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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 [...]

Published On
December 24, 2019

Merry Christmas! Just in time for the holidays, the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, has been made law, effective January 1, 2020. Joe and Big Al explain what it means for your stretch IRAs, required minimum distributions, retirement savings and more. Plus the fellas answer your questions on self-employed small business retirement plans and paying off the mortgage.

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Show Notes

  • (00:44) The SECURE Act Changes Retirement Savings, Stretch IRAs, RMDs, and More
  • (10:53) Self-Employed and Maxing My Retirement Accounts. What Else Can I Do To Lower Taxes?
  • (12:58) What Self-Employed Retirement Account Should I Open and Where?
  • (20:17) Should I Pay Off My Mortgage? (Tim’s Scenario)
  • (25:08) Should I Pay Off My Mortgage? (Will’s Scenario)
  • (36:40) Cynthia & The Roth Break-Even
  • (37:21) John & YMYW on his iPod

Resources mentioned in this episode:

SECURE Act: Retirement Savings, Stretch IRA, and RMD Changes:

SELF-EMPLOYED SMALL BUSINESS RETIREMENT RESOURCES:

WATCH | podcast video: Solo 401(k) & Solo Roth 401(k): How Self-Employed Small Business Owners Can Save Big for Retirement

WATCH | Ask Pure video: The Best Self Employed Retirement Plans

READ | BLOG: Small Business Tax Filing: A Helpful Guide

WATCH | YMYW TV: Retiring in a Gig Economy (Self-Employment and Small Business Retirement Plans)

Transcription

Merry Christmas! Just in time for the holiday, the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, has been made law, effective January 1, 2020. Today on Your Money, Your Wealth®, Joe and Big Al explain what this new retirement legislation means for your stretch IRAs, required minimum distributions, retirement savings and more. Plus the fellas answer your questions on self-employed small business retirement plans and paying off the mortgage. If you have money questions, comments, compliments or complaints, click the link in the description in your podcast app to go to the show notes, then click Ask Joe and Big Al On Air. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

The SECURE Act Changes Retirement Savings, Stretch IRAs, RMDs, and More

Joe: Happy holidays everyone. ‘Tis the season to be jolly. Hot off the press, the SECURE Act.

Al: This is probably the biggest retirement act in the last decade I would say.

Joe: Yeah but that’s all BS too.

Al: No it isn’t. There’s some stuff- I mean it’s not like the best thing ever.

Joe: This is huge.

Al: But well- it’s big. It’s the biggest thing in the last 10 years. Would you agree with that?

Joe: I suppose- because there hasn’t really been anything besides the, what, the Pension Protection Act of ’06.

Al: And if you roll the tape back, that’s what I said, it’s the biggest thing in the last 10 years.

Joe: That’s like clickbait.

Al: Yeah I suppose. Anyway so here’s what happened. Last Thursday- first of all- Let me back up. The House and the Senate, they’ve been working on this bill to try to improve a few things in our retirement system. And the House, I think it was maybe May if I’m not mistaken, they voted something like 100 no, 360 to 3, something like that to pass this thing. So it seemed like this would go right through the Senate and for whatever procedural reasons the Senate had to have a unanimous approval which they did not get. So this got delayed and what happened recently was this Act was attached to our spending bill. And so last Thursday, the Senate voted on it and passed it, and this last Tuesday,  the House of Representatives passed it. So therefore we should know what it is.

Joe: OK. It’s not that big of a deal. I guess, high level. A few things. RMDs. They moved them to age 72.

Al: Correct. So instead of 70 and a half where you have to take money out of your IRA, 401(k) whether you want to or not, now the new age will be age 72.

Joe: A year and a half.

Al: A year and a half.  Big benefit.

Joe: So another thing, there is no age restriction on IRA contributions. Before you had to be under age 70 to make an IRA contribution. That is no longer. So if you’re still working, because people are working a lot longer. So if you’re working till 75 and you want to put that $7,000 into an IRA. God bless you, you have the opportunity to do that.

Al: Of course if you’re over 70 and a half, even though you put the contribution in-

Joe: You gotta take an RMD.

Al: You have to take the RMD out the following year.

Joe: Well now it’s 72.

Al: Now it’s 72. Yeah yeah. And there’s one more big thing.

Joe: Well, now there’s a couple others, so let’s say if I’m a small business owner, there’s these MEPs. So it’s making it easier, cheaper for smaller businesses to have a 401(k) plan for the employer.

Al: By the way, MEP is multi-employer plan. So, in other words, you can get several small businesses together under a single plan and make it more cost-effective.

Joe: There are a few things in regards to 529 plans that they were fighting over and I don’t know what the heck they figured out there. I know one side was hey can we do it for homeschooling and the other side was no you can’t do it for homeschooling. So I don’t have the actual bill in front of me.

Al: I don’t either. Because there were some differences. Actually to be honest the Senate bill had the required minimum distribution date to age 75. But I think 72 is probably what ended up passing. There’s another one. So birth of a child or adoption, you can pull $5000 out of your IRA, you still have to pay tax but there’s no 10% penalty.

Joe: So these are huge. I mean this is really going to change the lives of every American out there.

Al: Ginormous. But the big one-

Joe: Because they had to pay for all these small little things that they did and so they got rid of the stretch IRA.

Al: Yeah the stretch IRA. So this is where when you- someone passes away when there’s a beneficiary that’s not a spouse. So this would be like a kid or grandkid or someone like that when they inherit your IRA they can stretch it over their lifetime meaning they have to start withdrawing money as soon as they get the IRA from you at regardless of any age. But now they’re supposed to take it out within 10 years. So I guess there is still a stretch but it’s a 10-year stretch.

Joe: It’s a little bit different in regards to- you have 10 years. So this was back Al, prior to the law in 2000. So this is about 20 years ago, is that there was the 5-year rule before the stretch came about. So the 5-year rule meant that well you had 5 years to fully distribute the money out of the retirement account.

Al: So you don’t have to do a single thing years 1 through 4.

Joe: Absolutely. Same rule applies now.

Al: Yeah.

Joe: So you have 10 years. So if you have 9 years of income that you’re still working you don’t have to take a distribution. And then the 10th year you have to pull then everything out.

Al: You have to take it all.  Right.

Joe: So you could get a little bit creative on your distribution strategy once you do inherit that account so it’s not all bad.

Al: That’s right. And so like let’s say you’re self-employed and your business fluctuates year to year. So that in low-income years then you would want to do some money out of that IRA while your lower tax brackets. But there are some exceptions Joe, to those that don’t have to do the 10-year rule. And I want to go over those really quickly.

Joe: There’s one that if your beneficiary’s 10 years-

Al: If you’re not more than 10 years younger than the owner of the plan.

Joe: So they stretch?

Al: They can stretch. In other words, if they’re roughly the same age right as the owner, they can still stretch.

Joe: So the stretch still applies for them. Spouse, death, disability-

Al: So like if you inherited my IRA-

Joe: I would have to take it out in 10 years.

Al: You couldn’t stretch it because you’re more than 10 years younger than me.

Joe: Got it.

Al: But so here’s the 5 situations where-

Joe: So you’re saying I might be a beneficiary of your…?

Al: You might be a contingent, contingent, contingent.

Joe: Got it.

Al: Somewhere down there and it’s the bottom of the-

Joe: So you’re saying there’s a chance.

Al: There’s a chance. So if you’re a surviving spouse you can still stretch. So that rule didn’t really change. If you’re disabled-

Joe: But hold on there, surviving spouse may not want to stretch.

Al: That’s right.

Joe: So surviving spouses have a unique rule where they can roll it into their own plan if they wanted to.

Al: That’s correct.

Joe: Or they could keep it in the deceased spouse’s plan. You keep it in the deceased spouse’s plan if you’re under 59 and a half and you need access to the money. Because then there’s no 10% penalty. Al: Yes.

Joe: If you’re over 59 and a half, it makes more sense potentially just to roll it into your own plan if you were younger than the deceased spouse. If this happened you’re probably younger, hypothetically. Unless she or he died of a car accident.

Al: Well and that’s right. So those rules, the surviving spouse rules they didn’t really change at all. But so, I bring that up just because that’s not part of this 10-year rule. The second one is if you’re disabled you can still do the stretch. If you’re chronically ill, so I don’t know what that means but I’m sure they’ll have a definition there. We talked about if you’re not more than 10 years younger than the owner or if you’re a minor child you can still stretch it. And I don’t even know what that means. Does that mean by the time you’re no longer a minor child you have to take the rest out in 10 years? I guess once we get the final bill, we’ll be able to figure that out.

Joe: I suppose if you inherit at 17. And then all of a sudden-

Al: Do you get the stretch forever? Or just when-

Joe: I would imagine that would be hard to monitor. You would get the stretch and keep the stretch versus now flip it on now take it all in 10 years?

Al: Yeah, I will have to find out. I don’t know.

Joe: Remember the required distribution rules were a bloody mess trying to figure those things out, so they simplified it. So a lot of these things that they’re doing it seems like they’re trying to simplify some things.

Al: Sure.

Joe: You know 70 and a half? That’s always been confusing for a lot of people. So do I have to take it out this year or next year? I turn 70 and half when? Can I push it to the following year? Then I have to take two?

Al: We get that question. Why did they pick 70 and a half?

Joe: Yeah all the time.

Al: Yeah. What do you say?

Joe: I say I have no f– idea.

Al: So what do you really say? My answer is the same.

Joe: And 59 and a half? I don’t know. Stupid.

Al: There’s no rhyme or reason, they just picked that date.

Joe: You know you know what SECURE stands for right Al?

Al: I do.

Joe: What?

Andi: I know and I don’t have to look.

Joe: What?

Andi: Setting Every Community Up for Retirement Enhancement.

Joe/Al: Setting every community up for retirement enhancement.

Joe: There’s no retirement enhancement in this stupid bill.

Al: Well you might get-

Joe: Except for if I sell annuities. There’s my annuity boys again. They’ll probably start blowing me up again.

Al: Oh boy. You didn’t just say that, did you?

Joe: Yes. They’re allowing annuities now in 401(k) plans. It depends on- I’m interested to see because I don’t hate all annuities. I like immediate annuities. If you want a guaranteed income stream for the rest of your life you’re just exchanging a lump sum for a guaranteed income that’s guaranteed by an insurance company. So I’m down with that for- because some people would need that because they’re spend-aholics. If you’ve got cash, they’ll spend too much versus maybe just exchanging that lump sum into a guarantee that they cannot live-

Al: Income stream.

Joe: Put that on top of Social Security, maybe a small pension. I think that’s wise. I think that’s smart.

Al: For someone, maybe they don’t have enough in their retirement account, they spend too much, they think they’re going to live a good long life. It’s actually a great tool. It can be.

Joe: It’s just to protect us from ourselves.

Al: Correct.

For more on the biggest change to retirement in the last 13 years, download our new SECURE Act guide and check out Big Al’s video on the SECURE Act – both are in the show notes at YourMoneyYourWealth.com. Click the link in the description of this episode in your podcast app to go right to the show notes, where you can download that guide for free, watch the video, get other free financial resources and read the transcript of this episode. The SECURE Act also includes some changes that affect business owners, so let’s get to some self-employed retirement savings questions. Click Ask Joe and Big Al On Air in the show notes to send in yours.

Self-Employed and Maxing My Retirement Accounts. What Else Can I Do To Lower Taxes?

Joe: How about Cindy from California?

Al: Okay, I like that.

Joe: Okay. “Hi guys. I found you guys a couple of days ago on YouTube/Spotify.” Ooh, we’re on Spotify.

Al: We’re on Spotify?

Joe: That’s awesome.

Andi: You didn’t know that?

Al: We made the big time now.

Joe: Oh my God.

Andi: We get a bunch of people who listen to us on Spotify.

Joe: That’s awesome. I don’t have Spotify.

Al: I do. I didn’t know I was on it. That’s pretty exciting.

Andi: I subscribe to us on Spotify.

Joe: Wow.

Al: Oh my goodness.

Joe: Cindy’s in California. She’s 24 years old. “I’m 24 years old with my Roth IRA, a solo 401(k) and SEP IRA, all maxed out.” 24 years old, maxing all that stuff out.

Al: That’s fantastic Cindy.

Joe: That’s awesome. “I am a paid $103,000 a year. What else can I do to reduce my tax liability?” So Cindy, 24, solo 401(k) and SEP. So she’s putting around what, $50,000 little bit less than that, just because she makes $103,000. Probably about $35,000?

Al: I guess we’re assuming since she’s got a solo 401(k) and a SEP she is self-employed.

Joe: Yes.

Al: So $103,000 she could put in $19,000 into the employee part-

Joe: Of the solo 401(k).

Al:  Yeah. And she could put in roughly $20,000 for the profit sharing. So let’s round it to $40,000. So she can put in $40,000. Plus she can put in what is that $6000, into a Roth IRA?

Joe: What else can you do to save your tax? It’s tough. Cindy, you’re 24 you’re making a ton of money. There’s charitable things, but I would not recommend it. 24, maybe I don’t know.

Al: It would be hard to get over the standard deduction. I got an idea for you.

Joe: You got 2 seconds.

Al: If you’re self-employed, if you need more computers, desks, things like that, you can purchase them. You can write them off in the year of purchase.

Joe: All right Cindy, congratulations. Way to go. You’re killing it. FIRE movement for Cindy.

Joe: Ooh, Meydel.

Al: What page are we on?

Andi: Page 5.

Joe/Al: Page 5.

Al: Okay, good.

What Self-Employed Retirement Account Should I Open and Where?

Joe: Meydel. From New Jersey. All right Meydel, that’s kind of a cool name.

Al: It is. Ever heard that name before?

Joe: Meydel?

Al: Yeah.

Joe: No.

Al: Me neither.

Joe: I don’t know. If I ever have a child, might name him Meydel.

Andi: Or her.

Joe: I’m not sure if that’s a boy or a girl.

Andi: I think Meydel may be female.

Joe: We’re getting some really unique names where I’m not sure if it’s-

Al: You think they’re making them up?

Joe: No.

Al: They’re real?

Joe: How can you make up Meydel?

Al: Just you make it up.

Joe: No.

Al: What sounds good.

Joe: No. Her mother gave her Meydel. This is definitely a female.

Al: I say 50/50.

Joe: “Thank you for a wonderful and educational program that you guys offer.”

Al: That’s nice.

Andi: Keep going.

Joe: I don’t think that that sounds like a-

Andi: “It is a pleasure to listen-“

Joe: “It’s a pleasure to listen to the program every time. I’m 27 years old. I’m self-employed making about $80,000 to $100,000 a year. I need to get a retirement account but it’s always confusing which way to go. Roth, traditional small business 401(k). Also which entity is more reliable or less costly? Like T.D. Ameritrade or Vanguard or any other? Also should I do my own investments in stocks, bonds or should I let the entity do it for me for a fee? I’m afraid to just put my money and not have any return at all. Hopefully, my question is understandable. Thank you.” Meydel. Totally understandable. I totally understand what you’re trying to accomplish. So let’s break this out real quickly. Meydel’s 27, self-employed.

Al: Right.

Joe: So a self-employed individual has the option to either just do a standard IRA, go standard Roth which most of you are familiar with. But they also have other options such as a self-employment retirement account like a solo 401(k) or a SEP IRA.

Al: Self-employed pension plan.

Joe: So I think Meydel, I would go with a small business 401(k). I would go with the solo 401(k). You make $80,000 to $100,000 a year. You can put up to roughly $20,000 into the plan.

Al: Yeah plus the profit sharing part, so let’s call it another $20,000. So about $40,000ish.

Joe: But Meydel lives in Jersey. Jersey ain’t cheap. So maybe you don’t want to save that much. But it would give you the flexibility to save more money than maybe just the $6000 in a standard IRA.

Al: Yeah and I think that’s probably a good way to say it. To the extent that you have extra money that you want to invest, you can put a lot away. Now if you max this thing out let’s just start there. So you could put $19,000 into the employee part of this small business or solo 401(k). That could be either deductible as a traditional 401(k) or it could be Roth. It could be the Roth side so you have a choice there. Then the employer part, since you’re self-employed you’re employee and employer, so that’s going to be roughly 20% of your bottom line profit. So let’s just say it’s $100,000, 20% of that’s $20,000. So that’s how we kind of said roughly you could put $40,000 in. So if you want to you could put as much as about half of that in the Roth side. But the other half has to be fully deductible when it’s the employer side. You can’t use the Roth component. It just has, it’s fully deductible. So that’s the maximum. But the real question is how much do you have to save? And should you save it in the Roth side? Or should you save it in the traditional side? And the answer somewhat depends upon your tax bracket-

Joe: How much money you’ve saved, what your goals are.

Al: Yeah.

Joe: But at 27 years old, I would probably go more Roth.

Al: I would too. And our thinking is that at 27 years old you’re probably- you’re already quite successful but you’re probably even more successful in the future in higher tax brackets. So take advantage of the lower tax brackets perhaps that you’re in right now and let that money grow 20, 30 years or more.

Joe: Yeah. And I’ve said this argument 1,000,000 times. I don’t care what tax bracket Meydel’s in, because Meydel’s not going to remember paying the tax today at 27, when she’s 67 years old. When all of that money is compound for tax-free, Meydel’s got a big fat pool of tax-free money.

Al: She’s gotta enjoy that tax-free.

Joe: And it’s like oh, I should have took the deduction when I was 27. Who gives a-

Al: You could make that argument. But I would also say if you do that your entire career, then all you end up with is Social Security which would be completely tax-free and you’ll have potentially no other money to utilize the low bracket. So you actually want some money in the traditional part.

Joe: Now he’s getting complicated.

Al: Not really.

Joe: Not for Big Al.

Andi: So, but where should she put it? T.D. Ameritrade, Vanguard? And should she let them invest it?

Joe: It’s up to Meydel.

Al: Either one is fine. I would say they’re both custodians.

Joe: I would say depends on how much money Meydel has. If it’s under $200,000, I would go to Vanguard for sure. I would-

Andi: Why?

Al: Why do you say that? Actually I agree with you. But why do you say that?

Joe: Because I don’t think you need professional management.

Al: Vanguard is known for very good low-cost investments.

Joe: I would just let- my favorite funds at Vanguard is like the total U.S. stock market index fund.

Al: Yeah and the total-

Joe: The total international.

Al: Agreed.

Joe: And if you want to get cute, you go total emerging markets.

Al: And you could also do a total bond fund.

Joe: So you’ve got thousands of different stocks.

Al: You could just pick those 3 or 4.

Joe: Right.

Al: And be pretty well diversified.

Joe: Very well diversified for a low cost. And then you just kind of keep playing with there. And then as soon as it gets to $200,000, you’re making a little bit more money and then now than that’s- you’re getting a little bit older. So things get more complex in your financial life then that’s when I would probably start looking for maybe some professional advice. Because the larger the pool of money you want to make sure that you’re rebalancing, managing the risk appropriately. And as that pool gets a little bit bigger then it makes more sense to go into different asset classes specifically to target those premiums. So yeah- but I think Meydel ls just starting. I don’t know. That’s what I would do.

Al: And I would say this, maybe as a rule of thumb: if your money is going to be invested for 10 years or more then make sure you favor money in the stock market as opposed to CDs or bonds. Because you’ve got plenty of time for market fluctuations and you’ll do better in the long term. And if anything less than 10 years, you’ve got to look at a little more carefully in terms of how that should be invested.

Cindy, Meydel and other entrepreneurs, I’ve posted a bunch of retirement plan resources for you self-employed small business owners in the podcast show notes at YourMoneyYourWealth.com, including a podcast video of Joe and Big Al discussing the benefits of the Solo 401(k) and Solo Roth 401(k), a giant blog post on small business tax filing, the YMYW TV show episode on retiring as a self-employed person in the new gig economy, and a video from Pure Financial Advisors’ Allison Alley outlining the best self-employed retirement plans. Click the link in your podcast app to go to the show notes and don’t forget to share these free resources with all the self-employed small business owners you know. 

Should I Pay Off My Mortgage? (Tim’s scenario)

Joe: All right. How about Tim? From San Diego. Tim writes in. “Hey my mortgage is 3.25% with a balance of under $100,000. I’m retiring in 2 years. My 401(k) is averaging 7%. Should I pay off my mortgage?”

Al: Well Tim-

Joe:  Are they mutually exclusive?

Al: Not necessarily. But I think he’s thinking of using his 401(k) funds. If you take your money out of your 401(k) first of all you got to pay taxes. So that may throw you into a higher tax bracket and that may not be advisable. If your mortgage is 3.25% and you’re 401(k)’s average is 7%. The math doesn’t really work in your favor to pay it off.

Joe: But that’s not going say that it’s going to continue to grow at 7%.

Al: No it’s not. That’s exactly right. So that’s the wild card. But I would say another thing is it depends upon your assets and the need. Because sometimes we have people that come into our office that have $100,000 mortgage and they got $4,000,000 sitting in the bank. It’s like yeah pay it off.

Joe: It’s a guaranteed 3.25%.

Al: It’s a nuisance to have the mortgage. In other cases, they have $100,000 mortgage and $20,000 in the bank it’s like no don’t pay it off. If you pay it off even if you had the resources to pay it off you’d have nothing leftover and you’re house rich, cash poor. You got no way to buy meals and whatever. So it sort of depends upon your overall assets. But to me the general rule is if the mortgage is a bit of a nuisance,  in other words, if you have plenty of assets to cover it and it makes you feel better, go ahead and pay it off just for the peace of mind not to worry about making that monthly payment.  Being mortgage-free is a nice feeling.

Joe: But do not take the money out of the 401(k) plan to pay off the mortgage because it’s going to cost you a heck of a lot more than you think.

Al: That does where people kind of get mixed up.

Joe: Because you’re pulling $100,000 out of your 401(k) plan then now you’re pushing yourself up into a lot higher tax bracket. You’re paying taxes to take the $100,000 out and you don’t have the liquidity anyway. So now you’re gonna pull more money out to pay more tax on the $100,000 that you pull out to pay off the mortgage.

Al: Yes. So going through the math if you need $100,000. I’m just going to assume he’s in a 22% federal bracket I’ll just make that assumption 9% state of California. So let’s just round that 30%.

Joe: I’m fine with that.

Al: So all right. So 30%, you pull out $100,000, you need $30,000, so you’re thinking I’ll just pull out $130,000. Well, now you pulled out $130,000. So now you need 30% on $130,000. So now you got to pull out $135,000. Whoops. Now you need 30% of – and it just keeps on going out. You probably have to pull out $140,000, $145,000 just to get the $100,000 net.

Joe: Yep. So if that is a big chunk of your overall liquid assets nest egg then just kind of be careful, just understand the math behind what you’re currently doing. Because a lot of times people will look at their 401(k) balances and think this is a liquid asset but they don’t calculate the tax or they don’t think about tax appropriately.

Al: Didn’t we have years ago, we had someone listening to our show and, or actually before they listened to the show, the gentleman retired. He pulled out about $350,000 out of his 401(k), basically drained it out and paid off his mortgage. Was so excited and then we met him and he realized oh, that wasn’t a very good idea, because of the taxes.

Joe: He had a huge pension too.

Al: And he had no money to pay the taxes. And it’s like, fortunately, we got him within 60 days and so he could actually put the money back in. You could do that once over the course of 365 days.

Andi: So he unpaid off his mortgage?

Joe: Then we refinanced the mortgage and got the money back and put it back into the 401(k) plan. So it was a complete cluster. It was bad. Because they listen to a few different things and you’re like they just heard the fact that Al said debt-free is a wonderful thing. Or Dave Ramsey is like oh God-

Al: Dave Ramsey-

Joe: Big Dave. Big Al and Big Dave are my idols.

Al: And they agreed. No debt that’s bad.

Joe: I don’t agree with that at all. So just be careful. There’s another guy that bought his dream home, $400,000, down payment. Wasn’t even- it was a down payment. He had $800,000 it his 401(k) plan, bought $1,000,000+ home. He pulled $400,000 out of his 401(k) plan to put the down payment down. Next year he owed like $100,000 and some odd thousand dollars in taxes plus that mortgage. . And he only had $800,000 total in his 401(k) plan. Well Joe, it’s my wife’s dream home and my dream home and we’re gonna- I go okay-  it’s up for sale.

Al: You realize you can’t afford it.

Joe: You realize you just blew yourself up.

Should I Pay Off My Mortgage? (Will’s scenario)

Joe: Let’s go to Will from Philadelphia PA.

Al: Okay.

Andi: I just want to preface this by saying his actual question is on the reverse side of the page. The rest of it is all story.

Joe: Sounds good. “Hey guys. This email’s from the podcast within-“

Andi: “This email is from the past, podcast-wise-“

Joe: Oh “from the past podcast-wise with an Asian POV.” OK?  “Been listening to your podcast for a few weeks after my uncle recommended you.” All right. Well thanks, uncle. “”I started listening to the 2016 episodes but changed to 2019 and now I’m in April. If this makes it on the air feel free to condense it. Just want to give you a little background.” So he started at 2016 and he goes, “this sucks.”

Al: “I’m way behind. I’ve got old tax law. This makes no sense.”

Joe: I gotta get-  How come you didn’t condense this?

Andi: I asked you if you wanted me to and you never replied. So I thought I’d just give you all of it.

Al: I’m gonna make an executive decision – let’s start condensing these. That’s your job.

Andi: You got it.  Okay.

Joe: “I would like to thank my mom for being very thrifty and teaching me the value of money. I’m mostly a saver and due to my unfortunate early adult dabbling into the stock market I’ve continued since. People warn about inflation but my thought is usually if I have $1000 it might be worth $900 but at least it’s still $1000. If I invested in the stock market and it drops to $900 well then it’ll be worth $800. So I continue just with CDs, new bank account offers, credit card offers, some one-time contribution mutual funds and Roth here and there once or twice. I’ve worked full-time, overtime, part-time-” he’s worked all sorts of times-

Al: And he worked years ago.

Joe: “even though I have an okay computer consulting business and my wife works 2 part-times, I’ve become complacent.

Al: I don’t think you’re complacent at all.

Joe: He’s lazy. Relaxed. That’s what he says.

Al: Well he works full-time, overtime, part-time. I guess he did that years ago. Now he’s lazy.

Joe: “I’m only 41.” He’s 41! I thought for sure this guy is like 60. “I’m so tired.”

Al: So he’s younger than you.

Joe: I’m just jamming, working full-time, part-time, I’m tired. “My wife’s 38 and we have a 12 year-old and we try not to live beyond our means. I learned to fix what I can around the house, cars.” He gets free gas. Okay.

Al: I wonder how.

Joe: I have no idea. Steals it.

Al: Siphons it from his neighbors.

Andi: See, this is why I leave it all in, because this is so funny.

Joe: Can you see Will just sucking it out with some tube.

Al: He’s gotta go to the hospital now and then…

Joe: That’s why he’s working part-time because the guy is sick. Because he’s full of gasoline. He’s on medical disability.

Al: Now he’s got his 12-year-old sucking up the gas because he can’t do it.

Joe: “Come here junior!” “No, no daddy!”

Al: “It’s a Buick.  It’s got a big- we can get a lot of gas from this one!”

Joe: “Daddy, I don’t wanna have that special juice!”

Al: “It doesn’t taste good.”

Joe: “Shut up! Come on. Suck on that thing!”

Al: Tastes just like mother’s milk.

Joe: Oh my God. Somehow, he happened to find the Dave Ramsey Show.

Al: Oh there ya go.

Joe: That’s Big Al’s best friend. He’s entertaining. He abhors credit cards.

Al: He doesn’t like credit cards.

Joe: He doesn’t like them at all. “- and it’s offers. We don’t have any outstanding balances.” He likes the perks but it’s not making him rich. “It’s that using up our earned income to spend on air travel and hotels and vacations. Only our debt are 2 houses.”  So he’s got about a 4%, 3% interest on them. The 3% one is being rented. The main thing I got from him is the urgency. Reigniting. Just to pay off the debt.

Al: Reigniting to pay off all that debt. Bad.

Joe: “We’ve become accustomed to the regular plus a little extra principal monthly payments. I had a thought right when I paid off the car payments a couple of years early essentially paying myself the 6% interest but I didn’t do it enough for the house.” So he’s crunching numbers and he could save anywhere from $50,000 to $80,000 in interest. “I got denied from refinancing despite excellent credit because of self-employment.” Well yeah-

Al: Because he hasn’t worked for 5 years. He’s relaxed and lazy. They go ‘here, don’t look my last 3 years returns, look at this 10 years ago. Look how good I was-

Joe: When I was grinding.

Al: That’s before I got sick from siphoning gasoline.

Joe: From sucking gas. “I read arguments that paying off the house with now money will cost more than next year’s money inflation when you can invest then now money and watch it grow.” All right come on Will, do you got a question for us here? “I also hated myself for not delving enough on the power of compound interest. So starting last year I opened up a Vanguard SEP IRA. I’d be able to contribute 25% of the business income and $6000 to a Roth.” So here’s the question.

Al: It’s a conundrum.

Joe: It is. “I technically have enough to pay off the house. Weird but it seems scary doing this.” I don’t know why the hell that would be scary.

Al: Then don’t do it.

Joe: “We already paid about $35,000 this last few months and have about $156,000 dollars left. Should I max out the Roth and the SEP and my wife’s 403(b) and Roth? Or should I pay off the mortgage?” Is I guess his question.

Al: I guess so. That’s the conundrum. Let’s see, the mortgages are at 5% and 3%. And it sounds like he got burned in the stock market probably right during the Great Recession or maybe the dot com bust. And so he only does CDs. And what the best CDs are probably paying 2.25% maybe?

Joe: OK. He’s 40 years old. He’s got $153,000 in debt, I mean in mortgages, 3%, and 4%. I mean the payments on those gotta be pennies.

Al: Pretty low.

Joe:  Right. Will, max out every retirement plan you possibly can, stop siphoning gas, and start working hard. Stop being lazy.

Al: Yeah, and let’s get a little bit of money invested.

Joe: Right. And then have a globally diversified portfolio. You’re at Vanguard. Total U.S. stock market index fund for about 50%. I would go another 30% of the total international market fund and then the rest in short term bonds.

Al: He’ll never do that because he got burned. But at least start out like 20% in the market or something.

Joe: OK. These are retirement accounts. He’s 40 years old. He cannot touch these for 20 years.

Al: I know. But he’s not going to do it because he’s a CD guy. He’s a cash man.

Joe: Cash man.

Al: Cash man.

Joe: Will, listen to me. We are roughly the same age. You have missed out on a pretty good 10 years.

Al: We actually have the 10 best years probably of our lifetime.

Joe: And now he’s kicking himself because he realizes that. And now he’s like should I pay up? No, you want to look at the sooner you get the money invested, the better off you’re going to be. Pick the portfolio that is right for your time frame, what target rate of return that you need to generate and go from there.

Al: So and I agree with you. And let’s just say that that’s 60% stocks.

Joe: At 41 it’s probably 80%. It should be-

Al: It probably. However, he’s not going to do it. So here’s a way to do it, invest 20% of your portfolio in stocks and every month add another percent. Dollar-cost average in.

Joe: I think, okay that’s one way to do it if you think that he’s not going to do it. But he just needs to get over his fear.

Al: He does. But it’s hard right now because-

Joe: Look yourself in the mirror Will. You’re 40. You’re not 65 and need the money next year.

Al: But he’s also thinking 10-year bull run. I missed it. Now I’m going to put all in. I can put the money in and the market’s going to crash.

Joe: OK. 20 years from now. Do you think the market is going to be higher or lower than it is today?

Al: Yeah that is the right way to look at it. I’m just saying it’s awful hard for a person that’s been burned and is invested in cash for probably 10 plus years, maybe 15. I don’t know.

Joe: But. Okay. How much money do you think a 40-year-old actually has?

Andi: Especially if he’s been lazy and complacent. It’s not millions.

Al: He used to work full-time, overtime, and part-time. He’s done all kinds of jobs. So he’s got all kinds of money. I don’t know. I have no idea.

Joe: What I’m saying, so let’s say he got burned in the stock market in his 30s. I mean so he lost a couple of bucks. You got to get over it. He never made any money either because he didn’t have any money to make.

Al: So I’ll just I just give you a little historical frame of reference Will. So if you would invest it in the Dow Jones in the height of the market-

Joe: Hypothetically.

Al: – Yeah hypothetically, it was roughly, in round numbers, 12,000 points. Would you agree with that?

Joe: 12,000. 12,000?

Al: 12,000. Then it went down to 6.

Joe: Yeah. Okay.

Al: And now it’s what, 27?

Joe: Yeah, it’s higher.

Al: So here’s the point. You could have invested at the height of the market in 2007 I guess? Late 2007? Somewhere around there, the height of the market, it dropped. And weathered that whole thing and have a portfolio that’s more than double, instead of having money in cash. All I’m saying is you can invest at the absolute worst times and still do rather well just because you do what Joe just said. Is the market going to be higher in 20 years than it is now? The answer’s probably yes. And so you go with those odds.

Joe: Alright Will, hopefully, that helps. Good luck with everything. Thanks for the question. Thanks for the uncle for referring and I’m sorry 2016 sucked.

That is how it’s done, folks. Your referrals, sharing this podcast, is the #1 way we reach new people, grow the show, and continue making hilariously bad guesses at what your emails mean. Thank you to everyone who has told even one other person to check out YMYW. You can help us keep Your Money, Your Wealth® going strong in 2020: give the gift of entertaining financial literacy for Christmas! Subscribe to us on any and all of your favorite podcast apps, and tell everyone you know to subscribe too. You can find us on Apple Podcasts, Google Podcasts, Stitcher, Pandora, Spotify, and all the podcast apps for free, you can get us on your Amazon Echo devices, subscribe to us on YouTube, subscribe to our newsletter to get the podcast sent to you via email. Find links to any and all of these in the podcast show notes at YourMoneyYourWealth.com – click the link in the description of your podcast app to go straight there and start sharing.

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ASK JOE & AL ON AIR

Cynthia & The Roth Break-Even

Joe: We’ve got a couple of comments here. Cynthia from Houston. She wrote. You know she writes in to Andi. “Dear Andi. Thanks to you and the boys for the incredibly helpful discussion on the breakeven point for Roth conversion. It was exactly what I needed to share with my husband. Happy holidays to you all.” Happy holidays to you, Cynthia from Houston.

Al: Agreed.

Joe: She probably was like ‘Here honey’.

Al: Yeah. ‘Listen to this.

Joe: ‘Listen to this. You don’t know what the hell you’re talking about.’

Al: ‘I got it on the podcast, episode 252, whatever it is.’

Joe: ‘Now listen we’re doing a Roth conversion. I don’t care about-

Al: ‘Listen to what the guys say.’

Joe: Yes.

Al: Actually listen to what Andi says. The guys just are filler.

John & YMYW on his iPod

Joe: John from Belton, Texas.

Al: Is that near Houston? That’s a great name.

Joe: Belton, Texas. I don’t know. I’m going to Belton, Texas though. And I’m gonna wear some cowboy boots.

Al: Do you have cowboy boots?

Joe: I do have cowboy boots.

Al: I do too. You got a cowboy hat?

Joe: uh, no.

Al: I do.

Joe: Yes I know you. Yeah, you look like a Yukon-

Al: Do you have cowboy shirts? Actually I gave mine away. I don’t have those anymore. But I can go get some more.

Joe: I’m sure you can.

Andi: Belton is north of Austin.

Al: Oh well that’s, I want to go there.

Joe: John, he goes “Don’t have a question today, but just wanted to wish a Merry Christmas to the crew of the best podcast in existence.”

Al: Wow. Thanks, John.

Joe: John. From Belton. “I have to keep a podcast that I have not listened to on my iPad or iPod because I would panic if I didn’t have a new podcast available to listen to. Keep up the great work. P.S. YMYW would be my favorite podcast even if I had not won the $100 survey last August. Thank you.” So, John, we paid you 100 bucks to make that comment. Appreciate that.

Al: Just to make that comment. That’s nice.

Joe: If anyone else wants $100, please write in to Andi and say how great we are.

Al: And then we’ll evaluate whether it’s worthy. We made a joke. That’s not true.

Joe: This is kind of a little self-serving last segment we’re doing here. All right. Happy holidays everyone. Merry Christmas. Thanks so much for your comments, questions and everything else, to make this show possible. Andi, Merry Christmas. Big Al, Merry Christmas. We’ll see you next week. The show is called Your Money, Your Wealth®.

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Got a couple derails for you at the very end of this episode of Your Money, Your Wealth®, which is presented by Pure Financial Advisors. Sign up for your free financial assessment.

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.