Wes Moss (1:58)

And I want to talk about how there's the worry about Social Security. Does it really keep up with inflation? Is it going to go away? There's always a fear around Social Security and I want to go through some history in relation to the new raise recipients just got.

Krista DiBiaz (2:16)

Awesome. All right, so AI stocks, how worried do we have to be too?

Wes Moss (2:20)

Well, I think it's just something that we, we can't overlook. And it's so new that three years ago there really weren't any AI stocks because I hadn't really officially launched. It was really November of 2022. And in this short, just shy of, call it 36 months, it's been the theme that has really driven the markets. And I think it's important to understand just how much it really is driving. And I. And again, new numbers out of JP Morgan that really tell the story from a math perspective. They identified 41 AI related stocks. That's 8% of the S&P 500 and it's 47% of the weighting. Almost half of the market is those 41 stocks. As an example, it's the usual suspects at the top. Nvidia, Microsoft, Apple, Alphabet, Amazon, Meta, et cetera. But then there are other companies that are a little less well known. But they're also in the AI camp if you will. Cadence Design, Dell and xp, Digital Realty Trust, Super Micro, et cetera. And then there's some AI related utilities that are very involved and then some capital equipment companies, Eaton Train, et cetera. And I'm not saying run out and buy or short these stocks. What I'm saying is that it's a pretty short list and it makes up about half of the S&P 500. It's also made up. That little group has made up almost 75% of the returns over the past three years.

Krista DiBiaz (3:49)

Wow.

Wes Moss (3:50)

So if you're looking at those 41, that's 74% of the total increase. If you look at the rest of the market, the other 459 companies, it has been much, much less. So those 41 as of this past week up a little over 190% in total return. The other 459 stocks only up about 27%. And that's how you kind of put the two together and you get the S&P 500 return. But the 495 is up less than 1% since last November. So the drivers, even though it's been over the last three years, it's really even been more exacerbated over the past one year. Now if you look at the top 41 stocks and they account for 50% of the weight, not the return, but the weight, that's actually not that new of a phenomenon. It is almost normal that the biggest 40 or 50 stocks do make up about half the index. It's really the return that has been somewhat shocking. If you go and compare Since November of 2022, three years, if you had money just in the safe three month treasury bill and you've made about 15% or just shy of a 5% annual return. The four hundred and fifty nine non AI related companies in the market up about 8.63% annualized. So better than Treasuries, but not a whole lot more than sitting money essentially in cash. So it's an overweight problem. That's what Clark and I talked about last week. The question is, what do we do about it? One, we don't want to abandon stocks. Right. We can't, we can't keep up with inflation if we're not invested for the really long haul when it comes to equity. So we can't just give up on equities. But we can rebalance and we can be mindful that one we're not. If you, if you own the general market, you're already about halfway invested in this one theme. AI so be cognizant of that. And a, you could be rebalancing. And where would you be rebalancing? You'd be rebalancing away from this over concentration. That would include things like equal weight market ETFs that don't have everything in just the or they're not weighted towards just the top 10 and top 41 companies. So that would be going beyond mega caps. It would be thinking about do you have small companies in your 401k? Do you have middle sized companies? Don't forget about international. I still have a real bias towards United States and U.S. stocks because we do a lot of the revenue, a lot of the revenue for companies in the S P 500 in America are. It's coming from outside because we have many global companies in the US and then of course keeping your dry powder or safety assets and those safety assets should be in things like Treasuries or high quality corporate bonds. And they have nothing. They should have very little to nothing to do with this single themed market. Does the AI boom have legs? Yeah, it may very well continue for some time, but it has pretty skinny legs that's holding it up. There's a lot of weight of that. So I would just be careful. And we really wanted to reiterate the theme that Clark and I talked about last week.

Krista DiBiaz (7:10)

Okay, well. And people are definitely calling for more of those joint episodes. See if we can make it happen.

Wes Moss (7:16)

Just what Clark wants, more podcasts. Yeah. Really?

Krista DiBiaz (7:20)

Okay, we're going to go to questions. If you do have a question. I saw somebody commented like how do I even ask a question on this podcast? You, you go to clark.com ask and you can indicate if your question is for Clark or for Wes. Lou in Virginia filled out that form and he said, wes, I have the opportunity to partake in an espp. What is the best way to determine if it's worthwhile? Any tips and or cautions would be appreciated.

Wes Moss (7:45)

A couple of things you want to like your company. That's the number one. So the ESPP is the employee stock purchase plan and it is an opportunity for you to typically get shares of your company at a discount. That is a huge advantage over time. If you're always buying at, let's call it a 10 or 15% discount, I don't know exactly what yours would be, but it's going to be some discount. The other thing is that for a stock that's doing well, you're typically going to get a discount over a that maybe have started at a window. Let's say the stock said 40 and it runs up to 50. You may be getting a discount at 40. So 10% off of that or 15% off of that. So you may get even a bigger discount than the stated discount that your company is giving you. So one, you're investing in your own company and you clearly should have at least some good understanding of are things going in the right direction? Do you see this as an enterprise that'll be around for the next 20 years? 10, 20, 50 years? And if that's the case, I've seen people make a really nice chunk of retirement money when it comes to these ESPB plants. And most of them you'll see are going to be from publicly traded companies where you're getting a discount on the stock. And unless the company is going to fade away over the next 10 years, usually these are something to consider.

Krista DiBiaz (9:10)

Doesn't it make sense even if you're going to sell the stock right away, if you're getting like a 15% discount?

Wes Moss (9:15)

Well, you usually do have some holding period. You usually have some holding period and that's going to be part of the plan that you're in. So I would consider that. How long do you have to hold it before you can sell it then? There are also ESPP plans for private companies. This would be you getting shares in a company has to be valued. You get a certain percentage or shares in that company and you still get a discount. Those can be great. Those can be great investments too. I've seen people make a million or $2 million on their company. Even private company stock. God forbid we're talking about private equity here. It'd be your own form of private equity. So on those what you have to really be careful about is what you just brought up Krista about selling stock in a public company. That's one thing. It gets really hard in a private company and you usually have much longer hold times in order for you to actually realize maybe you do have gains. But usually if it's a private company it may be a two, three, five year period where you're allowed to sell it. So it is about the holding period, it's about the discount you get and of course above all it's about do you believe in the company over time? The one, the other risk here is over concentration.

Krista DiBiaz (10:30)

Mm. Yeah.

Wes Moss (10:31)

Gotta be careful about ending up with 3/4 of your portfolio is this one company stock. That's something to really be careful about.

Krista DiBiaz (10:38)

I think Clark has always said he thinks no more than 10% in a company.

Wes Moss (10:42)

That's about right. I've seen people go higher than that. But that is a good rule of thumb.

Krista DiBiaz (10:47)

Joyce in Virginia wrote in with this I keep Hearing about saving $1 million before retirement as a single person is the $1 million per couple or per person. I understand everyone's circumstances are different, but I like having that marker or goal. Thanks. You don't have to use my question on Wes's podcast, but I think it would clarify it for some and I agree with that Joyce.

Wes Moss (11:08)

I agree. I think it's really good for for us to have a goal post. Financial planning is. Can be infinitely updated and changed but it's really good to have a goal post because it allows you to be able to give yourself a roadmap to get there. So I like having the goalpost and I still yes. And the million dollar number is what I would call the financial green zone. There's the red yellow get to a million and that is household investable assets. I think you're in a very good position to have a happy retirement now. It makes it tougher Joyce, for you if you're single. But the world is when it comes to running a household, there's usually one bill, it's one utility bill, it's one electric bill, it's one insurance bill, it's one mortgage. And it just is easier to get to these saving goals when it when you have two people dividing and conquering. When we my mom always used to say when we were doing dishes many hands make light work. And I would I still to this day when I call my kids in as a guys look, we could one of you can do the dishes. It's going to take you an hour. If we all do it together, it's going to take 10 minutes. So it's the same thing when it comes to saving with money. Many hands make lighter work. Now, yes, you may have to have two cards if you have two people. And there's, there are certainly things that are, there's two dinners and as opposed to one. But the number really should still be a million, even if it's just you. Because to me that's a household number, what it costs to run a household and run a full retirement.

Krista DiBiaz (12:45)

But again, it all depends on, you know, so many factors where you're living, you know, what you choose as a lifestyle.

Wes Moss (12:52)

Of course it does. And I'll talk to folks that have everything paid off and their spending is, they say, well, my spending's 2,500 bucks a month. 2,500 bucks a month in America.

Krista DiBiaz (13:05)

Right.

Wes Moss (13:05)

Right now that's rare. And I'd say that's on the low side. But if your spending is pretty low, then sure, you may not need a full million dollars and your Social Security may cover it. But that's not where we want to be in retirement.

Krista DiBiaz (13:19)

Okay. Angela in Georgia says I'm over 50 and in a higher tax bracket. My 80 year old mother is in a much lower tax bracket, but will likely leave me a decent sized traditional 401k will be over 500,000 when she eventually passes. I've encouraged her to spend her money, but she doesn't seem likely to spend it all and wants to save some from leave some for my family. Does it make sense to try to convert her money into a Roth IRA now to reduce the overall tax burden? And if so, should we convert a little bit each year or a bunch at once?

Wes Moss (13:52)

So, Angela, if you look at this purely by the numbers and you say this is collective money, and if you're a family collective, then I think if you look just at the math, it probably does make sense. Your mom may be in the 10% bracket, she could convert and still stay, let's call it in the 15, and you may be in the 30 bracket. So over time, if you were to, if your mom was to do the conversion, she's probably doing it at much lower rates and then it gets into a Roth and then you ultimately inherit the Roth and then it's tax free for you. But I don't know if it's the family collective and I don't know that your mom doesn't need the 500k for the rest of her life. She's 80, she could live. I met with somebody just this week. They're 92, I mean, and they could live to 100. So your mom needs that liquidity for the rest of her life. And even though she's not actively spending it today on things she's choosing, she may need it in the future and it may be for healthcare. So the only way I would suggest this ever be done is that you are with your mom and a financial advisor that's looking at both of your situations. Can she afford to pay the taxes for you? That's really what this is.

Krista DiBiaz (15:12)

And.

Wes Moss (15:12)

And that is the conversation I have with a lot of folks when it comes to the Roth conversion. Once in a while, a family will say, I really don't think I'm gonna need this money. Or I know I'm not gonna need this money, and I would like to pay the taxes today for my kids. That's like one out of about 199% of people say, I've paid a lot of taxes. My kids are doing okay. They're still gonna get a lot of money. I. I don't want to pay the taxes today for my kids. Not everybody, but it's a pretty rare case. I've definitely heard it. I'd like to pay the taxes for my kids. If Angela, your mom, says, honey, I'd love to pay those taxes for you. And it works with a financial advisor fiduciary who's looking at both situations, mapping out that your mom could live for another 15, 10, 15, 20 years. Then maybe you collectively as a family, decide that that's the smart thing mathematically, but it's gotta be done together as a group.

Krista DiBiaz (16:14)

All right, now, speaking of streams of income in retirement, Social Security's gotta raise.

Wes Moss (16:21)

We're gonna talk about the history of Social Security, the raise that everybody's just getting. That'll take effect at the beginning of next year when we come back and.

Krista DiBiaz (16:29)

More of your questions.

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Wes Moss (17:35)

At and T welcome back to Ask an Advisor Wes Moss here along with Krista Dibias to answer your questions here on the Clark Howard Show. Krista we're talking social media Security, Social Security, COLA raise. Social Security, I would say, has quite it gets a bad rap, but it is quietly been one of America's best inflation fighters and it hasn't been forever. But if you go back over the history and we just got a race, if you're receiving Social Security, you got a 2.8% COLA cost of living adjustment that starts in January of 2026. That may not sound like a lot. On average for people it's 50, 56 bucks a month. So it doesn't seem not a lot.

Krista DiBiaz (18:18)

It's something for sure. But utility it is.

Wes Moss (18:22)

I think the reason, and it didn't start it was 1972, they passed the automatic COLA legislation and then 1975, that was the first time Social Security checks went up for inflation. And the reason I think it gets this wrap that it doesn't keep up with inflation is that we've had some really different periods of time where social went up a bunch and then we had low inflation and Social barely went up at all. In fact, there were a couple of years where there was zero COLA increase because during those years we effectively had zero inflation. But if you go back over time, and I went back to 1975, Social Security really does keep up with the cost of living. So I'll start with the forgotten years. It was 2013 through 2021 and the annual cost of living increases were pretty they were kind of invisible. They averaged 1% or they're 1% or less. And that wasn't a failure of the system. And it wasn't that it wasn't keeping up. It was because inflation itself was really low. So roughly 2009 and the 2010s prices kind of barely budged in the overall economy. So we didn't get much of an increase. If somebody got a $7 increase per month, they just didn't even notice it. And that went on for a really long period of time. So people started saying, well, Social Security just doesn't go up for inflation. Because we really didn't have a lot of inflation since though 1975. The COLA adjustments, that's when they started. There's been an increase in Social Security checks every single year, except for 3, 0, 9, 10, 2 years of low inflation in 2015. Inflation then was effectively zero. But if you look over time since 1975, the average COLA increase has been 3.7%. So almost 4% per year. It's a very real number. Over the last 20 years it's averaged 2.6%. So the Cola increase we just got is very much in line with that at 2.8%. Now we did have some huge adjustments in the late 70s and 1980s. We hit 9.9% one year. That's a big jump. 11%. And then we, the, the largest was 14% in one year. Wow, a 14% raise. Then again, we went through this, that tame inflation period, 1 to 2%. But then more recently in 2023, we saw some extremes again because inflation was extreme. We got an 8.7% raise for social in 03. That was the highest in 40 years. And, and now it's kind of come back down to earth. It was a little over 3% in 24, 2 1/2% in 25, and now 2.8% for next year. It used to come in July and then in the 80s they amended that and now we get our raises at the beginning of the year, which I think obviously makes some sense. And again, it was, it was the pandemic inflation surge that, and that's why some of the more recent years were big, big jumps. The bigger question, I think is that the fear of the trust fund running out.

Krista DiBiaz (21:38)

Well, yes, I was going to say, I think since I've been in my 20s, since I was in my 20s, I've been told don't count on Social Security, don't think it's going to be there, it's going to run out, Ponzi scheme, things like that. And so how much should different age groups think about this as a part of their retirement planning?

Wes Moss (21:57)

You know, remember what that means. And it, it makes sense that it gets the wrap, that's going to go away. Because the truth is, at the current pace, and Social Security is very upfront about this, that trust fund cushion is set to run out in the year 2032, approximately. They don't know exactly when, but you hear, well, wait, the trust fund's gone, it's at zero. That means social's at zero. And of course that is not the case. That's just the cushion is gone. And without that cushion, remember everybody working a wage income job, whether you're self employed or you are W2, you still pay into the Social Security system. And we have 160 million people in the labor force and as long as they're working, they're going to be paying into Social Security on the first X amount of their pay. So that number in itself, that current money coming in and really becomes a true transfer system where money's coming in then going out to Social Security checks, FICA is coming in, the FICA taxes are coming in, it's going right out to Social Security and that would be able to still pay for 75 to 80% of the promised in quotes benefit that you see on that Social Security statement. So I think that's a worst case scenario. Social Security goes down by 20 or 25%. Now that's a big number. The reason I don't think that anybody over the age of 50 has to worry about that is because we've already seen Social Security make some tweaks there. They raised the full retirement age by several years. They were able to do that. They've been able to raise the amount of income we pay Social Security taxes on. So there have been changes and it's just a math formula and it's not that complicated. And I think what will happen if you really get to the point where the trust fund is, let's call it a couple years and Congress doesn't do anything unless it's emergency. I think if we get to within a couple of years of it going to zero, you're going to see some changes in the formula. Maybe they bump the full retirement age up another year or maybe instead of starting at 62, it's 62 and a half or 63. And those tweaks, they may not sound like a lot, but they can move the math closer to working. But I don't think it's going to happen or impact anybody who today is.

Krista DiBiaz (24:19)

50 plus makes sense because we're living longer too. So. Okay, we'll go to questions and this first one's from Maggie in Alabama. My husband and I are both 28 and we have what we believe is a good foundation of maxed Roth retirement accounts as well as an HYSA with 6 months emergency fund and a general brokerage account. So I'm wondering what my best option would be for some safe growth, for a fun account where we can put some excess money which we can pull from for vacations. I want my money to grow But I don't want this account to take on too much volatility or be locked up for any period of time. Thank you.

Wes Moss (24:54)

Maggie. This is a time horizon question and I see a lot of families do this. They want a separate bucket for specific costs and vacations are probably the number one bucket. I see. But the reality is when you put money in a vacation account, you're going to probably spend it that year or the next year soon. So the time horizon is really short, Maggie, and you don't want to be investing that money in stocks when the time horizon is that short. So you're already using what is the right vehicle for that. And that's the H you said the hysa, the High Yield Savings Account. For one to two year money, you've got to really got to keep it in something short term. The last thing you want to have happen is you plan a family Disney cruise and it's X amount of dollars and the whole vacation account is in the market and we're in a 20% correction. Now you're 20% shy of the cost of your Disney family vacation. So I think it's the wrong practice to think that you can put money in a stock account and have it be whole a year from now. The other thing you mentioned, people will often want to do this and they say they want a fun account or they want a play account. And I would contend that none of this is play and there is no such thing as fun money. Because think about how hard it takes to get money, like how hard we have to work. We have to work and we have to work hard and then we've got to pay taxes and taxes are tough. And then at the end of the day then we got to pay for everything and then we've got to. Then we're saving. Now, hopefully you saved first or you took it off the top, but either way you have to pay for all those things, Maggie. And when it comes to fun accounts, I think that people like them. When we're in a bull market and kind of everything's working and people say I like my fun account, but the minute we go into a bear market, and when bear markets, most things don't work for a period of time and your fun account becomes really unfun. So just remember that this is a serious sport. Investing is a serious sport. It's hard, takes discipline, takes time. And rarely have I ever seen a fun account really make a meaningful difference. What makes a real difference is discipline, broad diversification, low cost over a long period of Time.

Krista DiBiaz (27:17)

I agree, but I understand.

Wes Moss (27:19)

Did I just rain on Maggie's point?

Krista DiBiaz (27:20)

Well, I'm with Maggie psychologically. Clark always jokes with me because I have to put things in buckets. And so psychologically, if I've put money aside and I, I don't need to feel any guilt about what I spend that money on.

Wes Moss (27:32)

That makes it fun.

Krista DiBiaz (27:33)

Yeah, because you, then you, you save first. You do all those other things, but like this pocket of money, if I have this extra money, I can spend it on something frivolous or something I really enjoy, like an experience. That's what I would do.

Wes Moss (27:45)

Free money.

Krista DiBiaz (27:45)

That's what I think.

Wes Moss (27:46)

Yeah, but she's talking about fun in for investing. That's how I read it. People like, oh, I want a fun account to buy a bunch of.

Krista DiBiaz (27:52)

I think it's no, because she said for vac. Okay. I don't know. We'll see. Maybe she'll write back into us.

Wes Moss (27:57)

Maggie, you're the best.

Krista DiBiaz (27:58)

Enjoy your vacation. Shay in Kentucky says I'm turning 45 in a month. I can retire as a public school educator in 2031 at age 50 with a pension. I just realized that I need funds to Bridge between 50 and 59 or 59 and a half. I'm looking to open a taxable brokerage account. Should I be aggressive or conservative in the taxable account with only having five years to build it? And should I be aggressive or conservative in my Roth IRA knowing I have the pension in years?

Wes Moss (28:26)

So, Shay, first of all, it's so great to get to that 30 year mark. I've had so many teachers that I've worked with over the years and you know, you're 18, it's like I got 12 years left to get to the 30. And I just say, you've done it this long, you're over halfway there. Get to the 30 year and you're going to be so happy you did. And I can tell you, I've never had a teacher that gets to the 30 year mark, say, gosh, I wish I hadn't. I wish I had stopped at 25 or 20. The reward there is great. And I don't know the exact formula for Kentucky, but most of the teacher retirement programs around the country, and they're usually state by state, you're going to get two and a half percent approximately of your highest, whatever the formula is, two years, three years average salary and times the years, as long as you have a certain amount of years. So think about two and a half percent times 30. You're at 75%. 75%, let's say your average. They're basing it on $75,000. You've got 55, $56,000 in income for the rest of your life. And that's pretty awesome. And so, so yes, stick it out. Get to the 50 or get to the 30 year number. I would usually have your Roth be your more aggressive account because that's your longest term money. You absolutely are right. You do want a brokerage account because you want to bridge the gap before you get to 59 and a half. The rule of 55 probably doesn't apply. If you're totally done working at 50, you could maybe lean on the rule of 72t, the substantially equal payments that you could access your retirement money prior to 59 and a half without the 10% penalty. But there's some ramifications to that too. You have to take it for certain period of time all the way to 59 and a half, five years, whichever is longer. But you're right, I would be aggressively saving in a brokerage account and I would be moderately investing as opposed to 100% stocks. That's how I would do it. I would do a little more balance, a little bit more conservative in the, in the brokerage for now than the Roth.

Krista DiBiaz (30:34)

Okay. And Stephen in Kentucky wrote him with this for Wes. Sorry, buddy. Another 4% question. I suppose I'm a little thick.

Wes Moss (30:41)

I love that he called me buddy. Hey, hey, bud. My kids make fun of me for saying bud.

Krista DiBiaz (30:46)

Really.

Wes Moss (30:46)

And I guess I don't really notice it, but I do say, I say, hey, bud.

Krista DiBiaz (30:49)

I say it to myself, hey, buddy. Yeah, I always said to my son when he was younger, for sure my.

Wes Moss (30:53)

Kids will come in, they're like, hey, buddy.

Krista DiBiaz (30:56)

Okay, so, hey, Stephen.

Wes Moss (30:58)

Hey, buddy.

Krista DiBiaz (30:58)

Stephen says, I suppose I'm a little thick, but I would like to know. I'm in a construction field that is very hard on the body. So I will probably not continue working until full retirement age. I'm 56 at present with 1.4 million in my 401k. Should I retire prior to 65, I'll be paying around $1,100 a month for insurance. If I elect to postpone drawing Social Security, will I functionally be able to withdraw enough to live on $70,000 from my nest egg until Social Security kicks in? I always thought a million dollars was a lot until I've contemplated living on $40,000 a year.

Wes Moss (31:33)

Okay, so, Steven, I'm just doing some math for you. There are never too many 4% questions. Because it's not just a 4% question, it's a how do I make my money last forever question. And that is never going to be a bad thing to talk about when it comes to what we're doing here. It's totally cool and I appreciate it. That's what the rule is about. It's the rule of thumb is about, it's about maxing out what you can take out from your investments without running out. I'm doing some quick math. 70 divided by this 1.4, that's 5% on the surface. That's a little above the 4% rule of thumb. So it's not that far off. But realistically it's probably more like 6% for you because that's a, you've got to pay the taxes. So it's really, you're probably going to take 6% out gross to net down to the number you need. So 6%, depending how long. So think about that four, four and a quarter withdrawal rate as your home base. It is not the end of the world to go above that home base. You just can't. You don't want to go way above the home base and you don't want to go above the home base for a really long period of time. So if you're only 56 and you retired today, you've got another 9, 10, 11 years depending on when you want to turn on Social Security. So doing 6% for a full 11 years is probably too much and you're going to run it. You may run into a problem where you feel like your money's really withering. I think the answer here is that you're not too far off. And every year that you're able to work does matter because it gets you closer to when Social Security kicks in. And then that makes it much easier to reduce your withdrawal rate. You get back to home base. I think the easier answer, at least what I see in real life, Steven, is that is there anything you can do? Let's call it starting next year where you're making. Well, you also have got to get to 59 and a half to, to utilize this 401k money. Unless again you use the 72t rule which we just talked about in the last question. So let's just take that the age off the table and think about it as how do you bridge the gap until social kicks in? And the answer is part time work. Imagine if you, if you need 70 and you earn 20, now you only need 50. And if you're only earning 20, you're probably paying almost no taxes on that or very little. Now granted there's some taxes to pull money out of an ira, but you're probably in a really good tax situation. So now all of a sudden you need 50 divided by 1.4 and now you only need 3.5%. Grossed up, maybe it's four, four and a half. So I think the and I know that it's hard going from a if you're out, if you're actually on the job site and in some professions it's really hard to do part time work, but it's not impossible. And the construction industry I think is understaffed for the most part. Or under built in America, depending on the city you're in. And maybe it's not even construction, maybe it's something completely different. But I think of that as you're in phase one of working, saving, maybe your phase two is way less work. Just have enough that you're not totally blowing the 4% plus rule out of the water. It makes it manageable and I think that's the way to be thinking about this interim phase before social kicks in.

Krista DiBiaz (34:55)

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