08.12.25 Is the 60/40 Rule DEAD? and Inheriting Money The Right Way

Summary

The Clark Howard Podcast Episode Summary
Title: Is the 60/40 Rule DEAD? and Inheriting Money The Right Way
Release Date: August 12, 2025
Host: Clark Howard
Special Guests: Wes Moss and Krista Dibias (Team Clark)

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Introduction to the Episode

In this episode of The Clark Howard Podcast, Clark Howard, alongside his expert team members Wes Moss and Krista Dibias, delves into critical financial strategies and considerations for both current investors and those anticipating the complexities of inheriting wealth. The discussion primarily centers around the longevity of the traditional 60/40 investment rule and the multifaceted aspects of inheriting money responsibly.

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Segment 1: Evaluating the 60/40 Investment Rule

Timestamp: [01:14] – [07:42]

Wes Moss initiates the conversation by addressing a perennial question in investment circles: "Is the 60/40 Rule DEAD?" The 60/40 rule traditionally advocates for a portfolio composed of 60% stocks and 40% bonds, aiming to balance growth potential with risk mitigation.

Key Points Discussed:

1. Definition and Purpose of the 60/40 Rule:

   • Moss explains that the 60/40 rule symbolizes a balanced portfolio where stocks represent the growth component and bonds serve as a stabilizing force against market volatility.
   • "The idea behind it is predicated on we want stock or equity exposure to be able to outpace inflation. But we also want this conservative side that does pay us income or interest from bonds that is there to offset and not go down while stocks are going down." [02:06]

2. Historical Performance and Relevance:

   • Moss references his research from his 2013 retirement book, illustrating how a 60/40 portfolio would have performed from 2013 to 2025.
   • He notes that despite a general upward trajectory in the stock market, the bond market's improved yields due to rising interest rates have bolstered the overall portfolio performance.
   • "If we're balancing stocks and bonds, anytime you're not 100% in bonds or 100% in stocks, you have a balance." [02:06]

3. Impact of Interest Rates:

   • The conversation highlights the significance of the interest rate environment, noting that bond yields had risen from below 2% in 2013 to approximately 4.25% in 2025, enhancing the attractiveness of bonds within the portfolio.
   • "The 10-year treasury back then... is now yielding around 4 and a quarter percent." [05:53]

4. Future Outlook:

   • Moss asserts his belief in the continued efficacy of balanced investing, despite evolving market conditions.
   • "I don't think the 60/40 is dead. Are there other iterations, are there other pieces to add into that overall pie? Absolutely. But I just don't think balanced investing is dead by any stretch of the matter." [07:42]

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Segment 2: Listener Questions – Professional Guidance vs. Cost-Effectiveness in Investment Management

Timestamp: [07:42] – [14:32]

Krista Dibias introduces listener questions, beginning with one from an anonymous retiree couple considering the merits of continuing with a fiduciary financial advisor versus switching to a diversified mix of index funds for cost-effectiveness.

Key Points Discussed:

1. Value of Fiduciary Financial Advisors:

   • Wes Moss emphasizes the comprehensive role of financial advisors beyond mere portfolio management, including planning, estate considerations, and tax strategies.
   • "The advisor should help you with the overall planning and that cash flow and that helps you be a better investor over time." [09:13]

2. Cost Considerations:

   • The couple currently pays 0.5% annually on a $2.8 million portfolio, amounting to $14,000 per year.
   • Moss notes that this fee is relatively low compared to industry standards, which can range up to 1%.
   • "Half a percent is actually at the low end of the spectrum." [09:13]

3. Alternatives with Lower Fees:

   • Moss acknowledges services like Vanguard and Fidelity offer advisory options at competitive rates, potentially providing a more cost-effective solution without sacrificing professional guidance.
   • "Vanguard has an option and you're going to pay a certain part of a percent." [14:14]

4. Importance of Professional Expertise:

   • He underscores the benefits of having professional oversight to navigate complex financial landscapes, reduce emotional decision-making, and integrate various financial aspects seamlessly.
   • "To fly totally blind in that one giant area when you don't have the desire nor maybe the expertise to do so. That creates anxiety in its own light." [12:52]

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Segment 3: Roth Conversion Ladder and Tax Strategies

Timestamp: [14:32] – [19:17]

A listener named Chris from Texas seeks guidance on implementing a Roth conversion ladder from his traditional 401(k) to optimize tax efficiency.

Key Points Discussed:

1. Mechanics of Roth Conversion Ladder:

   • Moss outlines the step-by-step process of transferring a portion of the 401(k) to an IRA and subsequently converting it to a Roth IRA, mindful of the pro-rata rule to minimize tax liabilities.
   • "You just have to make sure you're not mixing pre-tax and post-tax money in your IRA to avoid the pro-rata tax complication." [16:20]

2. Importance of Plan Flexibility:

   • The feasibility of performing in-service rollovers is contingent on the employer's 401(k) plan provisions.
   • "If your 401k plan allows for an in-service rollover while you're still working, then the answer is you could do this very likely in any given year and you would just take a portion." [17:00]

3. Tax Planning Considerations:

   • Moss advises on aligning conversion amounts with tax brackets to maintain tax efficiency, emphasizing the unpredictability of future income and tax rates.
   • "Good tax planning is getting an estimate and an idea that's pretty darn close to what it's going to be. That way you're not paralyzed making decisions." [19:03]

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Segment 4: Understanding Self-Directed 401(k) Brokerage Accounts

Timestamp: [19:17] – [21:58]

Steve from Pennsylvania inquires about Fidelity's fully paid lending program and self-directed brokerage options within 401(k) plans.

Key Points Discussed:

1. Functionality of Self-Directed Brokerage Accounts:

   • Moss explains that these accounts allow investors to access a broader range of investment options beyond the standard offerings, facilitating greater customization of investment portfolios.
   • "You're getting more optionality. You get to do the ETFs or the stocks you want as opposed to just the funds of the 401k." [20:07]

2. Potential Benefits:

   • Greater investment flexibility and access to individual securities can enhance portfolio diversification and potential returns.
   • "They have a better chance of keeping you as a client for life if that's the gotcha." [20:42]

3. Considerations and Caveats:

   • While there might not be hidden fees, the primary benefit for providers is client retention and deeper integration into their financial ecosystem.
   • "The gotcha is exposure to what they could offer over time." [21:00]

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Segment 5: The Great Wealth Transfer and Inheriting Money Responsibly

Timestamp: [21:58] – [35:43]

The discussion shifts to the impending massive transfer of wealth, known as the Great Wealth Transfer, and how both inheritors and those planning to leave assets should navigate this complex terrain.

Key Points Discussed:

1. Magnitude of the Wealth Transfer:

   • Moss cites a Market Watch article estimating that $84 trillion will transfer from one generation to the next over the next 20 years, with $16 trillion expected in the upcoming decade.
   • "Now, the reality check here is that 70% of people are not going to have any inheritance. And a lot of that's concentrated in the top 1%, in the top 10% of wealth in America." [22:27]

2. Implications for Inheritors:

   • Inheritors often face challenges in managing sudden wealth, leading to potential financial missteps.
   • Moss advises taking time to assess the inheritance and integrating it thoughtfully into existing financial plans.
   • "You don't have to do anything right away. With one exception... you just have to think about what this might mean for me and my family." [28:49]

3. Estate Planning Essentials:

   • Emphasis on the importance of wills, trusts, and durable power of attorney to ensure assets are distributed according to one's wishes and to streamline the transfer process.
   • "The real solution for this is to discuss it, just to talk about it. And maybe today is just a reminder to nudge mom or dad or if your mom or dad listening to talk to the kids." [33:50]

4. Challenges Among the Wealthy:

   • Surprisingly, even among the wealthy, a significant portion lacks comprehensive estate plans, underscoring the need for proactive financial planning.
   • "Among even wealthy folks... only 54% have a basic estate plan." [29:08]

5. Practical Steps for Effective Inheritance Management:

   • For receivers, Moss recommends patience and strategic planning, especially when dealing with concentrated assets like individual stocks or real estate.
   • For givers, the focus is on clear communication with beneficiaries and establishing structured plans to ensure assets are managed and distributed effectively.
   • "It doesn't have to be an expensive, overly in-depth proposition. You can find an estate planning attorney." [33:13]

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Segment 6: Listener Questions on Investment Efficiency and Brokerage Programs

Timestamp: [35:43] – [43:16]

Further listener questions explore the tax efficiency of target date ETFs versus mutual funds and the intricacies of brokerage lending programs.

Key Points Discussed:

1. Target Date ETFs vs. Mutual Funds:

   • Moss explains that while ETFs generally offer better tax efficiency due to their structural advantages, the difference may not be dramatically significant in the context of target date funds.
   • "The structure of an ETF is better... but not necessarily or dramatically better." [39:39]

2. Fully Paid Lending Programs Explained:

   • Moss breaks down how brokerage firms utilize clients' securities to facilitate margin lending and short selling, sharing a portion of the revenues with clients.
   • "They're splitting the money that they're receiving from this. So they're gonna pay you just like they get paid." [40:16]
   • However, he cautions that returns from such programs are highly variable and often tied to the volatility of the underlying stocks.
   • "Stocks that are in high demand to be shorted... those rates can go up to something like 20, 30% a year." [42:44]

3. Risks Associated with Lending Programs:

   • The primary risk highlighted is the potential for holding highly volatile or risky stocks that are frequently shorted, which could negatively impact the client's portfolio.
   • "You're going to get paid 20% in a lending program to keep holding a stock. It's probably because a lot of people are shorting the stocks. You have the great risk of that stock going down." [42:52]

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Segment 7: Managing Assets for Elderly Care

Timestamp: [43:16] – [48:19]

Mary from Wisconsin seeks advice on asset allocation for her elderly aunt with substantial assets and upcoming long-term care costs.

Key Points Discussed:

1. Asset Allocation Strategy:

   • Moss suggests a balanced approach, recommending a mix of equities and "dry powder" (cash or liquid assets) to hedge against inflation and provide necessary liquidity for care costs.
   • "80% bonds but a little bit 20% in equities can actually smooth out the ride over time and be an inflation hedge, at least a portion." [46:37]

2. Interest Rate Considerations:

   • He emphasizes the importance of locking in current interest rates by investing in longer-term bonds or CDs, especially given the current environment where rates are favorable.
   • "If you can get that 4% plus rate... that covers a couple of months every single year." [48:19]

3. Risk Management:

   • Moss advises against placing all assets in cash due to the risk of declining interest rates, advocating for strategic investments that provide both growth and safety.
   • "Your money market immediately goes down in yield. But the ten-year treasury is essentially locking in for four and a quarter percent." [48:19]

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Conclusion

The episode effectively navigates through pivotal financial strategies, addressing both seasoned investors contemplating the relevance of traditional investment rules and individuals preparing for the significant financial transitions associated with inheriting wealth. Wes Moss and Krista Dibias provide insightful, actionable advice, grounded in current market conditions and timeless financial principles, ensuring listeners are well-equipped to make informed financial decisions.

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Notable Quotes

• Wes Moss:
  "The advisor should help you with the overall planning and that cash flow and that helps you be a better investor over time." [09:13]

• Wes Moss:
  "I don't think the 60/40 is dead. Are there other iterations, are there other pieces to add into that overall pie? Absolutely. But I just don't think balanced investing is dead by any stretch of the matter." [07:42]

• Wes Moss:
  "Good tax planning is getting an estimate and an idea that's pretty darn close to what it's going to be. That way you're not paralyzed making decisions." [19:03]

• Krista Dibias:
  "We all have moments when we could have done better. Like cutting your own hair. Yikes. Or forgetting sunscreen so now you look like a tomato." [24:29]

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Final Thoughts

This episode underscores the importance of balancing traditional investment strategies with modern financial tools and emphasizes proactive estate planning to navigate the impending wealth transfer effectively. Whether you're an investor questioning established norms or someone preparing for future financial legacies, the insights shared by Wes Moss and Krista Dibias offer valuable guidance tailored to diverse financial journeys.

Transcript

[Wes Moss]

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[Krista Dibias]

Of $45 for a three month plan equivalent to $15 per month required new customer offer for first three months only. Speed slow after 35 gigabytes of network's busy taxes and fees extra. See mintmobile.com foreign welcome to ask an Advisor where we here at Team Clark go deeper on all things investing, saving through retirement. Krista dibias here with Wes Moss.

[Wes Moss]

I'm Wes Moss and Krista, what are.

[Krista Dibias]

You talking about today?

[Wes Moss]

Wes first one is a really important overarching topic. I think it applies to pretty much any investor that's watching, which is the headline you'll read and it's perennial or I'll see it a couple times a year. Is the 6040 dead is the question. Really what they're pointing to is that is balance investing not work as well as it used to work. And as an investor, we want balance. Most investors want some sort of balance and that has to do with how stocks are doing and what could be happening with the bond market. That's the balance part. And I want to go over that because it's an I have some insights on it here as we are now and deep into 2025.

[Krista Dibias]

Great. Because so many questions about that. What should my balance be? What depends on your age, of course, and then lots of other factors.

[Wes Moss]

Right, right. So here, here's the way I would talk about it is that I, I don't know the exact balance, the right and perfect balance for anyone ever because it's a little bit of a moving target and they evolve. So first of all, 6040 really is just to me synonymous with a balanced portfolio of stocks and bonds. And it could also include some other areas that also produce income. And there are lots of other areas that are technically a little bit different than bonds, a little bit different from stocks. I think about real estate investment trusts, I think about the commodity sector, I think about preferred stocks, closed end funds, lots of other energy pipeline companies. So there's lots of other areas. But if we're just looking at those two, anytime you're not 100% in bonds or 100% in stocks, you have a balance. And the question is, what became popular 30 plus years ago is the concept of having risky assets like stocks paired with more conservative assets. And let's just call those bonds. Those are the two easy ones to pick out. And there's lots of different options to do that. The idea behind it is predicated on we want stock or equity exposure to be able to outpace inflation. But we also want this conservative side that does pay us income or interest from bonds that is there to offset and not go down while stocks are going down. So if we have a bad stock market, ideally the balance will. You'll have a big portion of the overall pie that's actually climbing a little bit. So it really takes the overall volatility of the whole pie chart, if you will, your overall investments. And it's supposed to smooth it out over time. So I think of that balance as making it easier for people to be stock investors, which we know has worked most fruitfully over time to be able to outpace inflation. But again, there's a constantly a drumbeat. Is that model dead? Is it antiquated? And I go back to when I was doing research for my first retirement book, which was you Can Retire Sooner Than youn Think. That was back in 2013, published. I think it ended up coming out in 2014. And the research way back then, so almost 15 years showed that an investor and these numbers have changed. But back then, getting to $500,000, $500,000, half a million was real. A really important inflection point for folks that end up in the happy retiree group. I know it may not sound like an extraordinary amount of money, liquid money, this isn't net worth to retire on. But in my research it said it worked. And I went back very recently to see how someone would have done if they just did a Good old fashioned 60% stock, 40% bond allocation with $500,000 retired back in, let's call it 2013, and then took out 4% a year from day one and then ratcheted up for inflation. Good old fashioned 4, 4% rule. So that would have been $20,000 year one, 4% of 500,000. Well over the years, over the last 12, 13 years. That 20,000 is now closer to 30 per year because of inflation. And what happened to the balance. And I'm not talking about any particular fund, there's a lot of funds that would look very similar to what this outcome was, but it's just shy. The individual would have just shy of a million dollars. So the file hundred is now worth almost a million. Wow. At the same time, remember we're taking withdrawals 20,000 and plus every single year a little over $300,000 in withdrawals. So a good old fashioned balanced account worked. That's just, that's the reality of what happened.

[Krista Dibias]

So if the, if that was just cash, they would have $200,000 right now.

[Wes Moss]

But essentially they'd have about a few hundred thousand. Instead they have a million and they've taken about 300,000. So, so balance investing, if you were to go back then, and this is what, where the question is always about, well what about the next 10 years or 15 years or what about today moving forward? Well, if I go back to 2013 and I look where interest rates are, which is really the most important determinant of how bonds would do, they were less than half of where they are today. So the 10 year treasury back then, starting in a balanced portfolio, big chunk of it in bonds, the 10 year treasury was, was yielding less than 2%. Today it's yielding around 4 and a quarter percent. So it's more that the interest rate environment. Even though it's not all that high relative to the last 50, 60 years of history, it's still markedly higher. The interest rate environment of where we were back 12, 13 years ago, if the 60, 40 balance portfolio worked back then and we can't predict the future, then it's maybe set up to do the history continuing to repeat itself. You're probably saying, wait a minute, Wes, what about the other 60% stock? Well, stock market has had a pretty good run over the last 12, 13 years. Is that same run going to happen exactly like it happened over the last 10 to 15? We don't know. But I am a believer in long term equity investing that that works over time. So I don't think this 60, 40 is dead. Are there other iterations, Are there other pieces to add into that overall pie? Absolutely. But I just don't think balance investing is dead by any stretch of the matter.

[Krista Dibias]

All right, I love that. All right. Well, we have lots of Questions for you. So I'm going to start with this one from Anonymous Florida.

[Wes Moss]

Okay.

[Krista Dibias]

I've appreciated West Moss's expert advice. My wife and I are retired in our mid-70s. We have no children, no debt, and live comfortably on our state pensions and Social Security, allowing us to maintain our lifestyle, including travel, without relying on our savings. Our state will eventually be divided between relatives and charities. Through disciplined living, savings and investment, we have accumulated $3 million plus real estate and personal property since 2018. We turned most of our liquid assets over to a fiduciary financial advisor who has broadly diversified our investments, yielding an average of 8.3% a year, for which he charges a half percent a year or $14,000 each year on 2.8 million. That's a lot of money. We frequently hear that index funds outperform most actively managed portfolios over time require minimum oversight and come with significantly lower fees. Given that we don't have the expertise or desire to manage our investments ourselves, we want to strike the right balance between professional guidance and cost effectiveness. Would you recommend we continue with our current strategy or would a diversified mix of index funds offer a simpler, more cost effective alternative?

[Wes Moss]

It sounds a little bit like your advisory is probably using some low cost index options, right? It's very, very likely that there are some index options in there, probably low cost ETFs.

[Krista Dibias]

Half a percent is pretty low, right?

[Wes Moss]

So the landscape is, it's, it's a pretty wide landscape. It just depends on how you look at it. Anywhere from as low as a quarter or a third of a percent to a little over 1%. So half a percent is, is actually at the low end of the spectrum, the, the first part, but I picked up a couple of words there that matter and there's a lot of information in that question. $3 million, real estate, Social Security, pension, the cost of having an advisor, a fiduciary. The first thing I'll start out is I think people sometimes forget I am a advisor, I'm a fiduciary. You know, you say that on the show. So yeah, the, there's a little bit the Warren Buffett always says, if you ask a barber if you need a haircut, yeah. He's going to say yes. The reality here is that I, I'm biased towards saying yes to that question because I really believe in the financial advisor community. Not every advantage financial advisor is great or worth the half a percent or the 1% they might charge, but a lot of them are. And here are the couple of words I picked up on it one was you said desire, there was the. I don't know if I have the desire to do this and keep up with it and manage it and look at all the pieces. Number two, I don't know if I have the expertise to do so. And we can pretty much do anything on our own. Krista, in this world we can pretty much DIY any, almost anything we want. We can build our own deck, we can take care of our own mechanics in our car, we can wash our car, we could do, we could take care of our yards. We can all, we could almost self diagnose and help ourselves almost from a health perspective. I mean there's really very little that you can't DIY can't do it yourself. If you have the desire, the interest that then leads to the expertise. Because I've been doing this for almost half of my entire life. I maybe take for granted all the different pieces that go into planning. But to me it's much more than just the portfolio. And in retrospect, first of all, you've done pretty well over 8% a year on average over time, pretty pretty darn well during that relationship. And it's put you in a really good position. To me, the advisor serves a lot of different roles. The advisor should help you with the overall planning and that cash flow and that helps you be a better investor over time. It almost forces you to lock into a goal and know you're an understated strategy so you stay on the path and that is just so valuable. And you could always look back and say, well, I could have just done that. But what about all the iterations along the way? What about the integration of estate planning and figuring out what the legacy should be and how, what your overall estate should look like and be set up? What about the tax strategy on where to pull money from at any given time? Because there's different times you need money, sometimes it's steady amount, sometimes it's a big chunk. Who helps you work through all of that? So to me, of course we can all DIY and do it ourselves. And half, I don't know, I've never gotten an exact perfect number on how many people do their own investing million dollars and up. The statistics I've seen are half of all people do it on their own and a really large portion they get some help doing it because it can be really valuable. And it may not be perfectly invisibly valuable every single day or week or month, but over the course of time to have some sort of relationship where you're understanding the journey making you that much better and taking the emotion out of it. I think is is very important and I think it can be very worthwhile. I don't do a hundred percent of all of my things on my own. I like to consult with some of my colleagues who are advisors because I like other opinions. Think about the biggest, most important besides your health cog in your overall life, socialization, health, finances. To fly totally blind in that one giant area when you don't have the desire nor maybe the expertise to do so. That creates anxiety in its own light. That makes you a worse investor potentially. And then the whole thing could unravel or could be great. And I just want to. I want to put as many guardrails in there for families to make sure that the journey has the best chance of success. So that's my take on it.

[Krista Dibias]

I'll just throw in my little two cents, which is I use an advisor myself. But I think for someone like I just recommended to a friend who has enough assets for this and they certainly have them, the person who run the question, you could always use like a Vanguard, Vanguard's internal service or Fidelity or someone like that too. You have to be careful with Fidelity because they're selling life insurance now too.

[Wes Moss]

But there are lots of other options, right? So Vanguard has an option and you're going to pay a certain part of a percent. I don't know the exact.

[Krista Dibias]

It's not. I don't think it's quite 0.5 depending.

[Wes Moss]

On the amount of assets. But the thought that Vanguard was the ultimate low cost, take away all possible costs as an investor also offers a service that has an advisor that is a percentage base per year. I think that right there says a lot.

[Krista Dibias]

Yeah. Okay, next question from Chris in Texas. I need help with the tax situation I'm trying to figure out. My wife and I are in our mid and late 30s. The plan is to have enough money to retire sometime in our 50s or earlier. That's our goal because we'd be retiring early. I'd like to take advantage of the Roth conversion ladder from my traditional 401k. I'm wondering what the mechanics look like when doing this. Well, I need to only move the amount I want to convert that year to my traditional IRA and then convert that amount to the Roth. The goal would be to keep taxes to a minimum or zero if possible. And if there are enough years to do so. I've heard things about what I think is the pro rata rule, which I'm guessing would affect the Roth conversions. If I transfer the whole amount into the IRA and then only convert a portion, is this going to depend on my employer's 401k plan when it comes to allowing only transferring a specific amount and not the entire balance to make these conversions happen and keep the tax bill low? I don't hear much discussed about this topic. I'd love to know now if I'm planning correctly since I would like to take advantage of these conversions when the time comes.

[Wes Moss]

Chris, is is kind of right about something is that we don't talk much about folks that have all 401k money and then moving into a Roth, right? It's almost you just assume well with your IRA money do you convert into a Roth or not? It's a thoughtful question and he's and that actually is probably the situation that a of folks are in their 20s and 30s. The money you have, it might very well all be in a 401k. So this is why questions are cool because they're coming from areas that we we maybe hadn't thought about. When you're 50 you've probably had two or three 401ks and they're probably rolled over into IRAs and that that's why it's IRA to Roth Focus, not 401k to Roth Focus. So good question. 1, 2 Chris, the answer would be if your 401k plan allows for an inservice rollover while you're still working, then the answer is you could do this very likely in any given year and you would just take a portion. Again, depends on if your plan allows it move. Let's say it's 10,000 of the 401k into an IRA and then that gets converted. The pro rata rule comes into effect when you have both after tax and pre tax contributions inside an ira. It doesn't sound like that would be something that you'd have to be worried about right now. It's nicer to have a clean IRA where it's just pre tax money. Otherwise if you commingle the two then you're then you're worried about a pro rata tax on the ratio of the pre and the post tax money all in the ira. It doesn't sound like that's an issue for you. The reality though is if your if your plan doesn't allow for that, the way I've seen it in practice, real life more often is yes, you'll end up one day doing a 401k rollover, then you map out the right amount to convert each year. That's the latter part. But I guess the third option here would be if you're allowed an in service and they say yeah, sure, you can roll over 90% of whatever's in your 401k just because you let's say it's 100,000 in the 401. Just because you roll over 90,000 into the Iraq, it doesn't mean you have to convert 90 into a Roth. So then once you make the direct rollover so that you're not worried about taxes, then you can determine whether it's 10 or 20 or 30,000 in any given year. You can convert and still stay in the appropriate tax bracket. That by the way you choose as well. You choose how much you want to convert relative to how high you want to go on the tax ladder, if you will. So it's a combination answer, but one I think you can probably do. It's not unlikely that you can do in service and then convert that amount each year or do a larger amount. But really what matters is only what you convert out of the ira. You're going to pay taxes on it to get it into the Roth.

[Krista Dibias]

I can't tell you how many questions we get about Roth conversions. It's just so confusing for so many people.

[Wes Moss]

For sure it, it is because there's no set it and forget it on a Roth conversion anyway because you're going to oh your income changes any every given year. Nobody knows exactly what you're going to make until the year's over. You don't know exactly what you're going to make. So you don't know your exact tax bracket. And then you've got to factor in what you're going to pull out and then what estimated tax bracket you're going to be in. And maybe that is another important point here, Krista, is that as much as taxes seem like the most exact science, it's a very unexact and good tax planning is getting an estimate and an idea that's pretty darn close to what it's going to be. That way you're not paralyzed making decisions.

[Krista Dibias]

All right, one more here. Steve in Pennsylvania says some 401k providers offer the ability to invest 401k money in a self directed brokerage account to access investment options beyond the few pre selected ones in the 401k. Is this the same as a self directed 401k? If my new employer's provider, which is Fidelity, I can move all or some of my 401k to a self directed option within the 401k plan. The provider claims I will pay no additional fees. It seems too good to be true. What is in it for the provider and or my employer? And what is the gotcha?

[Wes Moss]

I'm not seeing Steve in pa, my home state. I would tell you that there's probably not a gotcha here. There's not some hidden hook that these companies are looking to do. I think they're really giving you optionality and, and that makes for a better 401k plan. And a lot of people's opinion that hey, if you really want to go beyond the 10 funds in the plan, we'll let you do that. They call it a self directed brokerage, but also we use the terminology self directed brokerage when you're looking to put real estate or other hard assets or different assets inside an ira. So there's kind of two uses for the word self directed really. This is a self Directed did brokerage 401k. And sure you get more optionality. You get to to do the ETFs or the stocks you want as opposed to just the funds of the 401k. Where does the company benefit from this? I think it just gets you into the ecosystem of the company. There's a perception that your 401k provider, whether it's Vanguard Fidelity Schwab, any of the big providers, is that you're still in your work 401k and you're not really as much of a client of the institution like Vanguard Fidelity Schwab when you have your own account. And again, just to make sure there's no confusion, the self directed 401k is not a solo 401k either, which is different. That's where you would be setting it up on your own contributing. This is not that. This is just to manage some of the assets that otherwise would have been in your company 401K. Now you can do it in your own account, but I think it gets you exposed to that company. You open an account at that company, maybe you open another account that's an after tax brokerage account. So they kind of get you into their ecosystem and I think they have a better chance of keeping you as a client for life if that's the gotcha. I think that's the gotcha, but not that I know of some backend hidden fee that they're going to get you. It's more about exposure to what they could offer over time. Great question.

[Krista Dibias]

So we're going to take a quick break. And then we come back, you're going to talk about inheriting. Inheriting money. Or you know, you might be leaving money to children.

[Wes Moss]

The great wealth transfer. It's supposedly it's $84 trillion.

[Krista Dibias]

Wow.

[Wes Moss]

Trillion over the next 20 years and 16 trillion over the next decade. We'll talk about this number.

[Krista Dibias]

Lots of pitfalls to watch out for, right? Whether you're the inheritor or you're planning on leaving money. Yeah.

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[Wes Moss]

Fiscally responsible financial geniuses, monetary magicians. These are things people say about drivers.

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[Krista Dibias]

Potential savings will vary. Not available in all states and situation. We all have moments when we could have done better. Like cutting your own hair. Yikes. Or forgetting sunscreen so now you look like a tomato.

[Wes Moss]

Ouch.

[Krista Dibias]

Coulda done better. Same goes for where you invest. Level up and invest smarter with Schwab. Get market insights, education and human help.

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[Krista Dibias]

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Together we won't fear tomorrow.

[Krista Dibias]

Not an offer to invest, terms and condition supply. The Guild is a fictional Property. BackDoor Vision™ Copyright 2025 welcome back to.

[Wes Moss]

Ask An Advisor on the Clark Howard Show. Wes Moss here, along with the great Christa Dibiaz. We're a team. We're a team.

[Krista Dibias]

We are a team.

[Wes Moss]

So when I'm falling down. Not answering your step.

[Krista Dibias]

You never fall down. You never fall down. I'm your assistant.

[Wes Moss]

I'm your intern. All right, so where are we going next?

[Krista Dibias]

You're going to talk about inheriting money and all the pitfalls. The great wealth transfer, you called it, right?

[Wes Moss]

It is the great wealth transfer. Just read an article this past week from Market Watch that talks about. We've all heard about the great wealth transfer. And the opening paragraph, I think it was, according to Sorelli and associates, said that $84 trillion will be passing from one generation to the next and $16 trillion over the next decade by 2035. So you just kind of brush through that and I think your brain says, oh, 84 billion is a lot. Yeah, 16 billion is a lot. And then you say, wait a minute, no, no, it was trillion. And that starts to not even make any sense. 84 trillion. So I went down a rabbit hole just to see how that was possible. And it kind of makes sense because over the next 20 years, there's going to be a lot of people passing away. That's a long time. And that's about half of the wealth in America. So if you look at the total wealth in America, it's. And again, these are just estimates. It's about 130 to 160 trillion dollars of wealth in America. And it makes sense. Over the. The course of the next hundred years, it's all going to transfer right to the next generation. So the numbers are giant. If you look at the Gen X or something like 29 trillion over that long 20 year period. Millennials, 27 trillion. Gen Z, 15 trillion. So the numbers are massive. Now, the reality check here is that 70% of people don't are not going to have any inheritance. And a lot of that's concentrated in the top 1%, in the top 10% of wealth in America. But again, this is very likely. Our audience and our. Our network of folks that listen to the Clark Howard show are great savers. They're great investors over time. So you're very likely to be on one end of this. And pretty much everyone listening is on either one of the two ends, either a receiver of an inheritance or the giver of an inheritance over time. So I really think this applies to everyone. The average I looked up. I like to try to get some context around this. I think the average inheritance is something like $68,000, depending on the generation. So all wealth will transfer at some point. That is just the reality of the world. Unless we live forever and we don't. We don't. So it's going to transfer. And I think about the conversations that I have with my own family, my parents, my own wife and kids. And then I think about the families I work with. Nobody really wants to talk about it.

[Krista Dibias]

I would say that's so true. Yes.

[Wes Moss]

It's just not a comfortable situation. It's even harder than life insurance. I had to get life insurance last year and I just didn't want to. I just didn't even want to do it because you're. The whole topic is around you dying.

[Krista Dibias]

Sure. And doing a will. Clark talks about that a lot. Trying to get people to do a will in their estate planning and. Or talk to your parents. I mean, I know that that's something my parents don't like talking about, but we did like have a lot of conversations several years ago. They did do wills, and they already had some wills, but they did the power of attorney for healthcare and financial stuff, which ended up being very helpful. My dad had a stroke almost a couple of years ago, so.

[Wes Moss]

Glad you had it. Yeah. At the time.

[Krista Dibias]

Yeah.

[Wes Moss]

Here's it. This is from the bank of America study of private wealthy individuals or wealth in America. They say that among even this is even wealthy folks. And you would think the wealthy you are, the more likely you would have a will and trust set up. Durable power of attorney among the wealthy and older. This is the older group of Americans, which they define as 44 and up with $3 million or more. Only 54% have a basic estate plan. Wow. So even half of wealthy people don't have this and. Because we don't want to talk about it.

[Krista Dibias]

Right.

[Wes Moss]

So a couple of things. If you Are the receiver. There are going to be millions and millions of people that receive something over the course of the next, call it generation, maybe this year, maybe the next 20 years. Is that first of all, you don't need to do anything right away. With one exception. There's a thought. I'm getting inheritance. Oh, what do I do with it now? You don't have to do anything right away. And I think it's, there's a lot of power in saying for six months or 12 months I'm just gonna think about what this might mean for me and my family. The exception would be if you, you're inheriting something that's highly concentrated like one stock and it's a lot of money or one particular property that is has a whole lot of value to it. I think with that exception, because you do need to understand and take action is the inheritance also at risk of, of a price decline? And if that's the case you do, you may want to quickly figure out if you want to diversify that. So that's my one exception to take your time. The second part here is as a receiver, it's okay to think it through. But I would say the majority of folks I've worked with and done financial planning with over the years, they don't want to put it in a financial plan. And I get that. I get that. So better is as opposed to saying I think I would inherit a million dollars. So why don't we put that in XYZ year out here. I think it's better to do your own financial plan. Make retirement on your own terms. And if it's an inheritance then it's, it's extra cushion and it just adds to the overall plan and life plan that you've already put in place. It just makes it that much easier and that much more cushion and discussing it and discussing it as a receiver, even though your, your family might not want to talk about it, I think it's the, the part of both the receiver and the giver to try to engage in that conversation and do it obviously in a tactful way. And the other thing is that when you do inherit funds, know what you own because you've got there's tax that different inheritance buckets. Whether it's an inherited IRA or an after tax account, those, those buckets are going to have different tax treatments for you moving forward. So understand that piece of the equation. On the giving side, here's what I hear from families. I want to spend all my money. I'm not worried about Leaving it to my kids or just heard this recently. I would like to spend my kids inheritance with my kids while I still can. Which is a cool way to think about it. And then there's the other combination would be I, I would really like to leave a lot to my kids. So we have some really strong thoughts about it. There's another study I read of something like 98% of all accounts. This is a big brokerage house said they plan on leaving money to someone but only 18% of that group actually had plans on who was going to go to. So as a giver someone that it will be passing money down to the next generation. The number one thing we can do is think through with you and your spouse. First of all, I'd say that the blocking and tackling Krista is just having a will or having an estate plan which includes a will, some sort of trust and a durable power of attorney. If, if just like with your father, you get incapacitated, stroke, dementia, you need someone to be able to care for your assets while you are if you're not able to but you're still living.

[Krista Dibias]

And make medical decisions for you too.

[Wes Moss]

So I know we don't want to do that. But it doesn't have to be an expensive, overly in depth proposition. You can find an estate planning attorney. There's a lot of great ones in every major city and beyond major cities. And you can spend a few hours with one of them and you can get a lot of that work done and then you get this peace of mind knowing where your assets are going to go and you're taken care of. The other thought about a trust. So the will. This is the way I would look at. Why do we financial advisors always talk about a trust versus a will? So you have a will. That's great. At least that's step one, the will. Once you pass, it's like giving a set of instructions to a judge, a probate court, and saying, here's what I'd like to have happen. You're the judge now. You adjudicate all of it and try to do what I said in the will and it has to go through the courts. If you put money in a trust, then the trust is the owner of those funds and it could be cash, stock, bonds, real estate. You get to stay the trustee and you still direct it. But if you pass the trustee that you have named, once you pass, it's as though you've given them a letter that says here exactly what I want to have happen. You're the Trustee. Now just go do it. So you skip all of that probate in the court and you're appointing someone while the sky is blue and you're still healthy that you trust to carry out those wishes. And that can make the transition to the next generation so much better. Ultimately, the real solution for this is to discuss it, just to talk about it. And maybe today is just a reminder to nudge mom or dad or if your mom or dad listening to talk to the kids and say, hey guys, what do you think we should do with the house? You guys want to inherit this house and hopefully in 20, 30 years, or would you? Nobody would really want to live here anyway, so you're going to sell it anyway. Just that conversation about the assets you have and then that bleeds into the family values of like, here's what we'd like to see done with this money so it becomes a greater, larger family values conversation. It doesn't really have to be that awkward. It's a responsible thing to do. And I think it helps both the giver of the assets and the receiver so you end up making smart investment decisions. And the article in Market Watch said that these generations aren't ready for it. They're going to bungle it, they're going to fumble it. Not this audience. Because we're okay to talk about money. That's 90% of the battle.

[Krista Dibias]

All right, well, thank you for that. I think communication is so important. All the stuff. You've said it. There you go. All right. John in Georgia has a question for us. He says, I've heard it said that you shouldn't put traditional target date mutual funds in your taxable brokerage account for tax reasons. But what about the new target date ETFs for those of us who appreciate simplicity but also want to invest tax efficiently, are these a workable solution?

[Wes Moss]

John? John is asking again another question I, I don't think I've ever had, which is the tax efficiency of a well known, not so tax efficient strategy, a target date fund that's almost exclusively been in a mutual fund format. What about putting in an ETF, which are their new ETFs that are doing this? I had not used them. Full disclosure, would they be better? And the answer is not maybe a little. And this is just my opinion on this. I think they might be a little bit better and here's why they would be maybe a little better, but not dramatically. The worry we have about mutual funds is that any sort of activity inside of a mutual fund creates a transaction and that Transaction creates a tax bill, whether it's a gain or a loss at the end of the year, they reconcile it and the fund distributes all of those taxable events out to each shareholder. And if you think about an actively managed mutual fund, there's going to be lots of trades and then you get a lot of distribution. In any given year or could be the minute they invented an index mutual fund, still mutual funds here, the transaction, the distributions went way down because, not because the structure changed, but because there was very little activity inside the fund, just a few changes from the s and P500 in any given year. So there wasn't a lot of movement or transaction, not a lot of rebalancing needed. So not a lot of pass through or distribution. Now in a target date fund by nature they're changing their allocation maybe not a whole lot in any given year, but at certain points they're going to shift from 70% in stocks, they're going down to 60%. They've got to sell stocks in order to do so. So it's going to create transactions and then intern distributions. Well, an ETF then they came along. ETFs are exchange traded funds. So it's a, it's a more efficient version of a mutual fund. Those were mostly passive, so they didn't have a lot of trading. And they got well known to not distribute a lot of gains because guess what, they weren't doing a lot of activity. There's also a structural difference for an ETF though versus a mutual fund. Mutual fund is, is a custom order. You put a hundred thousand dollars in a mutual fund, the fund gets it. They gotta go out and buy the stocks that they, that are either they already have and add to them or buy new stocks. At ETF the structure is different. They use authorized trading participants. So you put a hundred thousand in an ETF that ETF providers go into almost a reservoir that's holding a bunch of the same stocks they own. They go to the authorized participant and they may be just swapping funds or stocks or different assets that don't create a transaction fee or a transaction that then creates taxes. So the structure of an ETF in general is more about swapping securities which leads to less transactional or realized gains or losses. So the structure itself is better. However, you still are going to have this drift of going from lots of stocks to less stocks and you're buying something else. So. And by the way, ETFs still distribute out their taxes because there's some. So I think that the Target date ETF might be a little bit better just because of the structure when it comes to distributions, but not necessarily or dramatically better. And that's my take.

[Krista Dibias]

All right. Nitty in North Carolina says, I recently received a newsletter from Fidelity and it mentioned their fully paid lending program. I'm curious to understand what this program actually is, but I'm having trouble making sense of it in simple terms. Could you please explain in layman's terms? And there are five things that Nidhi would like explained. I hope I'm saying. All right. One, what does this program do? Two, what kinds of investments are eligible for it? Stocks, CDs, ETFs, et cetera. Three, what are the pros and cons? Four, is it something worth considering? And five, and if so, who is it best suited for?

[Wes Moss]

Edie. So I've, I've only read about the fully paid lending programs. I have not used them. I'm glad you brought it up. Think of it this way, is that in order for. One of the ways brokerage companies make a lot of money is they allow people to short stocks. So when you're shorting a stock, you're. You're essentially selling short. You're selling, let's say you get $10 in and you agree to buy the stock back. So if the stock drops to $5, you get to buy it back at 5 and you make the difference. That's shorting. But if you think about it, it has to be done on margin because you're selling a stock first and then you, you're in this contract of buying it back. Stocks. The brokerage firm, in order to allow people to short stocks, they've got to have inventory of those stocks and essentially the collateral for those stocks in order to allow other people to do it. And they make a ton of money by letting people short stocks. So these lending type programs, they're saying, well, if we've got all these clients that have hundreds of different securities and they're just sitting on them and they're not planning on selling them. Well, these fully paid lending programs can allow them to be in the margin program. And that's valuable to a brokerage firm. So what they do, and I don't know the exact structure on this, but I think they're splitting the money that they're receiving from this. So they're gonna pay you just like they get paid. They're gonna pay. Maybe they, let's say they split it 50, 50. I'm sure it's different for different firms, but they're making Revenue by allowing another client of the firm to short that stock. And guess what, you already have it in your account. So it takes care a lot of the mechanics for them. So they're making money and they're sharing it with you. Now where do you do you really make any money on this? And the answer is it's really different depending on the stock. So if it's a big widely held super stable company that there's tons of ownership, think of an Apple or a Microsoft. Those rates you're going to get to be in the program are super low. It might be like a third of a percent a year. So a million dollars, you might get three grand for the entire year.

[Krista Dibias]

Okay.

[Wes Moss]

Could be up to 3% for a stock that maybe gets shorted a little bit more. So now you're turning 30 grand on a million. But what's interesting is that stocks that are in high demand to be shorted, the brokerage firms are making a lot of money on those. Think of the really volatile, maybe even meme like stocks those rates can go up to something like 20, 30% a year. Wow.

[Krista Dibias]

Okay.

[Wes Moss]

But what's the con or the risk? The risk is you're holding a super risky stock that a lot of people are otherwise betting is going down.

[Krista Dibias]

Yeah.

[Wes Moss]

So there's obviously a. You're going to get paid 20% in a lending program to keep holding a stock. It's probably because a lot of people are shorting the stocks. You have the great risk of that stock going down.

[Krista Dibias]

Too rich for my blood.

[Wes Moss]

It's a, it's a lot of moving parts. I again I haven't participated in it. I, I'm glad n asked about it and I'm going to look more into it so maybe a follow up in a couple months. About that.

[Krista Dibias]

Perfect. Maram Wisconsin wrote him with this one. Love your show. It's a great addition. I'm the durable power of attorney for my elderly aunt aged 88 who is currently in a memory care facility suffering with Alzheimer's disease. Sorry Mary, that is very tough. She has approximately two more years of long term care insurance coverage left depending on how much the rates increase annually. The current cost is about $108,000 per year with costs rising 10 to 14% per year. She has about $850,000 in assets and receives Social Security and two small pensions adding up to about 2553 per month which is more than covers any additional expenses not covered by her long term care insurance. Her mother lived to 98 and a half and her older sister, my mother is currently 91. Both suffered from the same diagnosis. She's pretty darn healthy. Other than the dementia, in your opinion, what percentage of her assets should be in dry powder versus equities? Thank you.

[Wes Moss]

Hey Mary. Mary is a caretaker and, and it's a tough, it's a tough job. It's a special person that's able to, able to do that. And you're also very clear about what the situation is. It actually makes it pretty easy for me. You read off a lot of stuff, right. But here's what I heard. Two years left of long term care. So right now everything's getting paid for. Great. In two years that's gone. Right now it costs 108 grand in two years at 10% a year, let's call that 130. So starting in two years when your an will turn 90, it'll be about 130 all in. And she's getting 2500amonth which will still be there. And that's, that's about 30 grand. So the gap is about 100. It looks like Mary, your aunt will need about 100k a year in order to continue on and be taken care of on the 850. 100 into 850 is eight and a half years. So if you do, if you just keep the money in cash, that would then get your aunt another, that would last call it from 90. And then there's some other inflation, almost 99 that gets her to her later 90s. So you could keep this super conservative and do a hundred percent in dry powder Mary, and that really buys her to the later 90s. My approach would be slightly, just a little bit different to that. So I think that's a fine approach in my opinion. I would likely look at it a little bit, a little more balanced, meaning that. And I'm thinking about the efficient frontier stocks are risky, 100% stocks, super risky. Bonds are way less risky. Right. But what's riskier or more volatile over time? 100% in bonds or 80% of bonds is 20% stocks. What's safer or less volatile? It's actually having a little bit of mix. It's a balance. It's kind of the inverse of what we talked about earlier in the show. 80% bonds but a little bit 20% in equities can actually smooth out the ride over time and be an inflation hedge, at least a portion.

[Krista Dibias]

So what about like CD laddering in there somewhere?

[Wes Moss]

Well, let me, let me get to the next part, but thank you for prompting that CD's question mark. Okay, I would be looking at 20% in, let's call it dividend stocks or some sort of index and then 80% in the dry powder area. Now to your question, Krista and Mary's question. See here's what's happening with interest rates today. They're at the ten year treasuries at four and a quarter approximately and it's been bouncing there all year. If you leave all this in in a dry powder money market safe, but the rates are going to go down. If rates go down. So the Fed takes rates down to 2%. Now you're going to go from four down to two. Where we are in this environment you can lock in whether it's a CD, a five year CD at 4% I would take advantage because it's mostly solves and helps your aunt get through this. Her funding needs is that take advantage of where rates are today and you can lock them in. So a money market will just go wherever rates are, they go down. Your money market immediately goes down in yield. But the ten year treasury is essentially locking in for four and a quarter percent. Well depending four and a quarter percent for every year for ten years. So think about locking in some longer term bonds or CDs if you can get that 4% plus rate. 4% on 850,000 is about $30,000 a year in the early years. That covers a couple of months every single year. Now it'll get spent down and it'll be less and less interest over time but it really does help. And 4% is a heck of a lot better than if money market rates go back down to 1, 2 or 3.

[Krista Dibias]

Okay, well thank you Mary. And thank you to everyone who sends in question questions and thank you to everyone listening and watching. If you enjoyed this episode, I hope you'll share it with a friend. Please subscribe or follow the podcast and we really appreciate you so much. Clark is back tomorrow and we will see you with another Ask an Advisor one week from today.