Show Notes

• 00:00 – Intro: This Week on the YMYW Podcast
• 01:02 – Can Financial Advisor AUM Fees Come Out of Pre-Tax Money? (Heidi, Space Coast, FL)
• 09:54 – Are We Converting Enough Before RMDs? What to Do With Annuities? (Laverne & Shirley, Cleveland, OH)
• 30:23 – Target Date Funds and a Sad Brokerage: Good Enough? Can’t See Ever Paying an Advisor (Bess & George, MI)
• 45:37 – Outro: Next Week on the YMYW Podcast

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Transcription

(NOTE: Transcriptions are an approximation and may not be entirely correct)

Intro: This Week on the YMYW Podcast

Andi: Heidi from the Space Coast of Florida found a money-saving tidbit in a past episode that completely changed how she thinks about her financial advisor’s fee. Joe and Big Al expand on the strategy, today on Your Money, Your Wealth® podcast number 584. Laverne and Shirley have four million bucks, Roth conversion questions, annuity questions, and a retirement plan so detailed it may require a diagram. Finally, Bess and George from Pure Michigan are already retired, already on Social Security, and already losing sleep over their investments. So why are they so stressed? Joe and Big Al’s a debate about a 1% advisory fee gets a little spicy in that one.  Apple Podcasts users, you now have the option of listening or watching YMYW, just like our friends following us on YouTube or Spotify. Leave your honest rating and review, even if it’s just to tell us we have faces for radio. I’m Executive Producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Can Financial Advisor AUM Fees Come Out of Pre-Tax Money? (Heidi, Space Coast, FL)

Joe: We got Heidi, Space Coast of Florida.

Al: All right.

Joe: You ever been to NASA?

Al: I have not. Have you? Can you?

Joe: No.

Al: Do you ever wanna be an astronaut?

Joe: Never.

Al: I think I was. I wanted to be an astronaut when I was five, but that didn’t last long.

Joe: Not even close.

Al: N- didn’t want to be. No. I first wanted to be-

Joe: I would not wanna go to space.

I would be f- freaked out. I’m, like, claustrophobic. I think I… There’s no way I could handle

Al: it. Well, I think that’s when I realized that, first I wanted to be a cowboy. But then astronaut was cooler.

Joe: Yes.

Al: Yeah. I could…

Joe: all I just got the cowboy vision. you-

Al: I still have some cowboy outfits.

Joe: Yeah, I know. I remember. You remember? Some cowboy boots that you got.

Al: Yeah, yeah. Did I show them to you?

Joe: Yeah.

Al: Oh. One Halloween or something?

Joe: Yeah, maybe. Yeah. “Hello, Andi, Joe, and Big Al. I discovered YMYW a few months ago, and have now listened to all of your podcasts since January 2023. I know, Joe, what is wrong with me?”

“You guys have no idea how many of the small things you mention off the cuff end up being exactly what someone needs to hear that day. Please keep it up.” “The first time I heard Big Al mention that the standard deduction is part of the equation when bracket bumping, calculating my allowable Roth conversion up to the top of the tax bracket, I was gum smacked.”

What the heck?

Andi: Gob smacked.

Joe: Yeah. Gob smacked.

Al: That’s close.

Andi: Great word.

Al: What is gum s- gums- what is gum smacked?

Joe: Gob smacked, gum smacked.

Al: Close enough.

Andi: Shocked, stunned.

Joe: Shocked.

Al: Shocked.

Joe: All right.

Al: Yeah. ”

Joe: I thought I was hitting my ceiling every year, and turns out I wasn’t even close. I’m one of those engineers you’ve called out many times, and I immediately recalibrated all of my nerdy spreadsheets.”

Thanks. What’s he talking about here? So he was trying to do a- a Roth con-

Andi: She, Heidi.

Joe: She, I’m sorry, Heidi.

Al: Yeah.

Joe: Heidi- Well- … was doing a Roth conversion …

Al: you know, we say the top of the bra- 12% bracket is, you know, whatever- X … 100,000 for married.

Joe: Yeah.

Al: But you have to add the standard deduction to that.

Oh,

Joe: because, yeah- So really makes it 30 … the,

Al: yeah. Yeah,

Joe: So she was doing $100,000, but she could’ve been- And probably called that good … on 30.

Al: Exactly.

Joe: Come on, Heidi. You call yourself an engineer?

“I am a 55-year-old hilarious woman on the Space Coast of Florida, and share my home with two fur kids.” Meow.

Al: Well, that was, you might practice that a little.

Andi: Wow, coming to the sound effects now. You know, cat- Not only are we on video on Apple Podcasts, but we also get sound effects. That’s great.

Joe: Well, “I drive a 2024 Hyundai, Tucson.”

Andi: Tucson. Not Tu- We decided that last time. ‘

Joe: Cause I knew that was gonna come out.

Al: No, you got it right.

Joe: it’s a hybrid. “And my beverage of choice is an ice cold Coca-Cola. My question for you today is related to another little tidbit you mentioned in one of your shows. Financial advisory fees can be taken directly from a pre-tax retirement account.”

“What’s that you say? No kidding. The fees can come out before 59 and a half with no problem, and it looks to me like it’s an exciting 24% discount. I have been converting and converting, but now maybe you have given me a reason to keep a stockpile in a pre-tax account.” Yes, Joe. Finally, we reach the question.

“Is it true that you can only take the fees out of a pre-tax in p- a pre-tax account in proportion to the percentage of assets that are pre-tax? So millions in Roth accounts still will have to be billed due and no discount. This made it a lot less exciting about this tidbit. I have a rollover Roth IRA, rollover traditional IRA, Roth IRA, HSA, 401(k) with Roth pre-tax and more rollovers inside.

I feel like if we unpack this all into the buckets, it would be a 50/50 Roth pre-tax, but it would be, it wouldn’t be simple math with that 401(k) bucket of spaghetti. Do advisors really break things down this way and take fees from multiple places by percentage and type, or is there a different way to look at this?

Thank you. Heidi.” all So she’s talking about advisory fees that are coming out of, out of the account. So she, she has an advisor that’s managing the account, doing some financial planning, asset management and the like, I’m guessing. And let’s just assume it’s a 1% fee.

Al: Sure, okay.

Joe: She’s in the 24% tax bracket, and so if you charge 1% on a retirement account, it comes out of the retirement account, with no tax-

no penalty-

if it, if she’s under 59 and a half. And so she’s like, “Wow, that’s interesting. that’s a discount because I don’t have to pay tax on those dollars.” It’s not an after-tax fee, it’s a pre-tax fee that she’s paying. and the answer is yes, absolutely, 100%.

Al: That is correct, yeah.

Joe: So you get a 24, in your case, a 24% discount.

However, if you do have a Roth IRA that your advisor is managing, you can’t say, “Do not take it out of the Roth. Only take it out of the pre-tax.” It has to be proportionate. So if it’s a 1% fee, and let’s say you have $100,000 in a pre-tax account and $50,000 in the Roth account, it’s gonna be 1% is taking out from the pre-tax, 1% out of the Roth account, to total up your $1500 in fees for that year.

So $500 from the Roth, $1000 from the retirement account. You do get the discount out of the retirement account, but the Roth you already paid taxes on, so taking it from the Roth, is, you know, not ideal. but there, there’s going to be fees regardless- Yeah … if you have mutual funds or anything like that.

but if you do have an advisory fee, that would come from the Roth. There is one way to avoid it.

Al: Okay. Wow, you’re on a roll. Go for it.

Joe: You know what it is?

Al: well you can pay the Roth fee out of the trust account. Is that your, that-

Joe: Yeah, but everything would have to come from the trust account.

Al: Right.

Joe: So if you do have a non-qualified account, you could pay 100% of the fees from the trust account- Yeah

or a non-qualified brokerage account. so let’s say that $1,500 again, you have five, what? $100,000 in a retirement a- a retirement account, $25,000 in a Roth, and $25,000 in a brokerage account.

Al: Right.

Joe: Your total fee’s gonna be $1,500 for the year.

Al: Right.

Joe: You could say, “Take the $1,500 total from my trust account.”

Al: Right.

Joe: That’s the only way that you can kinda- Yeah … like pro rat or, not pro- Yeah … not do a pro rata, but, avoid the pro rata aggregation.

Al: Yeah. But yeah, in most cases you’re better off just doing, paying the fees out of the, account, right? Because, as Heidi said, Joe, I mean, if you pay for it out of the IRA, you’re getting, in essence, a discount, because you don’t have to pull the money out and pay tax on it.

So yeah, that’s a good idea. Now, some of you may be thinking, “Well, wait a minute. Didn’t I always pay that fee out of my trust account, my non-retirement account? and when we had miscellaneous itemized deductions, which was a deduction?” A lot of people did. So in some cases it made sense, but that’s now, at least for federal government, Joe, a thing of the past.

Joe: Yeah. You could itemize the, your professional fees-

to pr- on your Schedule

Al: A. Right.

Joe: But-

Al: Yep …

Joe: no longer.

Al: Correct.

Joe: Think that’ll come back?

Al: Probably. I mean, who knows?

Joe: The circle of life.

Al: Bell-bottoms came back, and that was a surprise to me.

Andi: Will you look at that? A few minutes ago you hit play on a podcast, and you just learned that your financial advisor’s fee might effectively cost you 24% less than you thought, and you can make sure that none of those fees come from your tax-free Roth account. People pay professionals for that kind of strategizing, and you just got it on your commute for nothin’. And Joe and Big Al provide this kind of useful stuff – in between the talk of cars, and pets, and drinks, and movies – every week, so tell your friends, your colleagues, your family, and even strangers. Another example: our brand new beast of a Retirement Account Guide just dropped, and it’s the most complete resource we’ve ever built on the topic. 55 pages on traditional IRAs, Roth IRAs, 401(k)s, 403(b)s, HSAs, contribution limits, Roth conversion strategies, the five-year Roth withdrawal rules, RMDs, how to sequence your withdrawals to minimize taxes for the rest of your life… all of that – all of it, is in there. Free knowledge and financial resources every single week, that you can reference for years to come? That’s what we do here at YMYW. Get your copy of the brand new Retirement Account Guide for free at the link in the show notes.

Are We Converting Enough Before RMDs? What to Do With Annuities? (Laverne & Shirley, Cleveland, OH)

Joe: All right. Cruising, long email. So I gotta be prepared here.

Al: Yeah. We learned it early.

Joe: Wow, this is-

Andi: Pace yourself.

Joe: Four pages. “Hi, Andi, Al, Joe. My name is Shirley, and my wife, Laverne, and I live in Cleveland, where our football team almost always wins.”

Andi: No, almost always almost wins.

Joe: Almost always almost wins.

Andi: It’s the Cleveland Browns.

Al: oh, yeah.

Joe: Despite this, we remain faithful fans.” Okay. “I discovered your podcast a year ago and have listened to the last six years of episodes as I drive my 2020 Highlander.” You know what happens, Al? This is what it is.

Al: Okay, what?

Joe: Is that people, you know, they can only last-

Al: Maybe a year. So they-

Joe: Because they binge us. So-

Al: That’s what it is. They listen to like-

Joe: Yeah … hundreds of episodes.

Al: Yeah, they get six years in, and it’s like-

Joe: They get six years in I’m- And they’re like, “Okay, I’m finally done.”

Al: I can now listen to a book on tape.

Joe: Oh. “I discovered your podcast a year ago, and I’ve listened to the last six years of episodes as I drive my 2020 Toyota Highlander.” We- I wonder what the mileage was when he first started listening.

Al: Well-

Joe: And knowing that-

Al: Yeah, I mean, do, you ever po- binge-listen podcasts? Have you ever done that?

Joe: No.

Al: Six years worth?

Joe: No.

Al: Yeah, I haven’t either.

Joe: Well, “I have found your spitballs to be both entertaining and very relevant to our retirement financial planning. I have learned a lot from you and am forever grateful.” Well, thank you very much, Laverne and Shirley. “I’m 66, yo, and my Laverne is 65, yo. And we have, And we’re looking to retire in the mid-2027 at the age of 68 and 67. We are example of being moderate income earners and have faithfully maxed out our retirement accounts since our late 20s, and find ourselves looking forward to what we hope to be a comfortable retirement, sipping our dry white wine and Belgium beer at the sunset.

We have a retirement budget and Social Security Roth conversion strategy and would like to get your spitball on these topics. Number one, is the retirement budget and Roth conversion strategy realistic?” Okay. “Number two, should I consider delaying my Social Security payments until age 70? Number three, should we consider Roth conversions into the 24% tax bracket? And then four, what do you think about annuities?” Okay. “Our assets are as follows.”

Al: Okay.

Joe: We got pre-tax retirement accounts of $2.6 million, Roth accounts 700,000, non-qualified annuities of $250,000, after-tax brokerage accounts of 650,000, emergency cash funds 100 grand, HSA 70,000. So total liquid assets, Al, 4.4 million.

Al: Wow, that’s a lot.

Joe: That’s pretty good, Laverne and Shirley. Current investment mix is… Did you ever watch Laverne and Shirley?

Andi: Yeah. Absolutely.

Joe: Schm- Yeah … Schmoodle Schmazzle, or what was it?

Al: Yeah, something like that.

Andi: Hassenpfeffer Incorporated.

Joe: Hassenpepper?

Andi: Hassenpfeffer.

Joe: What’s Hassen-

Andi: I don’t know. Hassenpfeffer? I have no idea.

Joe: Is that the name of the brewery?

Andi: I don’t think so. Wasn’t it Schlitz or something?

Joe: Okay, yeah. That could be. It was Milwaukee, wasn’t it? Oh, weren’t they in Milwaukee- yeah … or somewhere in the Midwest?

Al: yeah. Yes, yeah.

Joe: I just remember the glove on the beer bottle.

Andi: As it went by.

Joe: Yeah.

Al: Yeah, I remember that too, come to think of it.

Joe: Yeah, see?

Al: Yeah.

Joe: Let’s see. Who was the, who was Laverne and Shirley again?

Al: Well, Penny Marshall- Penny Marshall … and- Yeah … Cindy Williams, I think.

Joe: Oh, wow.

Al: How about that, huh?

Andi: Very well done. Yes.

Joe: All right, Penny Marshall, she was, like, A League of Her Own. Wasn’t she the director of that?

Andi: Yes.

Al: Was the director of that, yes.

Joe: Yeah. And then she-

Andi: Yeah, she went on to directing.

Al: Yes.

Joe: Yeah, didn’t she marry someone?

Andi: Oh, good question. She did marry someone. I’ll find out for you.

Joe: Like, like another actor of some-

Al: I, yeah, someone famous, I think. I-

Joe: Rob- Was it… It wasn’t Rob Reiner, ’cause Rob Reiner’s son just killed Rob Reiner and his wife.

Andi: She was married to Rob Reiner from ’71 to ’81.

Joe: Whoa. Oh, so- Okay … look at Aaron over there- Out, out in the- … in the peanut gallery.

Andi: Before that she was married to Mike Henry from ’63 to ’66.

Al: Okay.

Joe: But then she never remarried after Rob Reiner?

Andi: Not according to Wikipedia.

Joe: Oh.

Al: Okay.

Joe: Yeah. That’s a sad story with Rob Reiner.

Al: Boy, I’ll say. Yeah, surprising.

Joe: Loved his movies.

Al: Yeah, same. Okay, on that note.

Joe: “Current investment mix is, 70% stock ETFs, 30% bond CDs, about 10 years in fixed money. To weather any down market, my Social Security and small fixed pension will be $8,600 annually at age 67, and 51,000 at age 70.” Okay, hold on a second.

All right. “At age 67, it’s 51,000. At age 70, it’s 65,000. Laverne’s Social Security at age 70 is 63,000. Current annual spending is 120,000 with no mortgage and no debt. At age 70 it will be $135,000 given inflation. We pick cash for our used cars. Laverne enjoys tooling around town in her 2022 Lexus ES 350.

We are looking forward to our go-a-wandering years.” Oh my God. I know how much you hate the GG term, Joe. Yes, you’re right. I don’t know if I like go-a-wandering any better.

Al: That might be worse.

Andi: What would you call it, Joe?

Joe: I was like early retirement.

Al: Yeah, you just call it active. Your active years.

Andi: That’s so boring.

Joe: Early retirement, not go-go, no-no, lo-lo.

Al: Okay. Where are we?

Joe: Go-a-wandering years.

Al: Oh, there we go.

Joe: I know how much you hate that, yes. “We would like to budget $80,000 a year in travel and spending most winters in warm weather clime to play golf year-round. We do not plan to buy a second home, but we will rent in the winter.”

Where do they live? Cleveland, that’s right. “Our current annual income is $270,000, and we have been saving $60,000 to $80,000 a year. We have been dedicating or directing all outgoing retirement savings to our Roth 401(k) s for the last several years. Laverne gets a W-2, and I own my own business and have an individual 401(k) .

My plan this year is not to contribute to my Roth, but instead add to our brokerage account to have more cash available to fund our initial retirement years and pay the taxes on Roth conversions. We’ll need about 250- to $280,000 a year to cover our expenses, travel, and taxes on the Roth conversions before age 70.” You like that plan, Al?

Al: Yeah. Well, got some comments.

Joe: Yeah, I got some comments too. I wouldn’t do it. “Conversion plan and retirement spending. One option is to start to draw my Social Security pension at $28,000 for six months beginning in mid-2027 and then do Roth conversions to the top of the 22% tax bracket.

We would only be able to convert about $100,000 in 2027 due to my pension. Half a year Social Security, both of us working the first half of the year. So in 2027, we would draw 100 to 125 from the brokerage account to cover expenses, travel, and taxes. In 2028-29, we would withdraw $200,000 annually for expenses and taxes for the conversions.” All right. I, we don’t need that much detail.

Al: It does get… Oh, it keeps going.

Joe: This engineer is engineering them, I guarantee.

Al: Yep.

Joe: All right. “Another option…” Like, no one understands a word I’m saying. They’re dra- You have to draw this out, and you need a diagram.

Andi: You need a spreadsheet.

Joe: You definitely need a spreadsheet. Yeah. Yep. And he just- And we’re going- talking about your spreadsheet,

Al: Yeah, on, on… With any question.

Joe: That’s why there’s things called Excel, right? Versus Word.

Al: Or Retirement, Income Program- to help you with this …

Joe: another option is to delay my Social Security to age 70.” He’s like, “Man, what are you talking about? I’m following perfectly.”

Al: Yeah, because it’s your stuff. let’s see.

Jow: “Another option is also to delay my Social Security to age 70 to increase our longevity insurance and pull $125,000 in 2027 and the entire 250 from the brokerage account in 2028, 2029. Okay, this would allow us to convert 100 in 2027 and then convert 20…” Okay, hold on. Let me just get to the brass tacks here- … because we don’t need to know what, he wants to do. I need to understand-

Andi: She. This is Laverne and Shirley.

Joe: Or she. She. Laverne and Shirley.

Al: Well, and the questions are up, right up front on page one, actually.

Joe: All right. So Laverne and Shirley, they have $4.4 million. They wanna spend $250,000 a year. Is that an accurate assumption, or no? $150,000 a year- Yeah, no, what do they wanna spend per year?

Al: No, 250 to 280.

Joe: All right. Yeah. “We need about 250 to, cover expenses, travel, and taxes.” I don’t care about the taxes on the conversion. So what is the number?

Al: Probably 250, but a- anyway, let me start. Let me give some context and then you can w- take it from there. So in a case like this, what we do is we look at when are you gonna retire. One year from now, so this is a pretty easy calculation. You got 4.3 million now, maybe 4.4. We go one year, you add 70,000. I just picked that as savings.

6% it, you end up with 4.6 million. Then you compare your spending. I took the top end. I took 280,000. If you don’t take Social Security, you got about 9,000 of fixed income. You end up with about $270,000 shortfall. You divide that into the 4.6 million, you get a distribution rate of, 5.9%, which on its own sounds a little bit high, but when you consider this is probably only two to three years before you hit age 70, by the time you throw in your Social Security, income to the same calculation, you end up with a 3% distribution rate, which is great. So the first question is, this realistic? And the answer is yes, Joe.

Joe: So all right, putting this all together simply- … is they are how old today?

Al: They are 65 and 66. They wanna retire, when they’re-

Joe: At 67.

Al: Yeah. Yep.

Joe: All right. And, then did you run Social Security at 67 or 70?

Al: I just ran it at 70.

Joe: All right, so Social Security at age 70-

Al: Yeah is 65,000 and 63,000. So if, basically something like this, you know, just y- kind of… unless you have financial, software, y- you can’t run all these scenarios just on the, on back of the envelope. So I, just did Social Security at 70, and with and without, and it comes out just fine.

Joe: Okay, so you got $128,000 of Social Security benefits.

Al: Yep, and another, call it 9 grand or- Yeah … 10. So- So-

Joe: But when- You got 135,000.

Al: Yeah, exactly.

Joe: And you wanna spend 250.

Al: Yeah. I had, I put in 280, the higher number. Doesn’t d- doesn’t matter.

Joe: Whatever. All right, so l- let’s say they need $120,000 from the portfolio.

Are you good with that?  120,000 into 4.4 million.  Okay, it’s 3%.

Al: Yeah, and that’s what I got with my numbers.

Joe: All right, so they’re 65. Yeah. Can they retire at 67? Can they retire now? Yeah, you just gotta bridge the gap to Social Security. Does it make sense to push the thing to Social Security to age 70? I would push it to, to age 70.

Al: Well, at least for one of them.

Joe: But, yeah. ‘Cause you get more room in the bracket.

Al: True, for Roth conversions.

Joe: So y- I would think you both push it out to age 70 probably makes sense. Splitting hairs here, but let’s say y- that’s gonna reduce the overall taxable income.

Al: Yeah.

Joe: and then you could do conversions, but don’t… I, would, continue to save into a Roth. If you have the Roth plan-

Al: pull it out of the Roth later. don’t say, “I’m gonna avoid the Roth and I’m gonna use a brokerage account to bridge the gap,” because you’re, you already qualify for tax-free distributions-

Joe: out of the Roth.

Al: Right.

Joe: So it’s, an after-tax contribution to go in a Roth account of $30,000, in the 401(k) plan that will forever grow tax-free, or an after-tax contribution into a brokerage account that’s gonna be subject to capital gains tax. If all else is equal, you always go tax-free.

Al: Yeah.

Joe: Don’t worry about it. It’s in the shell of a Roth plan, and you wanna bridge the gap and not touch the Roth. Who cares? Don’t think of it that way. If you have the ability to put $30,000 into a Roth versus brokerage, and you’re over the age of 59 and a half and you qualify for the tax-free withdrawals- I would go Roth 100% of the time.

Al: yeah, 100%. and it’s, Joe, it’s the same tax. Whether you, whether it’s a Roth or whether it’s a brokerage account, why not put it in the Roth? ‘Cause y- they’re old enough, they can withdraw it immediately, assuming they’ve had the Roth for five years, which I bet they have.

Joe: Yep. All right, do you wanna do conversions to the top of the 22 or the top of the 24? All right, well let’s say if you retire tomorrow, you push your Social Security out to age 67, I would do a little bit of both. You could take money from the retirement account. Let’s say I would take distributions from the retirement account.

Al: Yeah.

Joe: You could take to live off of.

Al: Right.

Joe: So you need $280,000. Maybe you pull $130,000 from the retirement account to live off of and pay your 12% tax on that distribution. Then you have another h- $100,000 from your brokerage account just to cover the expenses there, and you keep your taxes somewhat low. Or you take money, you, ’cause you’re bleeding out the retirement account to reduce your RMDs later in life.

Al: Yeah.

Joe: Or you take the distribution and live off of some, and then do a conversion to the top of the 22. You don’t necessarily have to do a full conversion. Your goal is to l- like try to even out or reduce the overall taxes long-term throughout your life, and then to the next generation. You would wanna run some numbers there, but it’s not like, “Here, I’m gonna burn down all my non-qualified assets- and do conversions to the top of the 24, and pay all this tax and conversion.” It, I think it’s a combination of all three. You live off of the retirement account, you do the conversion of the retirement account, and then you use a brokerage account to live off of and pay a little tax.

Al: And I agree with you, and, I did run the numbers. So if- Oh, you did? … if you look at what future taxable income might be, without COLA, just, it’s just current numbers, right? Yep. So we got fixed income. because of the Social Security, Joe, it’s not all taxable. So I got 120 grand of s- taxable Social Security and pensions.

I’ve got a RMD, let’s just say of about 110,000 required minimum distribution. I know there’s, that’s a few years out, but just to give you an idea. And dividends, there’ll be some dividends ’cause they got a million dollars in taxable. I, you know, I don’t know how much, 10,000-ish, ’cause some of it’s annuity.

You know, I, or, you know, I don’t know if they’re receiving payments from annuity, but actually I did 20 just to be on the safe side. So that’s 250,000 of income minus standard deduction, 220. The top of the 22% bracket is 211, so they just got into the 24. So I don’t think they have to do a lot of conversions in the 24. If at all, maybe go to the top of the 22 to keep yourself in the 22% bracket in the future. Maybe that would be the way to go.

Joe: They just slipped into the 24% bracket.

Al: Just slipped into it.

Joe: Yeah. So it’s not like you have to do huge conversions to keep you in a 22. You just have to do smaller, you know, equal conversions over that time period-

Al: It gets you out of the 24

Joe: just to get you out of the 24.

Al: Exactly. That, I think that’s what makes sense.

Joe: Yeah.

Al: Now, of course, tax rates will change and everything changes, right? Yeah. But as we know it, as of today, that would be probably the right answer.

Joe: all right, let’s talk about these annuities for a second here.

Al: Yeah.

Joe: All right.

“Any spitball on how to best use the annuities? Laverne, 150 right now, was a post-tax deferred comp benefit. And mine, $100,000, was from what? $5,000? I let a Fidelity rep talk me into buying after I fully funded my 403(b) at age 30.” “I realize that the spending from my, our assets before age 70 will exceed 4% a year with this plan, but I believe we will make it up once, once we start bringing in Social Security in.

Okay, travel days, thanks for the spitball.” Yeah, I think they’re in good shape. I don’t know what the question is about the annuities. All right, so Laverne has got $150,000 in an annuity. He’s got $100,000. He had a tax-deferred, comp plan that they rolled into the annuity. He had a 403(b) that was in a, tax-sheltered annuity. So it sounds like both of those are still qualified plans.

Al: yeah. Sounds like it.

Joe: So you would just kinda look at those as your IRAs. You can get out of the annuities- and put ’em in mutual funds or- Yeah … stocks or bonds or ETFs.

Al: Yeah.

Joe: You don’t necessarily have to annuitize if they’re just variable annuities or fixed annuities. I’m not sure what type of annuities there are.

Al: And I guess they’ve been held for a long time, so probably their, the surrender period- 250, yeah … is over. So yeah, it’s kinda, to me, that’s personal choice. I mean, we don’t know anything about the contract, whether it’s a good contract or not, but yeah, that’s… they’re fine with or without it, so whatever they want.

Joe: If it’s inside a retirement account, right? You don’t have to keep it in an annuity, right?

Al: Correct. Yeah.

Joe: If it’s in a non-qualified annuity, so it was in a 403(b) , it wasn’t in a deferred comp plan that wasn’t a, part of a retirement account.

You took after-tax dollars, $100,000, you put it into a non-qualified annuity, and that $100,000 is now worth $500,000, right? the issue there is that it’s ordinary income tax on the growth. So in that example, that $400,000 of growth would be taxed at ordinary income rates. So it’s not like you wanna blow onto the annuity, because you would have to pay a bunch of tax.

You would wanna look at the annuity contract. You might wanna annuitize the contract. You might wanna pick something different depending on what your goals are. So there’s a non-qualified annuity, and there’s qualified annuities. If I had a 403(b) back in the day, it was a tax-sheltered annuity, a TSA.

If I was a teacher, if I worked in the public school systems, now that’s what my retirement account was. It was a TSA. So everyone had tax-sheltered annuities. That’s what your plan was. And then as things evolved, the 403(b) had more options. So the 403(b) plan, you roll into an IRA. Let’s say you bought an annuity with that.

As long as it’s in an IRA, you can then say, “You know what? Get rid of this annuity and I’m gonna buy something different. I’m gonna buy stocks, bonds, or, mutual funds,” because it stays inside of the shell of the retirement account. There is no tax.

Al: So it’s not a taxable event in-

Joe: It’s not, yeah … inside of a retirement account, yeah. It’s not a taxable event because you’re just kind of transferring w- the 403(b) to an IRA, and when the, th- that IRA, I’m gonna choose to purchase something different. It’s like selling a stock and buying a mutual fund, or, or- selling a mutual fund and buying an ETF.

Al: Yeah, inside a retirement account.

Joe: Inside of a retirement account.

Al: Yeah. Yep.

Joe: the thing that you have to look out for is that, all right, well, are there surrender charges? What kinda contract do I have? Is it like, all right, did I buy an immediate annuity that’s gonna give me a certain income stream where I w- where potentially I’m stuck with that contract? I don’t know. You didn’t give us enough information. But there is a way, if you don’t necessarily like the investment, you could potentially get out of it.

Al: Yep. I think that’s right.

Joe: Think that was another one of those side comments that just gobsmacked him- or her.

Andi: Are you worrying because your plan is bad, or are you sleepless, wondering if your plan is any good? This week on the YMYW TV show, Joe and Big Al break down the entire retirement course from tee to green, with the help of PGA pro Chris Riley. From saving and investing to the hazards that derail people just before and after retirement, like longevity, inflation, taxes, and sequence of return risk, Joe and Big Al show you how to manage all of that, and sink the putt with a Social Security strategy, good asset location, and sustainable retirement income. But how do you put your own numbers to the test? That’s where our Financial Blueprint comes in. It’s a free, self-guided, and personalized analysis of your actual situation. What you’re doing well now, how likely you are to reach your goals, and what to do about it now to get you where you want to be in retirement. Clarity like that might actually let you sleep at night!

Target Date Funds and a Sad Brokerage: Good Enough? Can’t See Ever Paying an Advisor (Bess & George, MI)

Joe: Bess and George. What a-

Andi: Okay. The- And- Bess and George say that they are from Pure Financial, Michigan. And so I looked that up because I wasn’t sure whether or not there was actually a town called Pure, and as it turns out, no, that’s actually an advertising campaign, Pure Michigan.

Al: Oh, okay.

Andi: They’ve been apparently been using that for years. And Bess and George, the names actually come from the Nancy Drew Mystery stories, all of the books of which I had when I was a kid. And Bess and George are actually two female cousins who were Nancy Drew’s best friends, who helped her on solving of mysteries.

Joe: Was Nancy Drew a spinoff of something else?

Andi: Hardy Boys.

Joe: Hardy Boys. Yeah. That’s-

Al: Yeah. Yeah. That’s the one you and I would know.

Andi: They had to make a girl version to-

Joe: Yes

Andi: … you know, to separate it out from the boy version.

Joe: Got it. The Hardy Boys. Yeah. Oh, man. All right. “Hi, hi, youse guys.”

Andi: Youse guys.

Joe: Youse guys. “Hi, youse guys. Andi, Joe, and Big Al, longtime listener, first time emailer looking for your retirement spitball. George retired in 2024 at 68, yo, and I retired in 2025, also at 68, yo.”

Al: Damn. ”

Joe: We have been cash flowing our living expenses for the last two years. RIP brokerage.”

Al: Guess they spent their brokerage account down.

Joe: Yeah. They got a little nervous.

Al: Yep.

Joe: so I’m, g- they, they’re living off the brokerage account and paying for Roth conversions over the last two years, I’m guessing.

Al: Yeah.

Joe: “But starting in April 2026, we both applied for Social Security- Full year retirement benefits will be $76,000 combined. Our combined yearly budget is $66,000, which includes every single recurring annual expense, from iCloud storage to medical expenses to separate monthly fun money, AKA the F-it funds. All right.

Andi: And Beth and George did not actually say F-it. They actually did say (bleep) it, and don’t worry, I will bleep that afterwards.

Joe: Oh. F-it.

Al: Wow, Andi, you go.

Joe: I love it. Bleep-it funds. Fluff-it. It sounded like you said fluff-it funds.

Andi: Oh, good.

Al: Yeah, that works.

Joe: We’ve rolled all of our 401(k) and 403(b) dollars to our traditional IRA and Roth IRAs. Here’s our combined saving totals. Traditional 550, Roth 550, inherited IRAs, AKA vacation, gifts, as well as upgrading our camping, hiking, hunting gear, 90 grand. Poor, little beat-up, and very sad little brokerage account, 40 grand. Cash, 25,000. What we’ve learned over the last two years- … of practicing retirement is that we can thrive around $78,000, $80,000 a year.

I see at this point we’re covered by Social Security and our vacation allocations. Here’s my two questions. Both IRA and Roth are completely invested in our total target retirement funds. The IRA is at 2030, the Roth is at 2045. Once upon a time, I had all of our investments in three fund strategies. Rebalance them, watch the markets, yada, But due to a hard scramble childhood, I experienced some moderately interesting money anxiety, and I found myself sleepless and micromanaging and panicky. Not good.

Al: And don’t wanna.

Joe: Don’t wanna. Well, I wonder what your sleep score was.

Al: Yeah. Probably like ours last night.

Joe: Pretty, pretty low. Pretty low. “Our target investment actually has four funds, US- USA total stock, USA total bond, international stock, international bond. I’m thinking this is good enough. Honestly, when I roll future projections through RMD Land, we’ll be at $96,000, which sounds good to go, and frankly, I can’t envision any world where I part with a 1% management fee. Sorry.” All right.

Al: Yeah, that’s fine. For- You always state, you always say everyone needs a financial plan, but not everyone needs a financial advisor.

Joe: Yeah, I think she definitely needs a financial advisor.

Andi: Bess and George, yes.

Joe: Bess and George, whoever’s writing this. “For the future assisted long-term memory care swap, we’ll sell the house and sell funds with the Roth. If anything’s left over, our three kids, who are right now are making more money,

Al: Singley …

Joe: singley than we’ve ever had as a couple. We enjoy a complete unexpected inheritance, a potential F-it kiddie fund.”

Al: There we go, yeah.

Joe: All right. What- It’d be fantastic.

Al: What’s that stand for, Andi?

Andi: (bleep) it.

Al: Yeah. Okay. Just to be clear.

Joe: Yeah. “Every November, December, we set up a budget and figure out if we have an overage and due to a Roth conversion tax bracket of 12. Moving forward, I’m wondering if instead of Roth, I’m trying to fix our sad brokerage fund, or do I say, well, EFIT until brokerage remains sad.

Still overages into cash, brokerage, or Roth conversions. At this point, our forthcoming RMDs in 2029 and 2030 are probably cream for the cat. What do you think? George drinks beer, and I drink screw-top wine because I once spent $25 on a bottle of wine which tasted like the same thing from the,

Andi: Meijer.

Joe: Meyer down the street at $5.99.”

Al: Yeah. Sometimes that’s true. Not always.

Joe: We, a $25 bottle of wine tasted like a s- A $6 I’ve never heard of a $6 bottle of wine.

Al: They’re hard to find.

Andi: Oh, dude, there’s pl-

Joe: Let alone a $25 bottle of wine.

Andi: There’s plenty. Go to Trader Joe’s, you can get a $6 bottle of wine.

Joe: Is that like Two Buck Chuck?

Al: Yeah, some are in a box.

Andi: it used to be, yes.

Joe: Is Two Buck Chuck not-

Andi: Two Buck Chuck has gone up in price now.

Joe: Yeah. It’s no longer two bucks?

Al: But your key is the s-

Andi: Yep.

Joe: Got it. “We’ve just downsized to one car, a 2016 Honda Civic, because our fantastic 2000 Honda Odyssey squished less than 400,000 miles.” Just got scraped for $270. Yeah, so I’m brag-

Andi: Scrapped.

Joe: Oh, scrapped. Scrap, scrape. Same. It’s 270 bucks.

Andi: Well, scraped sounds like the Honda Odyssey got a big scratch along the side of it.

Joe: Oh.

Andi: She got 270 bucks for scrapping it.

Al: Yeah. Okay.

Joe: She’s bragging.

Al: Or they scraped it off the road.

Andi: Or just bragging.

Joe: The Honda had electronic windows and a CD and cassette player and upgraded upholstery.

Al: Okay.

Joe: “We have two cats, Pickles and Scratchy. Don’t ask. Many thanks for everything you do. Bess and George.” Andi, we got you. “P.S. Andi, sorry about the swears. You know what to do.”

Andi: Yep, I’ll take care of it.

Al: Yeah, she explained it to us.

Joe: All right. And there’s-

Al: And we got a couple questions, I think. One is the, you like the investments, the target funds?

Joe: No, I don’t like target date funds.

Al: Why not? I mean, I know the answer, but for our listeners.

Joe: I don’t know. I mean, I don’t- I’m too tired to get into it. My SleepScore’s not high enough to get into that idea. It’s not, ideal. Pros and cons- Yeah … of target-date funds. Well, I think if you’re accumulating, I don’t know, they got a million dollars. Why are they in target-date funds? And if you’re gonna use a target-date fund, use one fund. Don’t use, like, two or three funds.

I like w- what she’s doing. I mean, she’s overly complicating things, and then she’s freaking herself out, or he’s freaking himself out, and he can’t sleep at night- because he doesn’t wanna pay a 1% fee because he doesn’t see the value, but he would rather not sleep and have a redundant,

Al: Right

Joe: investment experience- that’s probably underperforming anything that,

Al: Well,

Joe: and- … an advisor probably- could put together for him …

Al: especially in this case, as they get closer to, in this case, 2030. See what, happens with a target fund is you pick the date you’re gonna retire, and if it’s several years out, it’s gonna be more stocks, more equities, more growth. And as you get closer to retirement, in this case, 2030, then it’s gonna be a lot safer, a lot more fixed income, so your rate of return is gonna go down.

Joe: And they don’t need the money.

Al: they don’t need the money. So I-

Joe: It’s, their Social Security is covering way more than what they’re spending.

Al: Yeah, so-

Joe: Because she drinks, or he drinks, or who- Bess and George drink $5.99 wine.

Al: Yeah. Now I will say, there’s one reason maybe you would want a target fund, in my opinion, and that is that the target funds get rebalanced automatically. You don’t even have to worry about it. So wouldn’t you say that could be an advantage?

Joe: No. No.

Al: Yes, it is.

Andi: So are you suggesting that Bess and George should change all of it to a globally diversified low-cost portfolio-

Joe: It doesn’t matter.

Andi: That is not in target funds?

Joe: I think the- All right. So the point is, that all right, I can’t envision a world where I part with a 1% management fee. So he thinks it’s a fee or a line item expense. So you’re gonna pay an advisor a 1% fee, and then that’s an expense. I’m not gonna guarantee you, but if, you have a competent advisor that’s credentialed- that has a little bit of experience of working with people in your situation-

Al: You’re going to have more wealth. You’re not gonna have less wealth. It’s not gonna look, all right, here’s my account balance at the end of the year. Let’s say if you did it yourself, you saved your 1%, and you work with a really good advisor, I would imagine you’re going to have more wealth, more organized.

Joe: It’s going to have more tax advantage to it. You’re, and you’ll be able to sleep at night. I don’t know.

Al: Well, maybe- Maybe- you don’t, ’cause you’re paying 1%.

Joe: Yeah. Oh, my God, I- I’m freaking out about paying 1% to big Al. Versus thinking about, I don’t know.

Al: Yeah.

Joe: But I like what, you know. Use the three funds. He’s got the total US stock market, you got the total international stock market, and then you got the total bond index fund. I would much rather have him do that than target date funds.

Al: Yeah, we, ’cause you have more control. In fact, as far as rebalancing, you could forget about it. Maybe once a year you take a look at them, make a couple trades, and you’re done. Yeah, see, the reason why that’s better is because you have control, so it, it doesn’t have to go down a really safe income in 2030 or 2045. You have control whether you want more safety or being more aggressive, depending upon your circumstances and goal at that time. that’s the real advantage.

Joe: So here’s, another thing, Al, is that, all right, they have a million dollars, right? Roughly a million dollars liquid assets?

Al: Yeah. Okay. They got, yeah, 1.2.

Joe: All right, 2008 was 20 years ago. Okay? How much do you think they had in 2008?

Al: I don’t know. What are you thinking? tell me what you’re thinking.

Joe: It’s something a lot less than a million dollars- because they probably accumulated the million dollars over the last 20 years.

Al: Yeah.

Joe: The market has been fantastic over the last 20 years.

Al: Yeah,

Joe: Huge bull run in the overall markets. Double-digit returns over the last- Yeah … 20 years.

Al: So when you said that, I was thinking pre-crash, so I, yeah, that’s why I was trying to figure out where you were going with it, but, you’re right. Since 2008, market has done rather well.

Joe: Quite well. And so they had the ride of a very good market. Now they have a million dollars, and they, Bess and George are freaking out about their target date funds or whatever that they’re in, right? And, I get it, right?

You get some weird money anxiety. A lot of people have it. And you worry about the dollars that you have accumulated your entire life, and the last thing you wanna do is make a mistake. But I’m not gonna say we’re gonna have another 2008, but w- we haven’t had a, like, a, bear market for-

Al: Yeah quite some time. Right.

Joe: And now that you have the most money that you probably have ever had, and that market drops 20%, you lose $200,000. Two, $300,000. It drops 30%. What do you think they’re gonna do?

Al: Well-

Joe: Do you think they’ll abandon their strategy? Do you think they’ll go into cash?

Al: I don’t think so.

Joe: You don’t think so. You think they’ll stay the course?

Al: Well,

Joe: There’s no way.

Al: Yeah, they will because-

Joe: They’ve experienced $300,000 loss before in their lives, and they’re freaking out about a little- I- … dip in the overall market?

Al: But I’m assuming that during the Great Recession they stayed the course ’cause they-

Joe: They, they didn’t have any money

Al: Could be.

Joe: You think they had a million dollars 20 years ago and they only have a million dollars today?

Al: No, I didn’t say that.

Joe: Well, how much money do you think they had hypothetically 20 years ago? They probably were just starting to save.

Al: Yeah, 20 years, yeah, 20 years ago, let’s say, yeah, okay, I’ll say 250.

Joe: Okay. Yeah. So do you think they stayed the course then?

Al: I do.

Joe: You’re out of your mind. There’s no way.

Al: Because it’s all in retirement. They didn’t even pay any attention to it. Joe. It’s all Roth and deferred.

Joe: Bess and George, I guarantee were watching their money. They’re watching every penny of their money.

Al: That could be. Well, I’ve got a, actually, a real point.

Joe: I have a real point- … but I don’t think you’re effing listening to me.

Al: I’m not, ’cause I wanna make a better point.

Joe: I don’t think your point is gonna be even close to better than mine.

Andi: Wow. Getting spicy.

Al: Oh, this is good.

Andi: Can we hear-

Joe: This is what we got

Andi: Al’s, can we hear Al’s point, just for educational purposes?

Al: Yeah. just for fun.

Joe: Sure. I won’t listen like he does. But then it, then he sounds like a complete ass. Go for it.

Al: Well, here’s my point. Here’s another reason not to use a target fund.

Joe: Okay.

Al: Because they have about the same amount, Joe, in a deferred account versus a Roth.

Joe: Okay.

Al: You know, roughly, right?

Joe: So you’re going asset location.

Al: Asset location. You got me?

Joe: Yep.

Al: So I would put my safe money, my bonds in the deferred IRA, 401(k), and I’d put my more aggressive money in the Roth. That way, over time your Roth will grow more. If you have two target date funds in both, you don’t get that ability to sort of pick and choose what goes where. Okay, I will go back to you and listen. What do you got?

Joe: No, I, my point was, with their 1% management fee, it’s like, oh, my God, I could never pay that.

Al: Yeah.

Joe: Part of the one percent management fee is to help people stay in their seats.

Al: I, 100%. In fact, that’s usually the biggest part.

Joe: Walk ’em off the ledge

Al: Correct. Yeah. All right And there’s tax savings, there’s cash flow spending, peace of mind. But yeah, kinda walking ’em off the ledge is one of the biggest things an advisor can do,

Joe: I agree I think Jess and Bess and George, Bus- whatever.

Andi: Did you say Jess and Borge?

Joe: I don’t know. I told you it was my sleep starved.

Al: yeah, close enough 50, 50/2

Andi: It shows.

Joe: Yeah. all right, that’s it for us. That’s all we got. Very good.

Andi: Thanks again. Thank you for sticking it out, Al Joe

Joe: Oh, yeah All right. Pleasure, that was fun. All right, we’ll see you next time. The show’s called Your Money, Your Wealth®.

Outro: Next Week on the YMYW Podcast

Andi: Walter and Skyler, Kickass Seabass, and Steph and Ayesha, I’m working on getting your Roth and FIRE questions answered next week on YMYW Podcast 585, along with Michael’s question about taking out a margin loan to invest. Subscribe to the YMYW newsletter and make sure you’re following us in your favorite podcast app so you don’t miss a thing. Links are in the episode description.

Your Money, Your Wealth is presented by Pure Financial Advisors. And while Joe and Big Al are great, you need more than a spitball if when you’re making financial decisions about the rest of your life. When you meet with the experienced professionals on Joe and Big Al’s team at Pure, you get a much more complete analysis of your entire financial picture, and there is no cost, and no obligation. Click or tap the free financial assessment link in the episode description or call 888-994-6257 to book yours. Meet in person at any of our locations around the country, or online, right from your couch. No matter where you are, the Pure team will work with you and create a detailed plan tailored to meet your needs and goals in retirement.

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

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