Wade pfau

In 2013, Investment News named Wade Pfau one of the “20 people expected to shape the financial advisory industry.” Since then, IN has named him to their lists of industry leaders every year, most recently on their list of “Icons & Innovators” of the financial industry in 2016. He has been recognized with numerous other honors, including sharing the [...]


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 5, 2017

Dr. Wade Pfau reveals new research on the reverse mortgage as an insurance policy and investing tool and discusses the 4% rule for withdrawing retirement income from your portfolio. Plus, Joe and Al have 10 tips to boost retirement savings, the pros and cons of rolling your 401(k) into an IRA, long-term care tax strategies, the latest on the Department of Labor Fiduciary Rule, Prince’s $250 million estate planning mistake, and who is better at investing, men or women?

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Show Notes

  • Men Vs Women: Who Is Better At Investing? (1:00) 
  • Wade Pfau – Ph.D., CFA, Professor of Retirement Income at the American College: Breaking down the 4% Rule (11:10)
  • Wade Pfau – Ph.D., CFA, Professor of Retirement Income at the American College: How To Use Reverse Mortgages To Secure Your Retirement (20:57) 
  • Big Al’s List: 10 Tips to Boost Your Retirement Savings (32:37)
  • Tax Strategies When Paying For Long Term Care (43:02)
  • Learning From Prince’s $250 Million Mistake (51:08)
  • Will The Department Of Labor Fiduciary Rule Change? (56:50)
  • To Roll or Not to Roll Your 401(k) Into An IRA (1:01:05)


“Really, a lot has changed. Public policies changed, and it’s worth giving a second look at the idea that reverse mortgages shouldn’t just be viewed as a last resort option when all else has failed. They should really be thought of strategically as part of an overall retirement income plan.” – Dr. Wade Pfau

That’s Dr. Wade Pfau, CFA, Professor of Retirement Income at The American College. Today on Your Money, Your Wealth, he reveals new research on the reverse mortgage as an insurance policy and a versatile investing tool. Dr. Pfau also breaks down the realities of the 4% rule for withdrawing income from your portfolio during retirement. As if that wasn’t enough, Joe and Big Al have 10 tips to boost your retirement savings, the pros and cons of rolling your 401(k) into an IRA, tax strategies to consider when paying for long-term care, the latest on the Department of Labor Fiduciary Rule, the age-old men vs women debate: who is better at investing, and Prince’s $250 million estate planning mistake. Now, here are Joe Anderson, CFP and Big Al Clopine, CPA.


1:00 – Men Vs Women: Who Is Better At Investing?

JA: Al and I are discussing who is better at investing, men or women. I actually had some backing here.

AC: So this is Fidelity that just did a study, and this was based on an analysis of more than eight million clients. That’s a pretty good sample size. Women, men, which are better investors.

JA: Fidelity. Got 8 million people to answer a survey?

AC: I don’t know if it’s a survey or not, I think they just looked at returns, and they knew whether someone was male or female.

JA: How about Kim? Pat? Lynn? You know, there’s a client we have – Dale. Female.

AC: Yeah. True.

JA: Yeah. I’ve never seen a female Dale.

AC: When you fill out an application for an account are used to put your sex? Male or female?

JA: No. Well, I don’t know.

AC: Yeah I don’t either. I haven’t really paid attention.

JA: I don’t know if I’ve ever checked the box.

AC: We should ask our operations department whether you’re supposed to put that. I’m guessing no, but I don’t know how they got this information. But nevertheless, who do you think men or women are better investors?

JA: Well I know the answer. It’s women.

AC: It is women, you’re right about that. And here’s what they found. And there wasn’t that much difference. So men, on average, save 8.6% of their salary annually. So they’re looking at 401(k) plans.

JA: OK. Just 401(k) plan participants.

AC: You know what, because fidelity does a lot of 401(k) plans and they probably have a census, and they probably know whether they’re male or female, so that’s probably how they got the information. So, this isn’t the average. This is of those that actually are in the 401(k). There are people that don’t participate. So, of those that participate in the 401(k) plan, of these 8 million people, let’s say half men, half women, whatever, I don’t know what the breakdown is. Men save 8.6% of their salary annually, and women save 9%. So women saved just a little bit more than men as a percentage. And men, on average, earn a 6% rate of return and women, 6.4% rate of return. So it’s not hugely different, but it is different. And so Fidelity came up with some examples, like for example, let’s say you started at age 22. And that’s a tall order. And you’re making $50,000. But this is the sample. And then by 30, you’re making $75,000, by 40 you’re making $100,000, by 50 you’re making $125,000. So you just use these percentages.

JA: So the men are saving 8, and women are saving 9, and they’re getting .4% higher.

AC: Yeah,  call it eight and a half, we’ll round it for men, 9% saving for women. So let’s say, by the time they retire at age 67. So they’re using for the retirement age for Social Security. Women would have $276,000 more in their retirement account, had they started at age 22, Given these assumptions. If they started at age 30, with a $75,000 salary, they would have had a $195,000 more. If they start at age 40 with $100,000 salary, they would have had almost $100,000 more than men. And at age 50, they would have had about $35,000 more. Given those assumptions, but there is a flaw in this analysis because women’s portfolios are lower than men’s. So, any idea why that would be?

JA: They’re more conservative.

AC: They are more conservative, but here they’re making the higher rate of return. 6.4%.

JA: Oh, no because of the lower wage.

AC: Yeah, that’s the problem.There’s still not equality on wages. And so that’s why women’s portfolios are lower, yet they’re saving a higher percentage, and they’re earning a higher rate of return. And people have speculated why that is, and Fidelity has an idea, because they can look at the behavior of the investors, and they know that men tend to buy and sell, buy and sell, buy and sell, get in and out, pick this stock, sell that stock. Women invest for the long term.

JA: I would imagine, if you would take a look at the asset allocation of men versus women in that study, which I don’t think they do, they just take a look at the rate of return. I would say men are taking on a lot more risk, and they are getting a lower rate of return.

AC: Yeah, I would be almost willing to bet a year’s pay on that.

JA: Right. And that’s a big paycheck.  (laughs)

AC: (laughs) Yes, the big wallet would suffer from that.

JA: So if women would take on the same amount of risk as men, but had the discipline as they do, as good investors as they are, they would have a lot more money.

AC: Exactly. So the men are probably much more allocated in the stock market, but they’re getting in and out. And we know, from emotional investing, that your emotions sort of play tricks on you. That you have a tendency to buy and sell at the wrong times because you get excited about the market, when? When it’s going up when it’s already high when everyone’s talking about it. You’re buying, so you’re buying high, and you get nervous and fearful about the market when it goes down. That’s natural emotions. And you sell. And so you’re buying high and selling low, and it’s not a great recipe for success. And it does say, although it doesn’t quantify, it says that women across the board play it safer than men. It doesn’t quantify it, but we read other studies that say the same thing, that women tend to invest more conservatively. Interestingly enough though, investing more conservatively than men, they still have a higher rate of return, because they’re staying invested. And it’s not a huge difference in the rate of return. But I would agree with you Joe if women would be a little bit more aggressive. I’m not saying a lot more aggressive, but maybe a little bit less conservative, having a little bit more stock allocation for the long term, staying invested, than their percentage rate or return over the long term would be actually significantly higher than men, I would say.

JA: Or you can look at it like this. What we have found, with the academic research, is that if they bought the right categories of stock within their stock allocation. So taking the right types of risks. If you look at most portfolios, they’ll probably be, in a stock or equity component, it’s large company U.S. stock.

AC: Yeah, which is what most people would do, like maybe an S&P 500 fund. Which is a great fund, Warren Buffett says so. And I would tend to agree with that.

JA: Well yeah, but that’s just 500 stocks and those are all large companies. And those are safer companies, and they have, by definition, a lower expected return because they’re safer. But if they had a little bit more allocation, let’s say if they did play the safer route, of saying, I want 60% bonds, 40% stocks, where maybe men are 70% stocks and 30% bonds. So you can have more bonds in your portfolio, or safer investments in your portfolio, and a smaller component of stocks. But then if you diversify those stocks in such a way to take advantage of the risk premiums, the higher expected return asset classes, such as value companies, lower-priced companies, smaller companies, emerging markets. And just being a little more sophisticated in that strategy, I think that would give them even a bigger boost, potentially.

AC: Yeah. I think that’s a really good point, Joe, because we find that, obviously, to stay ahead of inflation, to grow your portfolio, you got to take some risk in your portfolio. You got to have some stock allocation. But we find that most people’s risks, it’s all over the place. Haphazard is probably a good word. And you can be a lot more intelligent.

JA: Versus having a well-defined strategy. What is the appropriate risk that you should take?

AC: You’re right. Certain asset classes over the long-term outperform other asset classes, because, simply because they’re riskier. So small companies and value companies, as you mentioned, are two of those classes that outperform large companies and growth companies – they have in the past. And that’s not to say it happens every year, you can go a five-year period and you don’t see it. But over the long term, and generally over five years and 10 years, you will notice. It’s like 90th percentile that those kinds of asset classes beat the S&P 500. So yeah, it’s just being a little bit smarter on putting these portfolios together, and it’s all about, not only your rate of return, but it’s mitigating your risk – it’s two things in one, and that gets especially important when you’re near retirement and you start drawing the dollars out of your portfolio.

JA: Right. Because let’s say that Alan has a portfolio of 70% stocks, 30% bonds. Well with that much exposure to stocks, that’s a lot riskier portfolio than, let’s say if I have a portfolio with only 40% stocks. He’s got 70, I have 40, but his stock allocation might just, like you said, haphazardly, “I need to take the risk.” But you’re not necessarily sure what type of risk, or where to go to get the return that you need. So let’s say you just go large company. So he is going to receive a lot more volatility in the entire portfolio because he has a lot more stock in his portfolio. But if I look at my portfolio, we could have the same expected rate of return. But I only have 40% of my allocation to stocks, versus 70. And I can still achieve the goal. But then it’s just doing it a little bit more sophisticated so congratulations to all the women out there. Great job, keep up the good work.


Can your portfolio stand up to a stress test? Find out! Visit YourMoneyYourWealth.com and sign up for free financial assessment with a Certified Financial Planner who will stress test your portfolio. Are you on track for retirement? How much money will you need in retirement? How much income can you get from your portfolio? What Social Security strategies are available to you? Are your investments aligned with your goals? Stress test your portfolio: sign up for a free two-meeting assessment with a Certified Financial Planner at YourMoneyYourWealth.com


11:10 – Wade Pfau – Ph.D., CFA, Professor of Retirement Income at the American College: Breaking down the 4% Rule


JA: Alan, I think we have the smartest man in the universe on the telephone right now. I

AC: Think so too. And it’s really going to class up our show, I think. Which is a good thing.

JA: We have Dr. Wade Pfau. He’s one of the most brilliant financial minds in our industry and is making quite an impact in some of the research that he’s doing.

AC: Yeah, I think so. In fact, I read every one of his articles, because I know I’m going to get the top information out there.

JA: Dr. Pfau, welcome to the show, my friend.

WP: Thank you and thanks, that’s the nicest introduction I’ve heard. Thank you very much.

AC: We worked on that all morning.

JA: Yes. We’ve been practicing it all week. (laughs) So it’s been a few years since you’ve been on the show. Let’s talk a little bit of some of the things that you’re doing. Really diving into looking at creating income in retirement. I think a lot of people get confused that the strategies that they use to build up wealth needs to change once they start taking a look at retirement.

WP: Right. And that’s really been my focus, in terms of retirement income planning really be in a unique field that’s different from traditional wealth management, or the approaches used for accumulating assets. It’s really the combined impacts of longevity risk, not knowing how long someone’s going to live, and then market volatility that gets further amplified, once you transition from adding new savings to your investments to taking distributions from your savings. The combined impact of that longevity risk and the increased market risk, that really makes retirement income into a different type of problem, requiring different kinds of solutions.

JA: Sure. So if the market goes down, the sequence of return risk is pretty major, because if I’m saving, volatile markets are my friend, because then I’m buying the same good stocks at a lower price. But if I have that volatility when I’m taking distributions, that could blow me up.

WP: Right. It’s the opposite effect. Sometimes it’s called reverse dollar cost averaging. Because if you’re trying to fund a spending level, and your portfolio is losing value, you have to sell more shares to meet your spending, rather than when you’re accumulating, you get to buy more shares on the cheap.

JA: People will need to take risk in their portfolio though right? In retirement, because of what you just said? We’re living a heck of a lot longer. A lot of individuals haven’t saved enough, and retirement is going to be, by far, their biggest expense of their life. And so what do they do?

WP: Yes, I do think that stock market investments are still very important for retirement. It’s really kind of the bonds that play a smaller role, in my view, in a retirement income plan. But I think one has to be careful about not getting too carried away with the stock market, and not having the entire lifestyle exposed to the stock market. So I think, in practical terms, it’s really about integrating different approaches, where you have the investment portfolio still, but you’re also looking at more reliable income sources to cover some of the basics. And that’s not necessarily bond mutual funds or bond ETFs, but either holding individual bonds or looking at different types of simple income annuities that provide a lifetime income. Or just really integrating Social Security and any traditional defined benefit pension that someone has into their plan as well. But having at least core retirement expenses covered through something that’s not really reliant upon big returns from the stock market, or the idea that the stock market needs to outperform the bond market because that does happen over the long term. But with the sequence of returns risk in retirement, if it doesn’t happen, if the stock market’s not doing well in the early part of retirement, that can be a big problem. And then even if the stock market does well over the long term, the retiree might be in a position where they don’t get to fully benefit from the stock market performance.

AC: Yeah I know, Wade, when you do retire, I think one of the first questions we’ll get from people is, “how much can I actually spent in retirement?” I know there’s been this 4% rule for a long time, meaning that 4% of your portfolio is a safe withdrawal rate. I know you’ve done a lot of work on this, and what would you say right now would be your thoughts on withdrawal rates?

WP: Well there’s a lot that goes into deciding the withdrawal rate. But the 4% rule was really a simplification, and it has a lot of simplifying assumptions built into it. But if you’re going to follow that type of approach, where you always want to adjust your spending for inflation, my two big concerns right now are that Americans are living longer and longer, especially the higher wealth, higher income Americans, that the assumptions behind the 4% rule, the idea that 30 years is long enough for a retirement plan. You might really need to plan for more than 30 years. And then also, with interest rates being so low, it’s something we haven’t really experienced all that much in U.S. history. There was just a brief time the early 1940s where we saw low-interest rates like we’ve seen in recent years. And when you put the two of those together, longer lifespans, lower interest rates, I think that for someone that really wants that inflation-adjusted spending from their retirement to last for long as they live, that 3% would be a more realistic number than 4%, with the situation we face now.

AC: Yeah, and how does that change when you’re older? Like some people retire at 55, and some at 75.

WP: Well, the 4% rule as it was originally designed, was meant to last for 30 years. And so, if you need to plan for longer than 30 years, then that implies spending less than the 4% rule. If you’re older, if you’re 75 or 80, you may not need to plan for 30 years, maybe something shorter is reasonable, and that would allow for a higher spending rate than the 4% rule.

JA: Wade, I always look at it, and you’re a hell of a lot smarter than I am, but if I’m looking at the 4% rule, I’ve always used that as kind of a target. I mean 3%, whatever percent we want to use, is to look at a target to get people close to how big of a nest egg that they actually need to maintain a certain level of lifestyle that they’re accustomed to. But in real practice, taking a certain percentage fixed percentage, of someone’s portfolio, I think you need to be a little bit more sophisticated of looking at like you were talking about earlier: what are the different cash flows? How much money are you going to get from Social Security? What are your true expenses? Do you have a pension plan? Real estate income? And everything else, and so just creating that income based on their specifics versus, well, I’m going to pull 4% out.

WP: Right. Absolutely. You need to really think about the entire picture and that’s worth some recent research that doesn’t get discussed as much, but that it’s relevant. It’s the idea that the whole concept of the 4% rule is just around spending from your investment portfolio. But if you have other reliable income sources from outside your investments – Social Security and pension and so forth – then your lifestyle is not as exposed to if your portfolio declines in value, you could potentially spend at a higher rate, and enjoy that money, it’s more discretionary in nature for you, because you do have your lifestyle protected in other ways. So there is a lot more to the picture in thinking about building a retirement income plan. It’s not just the question of how much can I spend from my investments, but really, how can I maintain my lifestyle with all the different resources I have available.

JA: You know with your comment about bonds, let’s say if I had a pension and Social Security, would you consider that my bond alternative, and then potentially have more stocks in my liquid portfolio?

WP: Yeah I agree with that sort of analysis, that Social Security and pensions really behave like bonds. They provide an ongoing income, and they’re even more powerful than bonds because they provide that spending power for as long as it’s needed for as long as the person lives. And that helps to protect their lifestyle so that they’re not exposed to, if the stock market loses value, but you have your lifestyle covered through this sort of Social Security pension combination. Then you have the ability to go ahead and weather that stock market volatility, and therefore if you want, it justifies having a more aggressive stock allocation for your investment portfolio. Absolutely.


Quiz Time: What investing tool can act as a line of credit that can help you make Roth conversions, manage your retirement tax brackets, delay taking Social Security, and act as an insurance policy against emergencies? Time’s up! Did you guess “Reverse Mortgage?” Probably not, considering the bad rap they get. Dr. Wade Pfau’s new book, Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement explains how, when used correctly, reverse mortgages can provide an added layer of security for retirees and allow them to enjoy retirement more by gaining liquidity from an illiquid asset. You can get a copy of this groundbreaking book, free! Click on “Special Offer” at YourMoneyYourWealth.com or call 888-99-GOALS, that’s 888-994-6257 for your free copy of Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement, by Dr. Wade Pfau. Click on “Special Offer” at YourMoneyYourWealth.com or call 888-99-GOALS. That’s 888-994-6257, or YourMoneyYourWealth.com


20:57 – Wade Pfau – Ph.D., CFA, Professor of Retirement Income at the American College: How To Use Reverse Mortgages To Secure Your Retirement

JA: Hey welcome back, show’s called Your Money, Your Wealth. Joe Anderson here with Big Al Clopine, talking to Wade Pfau. Hey, I want to switch gears a second. You’ve done a lot of work recently on reverse mortgages. Al and I have been doing this show for more years now than we want to admit.

AC: We’ve lost track. (laughs)

JA: And it’s so boring, Dr. Pfau, this show is just awful. I’m surprised we’re still on the air. (laughs) I would say 10 years ago, we would think a reverse mortgage is a lot like the last resort. That’s, you know, pull the plug, let’s dive into the equity. But some of the research that you’re doing is saying reverse mortgages might make some sense. Can you tell our listeners, and help them out? Basically, what is a reverse mortgage? Some pros and cons of it. And then how do you put them in an overall income strategy?

WP: Right. Well, just some background about that. A reverse mortgage, it’s an income tool that I started looking at about three years ago. But I shared the conventional wisdom about them, which is that they’re a bad idea and there are all kinds of late night commercials about them that just lead to a bad reputation. But a lot’s changed in recent years, and there’s been a lot of research in the Journal of Financial Planning in particular, that the financial advisors use that talks about not using the reverse mortgage as a last resort, but using it as part of a strategic and coordinated retirement plan. The basic idea is that reverse mortgage provides a way to tap into the value of your home to provide the spending power from your home. If you borrow from your home equity, then it goes into the loan balance and then when the individual leaves their home, then the loan becomes due – that is the time that the loan becomes due.

But the power, and what all the research has been focused on, is the idea that if you initiate a reverse mortgage earlier in retirement, you can set it up as a line of credit. And that line of credit actually can grow throughout retirement and that can become a very valuable tool as part of the retirement plan that can be used in a number of different ways. It could be used to pay down any existing mortgage, so you don’t carry that into retirement. It can be used to coordinate with the investment portfolio, that if markets are down, rather than selling your assets at a loss and triggering that sequence of returns risk, you could instead spend money from the reverse mortgage line of credit. It can just provide a source of funds to be able to do other things that really help in the long run with a retirement plan, like doing Social Security, or doing things like Roth conversions, or just managing your taxes in retirement because that’s not taxable income. They are proceeds from a loan. And it can just be set up as a type of insurance policy, that if you run out of money in retirement, or if your home declines in value or you need in-home care as part of the beginning stages of a long-term care issue. That line of credit could be used for that. So, really, a lot has changed. Public policies changed, and it’s worth giving a second look at the idea that reverse mortgages shouldn’t just be viewed as a last resort option when all else has failed. They should really be thought of strategically as part of an overall retirement income plan.

JA: How does the line of credit work? How does it grow?

WP: Yeah that’s the key question to understand why it seems like it’s a magical thing, too good to be true. And the basic idea is that what you’re really doing with a reverse mortgage is, you’re tapping into a principal limit. And that principal limit is equal to the loan balance plus the line of credit. And there can be a couple other little factors, but basically just to think about it simply, loan balance plus a line of credit. And I think everyone can understand why a loan balance would grow. If you borrow, you can expect interest to accumulate on that. But the interesting thing about the reverse mortgage is if you open it, and you’re not borrowing from it, so you don’t have a big loan balance, well it’s the principal limit that’s growing. And instead of it being represented as a loan balance that’s growing, it’s instead represented as a line of credit that’s growing. So I don’t think there was necessarily this idea when reverse mortgages got going, that people would open them and not tap into them. Basically, the idea was that people would open a reverse mortgage and borrow heavily from it, and then it would just be the loan balance that grows. But, if you open the reverse mortgage and you keep a low loan balance, then it’s the line of credit that grows instead. And that’s the basic process for why that happens.

JA: And then you can tap into that line of credit at any time, at any amount?

WP: Yeah, up to the maximum value you have available. But right, it’s very flexible and how it can be used.

AC: I want to talk about a strategy with reverse mortgages that you’ve talked about that I think is really clever. So, this would be 65, 66 year old who retires, and typically, they’d start their Social Security. And let’s say all their assets are in their IRAs or 401(k), so they start withdrawing to pay their lifestyle. Can you explain how a reverse mortgage would be used then to perhaps delay Social Security and maybe even look at Roth conversions?

WP: These are both things where – Roth conversions, delaying Social Security – you pay more early on, but you get a big benefit later on in retirement. And so, paying more early on, well the reverse mortgage can be used as a source of funds. If I decide to delay Social Security, but I need some spending power now, I can draw from the reverse mortgage as a way to help support being able to go ahead and delay Social Security.

Roth conversions, this is all about kind of tax bracket management in retirement. If I retire in my early 60s and I delay Social Security until age 70, and then my RMD, my required minimum distributions don’t start until 70 and a half, I may have very low taxable income during my 60s. That can be a case where I want to take advantage of my 10%, my 15%, and 25% tax brackets, pay taxes at those lower tax rate today, so that later on, after 70, when Social Security starts, when I have to start taking required minimum distributions, I don’t push myself up into the higher tax brackets beyond that level. And so, getting assets out of my IRA, moving them into the Roth, paying taxes at lower tax rates in the short term, can really help the financial plan in the long term. And again, the reverse mortgage can provide the funds to be able to pay those taxes without further increasing your taxable income, since the proceeds from the reverse mortgage do not go into the AGI, the adjusted gross income. They’re not taxable income for the individual.

JA: So delaying Social Security is kind of the topic of most advisors, but there’s also the question of break-even. Should I take it, save it, invest it, spend it, or wait? I heard this 8% delayed retirement credit thing. What is your thought with Social Security and what claiming strategies are out there? It’s funny, I think the more information and education people receive, it’s delay. But I know you see the statistics as much as Al and I. And still, most people are taking it as soon as they can get it.

WP: Right. It’s come down a little bit, but it’s still close to maybe 40% of Americans are taking Social Security as early as they can. And there may be a few cases where that’s a good idea. But generally speaking, especially for the high earner in the couple, I think it’s a bad idea to claim Social Security early. For more above average income or above average wealth individuals will live longer than the average American. And Social Security built in all these factors to benefit delaying Social Security. They designed that in 1982, and it was meant to be fair at that time, in terms of it didn’t matter what age you claim Social Security, you should still get the same lifetime benefits if you live to life expectancy. Since 1982, people are living much longer, and also interest rates are lower. They were looking at real interest rates of around 3% at that time. Well today, if you look at TIPS yields, the inflation-protected bonds, even a 30-year TIPS is only around 1%. So both of those factors, lower interest rates today, and the fact that people are living longer, really strengthen the case for at least the higher earner in a couple to delay Social Security to age 70, the probability that they’ll live beyond that break-even age,  to make it a good idea, it’s well above 50%. So really, the odds are in favor of benefiting from delaying Social Security.

AC: Sometimes though, people though that are high earners, they’ll say, “we’re concerned there’s going to be means testing later. So I want to take it as early as I can.” What do you think about that?

WP: Yeah that’s the argument that I don’t really have a great response for. The whole history of Social Security was that it was never meant to be viewed as any type of welfare program. It was always meant to be, you contribute into the program, you’re going to get benefits. I never thought means testing would be a political reality. But in the most recent presidential election campaign, one of the candidates, not who became a nominee, but had dropped out of the race, earlier was talking about means testing. And that really surprised me so that I can no longer make this claim that means testing can never happen. So that is a potential reform. For people who are already close to Social Security claiming age, there would be a good chance – if that means testing reform happened – you could kind of be grandfathered out of it, applying to people who are very close to retirement today, it would more likely be something that would apply to younger people. But there’s no way to guess what’s going to happen with public policy. And though I think it would be unlikely, it’s not an impossible reform. And that could be a reason to claim early if you were particularly worried that might happen.

JA: Hey Wade, where do people find you? Where can people read your work and everything else?

WP: My home on the internet is just RetirementResearcher.com, and that’s where I blog and everything else.

JA: Hey Wade thanks so much.

Dr. Wade Pfau’s new book, Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement explains how, when used correctly, reverse mortgages can provide an added layer of security for retirees and allow them to enjoy retirement more by gaining liquidity from an illiquid asset. You can get a copy of this groundbreaking book, free! Click on “Special Offer” at YourMoneyYourWealth.com or call 888-99-GOALS, that’s 888-994-6257 for your free copy of Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement, by Dr. Wade Pfau. Click on “Special Offer” at YourMoneyYourWealth.com or call 888-99-GOALS. That’s 888-994-6257, or YourMoneyYourWealth.com


32:37 – Big Al’s List: 10 Tips to Boost Your Retirement Savings

AC: This is a top 10 list. This is kind of like the Dave Letterman list, a countdown from 10 down to 1. And number 10 is an obvious one, but sometimes we need reminding. Take advantage of the employer match. If you have a 401(k) or 403(b) that has an employer match, you certainly want to contribute enough of your own salary to fully max out that employer match. In other words, you put in a dollar, your employer puts in a dollar. It’s like free money to you. it’s like increasing your salary and improving your retirement. And it’s amazing how many people actually don’t do that. It’s over 25% of the people out there don’t maximize their plan, and that’s, what, something like $24 billion left on the table each and every year.

JA: Yeah, it’s huge. $24 billion

AC: With a B. (laughs) Yeah, so definitely take advantage of that. Here’s another one. No matter what you’re saving, keep increasing it. Agree?

JA: I like that you like that. Yeah. You know, it depends on when you start, but you have a goal of 15% of your income to be saved. And if you can get that, then you want to continue to increase it in my opinion. I don’t think anyone’s ever got to retirement and said, “man, I wish I didn’t save this much money.”

AC: I think that’s right. And of course, we’ve actually read books and articles, and actually had some guests on our show, that say, “if you want to retire before age 35, then you got to save about 75%.” So if you’re into that, then great. But for the rest of us that want to live a certain lifestyle, 15% is a good goal. But Joe, when you’re in your 20s and 30s, that seems impossible. So here’s what you do instead; you work up to it. So start with 1% of your income or 2%, and each year increase that a little bit. You get a little raise, hopefully, cost of living, maybe you get a merit raise because you get a promotion. Every time you get a raise, make sure that you’re increasing that percentage because if it’s out of sight, out of mind, it’s so hard to save when you actually have the money in your hands. But if it gets taken from your paycheck before it comes to you, it’s not that difficult to adjust to that lower net pay.

JA: I mean you look at anything else in life, you ask someone in their 50s, 60s, and 70s. it’s just a simple question, would you have saved more money if you could go back in time? How many, what percentage, do you think would say no?

AC: I’m going to say 99% would say yes. That’s probably one person that would say no.

JA: Right? Whose like, “No way.”

AC: “No, I saved plenty. I wanted to live.” (laughs)

JA: So you just gotta take a look at certain things you purchase, because when you hit your 50s, 60s, and 70s, you don’t want to be,  “man, I wish I would have saved more.” Start as soon as you can. And if you’re in your 50s, 60s, and 70s, well now’s your time, you’re probably in your peak earning years, to the bank and save absolutely as much as you can.

AC: Right. Number 8, Joe, automates your retirement plan increases. Boy, that’s really important too. So automate means like a 401(k). Out of sight, out of mind. Pay yourself first is the concept. Because most people that don’t have an automatic savings plan, what they do is they wait till month then and see what’s left over in their bank account, and usually, interestingly enough, nothing’s left over. And so they don’t save anything. “Well, I couldn’t do it this month, because the car broke down.” “I couldn’t do this month because, Sally, we had to buy a new bicycle for her.”

JA: Well you will you’ll find a way to live within your means. So save first, pay yourself first, and then spend everything else. It’s the easiest way to budget. You’re not going to spend hours on spreadsheets and journals and everything else, fighting with your spouse, “What? You spent this on X,” or whatever. Just try to come up with a certain percentage of your income that you want to save, and they go from there. Then if you want to get a little bit more sophisticated in your strategy, then you say how much money do we need in the next 10, 20, 30 years whatever your retirement date is, or whatever goal that you’re shooting for, and then find out how much money that you should be saving. Is it 20%? 25%? Well, at least you know that you need to be saving that percentage. So if you say we’ll start with 1, 5, 10%, yeah that’s all great. I think that’s a good start. Because then, when it comes time to buy something that’s just kind of like an impulse buy. You’re like, well damn, I’m only saving 10% of my income, I know I should be saving 15. Do I buy this or can I save a little bit more?

AC: Yeah. And if and if it’s out of sight, out of mind, you’re going to do the right thing. And once it gets into a retirement account, keep it there. Don’t take it out. I mean the penalties are amazing. Number 7: Don’t forget the catch-up contribution when you’re 50 and older. A 401(k), when you’re younger than 50, you can put $18,000 into a 401(k). When you’re 50 and older, you can add another $6,000. So that’s $24,000 that you can put into a 401(k), and with an IRA, regular IRA, Roth IRA, $5,500 is the normal amount. But once you’re 50 and older, you can add another $1,000. So it’s $6,500. And there are SIMPLE plans. I think the catch-up on a SIMPLE plan is another $3,000.

JA: How about a SARSEP?

AC: (laughs) SARSEP I don’t know because that plan ceased to exist about 25 years ago. Old news. We actually had a client that came in with one of those, and I had to explain it to our younger advisors what a SARSEP was. It’s a salary reduction self-employed pension plan, is what it is. Number 6, Joe, is: check the fees on your investments because some investments are rather expensive. Some of those retail mutual funds that are trying to time the market will have a higher cost than, say, a lot of index funds, and ETFs, which are basically buying just an index, if you will, and not really trying to buy and sell to time the market.

JA: Yeah, but I’m still going to argue with this whole fee stuff.

AC: I’m going to argue back. So, the first point, of course, is you have to have the right allocation, and that’s where you’re going to go. But once you have the right allocation, you could either invest in the S&P 500 to fill the large company, or you could invest in a retail mutual fund that buys large companies the are trying to beat the market. Those are more expensive. Those tend to lag the indexes, those tend to lag the passive investments. So given that, I would rather go with a cheaper fund. You can’t argue that. Number 5: put yourself on a budget. Agree or disagree?

JA: It’s very difficult to stay on a budget.

AC: Yeah. No one wants to do that.

JA: Right. I would much rather pay me first and spend everything else.

AC: I think that’s, for the average person, maybe you’re an engineer, you’re an accountant that loves to look at this every week or month or whatever, but for the rest of us – of course, I’m an accountant, even I don’t like budgeting – but for the rest of us, it’s like, let’s save as much as we can in a 401(k), have it be automatic, and then we know that we can spend what’s left from our paycheck. That’s all right. And if there is some extra, and hopefully there would be some extra, because you want to make sure you have an emergency fund, and maybe you want to save for a down payment on a house, or maybe you want to save for kid’s college education, things like that but yeah, budgeting is tough for most people. Number 4 is: look into your health savings account. So if you have a health savings insurance plan, make sure that you are funding that. I think the married couple is about $6,700 give or take, and single is about half of that.

JA: Do you have your cheat sheet there?

AC: Yeah, but I’m in the middle of my list. I can’t pull it out.

JA: If you don’t understand what a health savings account is, it’s a high deductible health insurance plan that you can put the money in pretax. That health savings account grows tax-free, and then when you use it for medical expenses, you can take it out tax-free. Be careful with, if you’re getting close to Social Security age, because once you elect to collect Social Security, you are automatically enrolled then in Medicare, and then Medicare and HSA plans are non-compatible. So it will blow up your HSA plan. So there could be taxes and penalties. So just FYI.

AC: I do have the numbers, Joe: if you’re an individual, you can put $3,400 into an HSA savings account. And families, $6,750. And if husband or wife is 50 and older, you can do an extra $1,000 on top of that. The nice thing about that is, the money goes in, you get a tax deduction, and all those assets grow tax-free, as long as you use them for medical, down the line. You can carry them over a year after year. Number 3 is: make sure you have the right kind of account. In other words, there’s more than one place to invest. It’s not just a 401(k). If it makes sense to put money into a Roth IRA, make sure you’re doing that. Or a non-retirement account gives you some flexibility in retirement. Number 2 is: don’t forget the saver’s credit. So if your income is low enough and you’re still putting money…

JA: (laughs) If you make more than $10,000, $4,000, you don’t get the savers credit.

AC: But if you qualify, and you’re filing your return by hand, you’re going to miss out on that. (laughs) And number 1, remember that payroll contributions to a retirement plan can lower your taxes, and that’s a big one because a lot of people say, “well I can’t put more money into the 401(k) because I can’t afford it.” Well, it’s going to lower your tax bill, so you put a thousand bucks in, it’s only going to cost you $700, $600, depending upon your tax bracket. Because you’re saving taxes.


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43:02 – Tax Strategies When Paying For Long Term Care

JA: Hey, a couple of things Alan, when it comes to long term care and long term care type planning, or paying for it. Not necessarily the insurance, but paying for a long-term care or assisted living facility.

AC: So it’s to have a plan to pay for the costs, whether it’s insurance or some other way.

JA: And I want to talk about taxes in regards to funding it. Because let’s say, if I’m funding long-term care, sometimes it’s like, well, you have a brokerage account, or you have an IRA account, which one would be more appropriate to fund long-term care?

AC: Are you talking about when you’re paying for it yourself?

JA: Yes yes yes. Not taking money out of a retirement account to buy an insurance policy. But now, I’m in a facility. Or maybe I’m the successor trustee and power of attorney of my mother’s estate, and she needs to go, and I’ve got to figure out, well, how do I pay for her care?

AC: Yeah. that’s a really good question and it depends on a few variables, I would say. One is, what kind of long-term care. Whether it’s just some convalescent care that you’re going to be in temporarily and then get out, or if it’s assisted living, or if it’s full on convalescent, long-term care, kind of a nursing home type of thing. So, if it’s the first two, it really depends on your tax bracket, and you’re going to get some tax deduction for those payments. And so honestly, you kind of have to do a tax projection, based on your circumstance, to see what would be better. But I can say, generally, if it’s a full on a nursing home, the IRS lets you deduct that 100% as a medical deduction.

JA: Right So let’s say it’s $70,000 a year.

AC: Yes. So $70,000 comes out of your IRA, which is taxable, but you get a $70,000 medical deduction. Not quite, because there are a couple of limitations, but you get the idea. So, you might as well take the money out of your IRA, because you get that deduction anyway. And sometimes, we see people just paying for it out of their savings, and they end up with negative taxable income, and they miss the huge opportunity.

JA: Because they’ll look at the IRA and they’ll say, “well, I don’t want to pull that out because there’s going to be income tax on that.” But then they’re paying for care out of cash, or their brokerage account, that is a lot lower capital gains rate.

And maybe they don’t even have that much other income. They have Social Security and a small pension, and then you’re paying another $70,000 out of cash to fund that care. You get a huge deduction, that’s going to wipe out all the other income, and then there’s even more of a deduction that you could have written off ordinary income, and not paid any tax on it.

AC: Yeah, I’ve seen numerous cases where people have negative taxable income, sometimes, Joe, even when they pay for the long-term care, or the long term convalescent care, out of their IRA, they still end up with negative taxable income. And if they got extra money in those IRAs, you might as well look at a Roth conversion. And it’s really, at this point, it’s probably going to be more for the kids’ benefit than your benefit. But we see this all the time, and sometimes on this show we’ve talked about it, which is if you’ve got a parent who is in a nursing home and taking advantage of all these deductions, creating negative taxable income, and there’s obviously money in an IRA, potentially, then why not look at a Roth conversion, maybe to the top with the 15% bracket, which for a single person would be about $37,000 taxable income. Meaning that, if taxable income without a Roth conversion is negative $10,000. So roughly almost $50,000 would be your Roth conversion, give or take, to get to the top of that 15% bracket. What that’s going to do, is when you as the children end up inheriting what’s left of the IRA, then it will be tax-free in a Roth IRA. Presumably, your tax rate is greater than that 15% rate. And you’ll completely benefit from that.

JA: Right. It sounds like, well, Mom and Dad go in a nursing home, you get a great tax break. (laughs) But it’s just utilizing the tax code.

AC: It’s family planning, and sometimes even if your parent really isn’t quite fully aware what’s going on, they would want it. No one likes to pay more taxes, and when you know that obviously, your assets are ultimately going to go to your children. You would want your children to pay the least amount of taxes possible.

JA: Right. This is just one deduction that we see that is missed, and I just saw that, so that’s why I wanted to mention it, is that they were paying for the care with the wrong pool of money. So it was creating a large tax deduction on the tax return, and they were like, “Oh, mom hasn’t paid taxes in years. But she’s got $700,000 in a retirement account.” Well, take the retirement dollars out first. Because then that will then help with that deduction that would offset that income. You still won’t pay any tax or very little tax. But then you can just kind of maneuver the money, because if mom were to pass, with that big retirement account, then it’s going to be taxable to the kids. So depending on what their tax rate is, that’s the tax they’re going to potentially pay. Of course, they don’t have to pull everything out. They can take that their required distribution over their lifetime. But still, it’s looking at all sorts of different things when it comes to planning.

AC: And when it comes to the other levels of care, like assisted living, for example, there is a medical component with assisted living facilities, and usually at year-end, the facility will tell you what that is. And usually, it’s 20%, or 15%, or something like that. In other words, if you pay $50,000 and 20% of that is – what is that it’s about $10,000 – that would be your deduction. So, it’s a little trickier than to take it out of your IRA, because only 20% is sheltered. But if it’s a nursing home, that’s generally 100%, because you’re there under doctor’s orders, you’re there because you have to be there for medical purposes, so it’s all considered medical. Your room, your board, and of course all the medical and nursing and that sort of thing.

JA: Then you have to look at the future here. So we talked about this over the past couple of weeks, with President Trump’s tax reform proposal, and it was some changes when it comes to taking those types of deductions. So the only deductions on his one-page piece of paper are the mortgage deduction and charitable deduction.

AC: Yeah. Good point Joe, because that’s the one-page proposal. It would be interesting they have a one-page tax code. (laughs) But medical deductions are not on there. And so who knows what’s actually going to happen.

JA: Right, neither was state tax.

AC: Right, no state tax and property taxes, miscellaneous, unreimbursed job expenses, investment expenses, those were not on there either. So we’ll have to see what happens. I’m not sure that’s such a fair deal for it because that’s going to hurt a lot of our oldest citizens that are in nursing homes. All of a sudden those big payments would no longer be tax deductible.

JA: Well then they need to have assets though to offset. A lot of people haven’t saved. I wouldn’t want that job. (laughs)

AC: Right, right, right.


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51:08 – Learning From Prince’s $250 Million Mistake

JA: You know I’m from Minnesota, Al. I grew up a few miles away from Prince Rogers Nelson.

AC: Right. Anyway, boy, he’s still in the news.

JA: Because he’s an icon, Alan.

AC: Yeah, but not necessarily for the right reasons in this guest blog in the AICPA Insights.

JA: Is that what you do on Saturdays, read the AICPA Insights?

AC: You got it, brother, and sometimes it spills into Sunday morning before I go to church. So it’s really a great weekend. (laughs) So here’s the title: Learning From Prince’s $250 Million Mistake. Because it was almost a year and a month ago that he passed away, and a judge confirmed Prince’s six siblings to be his rightful heirs. After more than 45 people came forward claiming to be his wife, children, siblings, or other relatives. 45 people. And here was the mistake. The mistake was Prince did not have a trust, he did not have a will. So what happened then was it’s left up to the judge, and the state law, to try to figure out who these assets should go to. Of course, it’s a public record, which is why we know it’s $250 million. It’s something that can be so easily avoided.

JA: I would imagine this estate is still going to be caught up in the courts for several years because there are assets that are very difficult to put a price on at this point.  Because of all the music that he had that wasn’t released.

AC: And his Estate, of course, is still receiving income from royalties.

JA: Sure. He might have thousands of songs and someone puts out maybe five songs of the thousand, and it creates x amount, you gotta take a present value look all those. How do you price that? So I would imagine it’s more than $250 million.

AC: Yeah probably. I mean that’s what it is right now. But in terms of future royalties, and you try to maybe present value that back to current day, it’s probably a much bigger number. If you just set up a will, which about half the people in the country die without a will. If you set up a will, at least the judge has a piece of paper that has your wishes on it. Now, of course, it’s got to go through a court. And it’s public record and probate fees and in some cases attorneys fees, and trustee fees. If you want to avoid all that, that’s why you set up a trust. You set up a living trust. And what happens with a trust is, there’s no court involved, there’s no probate, there’s no public hearing, there’s no nothing. The trustee that you designate, usually it’s you to start with, and then there’s a successor trustee when you pass away. They take over, and they distribute the assets in accordance with the trust document. And they have to do it, the beneficiaries will get all over him if he or she doesn’t distribute the trust in accordance with the trust document because they get a copy too.

JA: Sure. Yeah, then the beneficiaries could sue the successor trustee.

AC: Right and that happens sometimes. But the point is, at least get a will, because then it’s not left up to the judge trying to administer your estate based upon state law.

JA: I saw a statistic. It was the percentage of married couples with kids that do not have any estate planning documents.

AC: It’s pretty high. I want to say it’s in the 40%, 45% range.

JA: I think it was higher than that. 70%-ish.

AC: I don’t think it’s that high. But maybe. The problem is when you first start raising young children, that’s kind of the last thing on your mind is estate planning. But it actually should be one of those things that are near the top of the list, after you buy the crib and assemble it. (laughs)

JA: Yeah. Buy some life insurance, and then get an estate plan. And you could just have simple documents. I think people get maybe a little bit intimidated too by it. Now I gotta to sit down with an attorney, and I don’t have a lot of assets, or I don’t want to share this, and then I got to think about things that I don’t necessarily want to think of, such as death, and who’s going to take care of junior, or where did the assets go. And so I get it.

AC: Sometimes people say well, should I get a will or a trust, and I’ve heard a lot of attorneys in California say that if you have property in California, you probably ought to get a trust. Or if you don’t have property but have some assets, a few hundred thousand of assets.

JA: Well you want powers of attorney, you want it for health care, you want it for financial reasons.

AC: Which, whether you get a trust or not, you definitely want that. But usually, the people that don’t have a will, don’t have those power of attorney documents either. So then they end up getting sick, and their spouse can’t even really access their IRA because they don’t have power of attorney.


Your Money, Your Wealth isn’t just a podcast, it’s also a TV show! Check out Your Money, Your Wealth on YouTube to see Joe and Big Al talking about planning for retirement over your entire lifespan, investing biases you may not realize you have, Social Security claiming strategies, and… Pure Financial Feud! Watch clips of the Your Money, Your Wealth TV Show – just search YouTube for Pure Financial Advisors and Your Money, Your Wealth.


56:50 – Will The Department Of Labor Fiduciary Rule Change?

JA: You know, this Fiduciary Rule. The Department of Labor. So now it’s coming up. And what’s his name? Alex. He spoke. He’s the U.S. Labor Secretary. Came out and says it’s June 9th, I believe is the date.

AC: Yeah, that’s when it first goes into effect or at least part of it.

JA: Yes, but it’s not really going to actually go into effect until January 1st of 2018, like the best interest contracts.

AC: Well I think it’s kind of staggered. I think some things go into effect, right?

JA: Yeah but there’s no way. There’s no way to verify if they’re actually acting as a fiduciary or not.

AC: It’s almost like, “here, try to do this, and January 1st we’ll really make sure you’re doing it.”

JA: Right. So then it’s going to get pushed out, and then are they actually going to go through with it or not? And who knows. But I found this interesting, is that – Financial Engines, heard of them?

AC: Yes.

JA: Sunnyvale California. They surveyed. 93% of Americans believe it is important that all financial advisors be legally required to put client’s best interest first. Who would be the 7% that was like, “Nah?” (laughs)

AC: The industry that’s selling the products. (laughs)

JA: 93%, “I want them to put my interest first.” 7%, “I want their interests before mine!” (laughs)

AC: “I don’t really care if it’s in my best interests or not!” (laughs)

JA: “I could really care less.”

AC: Those have to be the insurance salesman, don’t you think? That are selling the products, that they want to keep selling the products?

JA: That would vote – no! (laughs) I don’t know. This is someone that’s – whatever. But then they ask… what percentage of people do you think knew what fiduciary meant?

AC: Oh boy. I’m going to say less than 50.

JA: Is that your only guess?

AC: You want me to be more specific? 40-45%

JA: 70% had no idea what the word fiduciary was.

AC: So only 30% knew. Yeah, I can imagine that, because when we talk about being fiduciaries, people have blank stares. “Well, that’s nice.” Or, “I’m so sorry for you because it sounds awful.” We’ve got a fiduciary disease.

JA: Yeah, they’re leaving the office, they’re like, “What do they have?”

AC: “I’m concerned because Joe and Al said they got a fiduciary disease!”

JA: (laughs) 70%.

AC: So what is a fiduciary?

JA: Well, you’ve got to put your client’s best interest first. Simple as that. Only 93% of people want that.

AC: So what’s the other way to go?

JA: No, we’re not going there. I just wanted to bring this up. I was going to go to another topic because that would just bore the hell out of me. We could go to the suitability standard, and then we got blah blah blah. So the funny thing is 93% want it. I don’t know who the other 7% is, but then 70% of them don’t even know what it is. So it’s like you’re at a French restaurant, the waiter comes up talking French. Uh, yeah! (laughs)

AC: Next thing you know you got snails. (laughs)

JA: Right. That’s exactly what I want. That sounds delicious! (laughs)

JA: (laughs) Oh my god. Speaking of the fiduciary rule, it’s just on retirement accounts. It’s not on any other assets that you have. So if you have a brokerage account, the fiduciary rule doesn’t apply. (laughs)

AC: It doesn’t matter. You could have an advisor do whatever they want. Doesn’t have to be in your best interest. (laughs) So the Department of Labor it came up with this ruling, what, about three years ago? And it was so controversial for the industry, all they could really focus on was one type of asset, which is retirement assets. And of course, the industry is fighting it, because, I mean I guess they don’t want to go too deep into this, but a lot of our industry still gets paid the old fashioned way, which is commissions, and some of those commission products that they sell you, are pretty high commission products.


1:01:05 – To Roll or Not to Roll Your 401(k) Into An IRA

JA: So when you look at those retirement accounts, then you have to decide, do I keep it in my current 401(k) plan, 403(b), TSP, 457, whatever, or roll it into an individual retirement account. So those are very important decisions that you want to make. And there’s pros and cons to each of that decision-making process. Here’s a couple: Let’s say if you want to retire early. So, I’m 50 years old, and I want to retire at 55. So I’m plugging away, five more years. If I keep the money in the 401(k) plan, and if I separate from service at age 55, there is no 10% penalty when I start taking distributions from that plan. So it’s ideal to keep the money into the 401(k) plan because then you can avoid that 10% penalty. I think most people think it’s 59 and a half.

AC: Yeah they think it’s the same rules, and so you have to separate from service with that plan at age 55 or older. But then, you can take the money out of the 401(k). Of course, you’re still gonna pay taxes on it, but you avoid that 10% penalty. Now, if you take that same exact money at age 55 and roll it to an IRA? Now you’ve got to wait till 59 and a half to take it out to avoid that 10% penalty.

JA: Right. And then you have other plans, you could roll it into the 401(k) plan at 55, if you’re going to blow through your money, I guess, in 4 and a half years, hopefully, that’s not the case. (laughs)

AC: (laughs) Have a good time and go out with a blaze at age 60.

JA: So that’s one reason. Retiring early, How about if I’m retiring later?

AC: Yeah, that’s another one that a lot of people don’t really know. So 70 and a half is when you’re required to take a required minimum distribution, meaning you have to take money out of your 401(k) or IRA, but there’s an exception. The exception is if you’re an active participant in a 401(k) plan, and you’re over 70 and a half, you do not have to take a required minimum distribution from that plan. So you could work until age 80, and you don’t have to take a required distribution from that plan until the year after you retire.

JA: Right. And if you work until you drop. But if you have a business, you can’t be, what, more than 5% owner.

AC: Yeah. And so people get excited, “I’m going to set up a side business and roll it into a SOLO 401(k).” No, that doesn’t work, if you’re more than a 5% owner, that rule doesn’t apply.

JA: But if you work for a large company, and they keep you on board, you can work until your 80s or 90s. As long as you’re an active participant in that plan, there is no required minimum distribution.

AC: And interestingly enough, if it’s a large company that can be flexible, maybe you only working five hours a week, but you’re still contributing to that plan, maybe not a lot, but you’re still an active participant. And so then, you don’t have to take that required minimum distribution from that plan. You still have to take it from your IRAs. You still have to take it from old 401(k)s. But in many cases, you can roll old IRAs and 401(k)s into the new 401(k) and avoid the required minimum distribution altogether.

JA: Right, no, that’s a good point. It’s not like you’re exempt from all required minimum distributions from all accounts, it’s just you’re exempt of the required minimum distribution of the active account that you’re participating in, as you’re still employed with that employer. So, another reason, if you worked for a very large company, the pricing of those mutual funds might be cheaper than you can get on your own. So let’s say I have a bunch of Fidelity funds, whatever, XYZ fund company.

AC: We’re not endorsing Fidelity or anybody.

JA: Or ripping on them. So you’re like, I’m in this big plan. There’s the Law of Large Numbers. So there’s a lot of money in the plan, and let’s say you got 10,000 employees of this big firm, and even let’s say 30% of them are participating in the 401(k) plan, or 50. There are hundreds of millions of dollars, probably, in that plan. And because of that, they get better pricing on the mutual funds. So they have different share classes. It’s more on the institutional side versus an individual. So, if you keep it in the plan, the cost – I know this is your favorite topic, Al –  the cost is probably, it might be a little bit cheaper on a larger plan than you could purchase your own, even if potentially it’s the same fund, because you’re not transferring. If I have an IRA to an IRA, and I really like these funds at Scott’s trade and I want to move it to TD Ameritrade, how a transfer works is you don’t sell any of the securities, it’s a trustee the trustee transfer, those securities just change hands, and a different brokerage account. But when you roll the money out of a 401(k) plan, everything is cashed out. Unless it’s company stock, which I’m going to get into in a second, but you get a check, and then you take that check and you deposit it into your new IRA, or your existing IRA, or whatever that you’re doing. So you will have to repurchase shares. Now you’re on an individual level, versus the institutional side, and you’ll probably pay a little bit more.

AC: Yeah, Joe, there’s a few cons though, from leaving it in the 401(k), one of which is, in general, you have fewer investment choices in a 401(k), than, let’s say, in your IRA. That’s not always true. Sometimes you’ve got a brokerage account inside.

JA: Right. Most companies now have that brokerage link, where then, you can just go to the brokerage account and pick anything you want under the law.

AC: Right. But many don’t. Many are limited to say 20 or 40 investment choices.

JA: That’s also the downside too because it becomes analysis paralysis for some people.

AC: I know, right? Another one is if you want to do Roth conversions, it’s much easier to Roth conversions in an IRA, than it is in a 401(k), because if your 401(k) has a Roth option, for example, you can generally do a Roth conversion in-plan, but you can never re-characterize it. And that’s a huge benefit of an IRA. An IRA you could do a $50,000 Roth conversion, meaning that you’re going to pay tax on $50,000, but that $50,000 ends up in a Roth, forever tax-free after that. But, by the time you do your tax return, you realize, “Boy, $50,000 was way too much, because I made too much income. Gosh, I wish I would have only done $30,000.” Well, you can re-characterize, even to the filing date of the following year. in that example, you would characterize $20,000 from the Roth, back to the IRA, and therefore only pay taxes on what you end up keeping.

JA: So, inter-plan conversions, it’s irrevocable. But if you already left the company, they’re not going to allow you to do an inter-plan conversion anyway. It’s a dormant plan.

AC: Because you’re not an active participant.

JA: Right, you can’t take loans, you can’t make contributions to it. You cannot do the conversions. And another thing too, I guess if I take it from a 401(k) and move it into a Roth… you can’t do that, the Pension Protection Act of ’06 allows us to do that now, you can go directly from a 401(k) or any defined contribution plan, directly into a Roth. Before it had to touch an IRA and then from an IRA to a Roth. We still probably practice that, because it’s easier, just from a paperwork standpoint, because some of the stuff gets fairly complex, depending on how much money that you have, and what you’re trying to maneuver, and what kind of planning that you’re currently doing. So we like to put it into the IRA, then you can just journal shares into the Roth. It’s a little bit easier. You’re not going to sell anything, get cash and then take the cash, and then invest it in the Roth. And so, move it into the IRA, get in invested, then you can journal shares into the Roth and then journal shares back into the IRA if you want to.

AC: Yeah. Another thing, Joe, is there could be three types of dollars in your 401(k). You have pre-tax, you got a tax deduction. You have Roth IRA, potentially, if you have a Roth option, you took advantage of that, and then you have after tax money, that’s not in a Roth. In other words, some companies allow you to put more than $18,000 or $24,000 if you’re over 50, into the 401(k). You put extra dollars in, you don’t get a tax deduction, but you got those dollars in a retirement account. So the IRS says, if you want to roll it out, you can do this. You can take the pre-tax money that you got a tax deduction on, you put that into an IRA. You take your Roth money, you put that into a Roth, and you take your after tax money and you can put that in a Roth too. This is a new revenue ruling, about, what, 2 and a half, 3 years ago? This is a big deal because if you can get those after-tax dollars into a Roth, that means all future growth on those dollars is going to be tax-free. Not just the original contribution amount. If you left it in the 401(k), all future growth is taxed at ordinary income.

JA: Right. You can isolate those after-tax dollars, and move them directly into a Roth IRA. If you keep it in the 401(k), then you have to take the thing out pro-rata, which is not nearly as effective or efficient. So you could separate everything, and get them in the right pools in the right buckets, and have them grow tax-free, and then keep your tax-deferred growing tax deferred. Versus you got taxed, taxable… And then when it comes to Roth 401(k)s, there is a required minimum distribution in the Roth 401(k), there is not a required a minimum distribution in a Roth IRA.

AC: Yeah, I don’t think hardly anyone knows that. So at 70 and a half, if you got a Roth 401(k), you have to start taking a required minimum distribution. It’s tax-free, yes, but you have to start taking money out of it. Yet if you roll to a Roth IRA, you don’t have to take a required distribution.

JA: Right. So I mean those are just easy reasons. Just to break it up, to get it in the overall account. And then how about company stock, Al? Let’s say if I have company stock in my 401(k). I worked for Sempra, and I got Sempra stock inside the 401(k) plan, or Goodrich, or GE, whatever. There’s something that’s called Net Unrealized Appreciation. That’s where you could take that company stock outside of your 401(k) plan, move it directly into a brokerage account. The benefit of that is that all future growth of that stock is taxed at a capital gains rate. If I kept it in the retirement account, I’m going to be taxed at ordinary income rates. You pay tax on the basis. Whatever you paid for that stock. This works really well for individuals that have worked for a large company for a long time, that have a lot of company stock inside the plan that they’ve purchased over the last 30 some odd years. Because you might have the basis on some of that stock is very low, and that appreciation of that stock might have been fairly large over 20-30 years. So then you could just pay the tax on what you paid for it. Maybe it’s $2 a share and it’s worth $10 now. Well, you pay tax on two bucks. But then the $8 of growth is now taxed at a capital gains rate.

AC: Yeah and a capital gains rate when you sell the stock, Joe.

JA: That’s it for us today, for Big Al Clopine, I’m Joe Anderson, show’s called Your Money, Your Wealth.



So, to recap today’s show: we covered 401(k), 403(b), 457, AGI, the DOL, ETFs, HSAs, IRAs, LTC, NUA, RMDs, SEP, SARSEP, SIMPLE, SOLO, TIPS, TSP, 10 Tips to Boost your Retirement Savings and why you don’t want to be like Prince when it comes to estate planning. Make sure you have a living trust or a will.

Special thanks to our guest, Dr. Wade Pfau, CFA, Professor of Retirement Income at The American College. Get a free copy of Dr. Pfau’s new book, Reverse Mortgages: How to use Reverse Mortgages to Secure Your Retirement, click special offer at YourMoneyYourWealth.com or call 888-99-GOALS.

Subscribe to the podcast at YourMoneyYourWealth.com, through your favorite podcatcher or on iTunes, where you can also check out our ratings and reviews. And remember, this show is about you! If there’s something you’d like to hear on Your Money, Your Wealth, just email info@purefinancial.com. Listen next week for more Your Money, Your Wealth, presented by Pure Financial Advisors. For your free financial assessment, visit PureFinancial.com

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.

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