01.21.25 Ask An Advisor With Wes Moss - Why Successful Investors Buy Stocks (Mostly) and Stock Market FOMO

Summary

The Clark Howard Podcast – Episode Summary Title: Ask An Advisor With Wes Moss - Why Successful Investors Buy Stocks (Mostly) and Stock Market FOMO
Release Date: January 21, 2025
Host: Clark Howard
Guest: Wes Moss, Fee-Only Fiduciary Advisor

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Introduction to Successful Investing

In this episode of The Clark Howard Podcast, host Krista Dibiaz welcomes Wes Moss, a fee-only fiduciary advisor and a new member of Team Clark. Wes delves into the foundational principles of successful investing, emphasizing a strategy centered around stock investments while highlighting the importance of diversification, patience, and strategic planning.

Key Points Discussed:

1. Stocks Mostly:

   • Wes Moss [01:25]: "We want stocks mostly. If you look at what's outpaced inflation in a very successful way and help people keep their purchasing power over time, so we want to be able to participate in stocks."
   • Rationale: Despite market volatility over the past 25 years, stocks, particularly the S&P 500, have consistently outperformed other asset classes, providing an average annual return of around 10%.

2. Massive Diversification and Asset Allocation:

   • Diversification Importance: Diversifying investments across various sectors and asset classes mitigates risk and enhances the stability of returns.

3. Patience and Longevity:

   • Wes Moss [04:07]: "You can retire sooner than you think." Emphasizing long-term investment horizons, Wes highlights how compound growth over decades can significantly bolster retirement savings.

4. Avoiding Market Headlines:

   • Strategy: Investors should remain focused on their long-term goals rather than reacting to short-term market news or fluctuations.

5. Strategic Planning:

   • Financial Planning: Proper estate and retirement planning are crucial for achieving financial freedom and ensuring a comfortable retirement.

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Listener Questions and Expert Advice

1. International Investing:

Question from Benjamin in Alaska:
“My wife is from India and is Canadian. As an American, would it be wise to invest in Indian, Canadian, and US stock markets?”

Wes Moss [07:00]:
"Unless you have a hometown bias that justifies heavy investment in those specific markets, it's generally better to focus on the US market due to its stability and robust economic structure."

Advice:

• Home Bias Caution: Avoid concentrating investments in foreign markets unless there's a compelling reason.
• Diversified International Funds: For exposure beyond the US, opt for diversified international funds that spread investments across multiple countries, reducing risk associated with any single market.

2. Estate Planning Amid Health Challenges:

Question from Louise in Pennsylvania:
“My husband has been diagnosed with Alzheimer's, and we're concerned about the financial implications of long-term care. Should we set up an irrevocable trust to protect our home?”

Wes Moss [10:14]:
"The first step is to consult with an elder care attorney specializing in Medicare and Medicaid planning. Irrevocable trusts can be complex, especially with Medicaid's five-year look-back rule, and professional guidance is essential."

Advice:

• Appoint a Trusted Power of Attorney: Ensure a reliable family member can manage finances and healthcare decisions.
• Professional Consultation: Engage with an elder care attorney to navigate Medicaid planning and evaluate the benefits and drawbacks of an irrevocable trust.

3. Retirement Planning vs. Mortgage Repayment:

Question from Tiffany in Georgia:
“At 55, I have $400,000 in retirement savings and a $128,000 mortgage at 4.2% interest. Should I double my mortgage payments to pay it off faster or reduce my retirement contributions?”

Wes Moss [13:10]:
"Continue contributing to your retirement funds while making an extra mortgage payment annually. This strategy allows you to grow your retirement savings while gradually reducing mortgage debt."

Advice:

• Prioritize Retirement Savings: Maintaining consistent contributions to retirement accounts is crucial for reaching the $700,000 median savings goal.
• Supplement Mortgage Payments: Making occasional extra payments can help shorten the mortgage term without sacrificing retirement growth.

4. Evaluating Fixed Annuities:

Question from Donna in Virginia:
“An insurance company is offering a guaranteed fixed-rate three-year annuity yielding 5.4%. Is this a safe investment?”

Wes Moss [26:12]:
"Fixed annuities through insurance companies lack FDIC insurance and concentration risks. They also tend to be inflexible once committed. Consider diversified alternatives like U.S. Treasuries or bond ETFs for greater liquidity and safety."

Advice:

• Diversification: Avoid placing significant funds into a single insurance company’s annuity.
• Alternative Investments: Opt for U.S. Treasuries or diversified bond ETFs that offer more flexibility and lower risk.

5. Withdrawal Strategies in Retirement:

Question from Keith:
“With retirement approaching, should I use my Roth IRA funds first to take advantage of tax-free income?”

Wes Moss [29:47]:
"Start withdrawals from taxable brokerage accounts to benefit from lower long-term capital gains taxes, then utilize IRA funds, and finally tap into Roth accounts. This approach optimizes tax efficiency and preserves the growth potential of Roth funds."

Advice:

• Order of Withdrawals:
  1. Taxable Accounts: Utilize these first to manage tax liabilities effectively.
  2. IRA/401(k) Accounts: Withdraw next to minimize future Required Minimum Distributions (RMDs).
  3. Roth Accounts: Preserve these for as long as possible to maximize tax-free growth.

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Understanding and Managing Investment FOMO

Segment on FOMO Freddie:

Wes Moss [16:11]:
"FOMO Freddie is that voice at social gatherings pushing you to chase the latest investment trend, fearing you'll miss out on significant gains."

Key Insights:

• Patience Over Chasing Trends: Successful investing relies on long-term strategies rather than reacting to short-term market spikes.
• Consistent Investment Styles: Historically, sticking to a chosen investment style yields better returns than frequently shifting to chase recent winners.
• Long-Term Growth: Emulating investors like Warren Buffett, who focus on sustained growth over decades, typically leads to financial success.

Notable Quote:

• Wes Moss [19:31]: "If you're chasing styles, you're chasing what did well. Mathematically, we have seen, and historically, that can lead to underperformance compared to a consistent, long-term strategy."

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Conclusion

In this insightful episode, Wes Moss underscores the importance of a disciplined, long-term approach to investing, primarily through stocks, while maintaining diversification and patience. He provides thoughtful responses to listener questions, offering practical advice on international investing, estate planning, mortgage repayment, evaluating annuities, and optimizing retirement withdrawals. Additionally, the discussion on managing investment FOMO reinforces the value of sticking to a well-thought-out investment strategy over succumbing to market hype.

Listeners are encouraged to focus on sustainable investment practices, seek professional guidance for complex financial decisions, and remain steadfast in their financial planning to achieve long-term financial freedom.

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For more personalized advice and to join the conversation, visit www.clark.com/askclark.

Transcript

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[Krista Dibiaz]

Welcome back to Ask An Advisor. Team Clark's weekly episode where we go deeper on all things investing. I'm Krista Dibiaz. I am here with Wes Moss, who is a fee only fiduciary advisor and a great friend of the show and now a member of Team Clark.

[Wes Moss]

And a burgundy vest.

[Krista Dibiaz]

Yes, and your burgundy vest looking very sharp as always. All right, so what are you going to talk about today?

[Wes Moss]

I wanted to pick up on five keys to being a successful investor and successful retirement. I went through these more in depth two weeks ago when I was here on the show, but I wanted to go in more in depth than the first one, which is stocks mostly. And there's a reason that I say stocks first and then mostly second. Remember, just as a quick outline, we want stocks mostly. We want massive diversification and asset allocation. We want patience, longevity. Investing is easier and harder all at the same time. So we have to figure out how to avoid headlines or ignore headlines and then planning. So let's go into stocks mostly. I think back over the past 25 years or so of investing. There's so many major market events and economic events that make investing really tough. If you think the most recently Covid was a 35% stock market correction, really a crash in a very short period of time. In about a month, the world shut down. The stock market was down a third of its value. The financial crisis stock market was down over 50% after the technology bubble burst in 2000, 2001. That recession led to a minus 50% in the S&P 500. That makes investing really difficult. However, if we're looking at stocks broadly and just looking at The S&P 500, it's very difficult to find a better place to outpace inflation over time. There are lots of other categories. There's commodities, there are fixed income and bonds, which is part of the, mostly part I'll get to in just a second. There's real estate. So there's a lot of other good options. But if you look at what's outpaced inflation in a very successful way and help people keep their purchasing power over time, so we want to be able to participate in stocks. If I look over the past decade, The S&P 500 has had an even better run than it has historically. It's been close to 12% per annum. But if you look over 20 years and 30 years, it gets close to that 10% number. And we know mathematically if you're an investor in anything and you make 10% per annum on average, you, your money mathematically doubles every 7.2 years. So it's a, that's a very powerful force. I've seen very few people over the course of the last 20 plus years of doing retirement planning that have saved their way to retirement in order to get to a place where they are financially free and be able to do the things that they want to do. And by the way, happy retirees, which I studied for many, many years and.

[Krista Dibiaz]

Wrote a book about, and wrote a book about this, what's it called again.

[Wes Moss]

You can retire sooner than you think. And the second, what the happiest retirees know, I'm updating right now, you can retire sooner than you think because it's been a while and we've had a lot of inflation. So we've updated for inflation and several other items now with that. What's the happy retiree have on average or the median number adjusted for inflation is about $700,000 to get to, to get to retirement. Now that's not. I know that there's other folks out there that say you need 3 million or 5 million or 8 million. The median happy retiree liquid savings number is about 700. The average of the mean is about one and a quarter million. How do you get that? Most people can't just save their way to that. We've got to save and invest our way to that. And that's where stocks come in. So we know that it's had a, it's a bumpy history with stocks. It makes it difficult. But over time, that 10 year number of over 10% and the long term number 20 and 30 years, 10% on average. That's a really powerful tailwind if you're also a saver. So I think most of us know that. However, it's easier said than done. So how to make it a little bit easier is this mostly part. So stocks, that's our inflation fighter over time. But most investors need some sort of, whether it's a sliver of the pie or a big chunk of the overall pie, that's in what I call dry powder safety assets, whether they're bonds or U.S. treasuries or high quality corporate bonds or money market, anything that is designed or has a track record to not move all that much when the big scary stock market goes down 35% in a month. These are the assets that are meant for stability mathematically. Here's the way I look at this. If you have three years worth of spending, at least in your dry powder category, that helps you weather the storms on the more volatile stock side of the equation. So imagine you need $100,000 a year in spending. It's a big, I know it's a big number, but a round number three times that would be 300,000 if you had a million dollar retirement portfolio. If 300 or 30% of that was in dry powder, it would almost allows us to be better stock investors. So think about that formula. We want mostly stocks, but for most people that hedge against the whole portfolio going up and down at any given point is to have some dry powder. Three years of the spending is a really good starting point for that.

[Krista Dibiaz]

Great. All right, ready for some questions?

[Wes Moss]

Sure.

[Krista Dibiaz]

This came in from Benjamin in Alaska. My wife is from India and is Canadian. As an American, would it be wise to invest in Indian, Canadian and US Stock markets?

[Wes Moss]

Wow, talk about a currency basket here. So they're in Alaska and he's asking about India, US And Canada. Here's how I would look at this, is that we all have what is called a home bias. So we have this home bias of I know this country and I feel most comfortable investing in this country. The question though is if you're from Italy, would you want to have a whole bunch of your investments in the Italian stock market? Or if you were from this extreme example, not far from Alaska though, is Russia. So if you're from Russia, you want to have a whole bunch of investments in the Russian stock market, which by the way, virtually shut down over the last several years. So the answer is no, unless, and this, I'm very hometown biased here because I'm biased towards The United States. There are few places to invest in the world that have our structure and governance and rule of law and innovation. In fact, I often write about what I call the army of American productivity. We have the most productive system and the most productive workforce. So I'm partial to the United States to invest in the US not just because I'm from the United States, but because I've studied countries all over the world and it's hard to find any place as stable and as prosperous as the US I would say again, nothing wrong with Canada, but that stock market is very focused on oil, energy, commodities. Not necessarily a bad thing. India as an example, is an absolutely booming economy. We know that everything that's happened with tariff and political tensions around the world. One of our biggest headbutts is with China. And a lot of businesses have been moving their companies to India. And it's a very fast growing economy. However, it's also a lot less stable. They have less currency stability. And even though you're from there, I would still keep the vast majority of my investments US based. And if you're looking for international investments, look at a diversified international fund. It has not just one or two countries, but multiple countries around the world. And that's the way I would look.

[Krista Dibiaz]

This one is from Louise in Pennsylvania. My husband in his 70s, has been diagnosed with Alzheimer's. So sorry, Louise, that is so tough. At first the family thought it was normal aging, and two years ago he was diagnosed. Right now he's able to care for himself with minimal help from me. For example, he may have a question about an email and its authenticity or to show him how to get something on his iPhone. My concerns are the average cost of living at a nursing care facility costs 13 to $15,000 a month. If he lives in a nursing home, he will eventually use up his financial resources, at which time Medicaid will take over. I recently learned if I sell my home while he's living or deceased, the government will use the money from the sale to pay for his costs and reimburse Medicaid. I was told to set up an irrevocable trust and put our house in this tr. The trust would be managed by one of our daughters. But is this wise? Because I would no longer have control of the money. I would like to think that my daughter would honor my wishes. But what do you advise?

[Wes Moss]

So Louise is in a tough spot and this is happening every day in America as the baby boomer generation and older baby boomers are facing things like dementia and Alzheimer's and health issues. So I think the first thing that should remind everyone that that's listening and watching is that at some point somebody in the family is going to have trouble managing their finances. So right out of the gate, it's really important to remember that we need to have some person that we trust. And it may be the spouse, but it may be your most responsible or trusted child. And from big family, not everyone's the same, but you probably can find one really responsible child that you know will do the right thing and do it for a long period of time because it's a long term job to help take care of mom and dad's finances. So first of all that's estate planning and that is making sure someone can be a power of attorney when you need it. And that goes for financial, it also goes for healthcare. So that's number one. It sounds like she can trust her daughter and I hope she can and she may be that person. The nuances around Medicare Medicaid planning are really complicated. There's an entire profession dedicated to this. It doesn't get talked about a whole lot. You hear estate planning attorney all the time. Less often do we hear about an elder care attorney. So the very first thing I would do is you need to be talking to an elder care attorney that knows how to do Medicare or Medicaid planning. So when it comes to an irrevocable trust, remember that Medicaid can do a five year look back as well. So that complicates things. But if you're speaking with an elder care attorney that does this for a living, he can advise you on how to either protect some of those assets if that makes sense, or if you have a look back issue. Also, you can talk through whether it makes sense to have your daughter as the trustee of some of these assets or most of these assets, which is a really big decision. But the reality here is a lot of people are facing ultra high health care costs. We've got to have our family backup in place and it's good to start doing this trust planning today. While things are good, she's in a tougher spot because things are already getting more difficult. But I think a good elder care attorney will be able to help her through the nuances of exactly what to do.

[Krista Dibiaz]

Good luck. That is such a tough situation. This is from Tiffany in Georgia. I'm a 55 year old single female. I have 400,000 plus in retirement and no real debt other than $128,000 remaining on the mortgage with a 4.2, 5% interest. My question is, I contribute around $1,400 per month to my 403 at this point. Should I double up on my mortgage payments to pay off my house in half the time and reduce my contributions? I would love to retire at 62.

[Wes Moss]

So Tiffany is, let's call that seven years from retirement. Tiffany's 55, wants to retire at 62. So call that seven years. She's got a low interest rate on the mortgage and about she said what $400,000 in savings. I go back to some of, I think really important financial checkpoints for happy retirees. One of them is to have a liquid savings of around 700,000. That's the median. Of course more is, gives you more flexibility and it may be slightly better. And the average from my research is at about a million and a quarter for happy retiree savings. But she's getting there. She's not quite there yet, but she still has a lot of time. So she has seven more years. Another big piece of the equation to be a happy retiree is to have your mortgage either paid off or mortgage pay off within sight within five years. She's still even outside of that window. So I don't know if she needs right now to stop contributing to her retirement plan just to pay off the mortgage. What I would prefer Tiffany to do is continue to do her retirement fund 403. Continue that monthly amount. You really can't over save. It's hard to over save for retirement. I would encourage her to continue with those contributions. She's probably getting a matching to that as well. It's growing tax deferred, which is also really good. And over the next seven years, even at the current pace she's saving, it's probably another $150,000 worth of saving. $150,000 worth of savings plus the investment returns over an entire seven year period. I'm not going to say that it can double, but it can certainly go up significantly. You take her savings of another, call it 150 over seven years plus the investment return, she's going to get to that $700,000 checkpoint or maybe a lot more. I would not back off the savings, however, when it comes to paying off the mortgage because she wants to get rid of that too. Maybe just make an extra payment per year. So you're kind of doing both. Continue the savings, make one extra mortgage payment a year. That'll shave off some time and she'll, she'll arrive at age 62 where she may want to pull the retirement trigger. Maybe she works. I often see though, Krista, people say I want to retire at 62 and they get there and they say, well, maybe one more year. Oh yes, maybe I'll go to 63 or I'll go beyond a 64. So that's her target date of retirement. But she has obvious flexibility around that. So I think if she does a little bit extra on the mortgage, that's great. But I would not stop saving in her retirement plan just for the house just yet.

[Krista Dibiaz]

Excellent. Okay, it's time for a break. What's coming up next?

[Wes Moss]

I want to go into this idea around that it's the guy fomo Freddy, the guy at the cocktail party that's always telling you that what you missed out on how that relates back to patience and longevity when it comes to investing. And I wanted to go deeper into that.

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[Wes Moss]

Talk about FOMO Freddie?

[Krista Dibiaz]

Absolutely.

[Wes Moss]

He's the guy that we Everybody knows FOMO Freddie. This is your neighbor. You may not know him well, but he's at like the Christmas party, he's at the birthday party or the barbecue and he kind of corners you.

[Krista Dibiaz]

I might have met him on a dating app.

[Wes Moss]

He probably did. He probably didn't last too long who you work with and he probably FOMO Freddie wants to say, well, why don't you all talk about fill in the blank. And what he wants to talk about is the thing that's what's in the headlines and the investment that's done the best. If it was back in 2004, it was Florida condos. Freddie's got a Florida condo the last year. Maybe it's a bitcoin or he owns the best semiconductor chip on the planet and most of his portfolios in that invariably you get cornered by this person who we all know, who kind of makes you feel like you've missed out on something. Right. FOMO is fear of missing out.

[Krista Dibiaz]

Right.

[Wes Moss]

I didn't know that for a little while.

[Krista Dibiaz]

Oh, okay.

[Wes Moss]

No, that and it took me a while to figure out Bogo, which is buy one, get one free. I know that you know that here.

[Krista Dibiaz]

Well, Clark was born saying Bogo.

[Wes Moss]

He was born saying Bogo. So is my producer, Mallory. But FOMO Freddie is a Whole nother story. And he's a lot more dangerous. Here's what happens. And this goes back to our five fundamentals and keys to being a successful investor and retirement success. And one of them is patience, persistence and investment longevity. Fomo, Freddie is really just this ethereal concept that you're fearing you're missing out on something better. There is always something better. You can have a mutual fund or an ETF that did 35% last year and you look at that and you're happy about it. But there's an ETF that did 55% and there's an ETF that did 80%. There's always something better, invariably. So then we look at investment styles, right? So again, what's our goal here is to be persistent. We do patient and be and have longevity in the game of investing. We want to invest for 10, 20, 30, 40 years. That's how we make, that's how Warren Buffett made money. It's how almost anyone I've ever known that's successful in retirement. They've saved, but they've also invested for a long period of time. And they've been relatively. And we're human and we're always looking for other opportunities. And this doesn't mean that you don't look for other opportunities. But as long as you have identified something you're comfortable with from an investment standpoint, for the most part, we're better off staying with that in a marathon type way. Now, what are the big categories from an investment standpoint? There's a study that really proves this out. And we're going to look at, let's call it six different styles of investing. So not only are they, there are 8 to 10,000 stocks, there's another 10,000 mutual funds at ETFs and then there's some very core styles, let's say, in the investment world. And you can just start with pure indexing, which, let's just call that the s and P500. Then you can look at a little differently and say, I only want to invest in momentum oriented. I want to choose the style of momentum. I want to choose the style of value stocks. Maybe these are more mature companies that pay out bigger dividends and they're, quote, cheaper than the market. What's their cousin or the opposite style that's also done well over time is growth investing. These are companies that have higher price to earnings ratios. They don't necessarily pay out dividends, but they're growing faster. That's a whole style of investing. There is momentum investing. There is high quality investing, and there's minimum volatility investing. These are all different styles. You can find dozens or hundreds of mutual funds and ETFs that focus in on these particular styles. Now, if you look at any given year, there's almost this leaderboard effect where you'll have a year or two where value is the winner, or then you'll look at the next year and growth is the winner, and then momentum is the winner. And then let's say in rough stock market years, you'll probably see the low volatility style as kind of the leaderboard. And imagine something that looks like the periodical table. And each style has its own color. You start to look at any given year, who wins. You see these, the different colors. Let's say blue is for minimum volatility investing. It may be in the basement. It's kind of the New York jets of the investment world. And then it may move to the top of the leaderboard. Now it's kind of the bell of the ball. And if you look back over the course of the last 20 years and look at each one of those styles, they all do about the same, even though in any given year they're very different. So one year, one is up 25% and one is down two, and then the next year it might be up 15%. And the winner from last year is now in the kind of the New York Jets. So you would tend to think, well, why don't I just go back and look? And this is what FOMO Freddie does. He goes back in any given year and says, I'm going to pick and shift my investment style to what just did the best, and then I'm going to do it again next year. I'm going to pick whatever just did the best. And if you do that every year, you think, wait a minute, you're picking the winner. Maybe there is something to that, and maybe it wins again and wins again. If you look at this on a bar chart, every style does anywhere from 7.5 to 8.5% over the course of time, if you just stuck with it. But the FOMO Freddy approach, where you're going back and looking at the what did the best, he underperforms all of those styles, and in a significant way, 1 1/2 to 2% worse over time because he was changing styles and trying to invest in what already had done well. So the lesson here is that mathematically we have seen, and historically, if you're chasing styles, you're chasing what did well. And this can apply to more things than just style. It can be sectors of the market. You typically end up doing worse than if you stuck with something you really understood, believed in and liked. That gives you longevity. That's usually the best long term plan that keeps you on track and delivers good results.

[Krista Dibiaz]

Makes total sense.

[Wes Moss]

All right, well, speaking of fomo, Freddy on the show.

[Krista Dibiaz]

No, he's gone.

[Wes Moss]

You're cornered by fomo. Freddie. Gosh, I run out of my drink. It's time to go.

[Krista Dibiaz]

All right, we're going to go to a question about a different type of investment. This came in from Donna in Virginia. An insurance company is offering a guaranteed fixed rate three year annuity yielding 5.4 over three years. Five and a half for five years and longer. I'm unfamiliar with this company. Since it's not FDIC insured. Would you consider this a safe investment?

[Wes Moss]

It sounds like Donna is a conservative investor, first of all. So she doesn't want to deal with big fluctuation. She'd rather say, hey, give me five, five and a half percent, but make it really steady. And that sounds pretty good. So let's just maybe identify her as a little bit more of a conservative investor. One thing that conservative investors certainly know is they want lots of diversification. And if you are investing in, let's say, a product that is backed, of course not by the fdic, but in an insurance company, it's a lot like buying one bond from one company because the ability to pay you interest is coming from one company. It's also, I think, important to remember that insurance companies are not regulated by the same bodies as investment companies. When you're investing in an insurance company, you're not getting an investment product even though you're putting money in, you're getting an insurance contract and it's a really big difference.

[Krista Dibiaz]

Probably has huge commissions attached to it.

[Wes Moss]

Usually for these fixed annuities where you're just getting an interest rate, they're typically not necessarily all that expensive. But what are they doing? They're going out and they're saying, well, Treasuries are paying, call it 4.5% or 5%, and corporate bonds are paying 5.5%. They're just taking your money and investing it in corporate bonds, by the way, in a diversified way, and they're trying to pass most of that on to you and then they keep some of it and that's how they're making money. So they're diversified, but you're not. And I think that to me is the biggest drawback in any one of these situations, this particular company, even if it's an A rated or A minus rated insurer, you're still placing all of your cards on this one company to make good on their promise. And that's scary to me, number one. Number two, the other reason I don't love these fixed annuities or insurance contracts, they're very inflexible. Once you sign up for them, you're really locked in. You're locked in for two years, three years, five years. And that I think is really scary for investors. So what else could she do? If you're a conservative investor, you can just buy us good old fashioned U.S. treasuries individually in any brokerage account or any IRA. And those are highly liquid. You don't even have to wait till they fully mature. The highly liquid, meaning you can get out of it whenever you want to get out of it market. There are bond oriented ETFs from government bonds, municipal bonds, corporate bonds, high yield bonds, and again, there's no guarantee on those prices. Many of those fit into that dry powder or safety category that we've been talking about here. But at least they're liquid. So I'd rather see someone not place all their cards on one company that's really an insurance company to make good on the promise while they've locked you up over time. A lot of other more flexible and liquid ways to do it.

[Krista Dibiaz]

Okay, this question's from Keith. He says I'm about 10 months from my Social Security retirement age of 66 and 10 months. I have a Fidelity 401K and recently a Roth IRA through Fidelity. Also I have a portfolio valued at 1 1/4 million, of which 150,000 is in the IRA to date. I am putting as much as possible into the Roth and I plan to wait several more years to draw Social Security. My question is, when I begin to supplement my income with my retirement funds, should I use the Roth funds first and take advantage of the tax free income upfront?

[Wes Moss]

So Keith is thinking about something really important. Yes, the question's about withdrawing money. Where do I get my money from? Is it a Roth? Is it a brokerage account? Is it a retirement account? It's really about managing your taxes. It's about how do we in retirement keep our tax rate and manage it in the most effective way. Two extreme examples, Roth money. You pull out $10,000. There should be no taxes to that, so it doesn't increase your adjusted gross income. You pay zero. You take $10,000 out of an IRA or 401k. It's fully taxable, so it increases your income. So as an example here or as a general rule, different accounts impact your taxes in a different way. The Roth is really good for that. The IRA is really bad for that. What's kind of somewhere in the middle is a brokerage account. And it sounds like a big portion of his money is in a brokerage account. And that's kind of not as good as the Roth, but it's not as punitive tax wise as an ira. And here's the order of operations. Typically, to manage your tax rate, you want to first be utilizing a brokerage account because you can typically, if you're investing for dividends or long term capital gains, those are more favorable tax rates than ordinary income like the Iraq imposes upon you when you pull money out. So it's a better vehicle if you can have dividends that are typically at the 15% tax rate and depending on his tax taxable income, they could even be at zero. Now if he's a huge, huge income earner, 500, $600,000 or more, then it goes all the way up to 20%. But for the vast majority of Americans, we pay 15% on long term capital gains and dividends. So utilizing that taxable account to pull money out of in a tax efficient way, and by the way, can also look at areas that are flat or haven't done so well in a broadly diversified account and pull money out that maybe doesn't even have any gain. So that's a possibility. So first, start with the brokerage. Second we would go to the ira. And if you pull money out of the ira, that is a good thing in some respects because it's reducing how much your RMDs will be in the future. And then the most valuable asset of them all when it comes to tax deferred growth and then tax free distributions, is the Roth. That's the star in the group. And because it's the star, you want to give it the most time to grow. So typically we want to utilize our Roth money later because we want to give it the most amount of time to grow. So I think the order of how we want to take money out, and it's not always in this exact order and a lot of times it's a combination, but it is brokerage account, then IRA and then ultimately Roth. But he's got the right idea here, is managing what his taxes or his income will be to keep his taxes as low as possible in retirement.

[Krista Dibiaz]

Great. Well, that does it for us today. Thank you, Wes. We'll be back in a week. Clark is back tomorrow. Hope the rest of your day is great.

[Wes Moss]

Thanks, Krista.