Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]

Published On
June 30, 2020

Joe and Big Al take a look at an investing strategy a listener set up for his parents, and they run the numbers on their variable annuity. They also kick the tires on an early retirement plan and they discuss equity allocations in a portfolio. And since no YMYW is complete without a little Roth talk, how might Roth contributions for the grandkids affect college financial aid?

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Show Notes

  • (00:44) How is This Investing Strategy For My Parents? What Should I Do With This Variable Annuity?
  • (14:23) Are We On Track for Early Retirement?
  • (24:02) Sustainable Investments and Zero-Cost Investment Strategies
  • (31:00) Portfolio Allocation: What Percentage of My Equities Should be in Large, Medium, and Small Funds?
  • (40:03) Will Roth Contributions for Grandkids Affect College Financial Aid?

Free resources:

WATCH | What is the Truth About Variable Annuities? What is a Variable Annuity?

LISTEN | YMYW #262: What’s the Right Retirement Asset Allocation For You?

READ THE BLOG | What is Asset Allocation?

WATCH | Asset Allocation vs. Asset Location

Listen to today’s podcast episode on YouTube:



Today on Your Money, Your Wealth®, Joe and Big Al are all about investing strategies and retirement preparedness. They’ll take a look at a strategy a listener set up for his parents and run the numbers on their variable annuity. They kick the tires on an early retirement plan for a couple in their 40s and discuss portfolio allocations of large, medium and small equity funds. Plus they’ll make some suggestions you might not expect to hear on YMYW – investing books and target date funds, are you kidding me? And because no YMYW is complete without at least a little Roth talk, they’ll also touch on how Roth contributions might affect financial aid for education. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

How is This Investing Strategy For My Parents? What Should I Do With This Variable Annuity?

Joe: So we got Joe writes in from Philly and then Joe actually writes a novel.

Al: Wow, this goes on pages at least, a second page.

Joe: We got a few. This is called taking advantage.

Al: Getting your financial plan for free on the radio.

Joe: That’s fine Joe. That’s what we’re here for brother. He goes “Hey Andi.” Spelled right?

Andi: Yes.

Al: Yes it is. A-N-D-I.

Joe: “Big Al and Joe. This is Joe from Philly.” Look at Andi get front billing. What’s that all about?

Al: Well she is the best.

Andi: Al, thanks.

Joe: “I’m 31 years old however my question is in regards to my parents who are terrible with money. Before I became knowledgeable in regards to investment strategies etc., they were with an FA who put them in terribly high expense ratio mutual funds, had no dividend reinvestment, no Roth accounts, and lastly, a variable annuity. Really, really bad. I tossed the FA-” he tossed him.

Al/Joe: Tossed him.

Al: That’d be fun to watch.

Joe: Joe from Philly, he’s like I’m tossing your ass out.

Al: Forget this.

Joe: You’re tossed.

Al: I would have loved to have seen that.

Joe: “I tossed the FA a couple of years ago and I’ve completely overhauled their accounts to meet what I feel is a good investment portfolio consisting of low-cost mutual funds and will continue to convert to Roth IRA funds to the top of the 12% tax bracket every year. So here’s Mom and Dad’s stuff, $600,000 in an IRA, another $200,000 traditional IRA, so $800,000 in IRAs; $50,000 in a Roth IRA; $30,000 in a brokerage account; $50,000 in cash. Got an annuity $200,000. Total liquid assets is $1,100,000. Social Security will be taken at full retirement age. They are both 57 and a half years and will retire at 58.” Good for them. Look at Joe from Philly, tossing that FA out and getting mom and dad to retire early.

Al: Getting them on track.

Joe: “Dad plans on keeping a part-time job, $12,000 a year. He enjoys working at a golf course and gets free golf.”

Al: That sounds like you.

Joe: Wow. Joe, you’re getting a free financial plan. I’m going to Philly, playing golf with dad. “Here’s a summary of the info. I hope you guys hate it when you do- I know you guys hate it when you don’t have all the info. So hopefully I gave you enough.” Yeah. I think you went overboard.

Al: A page and a half, yeah.

Joe: “They rent in Florida, married, filing jointly with that- will have health insurance covered by employer $75 a month premium until Medicare; annual income needed in retirement is $50,000 per year; Social Security taken at 67, $2000, $1000 mom drawing 50% spousal benefit.” Ok, so the goal is $50,000 in retirement. Dad’s going to work part-time; he’s got $12,000, so they need $38,000.

Al: And they got $1,100,000.

Joe: They’ve got $1,100,000, so 3.8% burn rate.

Al: And that’s before Social Security.

Joe: Before Social Security.

Al: So that’s looking pretty good.

Joe: “My last venture is to figure out this annuity and what’s the best move. I tried reading the 121-page prospectus, googling stuff, and looking at the account investments and I’m still lost. Here’s the annuity information. We got a Prudential Premier retirement B series purchased 8 years ago for $120,000, surrender value of $210,000, death benefit $210,000, lifetime income basis of $220,000, steps up at 67 and guaranteed growth rate of 5%, guaranteed lifetime income of $8000 per year, annualization date 2057. W T F. Why is this so late?” Yeah, what the- “They haven’t withdrawn anything yet. It looks like they are getting $500 withdrawn every three months as a miscellaneous fee with some other BS-”

Andi: “- which is some BS.”

Joe: It is BS. Totally agree with you, Andi. “Having a hard time figuring this all out. But overall this annuity seems bad, real bad. So my questions are: number 1) if they take the surrender value now, will they have a 10% penalty since they are under 59 and a half? Correct?” That is true. So if they took the money out of the variable annuity- depends though, Joe one key thing you’re missing here-

Al: Yes.

Joe: Is it non-qualified or qualified?

Al: That is the key question. In other words, is it in a retirement account or not? So if it’s not in a retirement account, yes they’ll pay taxes on the gain, plus penalty.

Joe: If it’s in a retirement account, you can easily get out of the annuity and put it into your low-cost mutual fund portfolio.

Al: They’ll still have surrender charges but there’s no tax penalty.

Joe: Well it’s a surrender value of $210,000, lifetime income is $224,000 so that-

Al: Yeah that’s right. Well, it’s pretty close. Yeah.

Joe: Lifetime income is something different. I can explain that. “Do you think they should stay in the annuity or surrender it and put the money into a brokerage account to invest in bonds then drawdown during retirement?” So this helps if it’s a brokerage account. Maybe it is non-qualified. Do I want to surrender that thing and put it into a brokerage account into straight bonds to drawdown?

Al: Yeah. That makes it sound like it’s a brokerage, non-retirement-

Joe: Non-qualified annuity. No, I don’t like that idea. I don’t mind surrendering it, but you don’t just want to put it all in bonds. You want to be maybe the opposite here. “Number 3) do you pick the date when you start withdrawing in the annuity after 59 and a half and start getting the $8000 or whatever it grows to? I read that damn prospectus and I’m now more confused. Thanks for your help and I love the podcast. I listen to you guys every day as I go to work for the man, so I can retire ASAP.” All right, Joe. Okay. So let me help him out. So mom and dad bought an annuity. So there is a guaranteed growth rate. And that guaranteed growth rate is not on the principle; it’s based on the lifetime income. So it’s a guaranteed income benefit rider that they have on this annuity product. So they put in $120,000, 8 years ago. So let me just make sure my math is tight. $120,000, 8 years… future value there. Okay, so we got death benefit of $210,000, lifetime income is $224,000 and so the guaranteed growth rate- $224,000, 5 there is 11- this $8000 a year doesn’t make any sense to me. Because their lifetime benefit is $224,000. If I look at $8000 into $224,000, that’s 3.5% guaranteed. That’s not great. That’s awful. Usually, you see a 5% guaranteed on that income because they’ll give them a roll-up, and then they’ll say you’ll get a guarantee of X throughout.

Al: And that’s based upon a factor and that’s right. I’ve usually seen with you, that 5%.

Joe: So if I’m looking at $120,000- so they start taking income and I’m not sure when the income turns on here but let’s just say it’s 65, steps up at 67, so it’s going to take 15 years with that $8000 guarantee for them to make a dime on this product.

Al: To get their money back.

Joe: To get their money back.

Al: And that’s one of the problems. You think you get this great rate of return and you’re basically just getting your money back in 15 years.

Joe: So they’re giving you $8000- they’re giving your folks $8000 a year- that they already put in $120,000.

Al: They’re giving them back their own money.

Joe: They’re giving them back their own money over a 15 year time period and they’re taking that money they’re investing it to try to get a lot higher rate of return. That’s why insurance companies are very profitable. So if you look at it that way, it’s just that you have to figure out what the internal rate of return is on the overall product, not these BS returns that they’re kind of saying that they’re giving you. Because you truly don’t get the 5% because that’s a roll-up I’m guessing. So do you get out of it? I would. I would imagine the fees on this thing is probably 4% with other bells and whistles on this thing or maybe 3.5%. So if I go at $220,000 is the cash surrender value, let’s say your fees are 3.5%. They’re paying $7000, $7700 a year for the product to get an $8000 a year guarantee.

Al: Right.

Joe: So the fees they’re paying are going to pay their income. Joe, is this all making sense? Is this helping you find your way? I would do this. I would go to Vanguard. Open up a very low-cost variable annuity, do a 1035 exchange- or 1031, yeah 1035 exchange from this product into a very low cost, no fee, no gimmick, variable annuity until they turn 59 and a half. And then you could potentially get out. But they’re going to have a $200,000 some-odd tax scheme here because they put $120,000 in; the cash surrender value is $210,000. So they got $100,000 of gain here.

Al: Right.

Joe: All of that is going to be taxed at ordinary income rates. So if you want to keep it in the annuity and slowly bleed out that gain, you could do it that way.

Al: Keep in the lower brackets maybe? Maybe you sort of focus on that for the income for the first several years. That could-

Joe: Because if you blow out of this thing, they’re going to get hammered in tax.

Al: Yeah for sure, tax plus penalty right now.

Joe: So yes, they would lose half of this thing. They would just get their basis back. And the insurance company would say hey thank you very much. We really appreciate doing business with ya.

Al: Free money for 8 years.

Joe: So I don’t think they need the guaranteed income because they’re spending $50,000 a year. Joe Sr is working at the old country club making a few bucks, playing free golf, and having a couple of pops on the 19th hole. All he needs some walking around money. He could delay his Social Security to probably age 70 because the distribution rate on the total assets that they have is 3.5%. So you start bleeding 3%, 3.5% out until age 70 versus 67 or I don’t care, take it at 67. And then all of a sudden your distribution rate is going to be probably 1.5%.

Al: Very low.

Joe: It’s very low. Because you’re right, there’s Social Security and- will cover a lot of their living expenses.

Al: So that the whole plan looks fine financially it’s just a matter of making it better. And yeah, this annuity doesn’t sound like a great long term product for them, for sure.

Joe: I guess what’s the rationale? It’s not an investment, first of all. It’s not an investment. It’s an insurance product. And so if they want to transfer risk to get a guaranteed income, then keep the product. But just know that you’re not going to get returns like an investment. Just like with any insurance, it’s insurance, it’s income. So people look at this- it gets sold as an investment, but it’s not an investment at all. If you’re looking to say I want a guarantee of $8000 a year for the rest of my life, then keep the product. But your internal rate of return on that product is going to be significantly lower than you could probably do outside of the product. But then you’re subject to risk. There is no guarantee. So then you’re taking on stock market risk, interest rate risk, inflation, all sorts of different risk, if you get outside of the product. So there are tradeoffs. So those are the decisions, Joe, that I would make. I would worry- it’s like what’s done is done. If you go ‘Mom and Dad this is going to give you a guaranteed $8000 a year. And there you go. It’s not going to be adjusted for inflation. It’s probably going to give you a rate of return over your lifetime depending on how long they live. Maybe your mom and dad live until 125 and this could be an awesome product. So if it’s sold it as an investment, it’s dog- you-know-what. But if they bought it to say I want a certain guaranteed income, then it is what it is.

Al: Longevity insurance. You can look at it that way.

Joe: You got it. Well, Joe, hopefully that helps. Keep working for the man. And maybe you should be a financial advisor, a CFP®.

Al: And he could toss out the ones he didn’t like.

Joe: He could just be the top.

Al: Kinda clean up our industry.

Joe: Exactly.

Learn even more about variable annuities by checking out the free resources in the podcast show notes at YourMoneyYourWealth.com. Click the link in the description of today’s episode in your podcast app to learn what variable annuities are and to learn some truths about them from one of Pure Financial’s affable senior financial planners, Matt Balderston, CFP®. While you’re there you can also download our Retirement Readiness Guide for free to learn tips to make sure you’re on track for retirement. Or early retirement, as the case may be with our next question. And if you have money questions, click Ask Joe and Al On Air in the podcast show notes and send them in as a voice message or an email.

Are We On Track for Early Retirement?

Joe: Karen from Florida, she writes in. “Hello, Joe, Al, and Andi. Love your podcast and I have learned so much from all of you.” Thank you. “My husband and I live in Florida. I am planning to retire in 3 to 5 years. He is 40 years old and works for the fire department. I am 42 years old and a registered nurse.” So you’re gonna retire at 45. It’s a hell of a-

Al: That’s a great thing.

Joe: We are happily childfree.”

Andi: Yeah. Go, Karen.

Joe: “I believe we are on track to retire. But I want to make sure I’m not missing some key elements that can derail our plans. Current expenses $60,000 a year and plan to maintain this level of spending in retirement, maybe even less since we plan to spend months in other countries where the cost of living is lower. Currently we have a net worth of $1,100,000; $300,000 in a 403(b), maxing that out; 457, $150,000, they’re maxing that out; two Roth IRAs $200,000; and then two brokerage accounts, $144,000, contributing $54,000 combined. One brokerage account specifically for the purpose of a home in the future, $240,000 no contributions.” So they got three total brokerage accounts? Two brokerage accounts $144,000; one joint brokerage account specifically to purchase the home.

Al: So we can’t really count that in the net worth because-

Andi: So they each have one and then they have one together.

Al: – because they need it for a home.

Joe: Got it. “Cash, $100,000. Husband also has a pension of approximately $17,000 a year to start at 62, reduced amount since he’ll retire early and we should also qualify for Social Security but will just be icing on the cake. For the first 15 years of retirement, we plan to use the bucket method in our withdrawal strategy.” The bucket method.

Al: Wonder who that came from.

Joe: I don’t know. Cash $10,000 a year; brokerage $30,000 a year; 457(b) $24,000 a year; 403(b) to Roth conversion $48,000 a year. I believe this strategy will keep us in the 12% tax bracket.” OK 30 40 50 60-

Al: 64.

Joe: Definitely keep you the 12% tax bracket.

Al: Well, plus the Roth conversion, we gotta add that in. So call it $110,000 approximately, minus standard deduction. It’s close.

Joe: It’s close. “At retirement, we plan to be more conservative in our investments. Maybe 60/40 stocks to bonds split. What am I missing? Thanks so much.” Ok, let’s kind of look at this here.

Al: If we sort of summarize this, they’ve got $1,100,000, but they want to earmark about $240,000 for a house. So really- and I’ll just round it to their benefit- they got $900,000 to work with. And they’re trying to produce $60,000 of income per year. Right?

Joe: Let me just- I’m doing the math again here. $200,000 and then we got $150,000, 821, $100,000 cash; I got $921,000 plus the $240,000-

Al: Yeah, yeah, yeah. So I think you got $900,000 to work and you’re trying to produce $60,000. So that’s a distribution rate of over 6%.

Joe: At 45.

Al: At 45. And probably I don’t know whether Karen, you’ve considered health insurance which is at least a minimum $1000 a month for each of you. So that’s another $12,000 right there. So I think this is pretty tight.

Joe: $900,000 dollars- let’s say that’s what their working capital is to create income, at 45, I would use a 3% distribution rate.

Al: I would too.

Joe: So that would be $27,000 of income that you would be able to generate.

Al: So not $60,000.

Joe: Right. So if you want $60,000 of income, .03 divided is $2,000,000. So if you can make the $1,100,000 into $2,000,000 in the next 3 to 5 years, then you’ve got something. Because let’s see, $1,100,000 is the present value, they’re saving $54,000 into the brokerage account plus they’re maxing out the 403(b) and 457, so they’re saving roughly $100,000 a year, probably- let’s call it $90,000.

Al: Saving a lot.

Joe: Right. $50,000 plus $40,000 is $90,000.

Al: Well $20,000- Yeah, call it $20,000 and $20,000 on 401(k)s-

Joe: Yeah, yeah, yeah. So $90,000.

Al: But I would start with $900,000, not $1,100,000.

Joe: No, I would- that’s what I did.

Al: Yeah, okay.

Joe: Five years. Say you get 7% because you’re all in stock’s, future value of that is $2,000,000. So if you can save $100,000 a year for the next 5 years and get 7% on your money, that would equate to about $2,000,000. And then you take 3% out of that and that could probably get you close to your income.

Al: Now, that’s right. So a couple more things besides health insurance. If you’re going and living in other countries, are you giving up your home here? Because otherwise basically you’ve got double expenses, where you’re staying, plus your vacant home here unless you’re renting it out or something like that. So just be aware of that. I think what we normally see more often than not, is when people do something like this they end up spending more than they’re currently spending because they’re kind of on vacation if you will. They’re wanting to go out and do things. So just be careful of that. Think carefully about what you really do want to spend.

Joe: And then Karen also if you’re retiring at 45 years old, your Social Security benefit’s gonna be pretty low. Just because-

Al: -it’s the highest 30 years and you have lots of years where you’re not working.

Joe: So yeah it could be icing on the cake. But as a firefighter- here in Southern California the firefighters get a fairly significant pension.

Al: They do. And that’s not listed in-

Joe: They said the husband will have a pension of $17,000 a year starting at 62.

Al: Oh, 62.

Joe: That’s not a ton.

Al: Maybe he hasn’t done that for a long time.

Joe: But I mean that’s why I was thinking early retirement as a firefighter, we see firefighters retire early all the time.

Al: And they end up making 70% of their income.

Joe: Or 90%.

Al: Sometimes.

Joe: If you’re chief it’s 120% of your income.

Al: We’ve seen some big numbers on that. So Karen I like your thinking. I just think- just be careful on the numbers because you don’t have enough capital right now to do this. But if you save and earn a certain rate of return you probably would. But I’m little concerned you might be spending more than you think. Plus in five years there’s inflation, so $60,000 is going to be more than $60,000. So just a couple of things like that to think about. Now sometimes when people really want to do this and I’m not telling you not to do it. I’m all for it. But one of you or both you might need to have some kind of part-time income just to plug the gap. So just be aware of that.

Joe: Think of it like this, is that if you want to- if you’re 45 years old, and then-

Al: Can you relate?

Joe: I can relate. I want to retire too, Karen. I want to travel with you. I’m single, no kids. Well, I’m part- it’s a trio. Yeah right. Karen, myself, and the firefighter.

Al: Yeah, you’re all- Yeah. There you go.

Joe: About the same age and I’m no kids. You’re married, that’s fine. I’m third wheelin’.

Al: We’ll have to find out where they want to travel. Because you don’t like traveling. That’s the problem.

Joe: So we’ll have to figure that out. We’ll throw in my few bucks and call it good.

Al: Maybe that’s the way to go.

Joe: Maybe. But for being 40, 42 years old and having $1,100,000 is-

Al: That it’s incredible actually.

Joe: -is phenomenal. Saving $100,000 a year. Congrats. But I know the feeling of I’ve got $1,000,000-

Al: -so I’m good.

Joe: I’m good.

Al: Cuz that kind of was everyone’s goal for a long time.

Joe: $1,000,000 is still a ton of money but when you equate it into income at 40 it’s not as much as you might think.

Al: So here’s how we kind of think about that, if you’re 65 and you get $1,000,000 you can probably use a 4% distribution rate. So that’s $40,000 of income. At 45, since the dollars have to last so much longer, we might want you to do a lower percentage. That’s why we said 3%.

Joe: But also, they got at least 40 year life expectancy. So that’s given today’s technology in regards to health care. If we were Ric Edelman…

Al: – we would go live to 120.

Joe: -live to 200.

Al: Can’t retire till you’re 75.

Joe: You’re going to have 17 careers.

Al:  He does say that.

Joe: You’re gonna go back to school 14 times.

Al: Right.

Joe: I love Ric Edelman, just FYI.

Al: I do too. I know him by first name. Look at that.

Joe: Wow. Look at you Al. You’re celebrity status.

Al: I’m name droppin’.

Joe: Can I help you pick that up? Thanks, Karen. Good luck.

Sustainable Investments and Zero-Cost Investment Strategies

Joe: We got another question. Clint writes in. “Hi Andi, Big Al, and Joe. My wife had a no-cost $10,000 account with Motif, which was a trading fund that dealt with sustainable energy in eco-friendly companies.” They sold, right? Yeah, “Motif it was sold to or bought, to Folio, who is now managing the account at a rate of $2- or $20 a month. My wife is uncomfortable with trading and paying a monthly fee. She is now asking me for advice. This is where YMYW comes in. Can you direct me to a path of happiness where I can appear to be a hero of advice? Are there other zero-cost investment strategies that can safely manage a $10,000 investment? It’s not player retirement money. She would also like to make more than a CD or savings account. Would a money market account be something to look into? Thanks, Clint.” Well, first of all, there was a fee; she just didn’t know what she was paying within-

Al: Motif?

Joe: Mmmm. And it was pretty small. But now they’re charging $20 a month on $10,000. That’s $200 on $10,000, I can see- it’s kind of outrageous.

Al: Almost 2.5%.

Joe: Plus if they kept the actual chassis of the investment in place there’s some-

Al: You’re paying for nothing unless you’re gonna be trading.

Joe: Right. You could do a couple of things Clint; maybe- well Charles Schwab has zero transaction fees on some target-date funds or things like that. If she wants a trading account there’s RobinHood. They’re in the news quite a bit lately.

Al: They are. They’ve got some technical issues right?

Joe: Because it’s a ton of hot money. I mean- it’s the millennials. The average balance of a Robin Hood account is $2000. They got like 6,000,000 people on there- So we’re getting questions from clients of saying people are gambling and how is this going to affect my overall account? And it’s like, first of all, Black Rock is not gambling. There are individuals that are gambling with their overall investment accounts. Day trading’s back. You got Dave Portnoy out there from Barstool Sports making it fun because there’s no sports on.

Al: So you might as well do day trading. It’s like horse racing.

Joe: And gamble. There’s a ton of press on that stuff. And a lot of the investors on Robin Hood were putting money into the overall accounts during in the pandemic and still doing so. They’re loving to see the market just crumble. They’re like oh great buying opportunity. And then some of them are losing their shirts and so on and so forth. You could go into Robin Hood, it’s free. There’s free trading there. But I’m not sure Clint’s asking us that she just wants a ‘set and forget it’ type of investment strategy that- just to avoid the $20 a month fee?

Al: That could be and it needs to be- sounds like it needs to be relatively safe.

Joe: But if she had a sustainable energy fund right?

Al: It’s a little mixed up. So one thing, she would like to make more than a CD or savings account “would a money market account be something to look at?” The answer to that has no, money market accounts pay almost nothing.

Joe: But it’s almost the same as a CD or savings account.

Al: But a CD generally pays more money- the banks that I’ve been to, including my credit union, the money market pays like a checking account, almost nothing. I mean maybe .01%. You know, 1/100th of a percent.

Joe: Seems like you’re pretty upset about that. It’s not paying me anything.

Al: So then I opened up a CD. You know what I got on that?

Joe: What?

Al: 1%.

Joe: There you go.

Al: I got a full percent.

Joe: You got a point.

Al: But anyway as far as what to invest in, it depends upon what the money’s for. If you’re gonna need the money in the next 3 years, then CD, money market, savings, is probably your way to go because you never know what the market’s going to do in the short term.

Joe: “Are there other zero-cost investment strategies that can safely manage $10,000?” Well, he’s asking for a strategy. You could go into like a Vanguard target-date fund. That’s a strategy. That has stocks and bonds. That is somewhat conservative depending on what year that you want to pick. You could pick- they retire in 2020, so it’s going to be mostly bonds. It’s fairly inexpensive.

Al: What’s the name of that book? The Best Investment Book You’ll Ever Read? Forget the author; that attorney?

Joe: Dan Solin?

Al: Yeah. That’s a book he could read. Right?

Joe: He’s not asking for a book, he called us- because we are the ones that read the books.

Al: I know but I’m going to give him the strategy- is go get that book and read it. It’s not that long.

Joe: True.

Al: Or you could listen to Joe talk for the next four minutes-

Joe: He’s gonna be like oh this sucks. I was a fan. Not anymore. Sorry, buddy. Hopefully that helped. But there’s Schwab that’s had zero trade, zero ETF, very low cost. Fidelity, Vanguard, all have strategies that are very low cost.

Al: But I’ll go back to that book. What’s it called? The Best Investment Book You’ll Ever Read. I think that’s what it’s called. Anyway, so you can just skip to the chapter on whatever-

Joe: Building a portfolio?

Al: And it goes over how much to put in like- you pick 3 or 4 different funds and you’re done. That’s a strategy.

Joe: It’s total U.S. stock market, total international market.

Al: That’s right. Total bond market. It’s actually those 3. Yep.

Joe: And then it’s just a variation of that.

Al: Yep.

Joe: Cool. Thanks. So thanks for the email, Clint.

How is your investment mix, and why is it like that? Learn ways to grow your investments in all market environments, how to avoid poor investment decisions, and how to protect yourself from risk. Download 8 Timeless Principles of Investing for free from the podcast show notes, just before the transcript of today’s episode. It’ll help you feel more confident in your portfolio even in times like these when markets are volatile. Click the link in the description of today’s episode in your podcast app to go to the show notes and download 8 Timeless Principles of Investing and to Ask Joe and Al your money questions. Speaking of investment principles, let’s talk about portfolio allocation.

Portfolio Allocation: What Percentage of My Equities Should be in Large, Medium, and Small Funds?

Joe: We got Stephen writes in from Orange County. He goes “Hi Joe, Big Al, and Andi. Continue to appreciate your podcast for the knowledge and humor. You guys do a really good job. I’m 9 years away from needing to access my retirement funds to live on. Other than the RMDs starting in 5 years which will be reinvested into a brokerage account, I have two questions. My retirement funds are presently divided between 65% equities/35% fixed income. I’m mostly a moderate aggressively investor and was wondering what percentage of my equity position would your firm usually recommend the asset allocation be located in, between large, medium, and small funds, as well as between U.S. and foreign funds?” Steve’s looking at what would our portfolio look like if- what’s the makeup of our portfolio?

Al: What’s the split between foreign and domestic and large, medium, and small?

Joe: With a 65/35 split?

Al: Right.

Joe: Or is he asking us what the split should be? In regards to- because that’s the first decision you want to make when you’re constructing the portfolio.

Al: We can answer- well let’s start there. I think that the way you figure out how much the splits should be is based upon your own needs and goals and required rate of return. And we always believe that it makes sense to have the most conservative portfolio possible to be able to achieve the rate of return that you need. And so maybe 65% equities is the right number, maybe not. But that’s where a little financial planning comes into place. It’s like how much do you want to spend in retirement? What kind of fixed income do you have? Social Security? Pension? What’s your shortfall that has to come from your investments? You divide that into your total investments. What rate of return is that? And then you design a portfolio to try to achieve that. And I got to say if it’s- if we get much more than 6% or 7%, you’re kind of in the danger zone in terms of a required rate of return. So you might want to think about either cutting expenses or working part-time or something like that.

Joe: You mean that if my required rate of return is 8% for me to get the distribution I need to combat inflation-

Al: Exactly. And plus you got to add an inflation factor right? So if you’re getting 6%, you might need to earn 8% just to be able to have enough kept in your portfolio for inflation.

Joe: So in other ways that- you don’t want to take out more than roughly 3.5%, 4% of the portfolio.

Al: That’s another way to say it.

Joe: So we’re finding all sorts of ways to say a 4% distribution.

Al: But isn’t that educational?

Joe: So I guess to kind of give you a high level what the mix would be- let’s say if you had a 60/40 or 65/35 equity to fixed income split, we would probably have 60% of that- of the equities in domestic; 40% in international. Give or take. Probably it would be tilted more towards value type companies, small companies we would probably have a 10% exposure.

Al: I agree with that. I got some recent stats from Statista. Statista.com. So this is US- this is capitalization. In other words, the value of all the companies in the world, 54% of the value is in United States and the-

Joe: -of the total market.

Al: -total market capitalization.

Joe: Got it.

Al: Yep. The second biggest country is Japan at 7.7%. So it’s a lot lower and then followed by U.K. at 5% and China at 4%. So one way you could say is maybe 55%, 60% in the US which is what you just said, which I agree with that-

Joe: And I didn’t even need Statista to help me with that.

Al: I know. That was right off the top of your head. You just like hear it and respond like a computer.

Joe: Yes. It was good.

Al: Anyway, here’s what I have to add to that though. And that is, some people find they don’t really like to invest that way because all they look at is the Dow and S&P.

Joe: Well yeah. You’ve got to look at the appropriate benchmark when you’re investing or else you-

Al: You do. But some people just don’t. And because- then we’re bombarded with S&P or Dow did this today. So if you’re investing 60% in U.S. stocks, then only 60% of your equities are going to follow US. So just be aware of that. Some people have troubles with that. We call that tracking error. So tracking error- you have a different rate of return than what the S&P 500- and if that’s you, then do more than 60%, go 80% US or 90%.

Joe: I still don’t think that’s the right advice.

Al: I think-

Joe: Just because they’re not necessarily following the right benchmark. So here, let’s have a really crappy portfolio so that you can better benchmark your portfolio watching CNBC.

Al: Well let me- Here’s what I mean to say I guess. Sometimes when people- they don’t track the S&P 500 and then they get disenchanted with the whole investment thing and then they make poor decisions.

Joe: But if it was 2000 through 2010, they’d be pleasantly surprised.

Al:  I know. And the truth is, if you actually- now if you look back, you know exactly what the percentages should be. From 2000 to 2010 you should have had 100% foreign and nothing in the US. And from 2010 to 2020 should have been 100% in the US. But you never know what’s gonna be better.

Joe: If you had a crystal ball backwards.

Al: Yeah. Yes, that would be good.

Joe: But a globally diversified portfolio, I would recommend 50- 60% in US/40% in non US, just because of the market capitalization as Alan talked about. 40% or 45% of the market cap is not in the US-

Al: That’s right.

Joe:  -it’s globally.

Al: Correct.

Joe: So you want to make sure that you get exposure there. “What percentage will we have in small, medium, large?” You could do it depending on how sophisticated you want to get here, Stephen. I’m not sure how much money that you have; what’s in non-qualified versus qualified versus Roth? Because each of those different accounts want to have different asset classes in it just because of the taxation. And what the overall demand of the portfolio is. He’s 9 years away needing access to retirement funds. So he’s still 10 years out. So you kind of want to get a glide path to slowly get more conservative.

Al: Yeah that’s true. I agree with that.

Joe: So there’s bunch of different things. But high level, you can tilt the portfolio more toward smaller in value, you’re going to have more volatility; you’re going to have more risk in the equity side of the portfolio. But you’ll probably get a higher expected return in the long run.

Al: But one thing I want to say on that is if you look at a cross-section of companies out there that you can invest in, they’re mostly large. I mean the biggest market capitalization. So if you’d just like try to pick the U.S. total stock market, for example, which Vanguard and others have funds that kind of mirror that, it’s going to be mostly large because that’s what there is to invest in. So when we say tilt towards value- or tilt towards small, you might only have 6% or 7%, 8% instead of 4%. It’s not like we’re saying do 50%, it’s small. It’s just tilt a little bit more that way; you get a higher rate of return over the long term. But what you’re giving up for that is- what you’re receiving with that is volatility. So it’s a little bit more of an uncertain ride.

Joe: If you think of it like this- is that let’s say you have a cherry pie and then you’re going to cut- you’re going to put these cherries in the pie and then you cut a slice of the pie and there’s going to be some cherries in there.

Al: Hopefully.

Joe: Right. Hopefully or you could get skunked.

Al: Cuz my brother could have been there and picked out the slice before you got your piece out.

Joe: But what we’re doing is we’re trying to jam pack each slice with cherries if you will. Because if I buy total U.S. stock market index fund, you’re going to have small, medium and large within that fund. But it’s going to be heavily weighted towards large companies just because of how they construct the overall fund. You could then split up the funds and say I want to have a fund that’s specifically looking at an asset class such as smaller companies. So then that also is going to be heavily weighted towards the largest smallest companies. So then that’s when you get more on the institutional side of what we do is then they package those different funds up so you can get the best slice of that particular pie.

Al: You’re getting a slice.

Joe: Yeah. That is just how it’s constructed. So it gets-

Al: So instead of having a triple berry pie, you just pick the berry you want.

Joe: There you go.

Al: So it’s not blueberry, boysenberry, blackberry; you can get the blueberry pie.

Joe: You got it.

Will Roth Contributions for Grandkids Affect College Financial Aid?

Joe: So second question here from Stephen is that “I plan to start doing Roth conversions for my grandchildren in the years ahead.” Hold on, let me read that again. “I plan to start doing Roth contributions”- I’m sorry- “for my 5 grandchildren in the years ahead. My oldest, age 16, started working part-time this year. Can my son open this account for my granddaughter and I contribute the funds of $6000 depending on our income yearly for the next few years? As well, would her having a Roth in her name be counted against her with respect to financial need when applying for college loans in several years? Thanks for the input.” So he wants to start doing Roth contributions for his 5 grandchildren.

Al: That’s great.

Joe: Which is very cool, but then I think he gets it- is that Steven’s saying for them to make- for me to make the contributions on the grandchildren’s’ behalf, they need to have earned income.

Al: Which is true. Great.

Joe: So if they’re starting to work part-time, then your son or you can fund those Roth IRAs, but the Roth IRAs would be in the child’s name as long as they have $6000 of earned income.

Al: Or whatever they have. If they’ve got $2500 of income, you can put $2500 into a Roth. And it’s just fine that you put it in, it doesn’t have to be from her.

Joe: It’s not an account like a 401(k) that it has to come from the paycheck.

Al: Right. Right.

Joe: So, will it count against loans? Yeah. I think any asset in that case, but I’m not sure how old they are. And college will be free by then, Al.

Al: Maybe huh? We’ll have to see. It certainly- if you’re looking for financial aid- if your grandchildren are looking for financial aid, any assets that they have will definitely count against them.

Joe: We’ll see you next week. The show’s called Your Money, Your Wealth®.

Check out some additional free asset allocation resources in the podcast show notes at YourMoneyYourWealth.com, just click the link in the description of today’s episode in your podcast app to get there. And get your Derails here, coming right up after these words from our sponsor.

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