With volatility, should you time the market and change the asset allocation of your investment portfolio, your pension, or your Thrift Savings Plan (TSP)? Plus, asset location: should equities be in a brokerage account, Roth IRA or traditional IRA? And diversification vs. concentration, calculating how much you’ll have in retirement, how to get there from here, and Joe’s favorite, negative listener feedback.

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Show Notes

(00:49) Which is Better in Investing: Concentration or Diversification?
(04:34) Asset Location: Where Should We Hold Our Equities?
(10:56) What Should Be My Retirement Withdrawal Strategy? Should I Take Social Security Now or Wait?
(14:23) Based on My Savings and Investments, How Much Will I Have at Ages 65 and 70?
(20:25) Should I Reallocate the Investments in My Thrift Savings Plan (TSP)?
(26:49) Should I Change My Asset Allocation? If So, When?
(32:14) What Should Be My Pension Asset Allocation?
(37:18) I Have $40K at Age 40. How Do I Get to Retirement From Here?
(41:00) Taxation on Long-Term Captial Gains
(42:14) Negative YMYW Podcast Comment from RockyMountainWay

Resources mentioned in this episode:

WATCH | Strategies for Diversifying Concentrated Stock Positions

READ THE BLOG | What is Asset Allocation?

WATCH | How to Save on Taxes with Asset Location

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Transcription

Which is Better in Investing: Concentration or Diversification?

Joe: We’ve got Steve, Alan. He writes in from San Diego. He goes “Hi Joe and Al. And yes Andi too. I’d like to hear your take on concentration versus diversification. The show’s great. What can I say?” You could say that Steve. That’s exactly what you say. The show’s awesome. Scream it out loud.

Andi: Tell your friends. That’s the best thing you can do. Make them listen to this nonsense.

Joe: What do you think Al? What say you on this? I’d like to hear your take on concentration versus diversification.

Andi: Well I have a question. I know what diversification is. What is Concentration?

Joe: Concentration is holding one stock.

Al: It’s the opposite.

Joe: It’s the opposite of diversification.

Al: It’s holding very few stocks or very few investments. Diversification is a globally diversified portfolio which is what we typically recommend. So honestly I like them both for different reasons. So concentration tends to be a really good way to build wealth. Albeit it’s a lot more risky. And let me explain. So if you have a skill or idea and can set up a company then you’re basically concentrating your energy and efforts and probably your investments in that one company. If the company does well you’ll probably do a lot better than say a globally diversified portfolio. On the other hand, if the company doesn’t make it, and 4 out of 5 don’t make it within one year, then you’ve lost all your money and you did worse. So concentration is risky. They’re high payout but a huge consequence for failure. But if you do get the right stock, if you work in a company and can get company stock and that company goes way up you can earn certainly more than the stock market. So I like concentration for wealth building but you just have to understand there’s a lot of risks. That being said once you’ve made a certain amount of money to live off of you definitely want to focus much much more on diversification because how you actually make money is way different than how you keep money. And so a lot of folks that make money they just want to keep being aggressive through retirement. And they actually get that 1 or 2 or 3 stocks that don’t do well and then they got to go back to work. We typically- most of our clients are either thinking about retirement, in retirement, or at least starting to save for retirement and I kind of like diversification for that. But when it comes to maybe some of your investments to create wealth, I’m fine with concentration.

Joe: I agree with you 100%. I think it all really depends on what the goal of the individual is as well and what they’re trying to accomplish. But let’s say you’ve got a 30-year old that inherits $100,000 from Grandma. I guess our advice wouldn’t be put it all in Netflix stock. I think your definition of concentration would be potentially, hey, if you are that business owner – because how you build wealth is taking on extreme risks and I don’t think of a bigger risk than building the company.

Al: I totally agree. I think my definition of concentration as I’ve mentioned it was building your own business or working for a company or buying a rental property. Now you’re concentrating trying to increase your wealth more than say a globally diversified portfolio. In that example Joe, let’s say you inherit $100,000 which you’ve never had before. I would probably put at least $80,000 in a diversified portfolio. If you wanted to sort of play around and gamble with the other $10,000 or $20,000 let’s say, in 2 or 3 stocks, I’m okay with that. But just understand you’re taking a lot of risk and it may or may not pay off.

Joe: All right cool. Thanks for the question, Steve.

Asset Location: Where Should We Hold Our Equities?

Joe: Asset allocation question. “Hi Joe, Big Al, and Andi. This is Benji in San Diego. I’m a longtime listener and a huge fan of you guys. Although now that I’ve retired and my internal time clock has adjusted I have to admit that I no longer get up at 6:30 a.m. on Sunday mornings to catch your TV broadcast. Thank you so much for sharing your financial expertise in such an entertaining and straightforward manner. And I very much appreciate your past interviews with the likes of Paul Merriman and Larry Swedroe. The amount of quality information that you provide is truly amazing. At times I feel a bit guilty about getting such useful information while not being a client.” Well yeah, I think it’s time you start paying us, Benji.

Al: Me too.

Joe: Andi will send you a bill.

Andi: Oh make me do it!

Joe: “But that feeling passes quickly.” All right, whatever.

Al: He’s not too guilty.

Joe: Yes. “Seriously though there will come a time when someone else will need to manage our finances when I’m gone. Since my wife has no interest and your firm will be top of our list to speak of.” Well, thank you very much, Benji. “Now that I’m retired and increasing my fixed income portion of my assets I have a question regarding the asset allocation of my 3 accounts. I have a taxable account $700,000; traditional IRA of $1,100,000; and a Roth IRA of $600,000. Background, retired at 66, with retired wife at 65. Neither with pensions. Waiting until 70 to take Social Security. Making Roth conversions over the next 5 years until we have to take our RMDs so that the values of the traditional IRA and Roth IRAs are about equal. Annual expenses of $80,000; Social Security will be about $60,000 including mine and spouse. If I assume that we want a 50/50 split between fixed income and equity assets, where should the equity portion be held? My understanding is that the preferred order of preference is a taxable brokerage account, then the Roth account and then the traditional IRA. In any case, I plan to keep about $100,000 in cash in the brokerage account to live off of and replenish as needed. So that means for equities will have $600,000 in taxable brokerage; $600,000 in Roth IRA and zero in traditional IRA. Does that seem reasonable to you?” So asset location question here. Alan. Not really an asset allocation question. So if he’s got a 50/50 split, I would put equities in the Roth, fixed income in the taxable account and I might use tax exempt bonds in the taxable account if I do not have any IRA assets.

Al: I actually agree with you Joe completely. And furthermore, I would say if the Roth IRA has $600,000 and so 50% is going to be a little bit more than $600,000 so are you going to put some equities in the brokerage account. Then you want to put your more aggressive equities in the Roth such as small companies US, value companies US, emerging markets international. Because even though these asset classes are more volatile they tend to perform better than others over the long term. And over the long term I’m talking 10 years and that’s no guarantee. They just tend to outperform the other asset classes and you want your higher growth in the Roth IRA.

Joe: But Benji, I don’t understand your math. Because you have $700,000 right now in a taxable account; $1,100,000 in an IRA and $600,000 already in a Roth. He’s saying that he wants to do some Roth conversions over the next 5 years. He’s 66. His RMDs not till 72. So he’s got time to live off of the traditional brokerage account to spend that down. So he’s got some cash. He’s pushing out Social Security till age 70. So he’s got a 4 or 5 year window. And so he lives off of $80,000. Take the $80,000 from the brokerage account and then you’re going to do conversions from the traditional IRA to the Roth IRA. But you will have a lot more money in the Roth IRA because you’re converting probably maybe close to $100,000 a year for the next 5 years. So the brokerage account is probably going to be close to zero. You’re going to have a lot more money in the Roth but you’re still going to have money in the traditional IRA. And I think that’s OK. Because then you can start taking distributions from the traditional IRA at age 70 up to a certain tax bracket to keep yourself in the 10%, 12% depending on where brackets go. And then you can supplement your other income from the Roth. But you’re only spending $80,000 a year. And $60,000- so he needs $20,000 from the portfolio. So I mean he’s clean living. He’s been watching us Al. I mean look at how good of a position he’s in and he’s only going to get better over the next 5 years.

Al: I totally agree. And I think that’s often missed is when people retire and they’ve got brokerage accounts that they can live off of. And as before Social Security they’re in this super low tax brackets. That’s absolutely the best time to do some larger Roth conversions and fill up those lower brackets. And now with the RMD, with the SECURE Act pushed to age 72 there’s even more time. So yeah I agree Benji, you put yourself in a great situation here.

Joe: So he converts at least $80,000 let’s say keep him in the 12%, $80,000 times 5 years. That’s $450,000, $500,000 depending on whatever. So he’s going to have $500,000 in the retirement account. So his required distributions going to be $20,000. You take $20,000, that’s probably going to be below the threshold for taxation of Social Security. So all he needs to do is just take out that RMD. That’s covering his lifestyle. Then if he wants more money go on a trip, spoil, he takes it out of the Roth. It’s on a 100% tax free.

Al: Exactly right. And I think a lot of times people don’t realize you don’t have to convert everything out of your traditional. In fact, you don’t really want to convert everything because if you do you’re not going to take advantage of the lower brackets in retirement. And some people actually want to contribute to charity through their retirement and there’s that qualified charitable distribution that you can make directly from your IRA. So it’s not taxable to you anyway. So I guess the concept of wanting to convert everything is not necessarily something that we agree with. You kind of want to have that tax diversification.

Joe: Benji, I’m sending you a bill. You’re welcome.

What Should Be My Retirement Withdrawal Strategy? Should I Take Social Security Now or Wait?

Joe: We got Ray. He writes him from Minneapolis.

Andi: This one’s in all caps so I think you have to yell it.

Joe: I know. Ray is, like, super excited.

Al: You mean louder than he normally does?

Andi: Yeah right.

Joe: “I work part-time, $25-” who types in all caps?

Andi/Al: Ray does.

Joe: Don’t you know that means like you’ve got to scream this stuff? Like he’s really excited about his withdrawal strategy here.

Al: He is.

Joe: “I work part-time, $25,000 a year and I have a mortgage of $14,000 that I’m paying off this year with EE bonds. I’ve EE bonds that payout for 4 years for $173,000. Should I collect Social Security this year at age 65 or forgo this year?” All right. “I plan on retiring in 2021 and not working and possibly not collecting Social Security at full retirement age. I also have a pension payout of $15,000 a year for 5 years that is delayed one year from the date of leaving work. I also have Roth accounts and cash and mutual funds. What is the most tax-efficient to approach this? I hope I gave you enough info.” Well, let me start with this Ray. You didn’t even come close to giving us enough info. We didn’t even scratch the surface. This is like it’s all caps and I don’t even understand what the hell you’re doing here. But I’m going to try my best.

Al: Why don’t you explain what a series EE bond is? Let’s start with that.

Joe: It’s an EE bond, Al.

Al: Yeah but how does it work?

Joe: Well you can invest in an EE bond. It’s a zero-coupon bond. So let’s say he buys them for $50 and then when they mature it’s worth $100. So he’s got 4 years for $173,000. So over the next 4 years, they’re going to mature at $173,000.

Al: But you pay the taxes as you go, right? Or do you pay that at the end?

Joe: No, you know you pay them as you go but it’s a phantom tax. I believe with EE bonds but some of it could be tax-free as well if you use it for education- there are certain circumstances where EE bonds interest is tax-free. “I work part-time”, he’s making $25,000, he’s got a mortgage of $14,000, he’s going to pay that off. But I don’t know how much money he’s spending. So Ray here’s what do you do. You first start looking at how much money you’re spending on an annual basis. Let’s say you’re spending $50,000. If you’ve got part-time work of $25,000 the shortfall is gonna be another $25,000. Then you’d kind of take a look at where should you be pulling another $25,000? You have a pension that’s going to come in the year after you retire. What’s that going to look like? What are your Social Security benefits going to look like at full retirement age? If you take it earlier or if you wait until age 70? Do you have other assets that you can pull from to collect the other $25,000? So it’s just kind of simple math that you have to kind of run through to figure out what is going to be the most tax-efficient strategy for you. Right now you pay the EE bonds. That’s probably not going to pay any tax whatsoever because you’re in a fairly low tax bracket. As they come due you pay off the mortgage. Now you’ve got the standard deduction. So we need a lot more information to kind of give you the right idea. So if you want to write us back and tell me how much money that you’re spending; what total assets that you have; what your Social Security benefits going to be; what your pension benefits going to be. Then Big Al and I can kind of dive in the numbers a little bit better for you and give you better advice.

Based on My Savings and Investments, How Much Will I Have at Ages 65 and 70?

Joe: Let’s go to- help me out here- Mini- Br- – Min- Min-

Andi: Minerva.

Joe: Minerva. Min- bada-bada.

Andi: Minerva.

Joe: What? Min- Minerva.

Al/Joe/Andi: Minerva.

Andi: Minerva.

Al: I like it. It’s a good name.

Andi: It’s made up.

Joe: Minerva. Did you make it up?

Andi: Yes I did.

Joe: Oh my God.

Andi: Minerva was the Roman goddess of wisdom. She specifically asked to have her name changed to protect the innocent.

Joe: OK. Well why did you pick Minerva?

Andi: Just because I wanted to hear you try it, Joe.

Joe: Versus Stacy?

Andi: Because that’s boring. Minerva is really interesting.

Joe: Minerva. You know- geez. Because you knew probably I couldn’t pronounce it.

Andi: It was so much fun watching you try.

Joe: Okay good. “Hell.” Let’s start with that. “Hello Joe and Al. I have a question to either-”

Andi: She actually starts with, “hell.”

Joe: “I have a question to either one of you. I’m wondering how much I would have by the time I turned 65 and age 70. I just turned 63 this month and planning to work until age 65. Then quit unless the company lays me off before 65.” I love that. Quit. I’m out. Some people say retire. Minerva says quit. I am planning to claim the MRD or RMD at age 70. I don’t know how to calculate the gain and loss for my investments so I hope you can help me out. I currently have combined assets.” We got Fidelity, Prudential 401(k), Roth, CDs of $1,300,000. “I’m currently contributing $2148.45 a month to the company-sponsored 401(k) plan and $358.08 a month to Roth, both at Prudential. My personal CD has a little over $100,000 already included in the total assets I mentioned above and currently at 3%. It will mature a year this April but planning to reinvest. I’ve set automatic contribution increase to my 401(k), Roth at 1% every annual pay increase so I don’t have to worry about it. Then depending on how much pay increase I get each year, I normally add about 50% on my pay raise as well. Currently, I’m contributing 35%, so this year it will be 36% or 36.5%. My total annual base salary is a little over $92,000, with an annual increase of about 2.5%. Additional 401(k) Roth annual contributions of 35% deducted from my annual bonus of approximately $19,000 per year. Even though I’ve been receiving an average of $16,000. I don’t normally include it in the calculation because it’s not guaranteed. Can you please explain how much, what I’ll have, by age 65? And age 70? I’m not a big fan- Oh I am a big fan of your show-” excuse me “-and I never miss watching it every Sunday morning. And if I do miss it I log in and watch it online. P.S. Please if you plan to read my question on your show please do not mention my real name.” We didn’t. We made up Minerva for you.

Al: We did.

Joe: So she’s asking for just a calculation. So you’ve got a calculator handy Al?

Al: Yes I do. What do you want to do? We need E-Money for this. We’re gonna come close. How about that? So she started about $1,300,000. We’ll go with that figure.

Joe: And then say she’s saving $2500 a month.

Al: Yes. So we’ll call that $30,000. Joe, I’m just going to do it this way, real simple. So $1,300,000 times, I’ll just say 5% as an average rate because there’s CDs in there, so that’s $65,000 of growth. Plus the $1,300,000, plus $30,000 of savings. So that’s $1,395,000. That’s about $100,000 a year. So by 65 you get about $1,500,000. Another 5 years it’s going to be something north of $2,000,000. That at least gives you a ballpark.

Joe: Yeah. How are you doing math? You have your HP12C or are you doing it on your phone? What are you doing?

Al: I have an HP12C on my phone.

Joe: Okay. Got it.

Al: But I didn’t use it for present value. I just did $1,300,000 times 5%. $65,000, added $30,000 of savings. That’s close to $100,000. So between growth and savings it’s about $100,000 a year. I’m just saying just ballpark. Something like that.

Joe: So Minerva. You’re going to have a couple of million bucks. So unless you quit/retire, I think you’re in great shape.

Al: Minerva, if you want a better answer you’re going to need to get with a financial planner that has financial planning software. Because there’s a lot of variables in here such as your contribution increasing each year and you’ve got different kinds of assets and different growth rates. So we just gave you a back of the envelope, a quick calculation.

Based on Minerva’s question, and Bruce’s coming up a little later, a number of you, our faithful YMYW listeners, are wondering where you stand financially as you approach retirement, hoping that things are looking good. Luckily, Big Al can help you figure it out. Get a copy of Big Al’s Quick Retirement Calculator in the podcast show notes at YourMoneyYourWealth.com. Just click the link in the description of today’s episode in your podcast app and you’ll find it along with the transcript of today’s whole show. Or maybe you’re like Benji – you’re an avid listener to the podcast, you watch the YMYW TV show, but you’re not quite sure if your portfolio is where it should be. You’ve got four options: #1, you can keep plugging along, keep listening, and hope for the best. #2, you can click “Ask Joe and Al On Air” in the podcast show notes to send in your money question, like Benji did. #3, Southern Californians can sign up to attend a free retirement class, also right there in the show notes. Or #4, Find out exactly where you stand – and what you might want to change: click the “Free Assessment” button and get a thorough two-meeting financial assessment with a CERTIFIED FINANCIAL PLANNER at no cost.

Should I Reallocate the Investments in My Thrift Savings Plan (TSP)?

Joe: We got Susan. She writes in from Escondido. “Love the show. Been recording the Sunday TV show and listening to the podcast. I vote for daily podcasts also.

Andi: That’s 3.

Joe: Daily.

Al: Wow. That’s a lot of content.

Andi: Actually yeah, that’s the first person that’s asked for daily. We’ve people that have said more than once a week.

Al: We’re going to need a lot more questions.

Joe: Absolutely not Susan. I have no desire to do this daily.

Andi: I could just put out one a day, that’s just one question.

Al: There ya go.

Joe: We could do a 2 minute-

Andi: Oh, people would be so pissed.

Joe: She’s got 2 friends that are clients of Pure. Have you ever heard of that company Al?

Al: I have.

Joe: “And love their advisors. I’ve taken a class. Thought it was great. Don’t have enough funds to be managed but I’m working on it.” Well good for you Susan. “Some details are I’m single, have been for years. I was a stay-at-home mom until 1998 when I started work at the post office. I’ll be 61 this year, been looking at retirement. My Social Security will not have 35 years, maybe about 25. My pension from the post office will be about $1100 a month before taxes and I pay for health care. I still owe a mortgage on my home, about $158,000; payments are low, $1100. I’d like to pay it off before I retire but I don’t really see that happening. It’s cheaper than rent though.” You got that right. “My main question is the TSP. I have 7% going into the traditional to get the match and I have $400 a month going into the Roth, which I only started last year, a total of 15% going into my TSP.” So TSP thrift savings plan for federal employees. “I have $300,000 in my TSP, 20% the G Fund; 63% in the C fund; 10% in the S fund. All current contributions are 100% in the C. Should I reallocate some of the funds? Should I keep 100% going into the C? I’ve kept it aggressive trying to play catch up. I thought about 10% to 20% in international and 10% to 20% going into the S with the balance going into the C. It looks like I’ll have to keep working so I can maybe think of retirement at 65. I am debt free except for the house. I have 6 months emergency fund. I have $45,000 in non-retirement mutual funds and I have since 1997. That’s the balance now. It’s been a great performer. Allowing me to pay for 3 children’s weddings; go to extended vacations with my kids and pay for home improvements. I’ve never added to it and I just roll the dividends. It is AB large cap growth fund in Washington Mutual Investors Fund Class A. One advisor told me I had too much equities and had too much risk. It’s been good to me all these years all through the storms. Also does it make sense for me to roll my TSP into an IRA when I retire so I can convert to Roth? Or am I too old to mess with it? Again, I love the show with all 3 of you and I listen all the way to the Derails.”

Al: Derails?

Joe: What the hell’s the Derails?

Andi: That’s where you guys go off on a topic that is completely non-financial, so I put that stuff at the end and I call it the Derails. And people love them. That’s where you guys spend 5 minutes laughing hilariously at your friend who listen to audiobooks at 10 times speed. Stuff like that.

Al: Oh, got it, okay.

Joe: And he listens to like 15 books a week.

Al: Yeah. So yeah he does. So if you don’t want to hear our-

Joe: – banter? Or just nonsense?

Al: -nonsense. That’s the word I was looking for.

Andi: Yeah, then you can just dump out.

Al: You don’t have to, you can just cut it out.

Joe: Or just fast forward to it.

Andi: There are a bunch of people that love those.

Al: That’s all they want to hear.

Andi: Oh yeah.

Joe: All right. I don’t even know our question.

Andi: Should she reallocate her TSP?

Joe: Should she reallocate?

Al: Yeah, I think that’s her main question.

Joe: Here you go, Susan. I think you’re doing a good job by putting everything into the C fund.

Al: As a contribution.

Joe: As a contribution. I would not split up the $300,000, 20% international, 40% C fund and another 20% in small-cap. I think that’s too aggressive. I agree with your advisor whoever that you talked to there. Because you’re looking at retirement in the next what, 5 years or so? You want to keep what you got but the contributions that are going in you can take a little bit more risk because if the markets go down you’re just buying more shares. It’s called dollar cost averaging. So I think I’d be a little bit more conservative on the balance of the $300,000. Maybe 60% in the G fund, 20% in- or maybe 10% in the S fund, 20% international and the rest in the C fund. Something like that. I mean this is not a recommendation Susan. So if the market goes down don’t come back and sue us. But it’s just a thought. Food for thought.

Al: Yeah I think that a lot of times when people get close to retirement they want to get super conservative. And we see them actually going too conservative. And the point is when you’re 61 you may live into your 90s so you do still need to have growth. But I also agree Joe, you don’t want to have so much equity that buy so many stocks that by the time you actually need it you don’t have enough time to live off of. And so one of the things you do is you look at your cash flow needs and you figure out what I need per year? $10,000, $20,000, $30,000? Whatever the number is. And let’s just say it’s $20,000. So then it’s like well if I need $20,000 per year if I need that for 10 years no matter what the market does, that’s $200,000. Maybe that’s what I should have in safety and I’m not saying that’s your answer. I’m just saying that is a way that you can look at it when you’re getting closer to retirement. But until retirement, you kind of want to stay more aggressive.

Joe: And Susan be careful with playing catch up. I get it. Hey, I have $300,000. I don’t want to work for the post office forever because the mail just keeps coming. I get it. Remember that Seinfeld show?

Al: Yes.

Joe: OK I digress. This will be in the Derails.

Al: Yeah, already this whole show is on the Derails.

Joe: But be careful with that though because- I’m taking on a lot of risk trying to get really high returns. And then if the market collapsed, you lose 20%. I mean that’s a big number. 30% is almost a $100,000 on your $300,000. Now you’re not working to 65, you’re working 70, 75. Then you’re really playing catch up. So you’re doubling down on your retirement which is probably not a great idea. Thanks so much for listening, Susan. And hopefully that helps. OK.

Should I Change My Asset Allocation? If So, When?

Joe: Hopefully we don’t blow this one up Al. We got Linda from Pittsburgh, P.A. “Hello Joe, Big Al, and Andi. I love your show. I look forward to each Wednesday morning to listen to your new podcast. It’s always something new and interesting. Keep up the good work.” Thank you very much Linda from Pittsburgh P.A. “I am planning to retire next year. So is my husband. Both are in our 50s. We have 35% of our money in taxable accounts and the rest is in 401(k)s and IRAs. Roughly 30% bonds, 10% in BPALX, 60% in stocks. Among them 50 U.S., 50 international, mostly index funds. We have a rental income to cover living costs in retirement.” All right. That’s cool. “Currently we have some extra cash $40,000. I wonder if I should wait until the market goes down say 20% and then jump in? Or should I buy more BPALX for safety and dividends? Or buy more U.S. small value index ETF knowing it will eventually beat the market but could go down a lot sometime down the road? What are your thoughts? Thank you very much.” All right. Linda from Pittsburgh P.A. She’s trying to time the market, Alan.

Al: Yeah. Which we generally don’t agree with.

Joe: It’s very difficult to do that Linda. So you could sit on the sidelines and you’re like I got this $40,000 in cash and I’m going to wait for the market to go down 20%. That could be a long time.

Al: It could.

Joe: And then let’s say the market goes up 100% over that time period.

Al: I remember folks were doing that in, what was it 2012 when we had the fiscal cliff?

Joe: Oh yeah.

Al: And they got out of the market and were waiting for it to drop 20% or whatever their figure was? And then now 8 years later the market keeps going up.

Joe: Well 2009 too, because it was right when we kind of got through the recession there? And it was like well no we’re going to double dip.

Al: That’s right. Dead cat bounce, all those acronyms, it’s a W- the W recovery.

Joe: Yeah, right. So it’s like let me hold on because hey the markets had a really good run. I’m gonna take some chips off the table or maybe I just inherited some cash. I’m going to wait until the market drops 20% and then purchase. I would say this Linda, it sounds like your retirement is looking pretty good. It looks like you’re diversified in regards to your IRAs and non-qualifying holdings. You’re going to retire in your 50s and live off of rental income which is awesome and you’ve got an extra $40,000 bucks. I guess we don’t know what her cash reserves are. We don’t know if she’s got any debt; maybe kind of take a look at that.

Al: Yeah we don’t really know the income needs. And something that people forget sometimes when they retire in their 50s is you got to pay for your own health insurance. So make sure you don’t forget that.

Joe: Maybe it’s hitting $40,000 in cash on the side and if you want to play around with it and see if you can time the market. Because it doesn’t seem like this money is absolutely imperative for them to accomplish their goals. And then I think Al would agree if you want to try to time the market by all means try. Who cares? In most cases, it’s not going to work. But this would be a good education for Linda.

Al: And I tried timing the market once as you recall back in 1990 before the Gulf War because-

Joe: I was like in 8th grade and I don’t recall that.

Al: Well I’ve talked about it on the show. I didn’t call you up at the time. What do you think Joe? Should I pull out? Anyway, I got out of the market because I thought ‘gosh we’re going to war.’ The stock market’s gonna crash. And it went way up.

Joe: Sometimes war helps the markets, Al.

Al: I learned that. But anyway it’s very hard to time the market. Our good friend Larry-

Joe: Know what got us out of the Great Depression?

Al: A war.

Joe: A war.

Al: Yeah, Just sayin’.

Joe: Just sayin’.

Al: So our good friend Larry Swedroe, when he talks about market timing he says more people have lost money trying to time the market than find the dip. In other words, the market goes up while you’re trying to wait for it to go down.

Joe: So you know I think you’ve done a really good job, Linda. So small-cap value’s down. Emerging markets are down. You can look at it like that too. You could overweight asset classes that have-

Al: – have not performed as well.

Joe: -that have not performed. So value stocks have underperformed, small values specifically has underperformed.

Al: Well that is true. Small value and emerging markets over the past 5 years or 10 years, whatever, have underperformed other types of asset classes.

Joe: And so you want to take a look, do you have any emerging markets in your overall portfolio? I know you have some international funds. But are those large-cap? What type of international companies do you own? So you could spread the diversification by adding another asset class. You could get funny with some alternatives.

Al: Sometimes when people retire though they want to spend more time fixing up their home or going on vacations and so make sure you got money set aside for that. If not then maybe the $40,000 could be for that.

Joe: Yeah I like timing the market this way. I would much rather buy asset classes that have underperformed that I don’t own. Versus sitting in cash waiting for the market to drop 20% and then try to buy a certain asset class.

Al: Okay, I like that.

Joe: So it’s just a little bit more strategery there, Alan.

Al: Wow. That your own word?

Andi: That was Mr. Bush.

Al: I do remember that. Come to think of it. I remember Will Ferrell doing that on Saturday Night Live a lot.

What Should Be My Pension Asset Allocation?

Joe: Starling from Honolulu, Hawaii.

Andi: He’s emailed us before.

Joe: “Hello Andi, Joe and Al. My question is about pensions and asset allocations. Hopefully Joe considers this question a little bit more challenging since he considered my last one a dummy.”

Al: You did?

Joe: I don’t ever recall calling Starling a dummy. No, not- the question.

Joe: This is a dummy question- I don’t even say the word dummy. It’s rude. I might say it sucked.

Al: Same thing. Oh he said- he asked me what to do after age 59 and a half and you said golf, hike, surf.

Joe: Perfect. That’s what I’m gonna do.

Andi: In Hawaii. So yeah.

Joe: And I said that’s a dumb question?

Al: Well you implied it because that was your answer.

Joe: Maybe because I was just really confused by it. You thought it was the softer side. I thought it was- I don’t know. Alan really enjoyed the question Starling.

Al: Yeah I probably answered it that way.

Joe: My apology. I’m very sorry for considering your question dummy. But he writes on. “I will be in a position at retirement that my pensions and Social Security will cover my retirement expenses so I’m looking to change the asset allocation for my retirement accounts. Should I include my pensions as fixed income for my overall asset allocation my retirement portfolio?” That’s a really good question. “I plan to consolidate all my retirement accounts into a Roth IRA prior to retirement. My Social Security will start at full retirement age so I don’t need to pull from my retirement accounts to delay Social Security.” Now this really good question.

Al: It is a good question.

Joe: He’s looking at the fact that “I have fixed income. Social Security pensions that are covering my retirement needs. And you can even argue that if you have Social Security and pensions that are covering any portion of your retirement needs, would you consider that fixed income like a bond alternative for your overall asset allocation? So you’re using the human capital element of your overall financial life, his fixed income sources, to include in the asset allocation decision. Yeah definitely. If you’re going to convert everything to Roth you don’t have to touch the Roth. I would absolutely change the asset allocation to be a little bit more aggressive. And weight more towards equities because you don’t necessarily need them to live off of and it could be a really good wealth transfer play potentially.

Al: And I would say maybe another way to say the same thing is he did a little calculation of what your fixed income is versus your spending and it sounds like your fixed income covers your spending. So then what does that mean you should do to your portfolio? It means you have a choice. You can either go super conservative because you don’t need to go risky. Or you could go super aggressive because the market fluctuations don’t really matter because you can ride them out or something in the middle. So you’re in a perfect place where you can sort of decide which you want to do based upon your long term goals and an ability to handle risk.

Joe: Yeah. I mean that’s well said Al, because you look at me in my 40s I’m saying take more risk. And Al, you’re 60 and you’re saying well maybe you want to tone it down. Because why take on the risk?

Al: You don’t need to.

Joe: If you don’t need to, you got all the fixed income. Why don’t you go super conservative? So if whatever happens you have that. So this is a more personal question I think. You look at it as what’s the end goal for the money? Is it for you to live off of? Well you already told us it’s probably not because you already have enough income. But then usually when we say that, they’re like well maybe I’ll want to spend little bit more. Because that’s why he was asking us, what the hell do I do when I turn 59 and a half because he’s got a boatload of cash. Travel brother.

Al: Have fun.

Joe: Have fun. Buy an RV.

Al: Go ahead and golf, hike.

Joe: Yeah. Golf, hike. Do some surfin’. Buy a bunch of golf clubs. But yeah, that’s a little bit more personal. What’s the money for? Or do you want to give it to charity? Is it going to go to leave a legacy? Then from there then you can kind of back the numbers in to figure out what the asset allocation is going to be.

Asset allocation and asset location sound similar and they are related, but they are very different. One is based on how much risk you’re willing and able to take in your portfolio based on your goals, the other may help you save a whole bunch of money in taxes. To dive a little deeper into this topic, I’ve posted some additional resources on asset location and asset allocation in the podcast show notes. Click the link in the description of today’s episode in your podcast app to get there. Still confused? You know what to do – hit the ask Joe and Big Al banner in the podcast show notes and we’ll see if we can confuse you even further. Now, Big Al is once again armed with his HP12C financial calculator and he’s rarin’ to go. Let’s find out more about how to get to retirement from where you are now.

I Have $40K at Age 40. How Do I Get to Retirement From Here?

Joe: Bruce from Joisey. “Hello folks. Been listening to your show for a few months. Gotta say it’s very informative. A bit confusing at times though.” Yeah. I get it. “When I was younger, if there was an exam I wasn’t sure about I’d count the answers I know are definitely right and then determine if I was going to pass. So working backwards with retirement, say I retire at 70 and want $1,000,000.” You with this Al? He’s gonna work backwards here just like he did in the high school.

Al: I got it. Here’s where I want to get to.

Joe: You got a question, you got A B C and D. The toughest ones, it could be A or C; B or D.

Al: I think the reason Bruce, you didn’t pass this test is you spent so much time counting the questions to figure out whether you were going to pass the test.

Joe: Hopefully, they weren’t timed. So he’s going ‘I got that one right, nope that one’s off-‘

Al: Forget about it. And then he quits half way through. “I’m not gonna pass this one.”

Joe: Just guess. Who cares? So Bruce, so he wants $1,000,000 at age 70. “So I can withdraw 4% and never run out. Does it mean very quick mathly-?”

Andi: He actually wrote mathly, I love that word.

Joe: “-very quick mathly, that is at age 60, it would be $500,000.” So he’s doing the Rule of 72 here.

Al: Yeah. Your money doubles every 10 years if it’s invested at about 7%.

Joe: So $500,000 at age 60, you’ll be a millionaire at age 70. You are correct. And at age 50 would be $250,000 and at age 40, $125,000. So he’s assuming if it grows at 6%, $125,000, 10 years later. At age 50 it’s going to be worth $250,000; and then 10 years after that it’s $500,000; and then 10 years after that it’s $1,000,000. I’m down with that.

Al: That is a true statement.

Joe: “Of course it doesn’t factor the additional yearly contributions or that the past doesn’t guarantee future etc. I’m close to 40 and only have $40,000. What can I do? I’m self-employed; have emergency funds and savings. Does it mean solo 401(k) and self-direct after-tax mega Roth? Thanks. Just wanted to have some sort of plan in place so we can have peace of mind, less stress and enjoy life more.” All right Bruce. He’s got $40,000. So all right. Do this for me, Alan. $40,000 present value 8% return. $1,000,000 in 30- call it 3 years. What’s the payment? So we’ll figure out what we need to do here, Bruce. And if it’s a giant number it’s probably bad.

Al: So I’m getting- at 8%, I am getting, call it $4,000 a year.

Joe: $4000? That sounds about right. Bruce, this is what you gotta do. You gotta save $4000 a year. If you can save $4000 a year for the next 33 years. I’m assuming you’re 37 and so you’re going to retire at 70 and you want $1,000,000, save $4000 a year. And if you get 8% on your money you’ll have $1,000,000 by age 70.

Al: Now, and I hate to rain on your parade but consider this.

Joe: The inflation?

Al: Inflation. Yes.

Joe: I was going to say now do the present value of $1,000,000 at a 3.5% clip.

Al: So I did it the other way. I said $40,000. To spend the same amount of goods and services, how much do you need in 30 years based upon a 3% inflation rate? It came out about $95,000. Which means that if you want the same kind of spending at age 70 that $40,000 will buy today you’re going to have to have a little bit more.

Joe: But he doesn’t say he’s spending $40,000. He says he only has $40,000.

Al: I know but he’s saying he wants $1,000,000 at 4%.

Joe: Oh, I got it, I got it, I got it. I got it got it got it.

Al: So you’re gonna need more like $2,300,000, $2,400,000 to spend an equivalent amount of what $40,000 would buy you today at a 4% distribution rate.

Joe: So I guess the point is you’re young, save as much as you can. You can do solo 401(k) and you can go Roth option. And then just keep jammin’, Bruce. And just review it over time. You’ve got plenty of time to get you to where you want to go. Thanks for listening, Bruce from Joisey.

Taxation on Long-Term Capital Gains

Joe: All right. Long term capital gains question from Mark from Longmont, Colorado. He goes “Hi. I have a question about long term capital gains. My understanding is that if my wife and I married filing jointly have AGI less than $80,000 that we would owe zero tax on long term capital gains. My question is, is the long term capital gain is added to my W2 interest income to calculate the $80,000 threshold? Or just my base on my W-2 if I qualify for zero? What say you?” So he’s looking kind of some different forms. All you gotta do, look at your-

Al: Yeah let me reframe the- So the answer is actually taxable income, it’s not just adjusted gross income. That’s what you need to be concerned about. And yes it includes all income including your salary and anything else you have. And if that’s still under $80,000 and part of that was capital gains, the capital gain portion will be tax-free.

Joe: So if your taxable gain is $60,000- or taxable income is $60,000, you have $20,000 of capital gains it would be tax -ree all of it. But $30,000 of capital gains, $20,000 of it would be tax-free you would pay capital gains at $10,000.

Al: That’s right. But like, we know the state of California which does not have that same rule. So you do have to pay capital gains in California. I’m not sure about Colorado.

Negative YMYW Podcast Comment from RockyMountainWay

Joe: RockyMountainWay. He didn’t really care for our podcast, Alan.

Al: I do remember that we did laugh a lot on that one.

Joe: How do you know which one we’re talking about?

Al: Well Andi seems to have inside information.

Andi: I know based on when he left us this comment what it was.

Joe: Oh whatever. Andi gets all bent out of shape, I love these.

Al: It’s when we were talking about the double speed.

Joe: I dunno. He goes, “Annoying hosts. Giggling and simply sounding like kids. Turned me off. Bye.” I mean, who’s the kid here? “Bye.” Big Al is a very happy man. He likes to giggle.

Al: I do.

Joe: My goal is to make him laugh.

Al: So, was that in the Derails in the podcast?

Andi: Yes it was.

Joe: Yeah he made it all the way there?

Al: You don’t have to listen.

Andi: Yeah, and I even say-

Joe: I guarantee you that’s not what happened.

Andi: I tell people there are Derails at the end if you want to listen; if not go ahead, and cancel out right now.

Joe: So I love it. I’m sorry that we laughed and we’ve sounded silly.

Al: Yes. We do like to laugh.

Joe: I love laughing.

Al: Yeah it always makes you feel better.

Andi: Unless you’re RockyMountainWay.

Joe: He said bye. RockyMountainWay. That sounds like ice cream. Or it sounds like John Denver. Which, I love John Denver and I don’t want to equate this guy to John Denver.

Al: Okay I hear you.

Joe: So if you want to- no, I can’t even say that- can I just-

Andi: You can tell people to subscribe and share it with their friends. And if you do hate it, tell people that you hate it. ‘You should listen to this, it’s terrible.’

Joe: That’s it for us today, appreciate you hanging out, we’ll see you again next week. The show is called Your Money, Your Wealth®.

_______

With all this talk of Derails and giggling, there is some of both at the very end of today’s episode so if you like to laugh, stick around, if not, click Ask Joe and Big Al in the podcast show notes and complain. We’ll put it on the show!

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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.