01.07.24 Ask An Advisor With Wes Moss - 5 Keys To Successful Investing

Summary

The Clark Howard Podcast: Episode Summary – January 7, 2025

Episode Title: Ask An Advisor With Wes Moss - 5 Keys To Successful Investing
Host/Author: Clark Howard
Guest: Wes Moss, Fee-Only Fiduciary Financial Advisor
Release Date: January 7, 2025

---

Introduction & Context

In this special episode of The Clark Howard Podcast, Clark Howard is joined by Wes Moss, a fee-only fiduciary financial advisor and a new member of Team Clark. Hosted by Krista Dibiaz, the segment titled "Ask An Advisor" delves deep into the intricacies of investing, providing listeners with actionable insights to achieve financial freedom.

Wes Moss Introduces the 5 Keys to Successful Investing

Wes Moss begins the discussion by highlighting the shift in personal financial responsibility over the past few decades. He emphasizes the importance of planning for longer retirement periods, noting that individuals now spend approximately 30% of their lives in retirement compared to just 10% in the 1970s. This significant increase underscores the necessity for robust investment strategies.

Key Points Introduced by Wes Moss:

1. Stocks Mostly
2. Massive Diversification
3. Patience and Longevity
4. Investing is Both Easier and Harder Today
5. Planning

---

Detailed Discussion of the 5 Keys

1. Stocks Mostly

Timestamp: [04:18]

Wes emphasizes the importance of equities in combating inflation, pointing out that the S&P 500 has historically grown at an average of 10% annually, far outpacing inflation. He explains the power of compound growth, stating:

“Mathematically, if we make 10% a year, our money doubles every seven to seven and a half years.” – Wes Moss [04:35]

However, he cautions against an all-stock portfolio due to volatility. Wes recommends maintaining a balance by holding "dry powder" in safer assets like bonds, Treasuries, or money markets to psychologically and financially cushion against market downturns.

2. Massive Diversification

Timestamp: [05:10]

Wes advocates for extensive diversification, leveraging modern financial instruments such as ETFs to spread investments across thousands of stocks and global markets. This approach minimizes risk by ensuring that no single investment significantly impacts the overall portfolio.

3. Patience and Longevity

Timestamp: [06:20]

Patience is crucial in investing. Wes warns against the pitfalls of reacting to market volatility and succumbing to FOMO (Fear of Missing Out). He humorously describes "FOMO Freddie," a hypothetical investor easily swayed by the latest high-performing asset, distracting from a solid, long-term strategy.

4. Investing is Both Easier and Harder Today

Timestamp: [07:45]

While access to low-cost investment products and abundant information simplifies investing, the constant barrage of market news and sensational headlines can lead to decision fatigue and misguided fears. Wes advises maintaining focus on long-term goals and ignoring short-term noise to stay on course.

5. Planning

Timestamp: [12:30]

A comprehensive financial plan is essential for navigating an uncertain economic landscape. Wes outlines the critical components of effective planning:

• Timeline: Establishing a clear timeline for retirement phases.
• Savings and Contributions: Determining current savings and annual contributions.
• Rate of Return Assumptions: Selecting realistic return rates based on investment strategies.
• Spending Goals: Defining future spending needs.
• Withdrawal Strategies: Applying the 4% rule to ensure sustainability of funds.

“A well-crafted plan brings certainty into our lives, guiding us toward financial freedom and a happy retirement.” – Wes Moss [12:50]

Wes recommends using financial planning software or consulting with a fiduciary advisor to map out these variables effectively.

---

Listener Questions & Expert Responses

1. Kathy from Oregon: Managing High Management Fees

Timestamp: [13:18]

Question:
Kathy is concerned about a 1.41% management fee with Fidelity on her $400,000 403(b) rollover. She seeks advice on whether this fee is fair and if she should consider alternatives.

Wes Moss's Response:
Wes identifies the 1.5% fee as excessive, especially considering the reduction in mutual fund costs over the past two decades. He advises Kathy to:

• Seek Lower-Cost Alternatives: Explore funds with significantly lower fees, potentially 90% less.
• Consider Fee-Only Advisors: Transition to fee-only fiduciary advisors who prioritize her best interests without hidden agendas.
• Comprehensive Financial Planning: Focus on broader financial planning rather than merely fund selection to optimize retirement goals.

“If you’re paying a fee above 1%, you should be getting comprehensive advice. Otherwise, it’s just a vehicle to park your money.” – Wes Moss [13:35]

2. Vanessa from Alaska: Retirement Funds without Social Security

Timestamp: [16:44]

Question:
Vanessa and her husband are state employees in Alaska without access to Social Security benefits. Concerned about their retirement savings, especially after losing money in bad annuity products, they seek guidance on fund allocation.

Wes Moss's Response:
Wes acknowledges the unique challenges faced by Alaska state employees, including the absence of Social Security. He highlights:

• Defined Contribution Plans: Alaska requires an 8% contribution to their defined contribution plan, often matched additionally, leading to substantial retirement savings (e.g., 15% total).
• Permanent Fund Dividend: Residents receive an annual dividend (e.g., $1,300 to $1,700) from Alaska's $80 billion Permanent Fund, supplementing retirement income.
• Additional Savings Options: Utilize the 457 Plan, akin to a 401(k), allowing for further contributions and potential tax advantages.
• Roth IRA Considerations: If available, a Roth IRA option within the 457 Plan can provide tax-free growth.

Wes emphasizes maximizing available retirement accounts to bridge the gap left by the absence of Social Security.

“In Alaska, the Permanent Fund Dividend acts like a perpetual Social Security, providing a steady income stream.” – Wes Moss [18:00]

3. Gerald from Alabama: Managing 403(b) and 457 Plans & Investing Extra Funds

Timestamp: [28:36]

Questions:

1. Should Gerald convert his 403(b) and 457 plans before starting Required Minimum Distributions (RMDs) at age 73?
2. With a small pension and Social Security, what’s the best way to invest leftover money after ensuring an ample emergency fund?

Wes Moss's Response:
Wes advises Gerald to:

• Consolidate Retirement Accounts: Merge multiple retirement accounts into a single self-directed IRA to simplify RMDs and reduce administrative complexity.
• Avoid RMD Penalties: Ensuring timely RMDs from a consolidated account prevents hefty IRS penalties.
• Strategic Investments for Extra Funds: With a solid emergency fund, invest surplus funds in diversified, low-cost vehicles aligned with long-term retirement goals, avoiding high-fee products.

“Consolidating accounts makes managing RMDs straightforward and helps avoid massive penalties.” – Wes Moss [29:55]

4. Lucas from California: Evaluating Vanguard Fund Holdings and Expense Ratios

Timestamp: [32:35]

Question:
Lucas has five Vanguard ETFs (VTI, VGT, VHT, VXUS, and a 2055 Target Date Fund) with a combined expense ratio of 0.39%. He’s concerned about fee stacking and seeks advice on fund consolidation and diversification.

Wes Moss's Response:
Wes reassures Lucas that his diversification strategy is robust, covering thousands of stocks globally. He clarifies that:

• Expense Ratio Clarification: The 0.39% combined expense ratio is lower than Lucas perceives due to overlapping fee structures across ETFs. The actual aggregated cost is likely under 0.10%, debunking concerns about excessive fees.
• Diversification Benefits: Maintaining a broad array of ETFs ensures exposure to various sectors and global markets, minimizing risk.
• Investment Strategy Alignment: With nearly 100% stock allocation, Lucas is well-positioned for long-term growth, though Wes suggests adjusting the balance if nearing retirement.

“Your overall cost is a lot lower than you think. You don’t want to stack fees, and your diversification is excellent.” – Wes Moss [33:04]

5. William from Washington: Assessing the Vanguard Star Fund Nearing Retirement

Timestamp: [35:41]

Question:
William has 25 years of investment in the Vanguard Star Fund, held within a Roth IRA, and is three years away from retirement. He inquires if this fund remains suitable for his imminent retirement.

Wes Moss's Response:
Wes commends William’s long-term investment discipline and diversification within the Vanguard Star Fund, which balances 60% stocks and 40% bonds. He notes:

• Appropriate Asset Allocation: The current 60/40 split is well-suited for those approaching retirement, providing growth potential while mitigating risk.
• Maintaining Stocks for Inflation Protection: Retaining stocks ensures funds continue to outpace inflation, a critical factor for sustaining retirement savings.
• No Immediate Radical Changes Needed: William’s investment mix aligns with best practices, and no drastic adjustments are necessary unless personal circumstances dictate otherwise.

“You have a good balance with 60% stocks and 40% bonds. It's an appropriate balance for someone nearing retirement.” – Wes Moss [36:00]

---

Conclusion & Future Discussions

As the episode wraps up, Wes Moss hints at upcoming topics, including the intricacies of financial planning and the 4% withdrawal rule, promising listeners deeper dives into essential retirement strategies.

“Creating a financial plan is not as complicated as we think. It lays the foundation for a successful retirement.” – Wes Moss [21:18]

Listeners are encouraged to submit further questions via www.clark.com/askclark, ensuring continued engagement and personalized financial advice.

---

Takeaways:

• Emphasize Equities: Stocks are vital for long-term growth and inflation protection.
• Diversify Extensively: Utilize ETFs and global markets to spread risk.
• Stay Patient: Resist the urge to chase fads; maintain a long-term perspective.
• Strategize Amid Complexity: Navigate the modern investment landscape by focusing on core principles.
• Plan Meticulously: Develop a comprehensive financial plan to guide retirement goals and manage uncertainties.

By adhering to these five fundamental keys, listeners can enhance their investment strategies, ensuring a secure and fulfilling retirement.

Transcript

[Apple Advertisement]

If you love iPhone, you'll love Apple Card. It comes with the privacy and security you expect from Apple. Plus, you earn up to 3% daily cash back on every purchase, which can automatically earn interest when you open a High Yield Savings account through Apple Card. Apply for Apple Card in the Wallet app, subject to credit approval. Savings is available to Apple Card owners subject to eligibility. Apple Card and Savings by Goldman Sachs Bank USA Salt Lake City Branch Member FDIC terms and [e-mail] Would you wear the same shoes for every occasion or rock the same outfit seven days a week? Of course not. Your style is better with options. Your investments could be too. CBOE Index Options give you access to various contract sizes, global trading hours, and potential tax advantages. That's a good look for any portfolio. If you're ready to invest in style, head to betterwithoptions.com There are risks associated with CBOE Company products. Review the disclosures and [e-mail] USDISclaimers.

[Krista Dibiaz]

Welcome to Ask An Advisor. This is a weekly episode we're doing of the Clark Howard show where we go deeper on all things investing. I'm Krista Dibiaz and I am here with Wes Moss, who is now officially a member of Team Clark. Welcome Wes.

[Wes Moss]

Great to be here. Thank you Krista.

[Krista Dibiaz]

And you're a fee only fiduciary financial advisor Clark and I have known for years. And this is going to be kind of similar to the regular episodes of the Clark Howard show where you're going to hit on a couple of topics and we've got some investing questions for you from the audience. And if you want to ask Wes a question or Clark a question, you can go to clark.com ask but somebody just wandered in from off the street on his day off. So I'm going to get out of here for a second.

[Clark Howard]

Oh, you're leaving Clark.

[Wes Moss]

Supposed to be your day off.

[Clark Howard]

Hey, it's great to see you, but I'm so excited about this. I think this is absolutely a great opportunity because you know more about investing in your pinky than I do in my whole body.

[Wes Moss]

I hope that's true.

[Clark Howard]

But and we get so many investing questions which I think about my career going back to the 1980s. I didn't used to receive an investment question at all. I mean, when I started in broadcast, people still had pensions. Nobody knew what an IRA was or 401k. Nobody knew what that was. So things have changed so much with this personal responsibility for people's own well being instead of it being a collective thing through an employer or through a pension they might have from government. So it's a whole different era we live in. And I realize there are questions people are asking me that I need us to be able to go deeper on, and that's why you're here. What are you thinking you're going to start with today?

[Wes Moss]

Well, first of all, just to kind of take that a step further. Not only has the pendulum shifted towards our responsibility, right from the company saying we're going to take care of you to hey, no, you've got to take care of yourself in retirement. So that's been a huge shift over the last 30 years and just longevity in retirement in general. So I was looking at a pie chart of the amount of time we spend in retirement in 1970 versus today. We spent about 10% of our lives back then in the 70s, not that long ago, and now we spend about 30% of our lives in retirement. So we got a lot time we need to be planning for. So I think what I wanted to do today is the world is always so complicated, Clark. There's always so much uncertainty in markets and it's a nerve wracking thing for a lot of people. It's a big responsibility. So I wanted to go through, I really have five fundamental. There's five fundamental keys to being a successful investor and I wanted to go through those five today and then maybe expand on a couple of them. So I think that's a great place to start.

[Clark Howard]

All right, well, I'm all ears. Can't wait to hear.

[Wes Moss]

Enjoy your day off.

[Clark Howard]

Thank you.

[Krista Dibiaz]

That was super fun. I'm so glad Clark could come in. That was awesome. His hair looks a little different than it does on show days. So funny.

[Wes Moss]

Well, I, I hope he's enjoying his day off and I'm, I'm glad to be here to help. So yeah, we want to start kind of this five what I think are really important keys to investment success.

[Krista Dibiaz]

Yeah, let's dive in.

[Wes Moss]

So the first of all, the world has gotten more complicated and we've got a plan for really long periods of time. 10, 20, maybe 30, ideally 30 years. In order to simplify how we think about this long journey we've got to go on. You've got to have some pillars or some cornerstones to stick to. So here are my five that I've seen work for many decades now. And I think they're a really good starting place fundamentally to remember. So the first one, these are keys to being a successful investor and keys to having a successful retirement and being able to do the things you would like to do for as many years as you would like to do. So financial freedom in retirement and beyond the financial part of this, and we'll talk about this in other episodes, I'm a huge believer in having also a happy retirement. And that's a whole other layer that we'll talk about after we get to investing. So here are the five things and we'll talk just a little bit about each one. The first one I call stocks mostly. The second one is that we've got as a, as an investor. We have to have massive diversification is something again, we're able to do today better than we've ever been able to do. Number three is patience and longevity. And we've got to be able to be in the game of investing for a really, really long period of time. Number four on the list is investing is both easier and harder today than it's ever been. And we need to figure out a way to be able to avoid or ignore the headlines some extent. And then really the last one is all about planning. What kind of plan do you have? Because if you have no plan, you're going to be in trouble no matter what. Investing's already hard enough. So we want to have some level of plan. Let's start with stocks mostly. When I say stocks mostly, we know that over time the best elixir to fight against inflation is owning equities, right? Not only have stock prices, if we're looking at the S&P 500 grown at on average, depending on the time period you look at, call it 10% on average over time, the last 10 years has been even higher than that. But let's say 10%, that is way above inflation. And that is what we're trying to do here is being able to make our money and our purchasing power last. So remember, mathematically, if we make 10% a year, that means our money doubles every, call it seven to seven and a half years. So that in itself is powerful. However, not Everybody can have 100% in stocks just because of the volatility of it. Particularly as your balances get higher and higher, you get closer to retirement. A 5 or 10% move in stock values can be jarring for folks. So when I say stocks mostly, even though I think that's one of our best long term inflation fighters, is they want to have some level of what I call dry powder, which is just safety assets. This can be bonds, it can be Treasuries, it can be money markets pay a fair amount right now, 4 to 5%. So we know that if we have some dry powder, it allows us psychologically to deal with the ups and downs of stock. So the dry powder part of this is that ideally, and you don't have to do this right away, but as you get closer to retirement, if you look at your overall allocation, you may want to have something like three years worth of dry powder when it comes to spending. So if you're spending 50 a year, 50,000 a year times three is 150. So of the portfolio, I think it makes sense to have about three years worth of dry powder. So on a million dollars, that'd be 15%. At $500,000, three years of spending would be close 30%. So that's stocks mostly. The second piece here is massive diversification. The good news here is that in any given ETF, we look some of the broad market ETFs, the S&P 500, as an example, has 500 companies. The total, many total stock market indexes have 3 or 4,000 stocks in them. So we can get diversification in a really big way better than ever today. The third piece here, again, these are all almost equally important. You almost have to have all five of them for the whole journey to really work is patience and longevity. And if we think about, we're constantly. You cannot avoid hearing about the price of gold or the price of Bitcoin or the price of the best stock that's performing or what has done really well this month. So we're always getting told to do something else because there's almost always, in fact, I would say there's always some investment that's doing better than the investments you have. And that pulls us as investors, just humans, we're humans, we want to do the best we can. So we're often pulled into something that is already done well, and we abandon what can be a tried and true strategy. And we all turn into a guy we all know. His name is FOMO Freddie. He's the guy at the cocktail party that always has done better with his investments than you. Your 401k. It's been a great year. It's up 20%. Well, FOMO Freddy's been in Bitcoin all year and he's up 100%. So there's always something better. And we. Not only do we not want to be FOMO Freddie, we want to avoid FOMO Freddie at the cocktail party because he's going to always make us feel like we're missing out.

[Krista Dibiaz]

Yeah, plus he sounds annoying.

[Wes Moss]

He's the worst get cornered by FOMO Freddy. The next piece of this, and this to some extent contributes to FOMO Freddy, is that we want to. Investing is both easier and harder than it's ever been. It's easier because there's low cost products and there's thousands of them to choose from. So that makes things easier than the 1980s, like Clark was talking about earlier today. And there's all of this information that's out there that also makes things somewhat easier but also makes it harder because you're pulled in all these different directions and then the headlines of the world about what is about to go wrong or what is currently going wrong, that permeates everything. So it makes it really hard for stock investors because you can always make a case that, hey, the world's about to fall apart. That means the stock market's going to go down, the economy is going to go into recession, there's a jobs number, inflation number, what the Fed's doing. It's okay to understand what's happening in the world, but we can't let the headlines constantly knock us off course. So we have to, we have to figure out a way mentally to somewhat ignore the headlines. And then the last piece of this, again, equally as important of the last four that I shared is to start with some sort of plan. The world is uncertain, but when we do planning, we can bring some certainty into our lives because we can control how much we're saving every year, how much we're spending every year, how much we think we might want to spend in retirement. When are we going to start our income streams? We could start Social Security at 62, but if we do some planning, maybe it makes more sense to wait for a higher security amount, our Social Security number amount per month, and wait till we're 67 or maybe even age 70. There are enough variables for us to control and I think there's really five core. You could add a couple extra to the list of planning. So you're talking about five to 10 variables. That's still a lot to keep just mentally in line in your head, particularly when it's got to be over a timeline, a 20, 30 year period. So whether you write down a financial plan, I'm a big believer of writing down a one page plan, drawn out a timeline, seeing when our different income streams are going to start depending on our age. So whether it's we draw it out or we do this through financial planning software, again readily available, if we are able to, to put something in place and it doesn't have to be overly complex. It really helps us, guides us on that journey. It helps us with avoiding FOMO Freddie. It helps us with patience and longevity and investing. And it brings all these pieces together. And I think it gives you a really good shot at achieving your goals of financial freedom and retirement and most importantly, give you more peace of mind so that you end up with a happy retirement.

[Krista Dibiaz]

I love it. All right, we're going to give you a couple of questions now. Wes, you ready for those from the audience?

[Wes Moss]

100%.

[Krista Dibiaz]

All right, this one comes in from Kathy in Orego. Kathy says, I wonder.

[Wes Moss]

I've never been to Oregon, first of all. So Kathy, I'm just going to tell you that right now.

[Krista Dibiaz]

It's beautiful. Okay. Kathy says, I Wonder if a 1.41% management fee with Fidelity is a fair amount to charge for my $400,000 403 rollover.

[Wes Moss]

1%.

[Krista Dibiaz]

Correct.

[Wes Moss]

Got it.

[Krista Dibiaz]

I retired in 2019 and live on my pension and other income. I have no debt and plan to draw RMD at 73. For the last two years, all my money was in CDs. But I think it may be time to get help. My Fidelity rep contacts me once a to review my account and what I feel is a sales pitch for their services. I'm not knowledgeable about investing and would rather not deal with it. What is your opinion on the fee or do you have other suggestions?

[Wes Moss]

Okay, so a couple of things here. If you're paying a fee, you should be getting comprehensive advice. So if you're going to be paying a, let's call it in the industry, a fee of anything more than 1% is high. Kathy's paying almost 1 1/2 percent.

[Krista Dibiaz]

Right.

[Wes Moss]

So it's a pretty high fee for just being in a fund which doesn't necessarily give any advice. Right. It's just a vehicle to park your money. So I think right out of the gate we've got to say that, yes, Kathy, that that's pretty high. And mutual fund costs have come down over the last 20 years significantly. And then ETFs or exchange traded funds, they've brought the cost down even more. So to pay 1.4% for just sitting in a fund, that seems really high. And there's a lot of other options that she can find probably very equivalent funds that are 90% less than that. So that is, I think, the first place to start. The second thought here for Kathy is when you're dealing with a representative from one of these big investment firms, they really are trying and I'm talking about the big guys, Fidelity, Schwab Vanguard. They want people to have a plan. They want people to be in the right investment products for them. So yes, sometimes it probably does feel like a sales call, but it also may just be a motivator to say, hey, let's do some bigger picture planning. And what Kathy can also do is find a fee only advisor. And Fidelity and Schwab and these big companies can typically point their clients to this and they actually are happy to do so.

[Krista Dibiaz]

Right. And they'll be a fiduciary if they.

[Wes Moss]

Right. And you can find a fiduciary, which means that that advisory fir that's now working alongside Fidelity Schwab is only allowed to look out for your very best interest. This is a confusing point in the financial industry. It's not just about you would think, well, isn't every advisor looking at your best interest? No, there's a whole other set of standards that just says the investments have to be prudent, which is another nice word for saying they just have to be okay.

[Krista Dibiaz]

Right, Right.

[Wes Moss]

So I think what she could do is find a fee environment that is a lot, that is less or a lot less. Find an advisor through some sort of fee only advisory firm that is looking out for her best interest. And then most importantly, looking at the bigger picture and not just the vehicle, hey, here's a fund that works, but here's a strategy that is less expensive. And let's also talk about your taxes and your estate planning and all of those things. So yes, I think that at least she's been invested and that's 80% of the battle. At least she's been doing that or that's half the battle. I think that she can really improve that, which will be a much more efficient path for her to reach her retirement goals.

[Krista Dibiaz]

Awesome. Okay, and then we've got this one that came in from Vanessa in Alaska. This question is for Wes Moss. Both my husband and I are state employees with no pension. Since our state doesn't participate in Social Security, we will not receive Social Security benefits when we retire. Both of us are in our late 40s. Since we don't have any fixed income, we retire. How would we allocate our retirement funds should we do anything different than those who at least have a part of their annual expenses covered by fixed incomes? We've had this concern for a while and even lost some money getting in and out of bad annuity products. Currently, we don't have any annuity or insurance products other than our term life insurance.

[Wes Moss]

Krista, we could probably do a whole show on Alaska. Right? This is still the wild frontier. And when this question came in, I was thinking, wait a minute, you've got no Social Security. So if you're in the private sector and you're paying into Social Security, yes, you're going to still get Social Security in Alaska. But it's very unique that the state employees like Vanessa, they don't get Social Security, which is a big chunk of retirement savings for people. It was something like in 2006, the state employees went from having a defined benefit, meaning a pension plan, like Clark was talking about earlier today, to say, hey, like, this is on you. They moved to a defined contribution plan. They said, look, you've got to save your own money. So to some extent, what does she need to think about differently? She's not going to have Social Security. That could be the loss of $2,000 a month, $2,500 a month for her, and if her husband is working in the system as well. So that's a big gap to fill. So there's a couple of things. One, Vanessa's got to rely on the system that they do have, which is a pretty good defined contribution plan for the state of Alaska or the state employee. It's, I believe, the way it works there. And again, this is another state I have not been to, but I'd love to.

[Krista Dibiaz]

You got to go there.

[Wes Moss]

I'd love to go to Alaska. Is that they want you to or they. They require you to put about 8% of your earnings into their defined contribution plan, like a 401k. So that's a lot. The good news is they match a big portion, depending on your. Whether you're a teacher for TRS or state employee, they're going to give you 5 to 7%.

[Krista Dibiaz]

Oh, that's good.

[Wes Moss]

So that get. If you do 8 plus 7, you're at 15% in savings. So that's a lot in itself. But again, it's taxing. Right. It comes out of your paycheck. But there's really. There's no other option for Vanessa. The one thing that is uniquely good about Alaska, and I'm sure Vanessa and anybody from Alaska listening knows this part of it, is that there's this very unique system called the permanent fund in Alaska. It's an $80 billion fund that state has, and I don't know if it was originally derived from oil revenue. And I was going to say that.

[Krista Dibiaz]

Sounds like oil money. Yeah.

[Wes Moss]

But now it's invested. It's a giant plan that Pays out a dividend. It's the permanent fund. I think it's the pfd, the permanent fund dividend. And every single person that lives in Alaska that's been there, I'd say, a year or more, and this is for little kids, too, receives money from this fund in any given year. So it's a little bit like Social Security. Last year it was something like $1300 per person. I think this year it was something like seventeen hundred dollars per person. So it's like Social Security, but you get it your whole life. So at least she has that to make up some of that gap. And. And we know Alaska is one of the most expensive states now. Housing is pretty cheap in Alaska. It's pretty inexpensive, but everything else is through the roof. Food is double. Transportation is double. It's expensive to live in Alaska. So she's going to need to really. She's going to really have on that defined contribution plan in the state so that she's saving her own money. And then there's one cool cherry on top when it comes to state employees in Alaska, and that's an additional plan called a 457 plan. She can put another big percentage of her salary into the 457 plan. So thinking this through, if she's doing 8 with the defined contribution, she's getting a match of 7. That's 15. If she does, let's say another 5%. And I know, Vanessa, this is a lot of money, but another 5% of savings on top of that into the 457 plan, which is very much like a 401 plan, then that might be enough to make up for the strange situation you find yourself in, which is no Social Security.

[Krista Dibiaz]

And I have to ask, because, you know, Clark's answer to everything is freeze your credit or Roth ira. Is there any room for a Roth IRA or anything like that in here?

[Wes Moss]

I don't know the specifics about the 457 plan right there, but I would not be surprised if there's a 457roth option. And if she has that, it's probably the best. A good option for her to go with.

[Krista Dibiaz]

Okay, great. Well, I think we'll take a break. Oh, no. Everything I've learned, I've learned from you and Clark. So. All right, we'll take a break now, and then we come back. What are you going to talk about?

[Wes Moss]

I wanted to dive into some of the metrics around planning, and maybe because we ended with that, we'll go into how to create a plan. It's not as complicated as we think.

[Krista Dibiaz]

I love that. Okay.

[Apple Advertisement]

This podcast is brought to you by Progressive Insurance. You chose to hit play on this podcast today. Smart Choice Progressive loves to help people make smart choices and that's why they offer a tool called Auto Quote Explorer that allows you to compare your Progressive Car Insurance quote with rates from other companies so you can save time on the research and could enjoy savings when you choose the best rate for you. Give it a try after this [e-mail] Progressive Casualty Insurance Company and affiliates not available in all states and situations. Prices vary based on how you buy. If you love iPhone, you'll love Apple Card. It comes with the privacy and security you expect from Apple. Plus you earn up to 3% daily cash back on every purchase, which can automatically earn interest when you open a High Yield Savings account through Apple Card. Apply for Apple Card in the Wallet app subject to credit approval. Savings is available to Apple Card owners subject to eligibility. Apple Card and Savings by Goldman Sachs Bank USA Salt Lake City Branch Member FDIC terms and [e-mail] Imagine what's possible when learning doesn't get in the way of life at Capella University. Our game changing flexpath learning format lets you set your own deadlines so you can learn at a time and pace that works for you. It's an education you can tailor to your schedule. That means you don't have to put your life on hold to pursue your professional goals. Instead, enjoy learning your way and earn your degree without missing a beat. A different future is closer than you think with Capella University. Learn more at capella.

[Wes Moss]

Edu all right, welcome back. I wanted to talk about planning because again, we live in this so uncertain world. And if you think about planning over the course of time, there's just so many variables swimming around in our heads and the media that takes us off track and FOMO Freddie at the Christmas party he wants us to we should have been invested in something else. I can't believe you missed that. So the whole journey is really hard. And it's not just hard at any given time, it's always hard. It's we're always running into walls and we're running into things that make the journey uncertain. And then they it throws us off track. So what we almost have to do is and this is number five on my list of five keys of fundamen, sound, investing and retirement planning is you've got to have a plan and you've got this uncertain world with unlimited variables of things taking us off track. But the good news Is when it comes to planning, there's only so many variables and we can control them. I really think there's five. There's five. You can make more than that. But if you think about what it takes to set a course and get to the point you need to get to in retirement, it's a couple really core things. First of all, it's a timeline. So thinking about it over the course of 20 and 30 years, and then the really important keys that come up, like when do I get Social Security or when do I have my mortgage paid off? Right. So we think about it in the course of time. Secondly, this goes back to what are the big variables? One, how much money we have already saved. Number two, how much can we save per year? Three, what is our assumed rate of return? Depending on how, what kind of investor you are, could be conservatively 4 or 5%. If you're a super conservative investor, it could be 7, 8% if you're going to be an all stock investor. So you've got to pick that number, but you can control it. And then of course, what we would like to be able to spend, like what's our goal, how much can we spend in the future? And then we apply when we look at our savings, what it will be in 10 and 15 and 20 and 30 years, then we apply the 4% rule, which is another topic we'll talk about. But very simply, we can apply. Well, I know I can take 4% plus inflation each year and have a really good chance of not running out of money for 30 years. So that's another variable. It's kind of somewhat of a. Even though it's a rule of thumb, it's more of a constant. And again, we want as many constants as we can and things that we can control in this, this mapping process of this plan, the way I like to do it, because I feel as though you really understand what you're doing if you draw it out. So I draw out a timeline and I start with the current year, let's call it 20, 25. And in five years, let's say you're going to be 65. Well, that's a year you might, you're going to get Medicare and maybe that's when you want to start your Social Security. So you say, well, I'm going to start social now and my wife is one year younger so she could start social the next year. So we started to drop in these income streams that really matter. If we live in Alaska, we drop in the permanent dividend fund like we talked about. Then we also start with, well, what's our nest egg today? Maybe it's 50,000, maybe it's 250,000. And we say, well, in 10 years, if I add 1,000amonth or 12 grand per year and it's at a 5% rate of return, well, we get a number. We know that, well, in 10 years we'll have a million and a quarter or a million and a half or whatever that number is. And then we say, well, we can take 4% of that and that'll be in addition to my Social Security or maybe I have a pension that I dropped into that timeline. And now guess what? We have approximately what we think we can spend on an annual basis in retirement divided by 12. Now we've got a monthly budget in retirement. So if you think about it, there are really only about five to six, call it a half a dozen really important variables that need to go into this plan. Six is a lot lower of a number to control than infinity. All the things that we can't control are kind of infinity. Yet if we're looking at the basics here, what I have saved today, how much I am going to spend or save each year, what my rate of return is and what I'd like to spend, and my 4% rule, and when my income streams come in, it's still a lot of variables, but at least it's manageable. So we can either draw this out, you can have a fiduciary retirement advisor help you draw it out, or you can do it via software. So there are lots of tools online that'll lay this out for you over time. You can go to any financial planning firm should have the software to put all this together. One of the critical pieces here is to understand that let's say our budget's $5,000 a month today or $8,000 a month today, that's not going to cut it in 20 years. So one of those variables, in addition to our rate of return assumption, is that we've got to be able to plan for inflation. And that's why it's helpful to utilize some of these more robust software plans that help map out what things are going to look like in 10 years and 15 and 20 years and 30 years. So if we're able to do that, whether we do it as just a sheet of paper, Krista, or we do it with an advisor and we use software to do it, it lays the foundation for you to be able to reach your goals. And more importantly, it can keep you on Track. It makes investing easier. And I think it's just. It is a critical piece to be able to make retirement successful.

[Krista Dibiaz]

I love it. Okay, so we're going to go to more questions. This one came in from Gerald in Alabama.

[Wes Moss]

These are all over the country, by the way. I love this. Oregon, Alaska, Alaska. I have been to Alabama.

[Krista Dibiaz]

All right.

[Wes Moss]

Have been to Alabama. I was just at BUC EE's in Alabama.

[Krista Dibiaz]

I've never been to a Bucky. It's been a discussion.

[Wes Moss]

Largest gas station that I've ever seen. I couldn't even. There are probably. There are a hundred gas pumps.

[Krista Dibiaz]

Oh, don't get Clark started on Buc EE's.

[Wes Moss]

Does he love Bucky's?

[Krista Dibiaz]

Loves it. All right.

[Wes Moss]

I got my ugly Christmas sweater at Buc ee's.

[Krista Dibiaz]

Oh, my gosh.

[Wes Moss]

And some candied. The lady that was there, she was making the candied nuts, and she let me try the different flavors. The almond, the cashew. They're all so good. They may actually have more sugar that runs through BUC EE's than they do pump gas in any given day.

[Krista Dibiaz]

I bet you're right. All right, so Gerald has two questions for you. First, I'm retired with a 403 and 457 with my old employer invested in this company. Both funds have been doing okay with a mix of stocks and bonds. I'm 69. I plan on leaving the funds alone until I have to start RMDs at 73. Do I need to convert them to anything now or wait until the year I have to start taking them? And second, I have a small pension and Social Security. I have a little leftover after all my bills. What is the best thing to invest? Put my money in. I have an ample emergency fund and one cd.

[Wes Moss]

So a couple really critical pieces of info here. Gerald is 69. That's important because there's some age differences between when you can utilize a 457 plan versus a 403 plan. But he's passed all of those ages, so that that kind of makes it so that he can focus in and look at both of those and say he has free and open access to both of those plans. That's retirement money. He can start taking it at this point at any time and not pay any penalties. So that's great. Of course, he does have to pay taxes, and he's looking four years out into the future for his required minimum distributions. That's when the IRS says you've got to take out around 4% or so in that first year. And Pull money out so that you pay taxes on it doesn't mean that you have to spend. It just means you have to take it out of a retirement account. Now if you can imagine having two accounts or three or four different retirement accounts, how do you keep track of your RMDs? And if you don't take your RMDs, it's a massive penalty. It's like 50% penalty. So if you're supposed to take out $10,000 and you didn't do it, you've got a $5,000 penalty, which is crazy. So you got to do the RMDs and you got to keep track of them. I think the easiest way to do that. And again, Gerald doesn't, we don't want to mess around with RMDs. So to make it easier, he can put all of those retirement funds, whether he has two or three or five different retirement funds. And if you're thinking about this question as well, listening or watching us, the more different retirement accounts you have, the more confusing it is. So just consolidate them into one. So Gerald can open up a self directed Iraq, not a Roth, because that has tax implications, but an IRA. Enroll in a tax free way. His $457,000 into that, his 403B into that. If he has another retirement account, he can put that into that. So now he's just got one account to manage. Easier to do. And it makes it a lot easier when it comes time to taking out those RMDs, because it's coming from one account and he can make sure he doesn't miss it.

[Krista Dibiaz]

All right, this one came in from Lucas in California. Of the funds I have now in Vanguard, I have five total holdings. VTI, VGT, VHT, VXUS and 2055 TDF. My combined expense ratio is 0.39%. Is this okay? Should I consider something different, like consolidating? Am I diluting my money? Am I even thinking about this the right way? I'm interested in your opinion for a situation such as mine, for a long term investor just getting started within the last few years.

[Wes Moss]

Okay, so Lucas in California. So first of all, we talked about number two or three on our list, massive diversification. Lucas has got it. This is a great thing about what he's doing. I think you listed out five different Vanguard ETFs. Maybe one of them's a fund right out of the gate. I recognize some of those symbols. VTI as an example. That's the Total Stock Market Index. Guess how many stocks that has how many? Over 3,500 stocks.

[Krista Dibiaz]

Oh, I was going to say a thousand. Wow.

[Wes Moss]

It's something like 3600 stocks. It's amazing. It's giant the X US, which is a Vanguard Total Global World Index. I don't know if that's the exact name, but it's essentially almost every single company that's publicly traded outside of the US that ETF alone has over 8,000 positions. So he's got lots of diversification. What he's thinking here, and if you go to Vanguard and you look at these ETFs, one of these is healthcare ETF, so it's 300 healthcare companies, a technology ETF, so you got lots of diversification. And by the way, it's almost 100% in stock, even though one of those is a target date fund. But if you go to any Vanguard etf, they're usually a tenth of a percent or less. So on any given one of these, and some of these are as low as the total market, one is something like a 0.0. So when he adds all them up, what he's doing is he's stacking all those fees on top of each other, and it adds up to almost, almost 40 basis points, which is almost a half a percent. I love that he's looking at this because cost matters, but he's looking at it the wrong way. So, Lucas, you're stacking all those fees to get to your 0.39 of a percent. The reality is you've got to look at it on a really a global basis. They don't stack up on top of each other. It's 0.3, 0.03 for one of them and.08 for another one. So all in that collective is probably less than a tenth of a percent collectively, not four, ten like he's thinking. So his overall cost is a lot lower than he's thinking. You don't want to stack it, so that's good. So I think he thinks he's deluding himself by having all these different funds. He's not. From a cost perspective, from an investment perspective, it's also not the worst thing in the world. I mean, he owns almost every single company on the planet, so there's probably a lot of overlap in those different funds, but that's okay. It's massive diversification. I think more importantly to note, it is almost 100% in stocks. These are stock ETFs, and one of these is a target date. That's a target date fund in 2055. So 30 years from now, those funds are almost all in stock as well when it's that far out. So just know lots of diversification. That's great. Your allocation is 100% in stocks again. Okay. Particularly if you're in your 30s, 40s, 50s. If Lucas is closer to retirement, it's probably a lot aggressive. If you're on the doorstep of retirement, it sounds like Lucas is mostly doing the right thing.

[Krista Dibiaz]

Yeah, no, I think he's definitely sounds like he's younger because he wants long term advice. So that is great. And William in Washington says that he started investing 25 years ago in the Vanguard Star fund. It's in a Roth, which I'm maxing out every year. I'm three years away from retirement. Is this fund still a good choice for my situation?

[Wes Moss]

Again, everyone's gonna be a little bit different. And there's no way to give exact investment advice here that you guys have said that many times. But first of all, this is a great example. William has had patience and longevity, and he has a nice. Not only just diversification, but some diversity within the asset classes that are in that Star fund. So the Vanguard Star fund is. Call it 10 different funds that Vanguard operates, and they're all in one fund. And about 60% of the assets in that fund are stock based. So there's a US part, there's an international part, so that's good. And the 40% is in the safety side of the equation. That's a little closer to what I would consider dry powder. But the bond side of the equation is there for stability, it's there for income. And again, it makes the overall investment experience a little less bumpy, or in this case, a lot less bumpy, because 40% is a fairly high number, I would say that this may have been even a little conservative for somebody in their 20s or 30s. But 90% of the battle is being invested. And having at least 50 to 60% in stocks like he has, it's been a really good fund. It's average. I want to say it's been over 7 or 8% per annum over time. Even though it's a relatively conservative fund. Now that he's close to retirement, William, I think that this is the kind of balance you want to go into retirement with. So maybe it was a little conservative 20 years ago. I think it's kind of right in the right zone for most people today. So if he was 100%, if we go back to the last question, if he's 100% stocks now and he's on the doorstep of retirement. He he may want to look at getting this balance that he has, 60% stocks, 40% bonds, but he's already there. The good news is I think that's an appropriate balance for a lot of people, not everyone. But I don't think he needs to make any radical shifts to get more conservative today because we still want stocks in our portfolio to outpace inflation for a long retirement.

[Krista Dibiaz]

Okay. Well, thank thank you so much, Wes. That does it for us this week. Well, you and I this week. Clark will be back tomorrow, and we'll be back next Tuesday. So don't forget, if you have a question for Wes, go to clark.com ask. You can ask a question to Wes or Clark there. And I hope you have a great rest of your day.