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- [00:00]
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This podcast is brought to you by Progressive Insurance. Fiscally responsible financial geniuses, monetary magicians. These are things people say about drivers who switch their car insurance to progressive and save hundreds. Visit progressive.com to see if you could save Progressive Casualty Insurance Company and affiliates. Potential savings will vary. Not available in all states or situations.
- [00:21]
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- [00:26]
Krista Dibias
You can.
- [00:27]
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- [00:55]
Wes Moss
Life.
- [01:02]
Krista Dibias
Welcome to Ask an Advisor where we here at Team Clark go deeper on all things investing, saving for your future retirement. Happy retirements.
- [01:12]
Wes Moss
I like a happy retirement.
- [01:13]
Krista Dibias
And today mortgages as well. I'm Krista Dibiaz here with Wes Moss.
- [01:18]
Wes Moss
Wes Moss. And the highly controversial subject.
- [01:23]
Krista Dibias
Yeah, the 50 year mortgage.
- [01:24]
Wes Moss
Whoa.
- [01:26]
Krista Dibias
I definitely have strong feelings about it. I'll say that. And I will express them.
- [01:32]
Wes Moss
Throwing things at me before we got on air.
- [01:34]
Krista Dibias
No, I wasn't. I wasn't. But I do have strong feelings probably because I work with Clark for so very long. And I'd also like to definitely pose some questions to you from our listeners and viewers. If you want to see the podcast, you can go to YouTube.com/clark. And of course you can listen wherever, wherever you are and share and review and rate the podcast. We really appreciate it. And if you have a question for Wes or Clark, go to clark.comask all.
- [02:04]
Wes Moss
Right, so where do we start? You. Well, you want to start with the 50 year mortgage.
- [02:08]
Krista Dibias
I don't. I don't. I will mention later on you're going to give us the key to a winning 401k as well.
- [02:14]
Wes Moss
That he is.
- [02:15]
Krista Dibias
Yeah. So we are going to start with the 50 year mortgage. You and I may agree, I don't know.
- [02:19]
Wes Moss
So let's right out of the gate here. This is a hot financial topic. We brought it up on a radio show that I was on earlier this week. Everybody on the show is going nuts about it. This is the worst thing ever. There. There's op EDS in the Wall Street Journal that are all about how it's just, it's a gimmick and it's terrible. There's memes out there of other financial hosts who are catatonic having meltdowns about it. And I get that because it really is a gimmick in a lot of ways. I do have one positive thing that it actually could be good, which I know nobody wants to hear. But in 2025, a lot of us have heard about the K shaped economy. The K economy is that one leg of our population is, is doing really well and another leg of the population is the part of the K that's headed down and it's not doing well. And that you've seen this in multiple charts. If you look at consumer sentiment, I saw a chart yesterday, consumer sentiment for people with 401k balances, it's pretty good consumer sentiment. For folks who don't have 401ks, not good consumer sentiment. For people who own houses, good consumer sentiment. People who don't have a home, they're not, they don't own a home down. So this year, and this is really always been the case, but it's exacerbated even more because we've had now three good years of stock market returns. We've had appreciation though much slower when it comes to home prices in real estate. If you've been an owner of investments, whether it's equity in a home or stocks, you are feeling better today than you were last year and probably three years ago. And you've built more wealth. And that wealth effect makes your sentiment higher. And we've seen an even bigger divergence that in 2025. Ownership has proven out to be financial stability for folks. So the whole key to starting to build wealth is getting started in the game. We'll talk about this when it comes to the 401k. And we also know that the median first time home buying age just hit an all time high. It's now 40 in the 1980s, it was in your 20s and it drifted a little higher in the 90s and a little higher in the 2000s. But traditionally, if you go back to the 1980s, a lot of folks listening probably bought their first home in their 20s or early 30s and they were able to start building equity in a slowly but steadily appreciating home market. And not only do you get home appreciation, when if you're staying in a home for a longer period of time, call it five years, seven years, 10 years, you are getting the leverage of the homeowner, you're getting an asset, let's say that's you're paying a small amount per month because you borrowed and you get the whole asset appreciating. It's called leverage. That's why there's so many wealthy real estate folks is they use the leverage they borrow. They get to buy a giant asset and the whole asset, if it goes up, if it appreciates its appreciation on this massive amount of money without you putting cash down for the whole amount, it's called leverage. And that's how real estate folks have made so much money over the years in an American economy that is pretty much had real estate go up, except for the great financial crisis when we saw home prices go down dramatically. Now there were places and there were pockets that were hit really hard and collectively most almost every lost value in the United States, but then that is since recovered as well. So you can see where I'm going on this is that the sooner we can get started on home equity, the better. And if a 50 year mortgage allows, let's say out of 10 people on the margin, one extra person to be able to start their home equity journey earlier, then that's the one thing I can say that the 50 year mortgage could be helpful with. Mm. So in concept it really could be good because it's getting more people on the upper part of that. K. Krista the problem with it is that it really doesn't save that much money at all. And if you run a couple, I mean, I run a bunch of different scenarios. A $415,000 mortgage, that's the median home price today in America, 20% down 30 year versus a 50 year. Now in fairness, if you had the exact same rate on a, you're going to save anywhere from on, on an average home price in America, it could be 150, it could be almost 250amonth. So it's not nothing. But if you were to assume that the 50 year would probably be a little bit of a higher rate than a 30% or quarter percent, half a percent, then you get the numbers down to more like 150 bucks a month savings, which is not again, still not nothing, but it's just not that significant.
- [07:20]
Krista Dibias
Yeah, but the difference in the principal you're paying down over time, like if you suddenly have to move because you have a job change or something, in two years or five years, you've paid down so much less in principal, then you know, that's, to me the huge issue is you could get stuck like yes, the, you know, being a homeowner, I am one. It's been great over the last few years, but there have been years we've seen where it's been terrible. And so if you're, you know, the value of your home goes down, you could really get caught I think with.
- [07:48]
Wes Moss
This on $400,000, the payment is called I'll do round, I'll round it here is about 2,500 bucks a month on the regular, good old fashioned, 30 year fixed and it's about 2,300 bucks on the 50 year. So it's, it's 150 to $200 less expensive. Is that really going to make a difference whether you buy a home or continue renting? I don't know. Maybe for some people it does, but for the vast majority, I just don't know if the numbers are big enough of a difference to really get people into the market, which it's really aimed to do. Now as interest rates go up and they've come down, they're still in the six and a quarter range. But if we had even higher interest rates in the seven, seven and a half range, we go back a year or two when we were in the 7 range. The amortization of that, that longer mortgage does help a little bit more, but when you have lower interest rates, it doesn't really move the meter all that much. And to your point on again, if I'm looking at simple numbers here, a $400,000 loan, if I did this over five years, you've paid down 27 grand on a 30 year, five years into a 50, you've only paid down 11,000.
- [09:01]
Krista Dibias
Yeah.
- [09:02]
Wes Moss
So the reason people are having meltdowns about how terrible this is is that one, the payment doesn't help all that much. But it does some. I want to at least acknowledge that. And the principal pay down, which Krista makes, that's a really important point, is very different as well. Where it could work would just only be in a situation where you're in a rising real estate market and you build home equity over that first five year period and that could be significant. So I just want to at least acknowledge that I'm not having a meltdown about it. Because the other thing, Chris, is that you don't have to stick to the, to the amortization schedule. You can pay it down soon, right?
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Krista Dibias
You can.
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Wes Moss
But I'd also say you may only live in that house for five to seven years, maybe longer.
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Krista Dibias
I mean, I would also say though, like if you're saving 150amonth, are we really saving that? Putting that aside, what would that be? Eighteen hundred dollars a year in savings? Are you saving, are you really saving that and homeownership's expensive. There are so many costs associated with it and things break and just all sorts of other factors too, that I don't know. I just think, I know it's always been the American dream, but sometimes, like it can be the American nightmare if you're in a bad situation, you know.
- [10:15]
Wes Moss
Can'T argue with that.
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Krista Dibias
Okay, let's go to questions Brandon and Tennessee. Brandon says this question's for Wes. In multiple episodes, you keep referring to weighted investing. To avoid being overexposed to the tech sector, can you please recommend which specific mutual funds or ETFs provide equal weighted investing? I'm currently invested 80% in Fidelity total US market and 20% in Fidelity International.
- [10:41]
Wes Moss
So, Brandon, I'm glad you brought this up because there is some confusion here. We're talking about the percentage exposure. When I say weighting or market cap weighted or equal weighted, it really goes back to how much influence any one stock has. And it is an important, it's a very important and Clark and I talked about this a couple weeks ago, for people to understand that if you're in the majority of assets are in traditional market cap weighted indices, the s and P500. I don't know how many different index funds there are for the S and P, but they for the most part are market cap weighted, meaning that the top 10 companies are really taking up about 40% of the influence. It's hard to even visual, it's hard to even fathom that as you have 500 companies but 10 of them, because they're so big relative to all the other 490 companies, they have an outsized influence on how the overall index does that is your investment. And the worry is that the biggest companies for the most part are really trading well because of the same exact theme. It's tech and it's AI tech. So we find ourselves in an environment where there's a lot of emphasis on that one theme. And if that goes wrong, people will get burned or they're going to have to deal with these temporary losses. So the answer to that would be how do I find an index that still gives me exposure to the s and P500 that is has equal weights for all 500. It's a very different formula. If you think you see the math one divided by 500, it's about 0.2. So if you had 100 stocks, every stock would have 1% and they'd all have equal 1% influence on how it does an equal weighted ETF with 100 stocks. There's an equal weighted Dow which would give the same weight to each all 30 stocks. An equal weighted S&P 500 fund would, would give about 0.2 of a percent to each one to all 500. Now, again, I can't recommend or go out and say you should go buy this ETF or that ETF, but here's some examples. RSP is the Invesco S&P 500 equal weight ETF, and that does the job. It is giving you an equal weighting of each S&P 500. There's a NASDAQ version of it. There's the equal weighted NASDAQ etf. There's also an equal sector weighted etf because if you think about this, there are more technology companies just by number in the S&P 500 than a lot of the other sectors. So even if you're equally weighting them, you're still getting a high percentage of technology. So that's when you may want to look at an equal sector weight where utilities, financials, banks, energy and tech have the same proportion. The other thing I think you could do, Brandon, is that there are ETFs for sectors and that is another way for you to try to equalize your overall portfolio by owning a similar percentage of each sector. And that's another way to diversify.
- [13:55]
Krista Dibias
Okay, this one is from Jamie in Nevada. Dear Wes, if you do not anticipate needing Social Security to pay monthly expenses, what do you think about collecting it early at 62 and investing it, for example, in a target date fund 10 years out? I retired in my mid-50s with a COLA adjusted public retiree pension that covers my monthly living expenses. I'll turn 62 in a few years and will only have a mortgage that is being paid down early. The original plan was to wait until full retirement age at 70, but I'm wondering if there's any potential upside to collecting early and investing instead.
- [14:30]
Wes Moss
Here's the thought around this, Jamie, is that for most people asking this question, you're in your, let's call it 62 and you can take social. You've got to be careful about your other income, meaning that if you have a certain amount of income, it would erode your Social Security payment over a certain amount over about, call it what, 23,400. Every $2 above that, you would lose a dollar in Social Security. So you're going to be careful about and you have income. The good news for you, Jamie, is that pension income and passive income doesn't count towards that. So you can have rental income, you can have dividends and capital gains, you can have withdrawals from retirement accounts. And that does not count against it's really wage income that takes a chunk out of your Social Security. So you're safe and you can do this. And the math is really about an 11 year break even. So for every year you forego taking a payment, but then you have a higher payment the next year, in about 11 years, you've now made up for what you didn't take. That's the deal. We all know that Social Security appreciates the payment goes up by about 7% per year. So if you were to be taking Social Security now, you've taken less because you've taken it earlier and you're making 7 or 8% a year, then you are somewhat just breaking even, provided you live into your mid to late 70s. So it's a little bit of a wash. But here's where I would, I would really consider doing it, Jamie, is that if almost everything you have is retirement money and then you've got your pension and you don't have a whole lot of after tax money that you can get to in a tax efficient way, then I would say, I would lean towards saying, sure, start building. Take social so you can save it. Build up your after tax cushion because you may need it from a tax perspective and a spending perspective one day.
- [16:22]
Krista Dibias
Okay. Jay in Florida says this is not an advertisement, just a review from a so far happy customer. Robinhood has rolled out some tantalizing incentives to draw people into their ecosystem and it's working.
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Wes Moss
You work for the Robinhood marketing team tantalizing, Jay?
- [16:39]
Krista Dibias
I'm not sure. For $50 a year I have Robinhood Gold, which gives me an additional 3% on deposits into their IRA up to the yearly max contributions. It also provides Morningstar Insight and a full service brokerage platform for advanced charting, which I use. Finally, it allowed me to sign up for their credit card, which gives 3% cash back on every purchase. Some of the redemption options are gimmicky, making the clear cut best option for my earned points to just dump them directly into my brokerage or into my ira. With our charge volume yearly, this is a substantial amount of found money that I can use to boost my retirement, my investment earnings. What do you think, Jay?
- [17:15]
Wes Moss
All right, man. I think that and I've looked at you guys, you guys are the credit card experts.
- [17:20]
Krista Dibias
We reviewed this card a year ago. Yeah, we have someone who just researches this. But at the same time, we always say every single article we write or anything about working the credit card game. You have to be someone who pays your balances off in full every month. If you can do that.
- [17:35]
Wes Moss
If you miss, if you're late a day or two, they just make it all back. Because this particular card, it's almost 30%, I think.
- [17:42]
Krista Dibias
Oh, it's insane.
- [17:43]
Wes Moss
28, 29, 30% APR. So it's. It's crazy, crazy interest if you're just a day late.
- [17:50]
Krista Dibias
But not for everyone to use credit cards, for sure.
- [17:53]
Wes Moss
Here's some of the math here. You get a 3% contribution up to your max. So that'd be. Let's call it 7K in the IRA. That's 210 bucks. So you get a free $210. It's only $50 for the card, so you're getting 160 bucks a year. That's pretty good. The second thing is that 3% cash back on every purchase is. It can be a big deal. I mean, 30 grand a year in spending, you're paying it all back. It's 900 bucks. So you're good here. About a thousand dollars a year. And that's not nothing. Now, they can always make changes. I mean, this reminds me of the toasters of the 50s. Remember, you could. Banks would give you a toaster if you opened up an account. It's a bank. This is just a modern version of a toaster. Except it's a pretty nice toaster.
- [18:41]
Krista Dibias
Yeah, for now, for sure. I mean, they started it, I think, in 2024.
- [18:45]
Wes Moss
It seems like it's still going. And Jay says it's tantalizing, because it is. More than anything, we're talking about a serious thing here, and that's your investments. That's really what matters here. This is not a checking account. It's not a utility that you could just. It's the same in any bank. Robinhood. If you like the platform, the charting, and it makes it easier for you to be the best investor you can be, then that's really what matters. So you're not flipping over to Robinhood just because of these incentives to take a lesser platform. And I'm not saying it is at all, but what matters is that you really like the platform, and it makes it easy for you to be a great investor over time. In addition to that, these rewards, as long as you're paying your credit card balances off immediately or with 0, 0 down late time, then you can really use this to your advantage, Jay. And it's not a small amount of money.
- [19:43]
Krista Dibias
Okay. All right. We're going to take a quick break and when we come back, you're going to tell us the key to a winning 401k.
- [19:49]
Wes Moss
Yes ma'. Am.
- [19:50]
Krista Dibias
Winning.
- [19:52]
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- [20:30]
Progressive Insurance Announcer
This podcast is brought to you by Progressive Insurance. Fiscally responsible financial geniuses, monetary magicians. These are things people say about drivers who switch their car insurance to Progressive and save hundreds. Because Progressive offers discounts for paying in full, owning a home and more. Plus, you can count on their great customer service to help you when you need it. So your dollar goes a long way. Visit Progressive to see if you could save on car insurance, Progressive Casualty Insurance Company and affiliates. Potential savings will vary. Not available in all states and situations. Jamie Lee Curtis and Lindsay Lohan are back in Disney's Freakier Friday, now streaming on Disney.
- [21:12]
Krista Dibias
We Switched bodies. I am freaking out right now. I think I just peed a little.
- [21:18]
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- [21:23]
Wes Moss
Much weirder than the last time. What last time?
- [21:26]
Progressive Insurance Announcer
It's the Frequel.
- [21:27]
Wes Moss
You ready?
- [21:27]
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- [21:35]
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- [22:06]
Wes Moss
Welcome back to Ask an Advisor. Wes Moss here along with Krista Dibias. Krista, the key to a winning 401k. What is it?
- [22:14]
Krista Dibias
Winning, by the way? You know, I use that word because of Charlie Sheen. Because I watched a Charlie Sheen documentary on Netflix after I heard him interviewed on my favorite podcast I listened to, which is not a financial podcast. It is called Armchair Expert. Yeah, and with Dax Shepard and Monica Padman. It's a really, really great. I love that podcast. Anyway, Charlie Sheen has done this documentary and it's about himself. Yeah.
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Wes Moss
Okay.
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Krista Dibias
And I mean, I assume that I don't know if he came up with somebody else or somebody wanted to do it on him, but it's been a crazy life and it was very interesting. And he's sober now, and I hope he stays that way because he really.
- [22:52]
Wes Moss
Does he seem, now that he's sober, is he a lot. He doesn't seem like he's bouncing off the walls. Is he seemed pretty normal or is he still a little out?
- [23:01]
Krista Dibias
He did no. And what I saw, he did for sure. I mean, he recognizes that, you know, things went off the rails a lot for him, you know, and I don't know, I'm rooting.
- [23:09]
Wes Moss
Last thing I remember about him was tiger blood. That was when he was talking about winning. And. Yeah, well, maybe he is now these cleaning.
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Krista Dibias
So I hope so.
- [23:18]
Wes Moss
God bless.
- [23:19]
Krista Dibias
Especially for his kids.
- [23:20]
Wes Moss
Well, here's the key to a winning 401k.
- [23:22]
Krista Dibias
Okay, let's hear it.
- [23:23]
Wes Moss
This is an article that I found this week and that was the title of it. It was the key to winning 401k. I said, wait a minute, what is the key? I think I know the key, but. And this is for anybody who is, let's say, younger in our audience. And the reason I like this story is because this, I've seen this happen just over and over and over and over again. This was what happens in real life. And there's two people they mention. And these are just fictional characters, but you can relate to them. It's Laura and it's RJ. And Laura and RJ are both 25 and they both make 75k a year and they both have a 401k. And we're going to talk about what they end up by the time they're in retirement or by the time they hit age 60. And they approach it not that differently, but it's a really big end result difference. So Laura jumps in, day one. She goes to the HR meeting. They say, you really should be saving in your 401k. So she says, boom, I'm done. I'm in 10% of my salary. And the company gives a 3% match. So she's saving 13%. Not bad for somebody who's just out of school.
- [24:28]
Krista Dibias
I'm trying to get my daughter to do right now.
- [24:30]
Wes Moss
Rj, on the other hand, he knows he needs to do it, but he's at least 25. And he's saying, everything's expensive. And I'm like, I'd like to have a little bit of fun. And that seems like a lot of money. So I'm not going to start right away. So he waits five years. Then he goes back to that same meeting when he's 30, and he says, you know, the HR person is right. I should contribute. So he. He finally does. Only five years later, he's 30. It's still young. And he contributes 6%, enough to get the 3% match. And the 3% plus the 6 gets him to 9%. Not bad. Not a huge difference here. On paper, Laura is at 13%. RJ is at 9%, started only five years later. But that little gap, that small gap, ends up being a really big part of the whole story. Now, in fairness, RJ's and we're assuming now that private equity comes into the equation and maybe these private equity firms or the investment options work. And he chooses a target date fund that has some exposure there, and he gets a really nice rate of return. He gets 8.9% average rate of return over time. But Laura chooses something a little more traditional. No private equity. And again, we're all. This is all hypothetical. She does okay. She does actually pretty well, too. But it's a half a percent difference per year. She makes 8.4% per year. By the time they're both 65, both had climbed the career ladder. They're now making about $180,000 a year. So they went from $75,000 to $180,000. Again, I've seen this story over and over again in real life. What is the difference between their balances? The question. Laura has over $3 million when she's 65. RJ, who got a better rate of return, only started five years later and saved about 4% less per year. He's at about 2 million. It's over a $1 million difference. So those little variables that just don't seem like they're that important when you're 25, 28, 29, they may not seem like a big deal, but they are a big deal. 4% more. It doesn't sound like a lot, but it really adds up. Five years late doesn't sound like a lot, but it really adds up. Even in this case, RJ's rate of return was better. Lars still ended up with over a million dollars more. So that, to me, is just a. This is a very real life story. This happens probably every day in America. This is happening. And I Think it's important for you to be aware of that because that extra time and a little extra savings can be a big deal. 25 or 30 years.
- [27:18]
Krista Dibias
I'm going to send that clip to my daughter. Although she believes in saving, she's always, she's had a Roth IRA for a long time but you know when you're starting your first job and you're living in an incredibly expensive city, which she is, it's really hard to like make that leap because she wasn't eligible yet for her 401k so. And do a Roth, which her mom is.
- [27:39]
Wes Moss
And do a Roth.
- [27:40]
Krista Dibias
David in Oklahoma wrote in with this Wes and Krista, I really enjoy asking an advisor. Thank you very much. We are grateful for you listening David. I'm a certified registered nurse anesthesiologist CRNA. I'm currently a W2 employee making close to $300,000 with typical benefits and a typical retirement contributions from my employer. They put in 9% and I save close to 8. As a CRNA we have opportunities to work 1099 and open an LLC or S Corp. There are currently jobs close to me that pay 3, $330,000 on a 1099 though I'd probably make closer to 370. I'm a married father of four with one of them about to start college in 2026 and my wife's a stay at home mom. Is it worth it to go 1099 for some more freedom of investing and saving a higher amount? If I paid myself a salary, what is a good amount to pay myself?
- [28:31]
Wes Moss
David in Oklahoma, that's a pretty awesome career.
- [28:33]
Krista Dibias
Oh my gosh.
- [28:34]
Wes Moss
The CRNA I have, my godson is studying to do that same thing because it is, it's a huge amount of income and there is a fair amount of flexibility. So it's a super career. And if I'm just doing the numbers here, David, you're at 300K, you're contributing 8%. That's 24 grand, let's say approximately and then they're giving you nine. That's I think maybe part of the key to the answer here is 9% is another 27,000. That is a contribution from the company. That's a big number. So you're at about $50,000. Called $51,000. That's a big deal. Now to your point, you could go out as a 1099 CRNA and probably make you said three. What you say 350?
- [29:23]
Krista Dibias
370.
- [29:24]
Wes Moss
Let's just say 350. You do the Same math here. So you're at, you max out your own boss. At this point, you're 1099. So you set up a solo 401. And yes, you can save more if you do that because you get to do your employer contribution. The employee side of it is the. Is the max the 23 5. Actually next year the IRS just came out with new numbers. They upped it to 24,5, but let's just say it's 24 grand. And your 25% of your net adjusted income gets you to another 58. You're at about $70,000 a year, so you're able to save more. You're at 70 as a solo 1099. You're at 50 as an employee. So that's not nothing. It's $20,000 more. But at the same time, you're also giving up $27 worth of free money that the employer is giving you.
- [30:19]
Krista Dibias
That's a huge 9%.
- [30:20]
Wes Moss
It's a really big number.
- [30:22]
Krista Dibias
I wonder if health insurance is part of the benefits too.
- [30:25]
Wes Moss
I'm sure. Oh, I'm sure it is.
- [30:27]
Krista Dibias
So you're a family with four kids.
- [30:28]
Wes Moss
You're going to pay for your own health care as well. So that's big deal is healthcare is not going to get covered anymore. Some of your life insurance or disability insurance, that's probably not going to get covered. You've got no more paid time off. I think about it liability wise, right? If you're solo, and I know there's ways to get into these group plans with malpractice or I believe there are, but that's a little bit scary too. In the world we live in, there's some liability risk out there, particularly for this profession, really almost any medical profession. And then you've got to start paying your own taxes. You've got to have probably a tighter relationship with the cpa and then you get the administrative overhead. I'm a big advocate to get out there on your own, own your own business. But really what you're doing here is you are just opening yourself up to more complication, more liability or. I don't know if it's worth it. In my book, it is definitely more money and there's a little bit more savings. But I somewhat think it's not worth the jump in a pretty high risk field. And that's. I don't have a perfect answer for you, but I think if it were me weighing it, you're at a really good spot and I'd probably be staying at that really good Spot.
- [31:50]
Krista Dibias
Okay. Juan in California says I've been lucky to be a Silicon Valley high earner. My prior employer of four years offered a mega backdoor Roth and I was able to max out 401k contributions every year at around 69k a year. 401k plus the match plus the mega backdoor Roth. I started work at a new company and they do not offer the Mega Roth. And additionally employer match is a pitiful $2,000. This limits me to a measly 25k in contributions. I know there's a backdoor Roth, but it's capped at $7,000. And then there's the pro rata rule complexity. Yeah, I'm going from saving $69,000 a year to just 25,000. What other tax advantage retirement options do I have otherwise? My plan is to put all that money into a diversified ETF like BTI using a personal brokerage account. That somehow doesn't sound very safe, relatively speaking. And there's also zero tax advantage. What can this quote unquote poor Silicon Valley brat do?
- [32:51]
Wes Moss
Juan, you're not a poor Silicon Valley brat. I think you're a clarky and you're wanting to save a bunch of money into a Roth and that just makes all, it just makes a lot of sense to be able to do that. So I would first of all, I double check your new 401K. If you can do after tax contributions but you still can't do do the mega backdoor Roth, you still may be able to make this thing work. If you are allowed to do the after tax contributions, then you can you do your regular contribution and then you go above that and you do the, let's call it up to 70 starting next year in 2025 approximately. And then the next step would be does the plan and a lot of plans do this one allow for an in service distribution. So if you're able to have the after tax contribution and they allow you to do in service withdrawals, then you could essentially have your own do it yourself mega backdoor off DIY MB. Dr. It's possible, but it doesn't sound like that's going to work. So we'll say yeah, you can still do your regular backdoor Roth conversions on the IRA side, but you're leaning against that. So you're right, you're going from saving almost 70 down to 20 mid 20s. And the answer here is that you can still save money. It's just after tax money. And that can be, it's not quite as good as a Roth because it doesn't get to grow tax free like the Roth does. But there's a lot of flexibility when you have an after tax account. Low cost ETFs, super high tax efficiency, and then you can then manage your withdrawals when you get into retirement. It's almost as good, but not quite, but that may be the only thing you have or able to do.
- [34:46]
Krista Dibias
All right. And Ben in Georgia says, my wife is considered a highly compensated employee at her company. Based on this, she's limited to how much she can contribute to her 401k. So the company has what's called a restoration plan as an option for her as a non qualified deferred compensation plan.
- [35:01]
Wes Moss
And non qualified deferred comp. Yep. Okay.
- [35:05]
Krista Dibias
My question is generally what are the pros and cons of this kind of plan? She currently makes a little over 250,000 a year plus about 80,000 in bonuses. 11% of her paycheck goes into the restoration plan and 6% goes to her 401k. From what I can see on the restoration plan, when she retires in about 10 years, she'll have the option to withdraw from that and equal payments for either 5, 10, or 15 years. I'm concerned about how we will handle those payments in the early years of retirement from a tax standpoint as that will be considered income. Just a little more background. I'm turning 50 in 2026. Yay. Catch up contributions. I make about 90k a year and max out my 401k with about 50% in a regular 401k and 50% in a Roth 401k as well as max out my Roth IRA every year. My wife just turned 47 and also maxes out her Roth IRA. In addition to the 401k and restoration plan mentioned earlier, we also contribute $500 a month to a taxable brokerage account. I love listening to the show.
- [36:04]
Wes Moss
She contributes to a roth or Roth 401K. Let's see.
- [36:08]
Krista Dibias
My wife just turned 47. She maxed out her Roth IRA in addition to the 401K restoration. Yeah. I was surprised she could do a Roth IRA.
- [36:16]
Wes Moss
They make like 420 grand a year. Yeah, I don't know if that squares, but. Okay, keep going.
- [36:22]
Krista Dibias
Just Ben wrote at the end. I love listening to the show. My commute into work every week. Thanks. Thank you.
- [36:27]
Wes Moss
And I love you listening to the show.
- [36:29]
Krista Dibias
Yes, we do.
- [36:29]
Wes Moss
I appreciate it. Here's the thought is that there are pros and cons to all these things. The restoration plan I've seen this in, I don't know how many companies in America have something like this, but I probably know where he's working and I know where the, the restoration plan is all about. It's a big company here in Georgia. But look, there's not a lot of drawbacks. One drawback is that it's non qualified, so it doesn't have ERISA protection. It's not protected from a bankruptcy situation or a creditor situation. And the company has to be able to make good on it. So it's not, it's, that's a little bit of a worry, but I'm not worried about it here. In this situation, you can't roll the money over to an ira. That's obviously a little bit of a drawback. And then they mandate you on how you want to take it over time. So there's a little lack of control there. But on the plus side, you get more savings above the 401k cap. You still get tax deferred growth. The company can do crediting. And a lot of companies do a good job with this. You get a pretty nice rate of return and they don't have to give it to you. But historically I've seen companies that use these restoration type plans usually do a pretty good job at how much they're giving you in percentage rate of return every year. So it really turns out to be a serious asset. It could be worth 3, 4, $500,000 by the time your wife retires. So all of that good outweighs the negatives or any sort of drawback. And then the one big question then is that how do you take it? And you're right, it could be a big tax burden if you choose the five year option. If it's 500 grand you get and you choose the five year option, it's $100,000 in income every year. And that's probably not a good idea. The good news is you can take it over 10 years or you can take it over 15, so you can really spread that out. So if you think about $500,000 divided by 15 years, now you're talking about 35 grand a year. So it's a way lower tax burden for you. And I think you will know, Ben, you and your wife when you get to that early retirement age, 62 or so. My experience in helping families plan for this in very similar situations. You'll know how you want to spread it out when you're getting closer to retirement. If you're going to take Social Security at 62, then you may want to be limiting how much you are pulling out for from the restoration and you maybe choose the 15 year option. But if you're saying, you know what, I really want to wait till I'm 70, but I'm going to stop working in my early 60s and you need a little bit of extra income to bridge the gap to get to 70 and have that higher payment, great. Then you maybe take the 5 or the 10 year option. You get a little bit more every year from that restoration plan. You'll know in the year or two leading up to when you really want to stop working what the right option is as far as the amount of years you choose to receive your restoration. You guys are doing awesome.
- [39:33]
Krista Dibias
All right, so we're winning today, Wes.
- [39:36]
Wes Moss
For sure, I guess has been the theme. Yeah, it's been winning.
- [39:39]
Krista Dibias
The listeners are winning. The viewers are winning. Thank you so much for listening and viewing this podcast. We're very grateful. I want to say happy birthday to my son today. Happy birthday, Matthew.
- [39:51]
Wes Moss
Happy birthday, Matthew.
- [39:52]
Krista Dibias
We will be back next week with him brand new episode of Ask an Advisor. And as a reminder, go to clark.com ask if you have a question for Wes. Have a wonderful day. Join Vanguard for a moment of meditation. Take a deep breath. Picture yourself reaching your financial goals. Feel that freedom. Visit vanguard.com investinginyou to learn more. All investing is subject to risk.