The Clark Howard Podcast: Episode Summary – 02.11.25 "Ask An Advisor With Wes Moss"

Release Date: February 11, 2025

In this episode of The Clark Howard Podcast, host Clark Howard welcomes listeners to a special segment titled "Ask An Advisor," featuring seasoned financial advisor Wes Moss and financial expert Krista. The episode delves into critical personal finance topics, addressing listeners' questions on pensions, retirement planning, investment strategies, and more. Below is a detailed summary of the discussions, enriched with notable quotes and timestamps for reference.

1. Pension Lump Sum vs. Lifetime Payout

Discussion Highlights: Wes Moss and Krista kick off the episode by exploring the often-overlooked decision between opting for a lump sum payment versus a lifetime pension payout. This topic is particularly relevant for individuals facing workforce reductions or policy changes affecting pension plans.

Key Points:

• Calculating the Return on Ad Spend (ROAS): Krista explains the importance of evaluating pension options through a mathematical lens, introducing her "6% test" to determine the better financial choice.

  "If the monthly pension amount is 6% or more, then you can start thinking, well, maybe I do take this monthly amount, because it's guaranteed for life." (06:00)

• Inflation Considerations: Krista emphasizes that while some pensions, like teacher pensions, adjust for inflation, most corporate pensions do not, meaning the purchasing power of monthly payouts may erode over time.

  "Some pensions, like the teacher pension, typically increase for inflation. But most corporate pensions are static." (07:00)

• Case Study: Through hypothetical scenarios, they illustrate how different lump sum amounts compare to monthly pensions, reinforcing the practicality of the 6% benchmark.

  "Taking the monthly pension in that case is definitely a better deal." (07:23)

Conclusion: Choosing between a lump sum and a pension payout requires careful analysis of return rates, inflation impact, and personal financial stability. The 6% test serves as a valuable starting point for this decision-making process.

2. 401(k) Target Date Funds: To Switch or Not?

Discussion Highlights: Listener Bruce from North Carolina inquires about adjusting his 401(k) investments from a Vanguard Target Retirement Fund 2025 to a 2030 Target Fund as he approaches retirement.

Key Points:

• Allocation vs. Target Date Funds: Krista advises that target date funds are a convenient tool for automatic asset allocation but may not always align with individual investment preferences.

  "It's not about the target date fund and what it does. It's about what allocation is right for you." (09:27)

• Conservatism Over Time: She notes that many target date funds become overly conservative too quickly, potentially hindering growth during retirement years.

  "They get overly conservative, overly quickly, especially when you're in retirement for 20 or 30 years." (09:27)

• Personalized Strategy: Krista recommends tailoring the investment strategy to maintain a balanced portfolio that reflects one's risk tolerance and retirement timeline, rather than solely relying on the target date.

Conclusion: While target date funds offer a straightforward investment strategy, investors should consider personal allocation preferences and the fund's conservatism levels to optimize their retirement portfolios.

3. Understanding Beta and Volatility in Investments

Discussion Highlights: Ron from North Carolina seeks clarity on the concepts of beta and volatility, expressing confusion over their definitions and inconsistencies across financial platforms.

Key Points:

• Defining Volatility and Beta: Krista differentiates between the two, explaining that volatility measures the extent of asset price fluctuations, while beta assesses volatility relative to a benchmark like the S&P 500.

  "Volatility just means how much any given asset class has a propensity to move up or down. Beta is volatility relative to something else." (12:15)

• Variations Across Platforms: She highlights that beta values can vary depending on the time frame and benchmark used by different financial websites, making standardization challenging.

  "Different websites will use different time frames to assign where the beta is relative to. That's why it's going to be hard to find an exact beta from site to site." (12:15)

• Practical Use: Krista suggests using beta as a tool to gauge relative risk but cautions investors to consider the context in which it's calculated.

Conclusion: Understanding the distinction between beta and volatility is crucial for making informed investment decisions. Investors should be aware of the specific metrics and benchmarks used when evaluating beta values.

4. Selling a Business: Tax and Retirement Planning Considerations

Discussion Highlights: McKay from Colorado raises questions about advising a family member who plans to sell their business, seeking guidance on tax optimization and retirement fund allocation.

Key Points:

• Professional Consultation: Krista strongly recommends consulting with a team of professionals, including a deal attorney, estate planner, CPA, and financial advisor, to navigate the complexities of selling a business.

  "The short answer on this one is lawyer, estate planner, CPA, then financial advisor." (15:09)

• Tax Implications: She underscores the importance of understanding the tax consequences of the business sale, whether it's structured as a lump sum or over time, and how it affects retirement savings.

• Strategic Investment: Krista advises integrating the proceeds from the sale into a well-thought-out investment strategy, potentially utilizing IRAs for long-term growth.

Conclusion: Selling a business involves multifaceted financial and legal considerations. Engaging with a diverse team of professionals ensures that the transaction is optimized for tax efficiency and aligns with long-term retirement goals.

5. Investing When the Market Hits All-Time Highs

Discussion Highlights: Wes Moss and Krista tackle the anxiety surrounding investing when the stock market is at or near all-time highs, debunking myths and presenting historical data to guide investor behavior.

Key Points:

• Frequency of All-Time Highs: Krista reveals that all-time highs occur more frequently than commonly perceived, citing that there were 57 new market highs in 2024 alone.

  "Since 1950, there are over 1,250 new market highs. There were 57 new market highs in 2024." (18:11)

• Historical Performance: Discussing studies by J.P. Morgan, she notes that investing at all-time highs has historically yielded higher average returns compared to random investment dates.

  "Investing at an all-time high was even greater. So picking the day the market hit an all-time high can result in a better return." (18:20)

• Bull vs. Bear Markets: Krista emphasizes that bull markets tend to last longer than bear markets, making the timing of investments less critical than participating consistently.

  "Bull markets last a lot longer than bear markets. Median length of a bull market is something like 46 months, and average bear market is more like five years." (22:47)

• Investment Strategies: She advocates for dollar-cost averaging as an effective strategy to mitigate the fear of market timing.

  "Dollar cost averaging is a wonderful remedy for the problem of not being comfortable putting money to work." (23:01)

Conclusion: Investing during market highs is not inherently risky and can be advantageous based on historical data. Strategies like dollar-cost averaging help investors participate in the market without the stress of perfect timing.

6. Mega Backdoor Roth Contributions vs. Brokerage Accounts

Discussion Highlights: Stanley from Iowa inquires about the benefits and complexities of utilizing mega backdoor Roth contributions compared to maintaining a joint brokerage account with his spouse.

Key Points:

• Legitimacy of Mega Backdoor Roth: Krista confirms that mega backdoor Roth contributions are a legitimate strategy for maximizing retirement savings but come with complexities.

  "It's not a cheat code, it's a real thing." (24:06)

• Plan Requirements: She highlights that not all retirement plans support after-tax contributions and in-service withdrawals, which are essential for executing this strategy.

• Tax Implications: Krista warns that while contributions to a Roth IRA via this method are tax-free, any investment gains may be subject to taxes.

  "The gain is. So you have to worry about the gain. You have to file special forms." (24:06)

• Tax Bracket Considerations: She advises assessing future tax brackets to determine the efficacy of Roth conversions versus traditional brokerage accounts.

Conclusion: Mega backdoor Roth contributions can significantly enhance retirement savings but require careful planning and adherence to specific retirement plan provisions. Consulting with a financial advisor is recommended to navigate the associated complexities.

7. Inheriting Traditional and Roth IRAs: Withdrawal Strategies

Discussion Highlights: Charlotte from Arizona seeks advice on managing inherited IRAs, focusing on withdrawal strategies to optimize tax implications over a 10-year period.

Key Points:

• Strategic Withdrawals: Krista supports Charlotte's idea of timing withdrawals during lower-income years, such as a planned sabbatical, to minimize tax burdens.

  "I love the sabbatical idea. ... it's a great year to do more distribution from the traditional IRA." (27:34)

• Roth IRA Management: She confirms that inherited Roth IRAs do not require minimum distributions, allowing for tax-free growth over the designated period.

  "You don't need to take out anything from the Roth until the 10th year. Let that thing grow and then distribute it tax-free." (27:34)

• Tax Planning: Krista emphasizes the importance of understanding current and future tax rates to effectively manage required minimum distributions (RMDs) from traditional IRAs.

Conclusion: Effective management of inherited IRAs involves strategic withdrawal planning aligned with anticipated income levels and tax situations. Charlotte's approach of leveraging low-income periods for larger distributions is a sound strategy to reduce tax liabilities.

8. Managing a Small Pension Account: Annuity vs. IRA Rollovers

Discussion Highlights: Eric from Georgia discusses his dilemma of choosing between taking an annuity payout from a small pension account or rolling it into an IRA for potentially higher returns.

Key Points:

• Assessment of Return Rates: Krista analyzes the discrepancy between the pension's projected 6% growth and current lower interest rates, suggesting that annuities may not offer favorable returns compared to IRA investments.

  "The annuity company on the annuity tables have to cover two lives. So the longer the expected life, the lower the payout per month will be." (08:00)

• 6% Test Application: She applies the 6% test to Eric's situation, concluding that even with a conservative 2% rate, the pension's return still surpasses the minimum threshold.

  "Even if it's 180 a month, 180 times 12 is $2,160 a year divided by 30 is 7.2% still beats the 6% test." (31:24)

• Investment Control: Krista points out that rolling over to an IRA offers greater control and potential for higher returns through diversified investments, albeit with increased risk.

  "If you're comfortable doing so and you want to take it under your control and invest it... then you would really want to consider putting that in your own retirement account." (31:24)

Conclusion: Deciding between annuitizing a pension or rolling it over into an IRA hinges on the individual's risk tolerance, expected return rates, and desire for investment control. Eric may benefit from investing the funds in an IRA to potentially achieve higher returns, provided he is comfortable with the associated risks.

Closing Remarks

Wes Moss and Krista conclude the episode by reiterating the importance of informed decision-making in personal finance. They encourage listeners to seek professional advice tailored to their unique financial situations and to leverage the resources available to optimize their financial well-being.

"Investing is about participation, it's not about perfection." (22:59)

For more personalized advice, listeners are invited to submit their questions at www.clark.com/ask.

Notable Quotes:

• "If the monthly pension amount is 6% or more, then you can start thinking, well, maybe I do take this monthly amount, because it's guaranteed for life." (06:00)

• "Dollar cost averaging is a wonderful remedy for the problem of not being comfortable putting money to work." (23:01)

• "Investing is about participation, it's not about perfection." (22:59)

Timestamp References:

• 06:00 - Pension Lump Sum Discussion
• 07:00 - Inflation and Pension Payouts
• 07:23 - Lump Sum vs. Pension Example
• 09:27 - 401(k) Target Date Funds Allocation
• 12:15 - Beta vs. Volatility Explanation
• 15:09 - Selling a Business: Professional Advice
• 18:11 - Investing at All-Time Market Highs
• 18:20 - Historical Market Performance
• 22:47 - Bull vs. Bear Markets Duration
• 23:01 - Dollar Cost Averaging Strategy
• 24:06 - Mega Backdoor Roth Contributions
• 27:34 - Inheriting IRAs Withdrawal Strategy
• 31:24 - Managing a Small Pension Account

Resources Mentioned:

• Ask Clark: Submit your financial questions at www.clark.com/askclark.
• Clark.com and ClarkDeals.com: Free resources for saving money and avoiding ripoffs.

This episode provides invaluable insights into complex financial decisions, empowering listeners to navigate their personal finances with confidence and strategic foresight.