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The Clark Howard Podcast
07.21.26 Ask An Advisor With Wes Moss
00:32:45
What Is the Retire Sooner Method? & Can You Retire Without Touching the Principal?
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Transcript35 lines
- [00:05]
A
Welcome to Ask an Advisor here on the Clark Howard Show. I'm Krista Dibias here with Wes Moss.
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B
Hello. Hey, Krista Dibias.
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A
And today you have a couple of really interesting topics. First, you're going to talk about, well, the title of your new book is the Retire sooner Method. So you're going to say what the retire sooner method actually is.
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B
Yes.
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A
And then later you came in hot today from a client meeting and said that a client asked you a question and it's something you want to talk about.
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B
Yeah. I'm going to title this. Don't mess with the principal.
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A
Okay.
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B
Don't mess with the principle.
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A
All right, so I'm looking forward to hearing that.
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B
All right, so we'll just start with I want to do this justice and I want to make this concise so that we're not talking about this for the next hour because I could definitely do that. And I wanted to give the highlights what we're trying to help with when it comes to the retire sooner method. So today I'll call this retire sooner method your retirement happiness gps. I was in a foreign city, that city, I don't know this past weekend, and I just think about how often if GPS is not on, how quickly I get lost. You're literally coming out of the parking lot and you forget to turn it on or you don't know where the next destination is and you happen to take the wrong turn out of a, a grass parking lot for one of these sporting events I was at, you end up, it could be like a nightmare. It could take an extra half an hour, hour to your trip if you're going the wrong direction. And I think we all know that if we are not using our GPS in our cars, in the world that we live in, it could double. Your trip could take a 15 minute trip into 30. And the whole point about the retire student method is to be able to have a map where you're making the most right turns possible. You can't make every right turn. That's somewhat impossible in the world of financial retirement planning. But you can make the vast majority of the right turns. So if you have a 30 minute drive and you shave off two minutes, and who doesn't do that? By the way, in your car you put in, it says 30 minutes. I immediately think, oh, I think I can do this in 28 same right. Same whether it's Google Maps or Waze or whatever you prefer to use. And that two minutes may not sound like a lot, but that's 6% and if you think about that, over the course of a working career, to shave 6% off of 65 years could be four years. So the accumulation of way more right turns correct terms, I should say, as opposed to left to right. The higher probability we have to shave off our working years and to be in a position to say yes for retirement. The overarching. One of the first things that really set this whole project off is that the minute someone is able to say yes to you're either retired or financially in a position to retire, happiness levels jump dramatically. To see a 5 or 6 or 7 or even 10% jump is was big in my research. This is a 21% jump. It's a big deal to be able to be in that position. And we all want to get there and have the really that the quicker we have financial freedom, the better. And that's what the retire suitor method really is all about. And the other big part of this, which I'm trying to help solve for, is this great fear we have in America of running out of money. It's pervasive. Even if you don't think, oh gosh, I'm going, I don't want to run out of money, it's still kind of that insidious worry that underlies a lot of our other fears because we think, oh, markets going down. Well, I don't like markets to go down. Why? Because we don't want to run out of money. We don't want to ever not have the freedom that we've worked so hard financially to find. So through what I think are these five steps together collectively, you, you end up being able to do the retire sooner method, shave some years off, and then I think maybe even more importantly, doing all five of them. What I've seen in our research and doing the math on this, it gives an American or anyone. I didn't do that. This research was all in the United States a 96% chance of being a happy retiree if they're doing all five of these. And that to me is the most wonderful part of all this. So I'll briefly go through the five steps. The one, the first step is the financial foundation. That is the money green zones. And I'll expand on this in another segment or topic. But it's the liquid amount, which is a million dollars. And the financial world is all over the map when it comes to how much you need for retirement. There are people that say you need a minimum of five, if not $10 million to retire. And then we get all these Mixed messages about what's the right number. To me it's the financial green zones or the checkpoints that the vast majority of Americans if we can get to a means financial freedom and we see a big direct correlation as happiness levels rise. It's the million dollar level green zone for liquid retirement assets too. Household income of 100,000 household and then a mortgage payoff within sight within nine years. So that's number one. Number two, super activities or core pursuits. I know from the research and I've done this now for 15 years and this is the latest version of it in the retire student method is to be doing almost 20 hours a week of your core pursuits. Those are your favorite super activities. And Happy retirees have five or more. The unhappy category has four or less. The time difference per year. It's 280 hours difference. Happy retirees spend that much more time doing their super activities and core pursuits. That's seven workweeks a year worth of doing the things you love to do. So that is number two. Number three, I call this get a life because it's about socialization and this is so much about our community. Friendship in America we know statistically has been in pretty dramatic decline for the last 40 years. If we go look at the numbers from 1990 through last year the number of people that have zero close friends has gone up almost 5x. It's gone from. Well it's four times. It's gone from 3% to 12%. That's a 4x rise in people who have no one in this world. So we have a loneliness epidemic in the United States. 77% of the happiest retirees say they have enough close friends. Only 38% of the unhappy retirees do. So that's another two times difference. Dramatic. So it's an essential part of a happy retirement. So that's step number three, four. So much of this can be that our anxiety can be solved by mapping all of this out. And that is you essentially doing your own GPS and doing that once or twice a year knowing that you have a guided blueprint. Blueprint on what? The financial side, the cash flow side. That's the dollars and cents of I need to spend this. I have this much. It'll give you your withdrawal rate and being able to map out that timeline. It's saying in three years or five years or seven or 10 years I'm going to stop working. It's easy to do. I love doing. I think it's fun to do and it really reduces so much of Our money anxiety and happy retirees do this in a much more significant way than the unhappy group number five is was a little bit of a wild card when I got this research back. I call this the superpower of the happy retiree and that's sleep. The statistics around this is that 69% so almost 70% of the happy retiree camp says they get enough sleep. Only 38% of the unhappy group does. Why? I'm not exactly sure. But it shows up that sleep is a critical piece of the foundation for. Part of it is that the culture we live in is still go go and we celebrate work in America and we celebrate a lack of sleep and a grind and that's hard to turn off when we stop working and then we go into retirement. So to me, being able to give yourself permission and understand that that not only from a health perspective, which is critically important in a hundred different ways, but from a psychological standpoint, having that map in step four, hitting those financial green zones, you put all that together. And I've seen people, once they have come together with some clarity, which I would, I look at as the retire sooner method, they're able to sleep well at night. And those are the five key pillars and steps of the retire sooner method that I believe in very much. And it leads to a happy retirement and that's what I want for everyone.
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A
That's great. Okay, I'm going to go to some questions that came in for you. If you have a question for Wes, you can go to wesmoss.com that's W E S M O S S.com ask and Eric in Kentucky went to that forum and wrote this. I, like you, I suspect am an affluent and frugal. I like to make my own investment decisions but I am loathe to fully trust the opinions of advisors. I'm semi retired but my wife still works full time and we've been blessed to be high income earners. We are in our early 60s and have saved in excess of $5 million for retirement. Most in IRAs and 401k, some in Roth IRAs, but not nearly enough in this tax free vehicle. We're going to take a tax haircut when RMDs come due. I'm looking for the most tax efficient method to help with this retirement transition and for Roth conversions. At the end of the day I'm looking for an AI program that I can put in all the numbers and let it chew through the various strategies based on income and expenses to achieve our go. Essentially I'm Looking for the AI replacement for a financial advisor and cpa. I currently use Quicken, but it doesn't offer any of these features. I have heard of some programs such as Meze, FP Alpha, Bolden instead TaxLab and TaxGPT. Have you had any experience with these or other programs you think might help?
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B
So Eric, a couple of things here. Yes, Bolden and several of the other ones that you've mentioned. I'm not a heavy user of these, but I've looked at them and I've prepared, previewed them and I've even built. Our team has even built some AI powered, well, not AI powered, AI related financial planning software. And it can be just as good as the legacy stuff that's been around for 25 years. What's interesting is that the new AI powered version of these is just, is very similar to the old version. It's just easier to use because it still ends up. You still need to identify the critical variables that allow you to make the decisions. And, and if you think about taxes, what is the hardest thing about taxes? I mean, just venture this guess besides the 10,000 pages of taxes.
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A
Oh my gosh, to me that's the worst part of it. But you're trying to also predict where taxes are gonna be in the future. There's so much.
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B
That's a good one. Yes, yes. Here's what's tough on taxes. Getting everything together.
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A
Oh, okay.
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B
If you've got K1s and 401ks and RMDs and income from here, and income from there, and accounts over here and deductions from over real estate from over here. The reality is there is no program that helps with that. That is you. You gotta be the person that collects all of that. That is the top. That is one of the many things that's really hard about taxes. And until we have robots running around and maybe Tesla will solve this with Humanoids, there is just no way around that. So I would say that there are great tools today in almost all of the different language models and all the different AI programs. They are great at math and great at spreadsheets and great at answering questions. And those are all super helpful, Eric, but you are, you are the financial advisor because there's no substitute for it. You don't need a financial advisor or a CPA if you are the financial advisor in the cpa. I think we have more tools today to do that than ever. But there is no one answer or plan for a Roth conversion. And why is that? It's because it's different every year because your income's different every year, but you don't know where your income is going to be in three years. So it's an ongoing process that these new tools, which just make the old tools more user friendly, it makes it so that you can do it, but it's an ongoing process that you're doing every single year. You're doing your taxes and you're figuring out, well, I don't want to convert anything above the 24% bracket, so I have to know my income today, and then maybe I'm in the 12. And that gives me 12% worth of room to fill the tax buckets. And that's your prediction because you don't know exactly what your taxes are going to be for that particular year. And then you say, we'll convert up to that. Then you have your new tax rate and then you'll do it again the next year and the next year. And you're right, because you've got so much Eric in IRA and 401k money, your RMDs will be huge by the time you get to 73. So you do want to really look at some Roth conversions, and they're great tools to help with this. But just remember, you are the QB from now on.
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A
All right. Kimberly in Texas says, I'm planning to retire in 16 months. I invested in a 6040 portfolio, 40% invested in the BND and BNDX ETFs. When the bond market dropped in 2022 due to high interest rates, I lost $26,000. Will I ever recover this loss? Help me understand why I would want to stay in the bond market earning two and a half to three and a half versus keeping the money in a money market account earning 3.8%. Thank you so much for helping us, Kimberly.
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B
You're on the precipice of retiring 16 months away. You're very right. There was a period of time where we had this giant transition of rates and when rates went up, bond prices went down. We had zero rates and we got back to a more normal level. They're around 4% today for both shorter term rates and even more intermediate term rates. That's the yield we're getting today on bonds. This is a very sensible question, because if a money market's paying for, why do I want to take the risk in owning a bond ETF that could go down? That's paying 4. The answer is the minute rates go down is the minute your money market rate goes down, it'll happen almost overnight. Whereas if you own bonds, that is much more locked in for the duration, for a much longer period of time. So in bond investing, yield is destiny. Meaning that about where yields are today gives you a very high confidence level that your overall rate of return, which is again mostly interest, some in price change, will be around where rates are. So, so that's the first thing is you get to lock in rates longer for fixed income and rates have moderated higher to a more normal level. The other big part of this, Kimberly, is the counterbalancing of something in a portfolio that actually goes up a little bit or goes up maybe significantly when the other piece, in this case stocks are maybe going down. And for a lot of investors, that counterbalance of the two very different pieces I think is very helpful for a lot of investors. It makes them, it almost makes it easier. And you can become a, I think a better stock investor because it takes patience, because you have the combination of the two.
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A
Okay, and this one came in from Mike in North Carolina. I'm 68 and retired. I have about 800,000 in retirement funds, 150 in emergency funds. And I'm lucky enough to have a pension, Social Security and VA disability provides me with an after tax income that total with everything of $75,000 a year. I'm doing a yearly Roth conversion that keeps me under the IRMAA limit. Our house vehicles are all paid for and expenses are for daily living. My spouse is 53 and still working. She maxes out her Roth 401K and contributes the max to a Roth IRA. I just started looking into spousal IRAs. It's my understanding that since I don't have any earned income, she can contribute to the over 50. Catch up to a Roth IRA for me as long as we file a joint return and she has income to cover it. Are there any other issues or pitfalls if we decide to pursue a spousal IRA contribution? And is there an age limit?
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B
Mike, this is cool. You're totally retired. There's a big age gap between you guys. Are you and your spouse 68 and she's 53. You're retired, she's working. The good news is there's no age limit on the spousal contribution, so you can do that. And the fact that she has earned income obviously makes it so that she can contribute to your spousal ira. You've got a lot of things going on here, though. She's contributing to 401k or Roth 401k and you're converting potentially some money from an IRA to a Roth, that counts as taxable income. That's a big part of this. And then you've got this Social Security and disability of 75,000. So just be careful. Here's the pitfall is that you convert too much to go beyond the allowable income phase out to be able to do the Roth contribution. It's something around 240,000 if you're a married couple filing jointly. So that's what I'd be watching out for here. Yes, you can do the spousal, but the Roth conversion is also income. So if you do that on top of the 75 and her wage income, she's working, then you've got to watch out for that higher overall income level so you don't get phased out.
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A
All right, we're going to take a quick break. When we come back, you're going to explain what you meant by don't mess with the principal.
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B
Don't mess. Don't mess with the principal.
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C
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B
Explore further@range rover.com welcome back to Ask an Advisor. I'm Wes Moss along with Krista Dibias. Do you know what I mean when I say don't mess with the principal?
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A
I know you're not talking about school.
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B
That's such a common word I write. I remember when I finally remembered how to spell which one. And it's the whole pal thing. The principal is your pal. So that's the principal Al versus la. Alright, so we're talking about the principal as in le, as opposed to the guy walking around the halls that you're scared about getting detention from. This is because I literally had a meeting this morning. And the goal, we'll call him. Jim has been working like so many of us for 40 plus years from age 16, well longer than that, to 65. And he's literally calling it quits. That was the email I got. I was like, I'm calling it quits. And he's been waiting to do that for so many years. And he finally is doing it this summer and he's very excited about it. But he is the first thing he said to me and he's like, I've told you this before, but I want to remind you I'm really scared of not having earned income. I'm really scared and I don't want to mess with or touch the principal. And I said, okay, well, we've got to do some planning around that. And again, what is the root of that? The root of that fear is, first of all, it's a big change. You're going from accumulation to distribution. You've worked forever. You're used to money always coming in through a paycheck and now you've saved a bunch. And you may be totally fine when it comes to your assets now and you don't have to work and they'll produce enough to fill the gap of a Social Security. And in this case he has an annuity that is a lifetime annuity, but it's still a little nerve wracking. And he said, is there a way I can take money and just not have to worry about touching the principal? And in this particular case, it is very possible. It's very possible. And here's the formula. You're trying to fill a gap. So you've got your social and maybe your spouse's social and maybe one or two other income streams. Say that adds up to 75,000. We just had a caller question about that, said they are around 75, but you need 100, so you have 25 a year. Well, if your portfolio is producing dividends and interest, it may very well be able to cover that every single year so that you don't mess with the principal. And let's go back to our total return equation that we're all follow. We all have the same equation to follow. Total return equals growth plus income. There's been a lot of growth in the market lately. Prices have gone up, the S&P 500, the Dow, et cetera. That means that dividend yields, the percentage yields we're getting are lower than they've been in a long time. It's not the amount of income because the amount of income for dividends of The S&P 500 have stayed about where they are and ratcheted Higher and ratcheted higher year after year after year after year. It's just that prices are really hot. So if I go back to a golden dividend age, not hard to find 3, 4, 5%, even 6% yields today, that's harder. But it's not that hard to find a 2 percenter or a 3% stock yield. It's not hard at all, number one. And again from another question earlier, we know that bond yields are around 4 to even 5% without having to go into the junk category. So if you have a portfolio of a bunch of 2 and 3% dividend paying stocks and then your bonds are yielding 4, 4.5, then all of a sudden you've got a overall 3% yield on a million dollars, 3% is $30,000. So in this particular scenario, needing to fill a gap of 25, totally doable, totally doable. And it's a, I think it's a really low pressure way to think about retirement because if you never have to worry about touching the principal, you just live off of the income, dividends, interest distributions, then you really, really do not have to ever worry about again messing with the principal or ever even coming close to running out. Now, for a lot of people you say, well, that would be nice if I could live off of 2 and 3 and 4% dividend yields and that would solve all my retirement problems. And for a lot of people it's, that's not enough. It's not high enough. So the next layer of protection and being reasonable about our withdrawal rates goes back to the 4% plus rule where families can count on anywhere from four. I'm not going to say all the way up to five, but that range of four, four and a half, maybe even 5% in some years that you can count on along with inflation increases and not worry about running out of money over time. And in most of the cases when you do the research on the 4% plus withdrawal rate, balances still continue to grow. And if you think about a market that has averaged 10, 11, 12% a year and bonds that have averaged 2 to 5% per year, if you're getting a blended return of 6 or 7, then really over a long stretch, not maybe in a given six month or even year, but over five and 10 and 15 years, if you're averaging six to seven and you're only pulling out four to five, then again, the math really works. So those are two ways to look at it. Be very nice not to ever have to mess with the principal. But if that doesn't quite work that 4 to 4.5% range should.
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A
And how did Jim feel after your talk?
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B
It was I just don't want to touch the principal and it doesn't sound like we have to. So he was in a much better place once we were done.
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A
Good for him. Okay, Lance in Minnesota wrote in to you@westmoss.com ask and he said I know Roths are best if you expect to be in a higher tax bracket in the future or during retirement. But my question is this. I don't plan on working in retirement. I don't plan on having any income in retirement other than my IRA and 401k. So why does it make sense to do a Roth? Shouldn't I just do a traditional IRA to avoid taxes now and once I retire and I'm generating no income, I'll be able to withdraw and pay less on taxes with what am I missing here?
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B
You may very well be right. And for a lot of people that that is the strategy that works is I see more times than not even with RMDs Lance, which is the big variable here, folks very often or more often than not are in a lower overall tax bracket in retirement than they are while they're working. One perennial factor is that a lot of states at Georgia is one example. There's a giant state income tax deduction for per individual once you hit 65. So that in itself wipes out 5% in taxes that you were already paying before our FICA goes away. FICA is 7.2% and that's on wage income. Well, you don't pay that when you're in retirement. So our effective tax rates often drop in retirement. Unless we go back to an earlier caller question. I keep saying call email question I'm sorry, email question Somebody has a giant amount of IRA money, $5 million. If you have $5 million in IRA money, your RMD will be something like 200,000 a year. If you've got a couple hundred grand in ira money, your RMDs are going to be minimal from a tax perspective. And that happens a lot. So if your taxes in the future seem as though they'll be flat to lower than where you are today, then a Roth conversion doesn't make sense. So that's so you're not crazy. It's just that I know we love a Roth account because it gets to grow tax free, then it comes out tax free. It's like a magical retirement planning vehicle. But to convert into one makes less sense than people might think it does In a lot of cases, just because there's so much, so much, as my children would say, so much glaze around the Roth.
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A
Okay, Kevin in New Jersey says, I'm having a debate with a friend over prepaying a mortgage. What is your opinion on say making one extra payment a year or X amount per month on your mortgage versus investing that extra money on a constant basis after 10 to 20 years, which would be more beneficial? My friend is of the opinion that it didn't help that that much financially for him. However, he does live in Ireland and he's not subject to high property taxes like we are here in New Jersey.
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B
Your friend is crazy. Kevin in New Jersey? What is this, a trick question? Yes, it helps to make extra payments. If your normal course of mortgage is 30 and you make extra payments and it goes down to 20, you've shaved 10 years off of mortgage, you've saved tons of money in interest payments and you've gotten to that magical mortgage freedom a decade sooner. It's a total no brainer. The only argument against doing that is that you, quote, make more money in the stock market by taking that extra payment and putting it in your investment account. Fair argument, but are you going to trade a maybe 10% rate of return for a guaranteed savings of 6% on your interest? Tie goes to paying it off. Not to mention the great financial or the psychological position you're in once you have no more mortgage. So your friend maybe has a point. He's all the way across the ocean in a whole nother tax scenario. And property taxes here in America. Kevin in New Jersey, you're on the right track.
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A
Okay. Jed, the water saver from California says, would it be a good idea to get a reverse mortgage and use the lump sum payment to buy a permanent annuity? My wife and I would get 80% of $1 million. We're in our late 60s and are also concerned about long term care. Will this affect Irmaa too? Any guidance would be appreciated.
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B
Jed, in California, in financial planning, two negatives do not make a positive. And what I mean by that is that you're contemplating. I'm glad you're emailing in and asking about this. Two of the worst possible things you can ever do for your financial future. One is a reverse mortgage and two is an annuity. And you're saying, you're asking, should I do both of these together? No way, man. I would not even think about either of them, let alone putting them both together. Because the reverse mortgage one, the money you're getting from that is equity from your home, so it shouldn't count towards the income. So that's one positive. But these things are super expensive. The fees are through the roof. Especially on a big reverse mortgage like that. It could be 20, 30 grand a year. Year. Or to set it up, then if you end up going into some sort of healthcare situation where, let's say it's memory care, they could call your reverse mortgage on you, and then you're really in bad shape. But to take that money out and then put it into another risky vehicle. And I don't think of annuities as risky because you're putting all of your eggs into one annuity basket and one company that's making you a promise. And I would never do that for such a big amount of money. So the answer is, please reconsider doing both of these, particularly doing both of these together, because I think it leads to. It's like financial quicksand for what you're thinking, Jet. So you're going the wrong way.
- [30:53]
A
Okay. All right. Well, that's gonna do it for us today on this episode of Ask an Advisor. Hope you have a great rest of your week. We're back with a new episode with Clark tomorrow, and we'll be back next Tuesday, and we'll see you then.