do this when my stock index funds are higher not lower.” So high not low.

Al: Ok. I like the thinking.

Joe: “Then withdraw my quarterly living expenses when I need to from my bond index fund into my FDIC insured savings account because my bond index fund is much less volatile than my stock index fund. So this is greater protection from the expensive mistake of selling low. The amount I transfer should work out to be about 3.5% of my total investments or less annually. Then once per year rebalance my investments to maintain 10% of my total investments in my bond index fund. Any thoughts would be greatly appreciated”.

Andi: This is a very thought out plan.

Joe: Yeah. So he’s going to transfer 10%. So do you think he’s got 100% stock portfolio?

Al: That’s what I’m reading into it.

Joe: And then he’s going to transfer 10% of his stock portfolio into a bond portfolio and then he’s going to take 3.5% out of the total portfolio or from the bond portfolio?

Al: He’s suggesting he’s going to take his distributions from the bond portfolio because it’s less volatile.

Joe: No I understand that. But “the amount I transfer should work out to be about 3.5% of my total investments”. Or is the 10% he’s moving into bonds 3.5% of his total investments?

Al: I don’t know.

Joe: Either way I like your strategy, Dave. I like it. But I need to get a little bit more information here. You’re making $300,000 a year, you’re going to work until you die, so you probably don’t need any money from the portfolio as he said. But just in case, the contingency plan- So I’m curious- and like all of sudden, he falls ill and then that’s when he’s gonna transfer the 10%?

Al: That’s what I was going to say is based upon your goals and if that really turns out this is a great plan. But things don’t always go according to plan. In fact, Voya did a study a few years ago about people retiring earlier than they were wanting to and it was something like 60% actually. And those were people retiring in their 60s, not 80s and 90s. So here’s what I would- I like the plan too, but I would amend it this way. I would say David if something happens to your health, it may be sudden and quick and you may not anticipate it. So I actually would have a little more safety right now just for those contingencies

Joe: You’re kind of a buzz kill here Al. I mean Dave you’re going to drop dead from a heart attack. And who cares anyway.

Al: Well then it doesn’t matter because he’s gone.

Joe: You’re going to fall ill and when you fall ill it’s going to be quick. It’s sudden.

Andi: Hey that’s much better than having it last and be horrible.

Joe: “Oh you don’t know what’s coming David, but I do. I’m Big Al.”

Al: What I meant to say is your health can take a turn rather quickly and you may be around for 10 years. But in other words, you may need the assets sooner than what you think. That’s what I’m saying. Especially 80s, when you’re in the 80s and 90s. And I could say that because my parents are 87 and 86 and they have health issues.

Joe: But they’re still strong and vibrant.

Al: Sort of.

Joe: But God bless you, David. I mean you’re killing it. You’re making a ton of money. You’re going to work. I would plan on it like this, just by having 100% stock portfolio, you got the stock index funds and then just kind of slowly shaving 10% off it kind of living off that I would plan like something is going to happen now, maybe have a little bit more conservative portfolio. You’re making $300,000 a year, you’re probably not spending that. Your savings could go into a more aggressive portfolio. You can still add that on the stock side. But I would have a little bit more cushion just because Al knows more than I guess most.

Al: And what one other thing I would say is when you actually do need the funds you don’t always take them from your bond fund. Sometimes you take them from your stock fund when they’re up. When the stocks are down, you take them from the bond fund. When the stocks are up, you take him from the stock fund.

Joe: But you’re also going to have to take required distributions too from your retirement account at 70 and a half. You may have your own business so pushing the RMD out, it doesn’t apply to you. So your plan is solid but there are some flaws. You just kind of maybe take a little bit deeper dive into it. But I like where your head’s at. It’s thought out. So congrats on your success.

22:11 – Should I Borrow from My Emergency Fund to Pay Taxes on a Roth Conversion?

Joe: We got Steve-n. Of course, he can’t just call himself Steve.

Al: That goes along with your theme of everyone being formal.

Joe: Yes. Stephen from Orange County, he writes in. “Hi, Joe and Al. I just discovered your podcast and really enjoy your financial and tax advice. I thought I was prepared for retirement but realized I miscalculated what my future tax burden is going to be.

Andi: Actually it said WRT.  With Regard To.

Joe: And what did I say?

Al: I think that works. What my future tax burden is-

Andi: Yes. He said with regard to my future tax burden.

Joe: Well look at Stephen. Little fancy pants.

Al: Yeah, WRT.

Joe: OMG. WTF.

Al: I thought it was like “wrt.” I didn’t really know what that meant.

Joe: I don’t know, a little shorthand?

Al: WRT, yeah.

Andi: It goes along with BTW.

Joe: I thought it was just like a spelling error. I wasn’t gonna call him out on it.

Al: Because we do get spelling errors.

Joe: All the time.

Al: And we try to guess.

Joe: So I’m sorry. With regard to my future tax burden.

Al: That makes it more clear now.

Joe: Yes. Thank you very much, Stephen, from Orange County. “Here’s hoping you can help. My situation is this, I’m 66, wife 64, recently retired. My house will be paid off in 3 years, have long term care insurance and term life. Wife began Social Security this year. And I’m collecting via spouse benefit”. All right so he’s taking the spousal benefit. Wife claimed, he took a restricted application took the spousal benefit and he’s letting his grow until he turns probably 70. “Together receive $2200 per month. This will increase to $5200 per month when I start taking Social Security when I turn 70”. So then he also has 2 term pensions. So he receives $62,000 per year now through age 82. “Then just started receiving number 2 pension-

Al: Second pension.

Joe: Oh second – sorry. Second pension. WTF.

Al: What does that mean?

Joe: “at $10,000 per month which will end when I’m 76 and a half. I have $2,500,000 in a 401(k) and IRA of which only $200,000 is in Roth. Until I turn 77, do not need RMD funds and figured RMD money would be reinvested in brokerage account after paying taxes. Realized now that my tax burden will be larger than expected once RMDs begin and especially with tax rates reverting in 2026”. He’s got 2 questions for us Al. “Number 1, 2019 will be my lowest income year for the next 10 years. Was already planning on a Roth conversion of $80,000 this year, $50,000 already done. Should I bite the bullet this year and borrow from my emergency fund to pay the taxes and convert an extra $50,000 – $100,000 more this year? I would remain in the 24% tax bracket. (2) Other than increasing Roth conversion this year and possibly next 1 to 2 years, do you have any other suggestions to help with future tax burden? Thank you”. Well good news, bad news. Stephen. You have great pensions, fat fixed income and you are a really good saver.

Al: Yep which equals high future taxes.

Joe: Unfortunately is all the good savings was in a retirement account. You got it.

Al: And now you’re aware of that and that the best way to try to fix this is to do Roth conversions and you’re in a lower income tax bracket, I guess although you’re still in the 24% bracket so it’s not that low currently. But it sounds like you don’t have a lot of non-qualified funds to pay the tax and therein lies the challenge. Because when you do a Roth conversion you have to pay taxes as if you received the funds today which you have them, you just put him in a different kind of account, a Roth, and you got to keep those funds in the Roth because they grow tax-free. So it’s best if you have non-retirement funds to be able to pay those taxes.

Joe: I’m going to throw something way out in left field and of course this is not advice by any stretch of the imagination.

Al: Is this Wade Pfau’s suggestion?

Joe: No, I don’t know. Wade Pfau’s a lot smarter than me. But here’s what I’ve looked at, and Al and I’ve looked at in the past. For someone in your situation and we would only look at this, only look at this for individuals that have very large retirement accounts and fat fixed income. Is potentially look at if you have equity within your home. Because he said he’s going to pay off his house in 3 years or something like that. Maybe hold off on that. You hear me out. I know you’re like- everyone listening, “what the hell, you telling me to take money out of my house?” And the answer is maybe. What Stephen’s lacking is liquidity. Because everything’s in the shell of a retirement account and every dollar that comes out of that retirement account is taxed at ordinary income rates. So he’s going to pay off his mortgage in 3 years. How about if you paid it off let’s say in 10 years? Is that going to be the end of the world? You’ll still have the thing paid off and you can always cut a check and pay it off regardless. But hear me out. You might want to tap into some of that equity to create liquidity. And so let’s say you do this. You do a cash-out refinance and where does he live? Orange County. So his house is probably worth $1,000,000+ anyway.

Al: Probably a lot of equity.

Joe: So let’s say he pulls out a couple hundred thousand bucks. Or maybe $100,000. And now he’s got that liquidity, and say his interest rate on that is 4%. So $200,000, 4% over 10 years, the total of that would be-

Al: So $80,000 interest per year.

Joe: Yeah. $80,000. So that $80,000 is what’s going to be the cost of capital over that 10 year period hypothetically. But then he is gonna take a look at where am I going to come up the money to pay the tax? So let’s say he pulls more dollars out of his retirement account to pay the tax. So he’s paying 4% to carry a note versus paying 33% to pay the tax. If he’s pulling it out of a retirement account to pay the tax.

Andi: But he said he wanted to take it out of his emergency fund.

Joe: Right. And I wouldn’t necessarily want to do that either.

Al: I would not do that. I agree with that.

Joe: So you either look at maybe creating liquidity through home equity. And then now once he turns 70 and a half and those RMDs kick in it’s already kicking in more dollars that he needs. So he takes that extra cash flow and he just pays off the mortgage.

Al: And I agree with you. Let me sort of explain why. If you look at your income, Stephen, at age 70. So Social Security $5200 a month. So we’ll call that $60,000 for a year. Then you’ve got a pension you’re receiving $62,000 through age 82. So there’s another $60,000. So now you’re at $120,000. Then there’s a second pension $10,000 a month through age 76. So that’s $120,000 a year plus the other $120,000, so now you’re $240,000 of income. Then your required minimum distribution of $2,100,000 is probably gonna be $80,000 or more. So now you’re income is what $320,000 which I don’t know what you’re spending, but here’s the point. The point is your income is going to be higher in the future than it is now. So now is actually when you need the money to be able to pay the taxes. So it would, it could make sense to borrow money from your home. It could be a home loan. It could be a home equity loan. It could be a reverse mortgage, which is where I was going to go with that.

Joe: A HECM?

Al: Yeah, a HECM. And that way you’ve got no line-of-credit to pay the tax. Now we don’t normally recommend that you borrow money before retirement. Please understand that.

Joe: But your income is going to be $350,000. Let’s say you’re spending $100,000, so you get $250,000 extra per year.

Al: In this case, I’d feel comfortable borrowing knowing I could pay it off just within a few years at age 70 and a half. That’s why it could make sense in this case. I would not touch the emergency fund. Completely agree with you. And I don’t really like paying taxes out of the retirement account because then you’re paying taxes on taxes just like you said.

Joe: So, of course, he would want to run the numbers in then- like what Al and I talk about too is that well this could make sense, but again this is not advice at all. It’s just a couple of kids hanging out talking about Roth IRAs.

Al: And we have recommended this before. It’s rare. I mean there are only a few circumstances where we would do this, but this would be one them, potentially.

Joe: Potentially. Hypothetically. OK well, maybe we’ve lost a couple listeners there. “I can’t believe you would use debt!” What do you think businesses do? You’ve got to treat your finances, your wealth, your family wealth – it’s kind of like your business, right?

Al: Well I think you use all available assets that you have to get the best solution.

There are 3 ways a reverse mortgage can supercharge your retirement, and an expert on the topic, Dr. Wade Pfau, spilled the details about reverse mortgages for us on YMYW episodes #168 and 117. I’ve put both in the resources section of the podcast show notes – just click the link in the episode description in your podcast app to find it, along with the transcript of this podcast, the YMYW TV episode about real estate in retirement, and more home equity conversion reverse mortgage resources – or just click “listen to podcasts” at YourMoneyYourWealth.com and start bingeing. Now that we’ve gotten your finances in order, let’s find out how and why it’s important to talk about finances as a family. While at FinCon, a conference for money nerds in September, I had a chance to talk to award-winning journalist Cameron Huddleston, the Life & Money columnist for GoBankingRates. She’s got more than 18 years of experience writing about personal finance for the likes of Kiplinger, Business Insider, Money, the Huffington Post, and many others. Her recent book is called Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances.

32:58 – Cameron Huddleston: Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances

Andi: Cameron, thank you for joining me today.

Cameron: Thank you so much for having me on.

Andi: So explain to me why you wrote this book.

Cameron: I wrote the book because I did not have money conversations with my mother before she was diagnosed with Alzheimer’s. And for all those people out there who think that these conversations can wait until they have to happen, until there’s a health care emergency, until your parents are having memory issues, it is too late at that point. It can be too late. Now, I actually was able to step in and get along with my mom just in time to get her to meet with an attorney, update her legal documents, name me power of attorney, which is so so important. Because if I had waited any longer then I would have had to go through a very lengthy expensive court process to be able to step in and make financial decisions for her and I just don’t think people realize what needs to be in place. If you have to step in and help your parents out with their finances because they need caregiving help or maybe because they didn’t prepare for retirement. And of course not everyone’s going to have to do that but everyone dies. And if your parents die without a will you have to deal with what’s left behind. And if there are no guidelines for you, then family is going to start fighting over who gets what. And even if you think everyone gets along, I’ve talked to enough estate planning attorneys who will tell you that when someone dies, those happy families they’re not so happy anymore. Fighting does happen. So personal experience drove me to write this book.

Andi: And who is the book geared towards? Obviously it’s going to be people whose parents are getting to an age where they’re going to need that assistance.

Cameron: Actually what I would really love is for young adults to read this so that they can have these conversations while their parents are still relatively young and healthy. You know if you say, “oh, my parents are in their 60s I can’t wait till they’re in their 70s. There’s no rush.” Well, my mother was diagnosed with Alzheimer’s at 65. My father died at 61, without a will, in a second marriage. So thinking that you have time you might not. The sooner you can have these conversations the better. Certainly, if you’re already in your 40’s, don’t wait. If you’re in your 50s have the conversation tomorrow. You cannot wait at all. But the sooner you can do it the better. Especially because it can take time to get your parents to feel comfortable enough sharing sensitive information with you.

Andi: And why is that? Why is it so difficult for us to have that conversation about our finances?

Cameron: Because money is a taboo topic. I mean most people don’t want to talk about money. Especially if your parents are part of an older generation, boomers, silent generation. It’s especially difficult for them because their parents told them you don’t talk about money. Even though you are family, they still might feel uncomfortable they think well it’s not really your business. And you know they might be ashamed if they haven’t managed their money well. Lots of different reasons why they might be reluctant to have the conversation. But don’t let that stop you. You can try a variety of approaches to get the conversation started. If it doesn’t work the first time don’t give up.

Andi: How much do we need to know about our parents’ finances?

Cameron: The more you know the better. Because if you do have to step in and get involved. You honestly have to know everything. But the most important things are those legal documents that I mentioned. You need to find out, do your parents have a will? Do they have power of attorney? Do they have a living will or advance health care directive? Because you have to be mentally competent to sign those documents. So if you wait until there is already a health issue and your parents are no longer competent they can’t sign them anymore. You have to go through very lengthy expensive court process to step in and help your parents out. That’s super important. Now you want to find out how are you paying your bills? Do you do it automatically? Do you write a check? And if something happens to you and I have to write checks for you, have you named me your power of attorney so that I can sign those checks? And then the more details you can get beyond that the better, the better you’ll be able to help them out if they need your help. And even if you never have to help them out, when they die if you don’t know what assets they have you’re going to have to play detective to figure it out so that the stock certificates that are in the lockbox of the bank that you don’t even know about and they’re left there, just rotting away. Or the will that’s left in a cardboard box in the garage that you tossed when you’re cleaning everything out. If you have an accounting of everything they have,  it’s going to make it easier when they’re no longer here to sort through it. Easier for you and you are just letting your parents know, ‘Mom and Dad I want to have these conversations because I’m looking out for your best interest. I want to be able to help you. And if I don’t know what you have if we haven’t laid the groundwork, if I don’t know what you want, I’m not gonna be able to do a good job of helping you’.

Andi: There are other chapters in your book on other topics that you need to have the conversation with your parents, like long term care.

Cameron: Long term care is a big one. Because there is a very good chance, your parents if they live past the age of 65, there’s a very good chance they’re going to need long term care at some point in their life. So if your parents end up needing long term care and they don’t have a way to pay for it, most likely that means you are your parents’ long term care plan. You are the one who’s going to have to provide that care. I think a lot of people don’t realize Medicare does not pay for long term care. If you want insurance coverage it needs to be a long term care insurance or you could get life insurance with a long term care benefit. These things aren’t cheap though. But it’s important to realize that they’re a lot cheaper than the costs of long term care. We’re talking an average of $4000 a month for an assisted living facility or a home health aide. Skilled nursing care, that’s twice as much. So you want to find out if something happens to you, do you have a way to pay for this? If you don’t let’s start looking into the options that we might have and let’s talk about how you’re going to get the care you might need. Because if they’re counting on you, you might not be able to provide that care if you have your own family to support and they’re counting on your income. Because being a caregiver is a full-time job.

Andi: And as our parents are getting older they may become more susceptible to people calling them up on the phone and trying to sell them things or all sorts of other things like that.

Cameron: Scams. Yes. Unfortunately, older adults are a big target of scammers and this can be a great way to actually start the conversation with your parents. ‘Hey, Mom and Dad have you heard that IRS scam, people who are calling up and saying you owe money to the IRS if you don’t pay they’re going to come and arrest you. This is a scam’. And talking to them about the various scams that are out there and then letting it lead to other conversations. You’re making them aware, you’re opening a door to more conversations. ‘Hey, I can help you check your credit report to see if your identity has been stolen, to make sure there aren’t any accounts that have been opened in your name.’ But warning them about the scams that are out there. So important. But the important thing too is if you’re going to tell your parents to watch out for scams, most of these scams are still happening with phone calls. I mean there’s e-mail phishing and the text messaging and that sort of thing. But still, phone calls are the most prevalent way. And if you tell a parent who is in their 70s to just hang up they’re not going to do that. Because they think it’s rude or maybe it’s the doctor calling. Or maybe it’s a friend calling and so they’re not going to just let it ring and let it go to voicemail or whatever. You want to give them a script. Something that they can use to say to that caller who calls up and says ‘Hello can I speak to Mrs. so-and-so this is someone calling from the Social Security Administration’. Oh well you know ‘I’m heading out the door right now but let me call you back’. And tell your parents ‘don’t call the number they give you’ if it’s someone claiming to be from the Social Security Administration, from Medicare, from their health insurer, tell them to call that organization directly. ‘Hey were you trying to reach me?’ ‘Hey, I’m calling you’. You know my doctor, were you actually trying to reach me? Don’t call the number that the person is giving you but tell them give them something they can use to get off the phone politely so they don’t have to feel bad about it. Because just saying, “hang up, hang up!” They’re like, “no, I can’t. I’m not going to do that. That’s so rude.”

Andi: And also they may forget somebody that’s on the phone may sound so convincing that they think this one probably isn’t a scam.

Cameron: Yes and this especially if your parents are already having memory issues it’s really hard to protect them from these scammers. My mother was almost a victim of someone who called up and said hey you’ve won a sweepstakes. All you need to do is wire some money to get your prize. She called my uncle and said how do I wire money? He called me and said I think your mom is being scammed. So I went right over to her house and intercepted the calls. But she was so convinced that she had won. She had a wire this money and so I had to stay with her for the rest of the day. And when I had to leave and go get my kids I had to call a friend to come and stay with her just so that she wasn’t going to get sucked in because the guy who was calling was not giving up. Fortunately, I live close to my mom. I can do that. I realize not everyone can do it. You know it can be difficult. So certainly if your parent is having memory issues already there needs to be a caregiver there. There needs to be someone there who is looking out for that parent to make sure they’re not becoming victims of scammers or anyone else who’s trying to take advantage of them.

Andi: And you’ve got some free resources on your website for this very purpose don’t you?

Cameron: I do. I have a scam red flag sheet that you can download. Give it to your parents and say ‘hey hang this up on the refrigerator. Hang it up by the phone. If you get someone who is saying this to you it’s probably a scam’. I also have an ‘in case of emergency’ organizer that you can print out, give it to your parents. It has a long long list of information that they can provide for you about all their financial accounts. Even their final wishes, how they want to be buried, cremated. What do they want in their obituary? Sometimes it’s easier for your parents to write it down rather than tell you. They maintain control. You know they’re not having to expose their finances to you. Say ‘please fill this out, put it someplace safe and tell me how to access it and at what points I am allowed to access it’. And that lets them maintain control of this information and it actually helps you if you need that information. And so I have that on my site. It’s free.

Andi: And the website is CameronHuddleston.com. Correct?

Cameron: Yes it is.

Andi: And we have one final question. You have three children of your own. When they start growing up, what is your money conversation going to be like with them?

Cameron: I have been having money conversation with my kids since they could talk. We talk about money in my house all the time. And so I’m already telling my daughters, they are in their early teens, but I’ve already told them ‘look your dad and I are trying to take steps so that you’re never going to have to take care of us. If something happens and I have memory issues like my mom, I don’t expect you to be my caregiver. You know there will be the resources there to pay for that care if I need it. Now, if it’s just me and your dad’s not there I do hope that at least one of you will step up and at least make sure my bills are getting paid with the money that I have set aside’. But of course, as they get older once they are actually adults we’re going to have some more in-depth conversations certainly. But money is not a taboo topic in our house. We talk about it all the time and so we have the conversations and we will continue to have them.

Andi: That is Cameron Huddleston. She is the author of Mom and Dad, We Need to Talk: How to Have Essential Conversations With Your Parents About Their Finances. You can find out more at CameronHuddleston.com. Any more final thoughts?

Cameron: Don’t wait to have the conversation. Do it now.

_______

Yes we do have Derails, stick around to hear them if you’re interested, they’re at the very end of this episode. Click the link in the description of today’s episode in your podcast app to go to the show notes at YourMoneyYourWealth.com to access the resources on Cameron’s website, to read the transcript of this episode, to subscribe to the YMYW podcast or our YouTube channel, and to send in your money questions or your comments, compliments, complaints and stories to Joe and Big Al. Thank you for being a part of this show each and every week and for sharing YMYW with everyone you know. We literally wouldn’t be here if it weren’t for you!

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