12.09.25 Ask An Advisor With Wes Moss

Summary

Podcast Summary: The Clark Howard Podcast

Episode: 12.09.25 – Ask An Advisor With Wes Moss

Date: December 9, 2025
Host: Clark Howard
Guest: Wes Moss (Financial Advisor)

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Main Theme Overview

This special edition of "The Clark Howard Podcast," titled "Ask an Advisor," features financial advisor Wes Moss alongside Clark Howard. The episode explores critical retirement planning topics, including Roth IRA conversions, the hidden costs and risks of rapid conversions, what happens to forgotten 401(k)s, and a host of listener questions about college savings rollovers, withdrawal rules, life insurance, investment approaches, and practical retirement strategies.

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Key Discussion Points & Insights

1. The “Tax Bomb” of All-at-Once Roth Conversions (00:50–09:33)

- Wall Street Journal Opinion Critiqued

• Wes Moss critiques a recent Wall Street Journal op-ed suggesting retirees convert entire IRA balances to Roth IRAs in one go, using a $1 million example.
  • "This kind of advice to me is...scary, because imagine somebody reads this article...and then they're going to be creating what is an absolute tax bomb, tsunami, whatever you want to call it." – Wes Moss (03:18)
• The article assumes flat tax rates (10, 20, or 30%), disregarding the real, progressive U.S. tax system.

- Why This Advice Is Dangerous

• Converting a large IRA all at once could push you into the top tax brackets (up to 37% federal, plus state), resulting in a tax bill of $400K–$500K for a $1 million IRA.
  • "You would be immediately in the 37 [percent] tax bracket. Most likely...Your tax bill could be $400,000 to $500,000 to do that conversion." – Wes Moss (08:04)
• Also affects Medicare premiums, Social Security taxation, and loss of deductions and credits.

- The Practical Approach: Staged Conversions

• Real-life Roth conversions should be made gradually, “filling up” each tax bracket without jumping to a higher one.
  • "It should be done over time. You fill up one tax bucket, you make sure you don't get to the next tax bracket..." – Wes Moss (09:04)
  • Rare cases may justify a lump-sum conversion, but most people should avoid a huge, single conversion event.

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2. Listener Q&A with Wes Moss

A. 529-to-Roth IRA Rollovers for Children (Rich in Nevada) (09:34–12:29)

• Rollovers can start even if the Roth is custodial (beneficiary under 18).
• Only permissible up to annual earned income (current/future IRA limits apply; for 2026: $7,500/year).
• Plan to convert up to $35,000 over 5 years.
• Paperwork: Ask the custodian to code rollover transactions correctly as non-taxable.

B. Adjusting Withdrawal Rates Pre- and Post-Social Security (Dan in Missouri) (12:29–15:09)

• The 4% rule is just a rule of thumb; you can withdraw more (e.g., 5–6%) in “gap years” before Social Security starts, then lower the withdrawal rate thereafter.
  • "It is not a straight line calculation, it is a destination." – Wes Moss (12:52)
• Beware sequence of returns risk during higher withdrawal periods.

C. When to Cancel Life Insurance (Debbie in North Carolina) (15:09–18:01)

• Cancel when you no longer need it, i.e., when dependents are financially independent and you’ve accumulated sufficient assets for your spouse.
  • “It's somewhat subjective, but there's some really, really important check marks...” – Wes Moss (15:45)
• Exception: If premium rates become unaffordable, or if it’s a low-cost policy you don’t strictly need but want to keep as a hedge.

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3. The Problem of Forgotten 401(k)s (21:10–23:34)

- Increased Auto-Rollover Thresholds

• Employers can now transfer old 401(k) balances between $1,000–$7,000 into safe harbor IRAs, often defaulting to low-yield money markets.
• Lost growth risk: Example—a $4,500 balance in a money market versus being invested could mean ending with $10K vs. $33K over decades.
  • "That's the last thing you want is to have three or four of these floating around doing nothing." – Wes Moss (22:06)

- Best Practices

• Consolidate old 401(k) accounts into a current employer plan or roll over to an IRA.
• Helps keep track of assets and manage investment allocations.

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Rapid Fire Listener Questions

1. Should I Shift More to a Guaranteed 7% Fund Pre-Retirement? (Patrick in NY) (23:34–28:25)

• If you have access to a guaranteed 7% or even 8.25% fixed fund, the "4% rule" is too conservative; you could take even higher withdrawals safely.
  • “Yes. The 4% rule is too low for you...If you have a locked in 7%...you could take more than 7.” – Wes Moss (24:34–25:16)
• Wes cautions that no state guarantee is absolute; watch for changes in state fiscal health.

2. Building a “Dry Powder” Safe Fund for Retirement (Patty in AZ) (28:25–31:11)

• Three years of safe assets is based on average bear market recovery times.
• Start building "dry powder" (short-term bonds, laddered ETFs, or money market) near retirement, though accumulating early can offer peace of mind.
  • "The three years comes from...that should get us through most bear markets." – Wes Moss (29:00)

3. Why Own Small and Mid-Cap Stocks? (Andrew in Iowa) (31:11–33:09)

• As companies grow, they graduate from small to mid to large cap; owning all categories ensures you don't miss long-term gains as companies grow.
  • "You do want to own all three...Makes sense to have small, mid, and large." – Wes Moss (32:10)

4. Updated “Home Value” Benchmark for Retiree Happiness (Gary in FL) (33:09–34:45)

• The $350,000 home value cited in Wes's older book now equates to $700,000, adjusting for home price inflation.
• The key for happy retirees: Pay off your mortgage, not necessarily hit a certain home value.

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Notable Quotes & Memorable Moments

• On Roth Conversion Op-eds:
  • "If a big tax bill is no problem...When is that ever?" – Wes Moss (04:14)
• Roth Conversion Reality:
  • "You fill up one tax bucket, you make sure you don't get to the next tax bracket..." – Wes Moss (09:04)
• On Keeping Multiple Old 401(k)s:
  • "That's the last thing you want...floating around doing nothing." – Wes Moss (22:06)
• On the “4% Rule”:
  • "The 4% rule is a rule of thumb...It is not a straight line calculation." – Wes Moss (12:52)
• Financial Security in Retirement:
  • "The real key here is to have your mortgage payoff within sight or paid off. That's one of the habits of happy retirees." – Wes Moss (34:36)

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Timestamps for Key Segments

• 00:50 – Roth conversion article debate begins
• 03:00 – Academic vs. advisor reasoning for conversion
• 04:14 – “If a big tax bill is no problem…”
• 09:33 – First listener question (529-to-Roth rollover)
• 12:29 – The “4% rule” flexibility
• 15:09 – When to cancel term life insurance
• 21:10 – Forgotten 401(k)s and auto-rollovers
• 23:34 – 7% fixed fund and pension withdrawal rate
• 28:25 – Building a safe “dry powder” bond ladder
• 31:11 – Why diversify with small/mid/large cap stocks
• 33:09 – What home value signals retiree happiness?

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Conclusion

This episode is a masterclass in practical retirement planning, dispelling dangerous oversimplifications about Roth conversions, reminding listeners about the risks of forgotten retirement accounts, and answering nuanced listener questions with real-world perspective. Wes Moss and Clark Howard combine expertise and clarity, giving actionable, step-by-step advice for listeners at every stage of their financial journey.

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To submit your questions for future episodes, visit clark.com/askclark.

Transcript

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[Clark Howard]

Welcome to Ask an Advisor where we're here at Team Park. Talk about all things investing. All things investing, saving for your retirement. And today, two topics we like to talk about. But you've got some specific spins on those topics. One is Clark loves to talk about the Roth ira. He calls himself the man from Roth Roth conversions. We get questions about those all the time. And you're going to talk about taxes and Roth conversions?

[Wes Moss]

Well, I'm going to talk about an article that was just in the Wall Street Journal from some professor who is saying that you should do your Roth conversion all at once. And they use a $1 million example and it's insanity. I cannot believe this was published. I had to read it five times to even see how it was possible, what they're saying.

[Clark Howard]

Okay.

[Wes Moss]

And so that's our first, that's our first topic. And then it's the $400,000 tax bomb is what it's about.

[Clark Howard]

Okay. And then the second thing you're going to talk about later, after we go to some of your questions for Wes is leaving your old 401ks behind. That advice was always, you know, leave it in there because you might, you might have a better deal with your old employer. But there's actually some people are leaving money behind and it's a real problem. Right.

[Wes Moss]

For getting a $28 billion in uninvested floundering 401k money.

[Clark Howard]

That sounds really bad. And if you have a question for Wes, you can go to clark.com ask and let us know that you would like Wes to answer your question.

[Wes Moss]

Can we start with this? I call this the 400 taxpayer tax bomb and that's underestimating it. And why you should not convert your entire IRA to a Roth all at once, which is totally contrary to the story that was an op ed in The Wall Street Journal. So it's not Wall Street Journal's fault, but this story stopped me in my tracks, which is rare for a personal finance story because I've read the same stories over and over and over again for years and years and years, and I'm actually not even going to mention who. It's a finance professor from a university who did this. So he's a finance professor, not a financial advisor.

[Clark Howard]

Okay.

[Wes Moss]

And I think that may be part of the issue here. It's, it's the academic view of a Roth conversion versus the real world part of it. And it argued that retirees should convert their traditional IRAs to Roths all at once, 100%. One big move.

[Clark Howard]

Okay.

[Wes Moss]

So according to their modeling from this university, the approach supposedly beats converting gradually over time. So on paper, maybe it sounds great. And I thought, wait a minute, let's see what their assumptions are. But I can't. This kind of advice to me is really is scary because imagine somebody reads this article, they have a million dollar Roth, which by the way, is in. That's the example they use a million dollar Roth conversion. They say, just do convert it all at once. I'm just worried that people are going to go read this, oh, it's in the Wall Street Journal, and then they're going to be creating what, what is an absolute tax bomb, tsunami, whatever you want to call it, it is such a massive tax bill that I cannot believe somebody would write to do this. But here's the line that I can't believe they put into writing. If a big tax bill is no problem.

When is that over? The big tax bill is no problem to what American would ever say, oh, no problem. Yeah. So on the surface of this is.

[Clark Howard]

And obviously a big bill would be a problem if you're trying to convert to a Roth, you're trying to avoid future taxes by doing a conversion. So you care about taxes by nature if you're trying to convert to a Roth.

[Wes Moss]

Correct. So yeah, we know, look, if you're going to convert to a Roth, we know moving money from an IRA in a Roth, it's going to create a tax bill. There's no question about this. But let's get into this craziness. And I had our team recreate this. I said, guys, how did they. Because the article doesn't give you the entire model, so you kind of have to back into what they're saying. The model that they're using in the article assumes a flat rate of 10, 20 or 30%, which applies equally to the Roth conversion and to the future. RMD's huge problem right there. Because if you're converting a big number your tax bracket, we have marginal tax rates, they're like buckets. One gets filled, the next one gets filled and the next one gets filled. And that goes all the way up to 37.37% plus state tax, which can go beyond even 10%. So you could, on a big conversion, you could easily be in the 37 federal and another 5 to 10% depending on what state you're in. You could be at 47% tax bill to do a conversion. And to some extent doesn't look like they model that. They assume the retiree has the cash to pay the bill.

This huge. Well, as long as you just have the money to do it. And then they use a short window, they just use a 10 year comparison which heavily favors the one time conversion they ignore. I think reality, which is the practical part of what we all have to actually consider. Liquidity needs, Medicare brackets, deductions, phase outs, and then the real world cash flow. Hey, you gotta, if you convert this IRA to a Roth, you've gotta take money from somewhere else to pay the tax bill. They first say that a one time conversion makes sense in most situations, regardless of the tax bill. Okay, but then at the end of the article they say it's only optimal. It's only optimal if a big tax bill is no problem. Well.

I just, just, I still. This is absolute lunacy. And you're hearing it here first on the Clark Howard show. Ask an advisor. All right, so what else do they do? They conclude that a one time conversion, they use these $1 million portfolio earning 6% annually, tested across marginal rates of 10, 20 and 30, not scaling, but converting it 20%, converting at 30. It seems like that's what they're doing here. And then they compare these three strategies. Leaving the money in a traditional IRA, taking and having to take RMDs, converting gradually over time and then converting it all at once. If a big tax bill is no problem, they say it could make sense for you. But let's just do the simple math here without having to recreate it, which our team did and essentially just says that they're not looking at the change in tax rates that would occur on a $1 million conversion. You would be immediately in the 37 tax bracket. Most likely you would be depending on other deductions. So you've got to be careful about. Everyone's tax situation can be very different. But for most folks, you convert a million Bucks million dollars. You have a million dollars in income, so that's 37%. Another five to ten for state. Your tax bill could be 400 to 500 grand to do that conversion.

[Clark Howard]

And you know, we're assuming people have that laying around.

[Wes Moss]

Assuming you have, remember, if the tax bill is no big deal to you, not to mention pushing Medicare premiums higher so Irma surcharges, not to mention the taxation of your Social Security benefits, not to mention elimination of deductions and credits and all the other things you'd get because you're not going to get them because you're in this super high tax bracket. There was a comment in this. I'm going to try to find this. Here's one of the Wall Street Journal readers comment. Are you going to pay 37% in taxes today so you don't have to pay 10% in the future? It just, it boggles my mind that they publish this because it makes it seem like, oh yeah, I'm a professor of financial planning and I did the model and it says that it's better just to convert all at once. Be really careful here. The Roth conversions. And I've had this conversation with almost every family I work with. It should be done over time. You fill up one tax bucket, you make sure you don't get to the next tax bracket or you know, what the next tax bracket might be. That to me, is the only realistic, practical way to do Roth conversions. There's always going to be an outlying case in either direction where you, maybe you could make the case to do this all at once. But for the vast majority of folks, be really careful reading that article and just creating an absolute tax tsunami for yourself.

[Clark Howard]

All right, you ready for some questions?

[Wes Moss]

Yeah.

[Clark Howard]

This one came in from Rich in Nevada. He says, dear Wes, my wife and I have been saving the past 17 years in a 529 for one of our daughters, and it's grown to a value of $115,000. We we currently take distributions from the account to Pay for qualified K12 educational expenses with homeschool tuition. Our daughter has expressed interest in earning an associate's degree to become a paralegal. Based on expected college expenses, we believe There will be unused 529 funds and we would like to roll over $35,000 to her Roth IRA. With this goal in mind, we have the following questions. One, since our daughter's Roth IRA is currently a custodial account, do we need to wait until she turns 18 to start the rollover process? 2. One of the rules, per the Secure 2.0 act of 2022 states the Roth IRA contribution is subject to the limit for the taxable year applicable to the designated beneficiary for all individual retirement plans maintained for the benefit of the designated beneficiary. Since the current annual IRA limit is $7,000, should we plan to make annual rollovers up to the maximum amount for five years? 3. Finally, how should we expect the rollovers to be documented? Will they not be listed on the IRS Form 1099 Q since the transactions are rollovers instead of distributions? Big thanks to you, Krista and Clark and everyone at Team Clark for helping us increase our confidence through financial education. Rich and Nevada, thank you for listening, Rich.

[Wes Moss]

Thank you for listening, Rich. Number one, Custodia, she's only 17.

You do not have to wait until she's 18 to start doing this. So that's number one. Number two, really, your question was about the earned income. And by the way, 2026, the IRA limit's going up to 7,500.

[Clark Howard]

7,500, right? Yeah.

[Wes Moss]

Right. So, yes, it is subject to how much she earns in a given year. So she makes five grand, $5,000 in income. That would be the most you could convert. If she makes $10,000 in a year, you can convert up to the maximum of the 7,500. But you do have that, right. You want to do as much earned income as she has. Hopefully you get to the $7,500 limit and then you would convert that over the course of, call it five years. Take four, four to five years and you should be able to do the full 35k. The last part was reporting the conversion. I don't know the exact form you would get, but I would think any brokerage firm, Schwab, Fidelity, Vanguard, you're going to get. You'll get a distribution form that'll code this as a rollover, and that way you're not having to pay taxes on this. So I don't know the exact form, Rich from Nevada, but you would just ask your financial institution to make sure it's coded properly so that you're not paying taxes on it. And I think that that should be no problem either.

[Clark Howard]

Awesome. Dan in Missouri says, Wes, you've talked at length about the 4% rule, but what if we want to stop working years before we take our Social Security? Any formula for taking a higher percentage distribution before Social Security and reducing to lower than 4% between 65 and 70 when we take our Social Security benefits? Love the show.

[Wes Moss]

Love your Question Dan from Missouri. The great thing about the 4% rule, and that's how people refer to it, is that when you hear the word rule, you hear etched in stone as though it's something that is extraordinarily by the book. And that's kind of the opposite of the 4% rule. The 4% rule is a rule of thumb. And it's important to know that because that means that it is not a straight line calculation, it is a destination, meaning we want to settle into that four to four and a half percent range over time. So absolutely you can. This happens all the time. There's usually a gap, particularly if you're an early retiree, you're retiring sooner. Maybe you don't want to take your Social Security until 67 and you're retired at 64. So you have a three year gap and you need a little extra money from your portfolio because social hasn't kicked in. But you know, when social kicks in, you can, you will be able to lower your withdrawal. So this happens all the time. And for you to be able to go to five, even six, even a little higher than that for two to three years, usually it's no problem whatsoever. And then you get to the point where social kicks in, your spending need, the withdrawal need goes down, and then you can adjust your withdrawals back to 4% or maybe even lower. And I've modeled that out for folks many, many times. This is a good place to do a cash flow plan or a formal cash flow analysis or retirement plan because you can just model in, hey, what if I take 6.5% for three years? What does that do to my balances? And then I adjust down to four or three and a half. I know that can work. Now, you don't want to do this for. You don't want to take 6% for 10 years and really materially have your balances drop. And you also, the one other caution, make sure that when you're in that period of time when, when your withdrawal rate's a little high, you've got some real balance. The last thing you want to have happen is you're having really high withdrawal rates and you have 100% stock portfolio and the market goes down. That's called sequence of return risk, is that we're in a bear market and you're pulling out more than you would like to relative to the 4% rule of thumb. So just make sure you have a really good balance if you're going to have to do that.

[Clark Howard]

All right. Debbie in North Carolina says Wes had a caller that asked about canceling his life insurance and Wes said not to do it yet. When is the time to cancel your life insurance? Wes also told us several years ago to not cancel our life insurance and take out another 10 year term life policy. Please explain when it's okay to cancel. Thanks Deb.

[Wes Moss]

I wonder if she's listening to my radio show probably or your or retirement podcast. Yeah. So the simple answer is when you don't need it anymore, that's when you cancel your life insurance. Or it becomes and when don't you need it anymore?

[Clark Howard]

What would the reason?

[Wes Moss]

Or when it becomes financially too detrimental to your current situation. And that can happen as well if you, there are policies that have rates that go up every year and that can make it to the point where you just can't afford it. And the benefit of the life insurance is it just, you can't, you can't pay for it. So Deb, when do you not need it anymore? Is the question. And it's somewhat subjective, but there's some really, really important check marks to look for. One, the life insurance typically is for either the kids or the spouse. So if the kids are grown up and they're out of the house, they don't need to rely on you financially anymore to pay for big bills like college. That's one where life insurance becomes less important because you, you pass away, you can't work, you can't pay for your kids college. So that's an important milestone. The second one is that when you and your husband or your spouse or you personally have enough saved and enough income to know that the life insurance would be more money on top if something happened, but you don't really need it anymore to fund your spending needs. Those are the two, those are scenarios. One, the kids are okay. The they're financially independent. And two, you've created your own independence and you no longer need the insurance. The other thought though is that it's somewhat subjective because if you have a term policy that you locked in a really low rate, you may not need the insurance anymore, Deb. But if it's a nominal cost to keep it, then it's just an extra hedge for you and your family. If you can afford it and it's not really cutting that far into your spending budget, then you, you may not need it anymore, but you still could choose to continue it on. Remember, none of us want to utilize.

[Clark Howard]

Life insurance but it's ultimately it's supposed to be replacement of income, right? So you know, if you're planning on still working for 10 years. It makes sense to do a 10 year policy, right? Because that yeah, if you're still needing.

[Wes Moss]

To work that means you probably for other people, you're still probably saving. You still may have dependents and the insurance is still it's still nice to have if you can afford it.

[Clark Howard]

Okay, so we're going to take a quick break and then we're going to talk about what you should do if you have old 401ks with other companies.

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[Clark Howard]

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[Wes Moss]

This is a real good story about.

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[Wes Moss]

Real United Airlines customers.

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[Clark Howard]

I got to sit in the driver's seat.

[Wes Moss]

I grew up in an aviation family, and seeing Bronx kind of reminded me of myself when I was that age. That's Andrew, a real United pilot. These small interactions can shape a kid's future.

[Clark Howard]

It felt like I was the captain.

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Allowing my son to see the flight deck will stick with us forever.

[Wes Moss]

That's how good leads the way. 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 leaving your old 401ks behind.

[Clark Howard]

The advice was always, you know, leave it in there because you might have a better deal with your old employer and they have, you know, like a decent lower cost and they're with a good provider that you should keep it.

[Wes Moss]

But. Well, here's what's happened though, is that just like all of these numbers, they keep inflating. Now it's up to 7,000.

[Clark Howard]

Oh.

[Wes Moss]

So if an employer now can automatically move a former employee's balance, if it's anywhere between a thousand bucks and $7,000 into a safe harbor IRA, and what happens with that money? It goes into a money market and people lose track of it.

[Clark Howard]

And so many people, like, compared to, you know, 10, 20 years ago, we're switching jobs so much more often now, too.

[Wes Moss]

Exactly. So the average American could have a couple of these laying around. And after several years, you've now really lost out on the potential growth if it were to be invested in funds that you could have or probably did have inside of the 401k. Here's the example. Let's say it's $4,500 and it sits in a 2% money market over several, let's call it four decades, that 4,500 bucks turns into 10 grand at a 5% rate of return, which is lower than I think people should get over time. You'd be at $33,000, three times the money, just by having the money invested. So the, the catch here, and this is something for all of us to watch out for if you've left your employer, it was a smaller balance. So now at that point smaller means anything 7 grand or below the 401k plan could have automatically put it into one of these safe harbor plans and it's sitting there in cash and it's, it's earning practically nothing. And that's the last thing you want is to have three or four of these floating around doing nothing. So take an inventory of your old accounts, consolidate your and this is why it does help to have 1 IRA or 1 401k. I like the idea of consolidating everything into your current 401k. So if you've got two or three old balances, put them in the current 401k, roll them into that or you have one IRA. You don't want a bunch of stragglers around. Put them into one ira. One, it helps keep track of it and two, it allows you to have a better eye on your overall allocation.

[Clark Howard]

Okay, I've got four questions I'm going to try to get through Rapid Fire Patrick in New York. I'm in my 29th year of teaching in New York City. New York City offers a very low cost retirement pre tax retirement account for some civil servants. We have several options for our investments that have done really well over the last 20 to 30 years. I currently have half my money in diverse stock market account and half in a guaranteed 7% fixed rate retirement account. Yes, it's guaranteed by our state constitution as I am less that number again 7%. 7%. And he said some people get 8.25%. As I am less than two years away from retirement, should I start transferring more money in the 7% fixed fund? I expect to start withdrawing from this account in about five years. Additionally, would the 4% rule be too low of withdrawal rate for those of us lucky enough to have a pension and Access to guaranteed 7% fixed rate? Appreciate all of your great advice, Patrick.

[Wes Moss]

Yes.

[Clark Howard]

Wow. 7% fixed.

[Wes Moss]

Yes. The 4% rule is too low for you. I don't think I've ever said that before.

[Clark Howard]

Wow.

[Wes Moss]

Never gotten a question from somebody that has the. I think it's the tax deferred annuity program, but it's, it is guaranteed by the state of New York and I've had a few people over the years that have brought this up and I remember having to look this up because that's an incredibly large percentage that is locked in for you.

[Clark Howard]

That's if you have the eight and a half percent too. That is wild, right?

[Wes Moss]

I Think if, if you're even higher level, I don't know if it's the superintendents or whoever get this, but yeah, it's 8. It's over 8%.

[Clark Howard]

Yeah.

[Wes Moss]

Which is incredible number to be guaranteed. And so Patrick, right now you're half stock and half in the fixed cap. What a balanced portfolio. What an amazingly what a great balanced portfolio. And you're going to retire in the Next I think two years and you're going to need it in five. I would say this. No, the 4% rule does not apply to you. Think of it this way. If you have a locked in and this is just like mathematically you have a 7% locked in rate of return, you could take more than the seven. You could take 8% and hypothetically and mathematically your balance would only go down by about 1% per year. So you could actually take 8% and be fine and not run out of money because you're gaining seven every year. You're just reducing it little by little. So you're way beyond the 4% rule. And I think that can be a real blessing.

[Clark Howard]

And that's with half the money, right?

[Wes Moss]

That's what half the money. But I think the question is that as you get closer, do you put more of the money?

[Clark Howard]

Right, that's what he wants to know.

[Wes Moss]

And I would say that it stands to reason that you could be at 75% and I think part of this depends on your risk tolerance. Yes, equities can, the stock side of the market can be more like 12 or 13 has been more like 15% over the last several years. So it's a real inflation fighter. So is seven. And you can really sleep well at night with that. I would pro me personally if I had something like this, I probably would stay at least 50% and do the other 50% in equities because I really believe in stocks over time that are inflation fighters. You could make a case though to go a higher percentage in the 7% number. Now the one catch, I would just say you make the argument put 100% and you got to be careful about anything that's is guaranteed. I don't think there's anything guaranteed in this world financially unless it's backed by the full faith and credit of the United States government Treasury. And this is backed by, it might be in the Constitution, but it's also backed by the state of New York.

[Clark Howard]

It's go bankrupt states.

[Wes Moss]

Go bankrupt states run giant deficits. That's why municipal bonds from issued by states, not all of them do well, some of them go. There are counties, there are, there's a lot of examples over the course of the last 50, 75 years where a state wasn't able to pay. So you are relying on the credit worthiness of the state. So I would just be careful that one. If this goes wrong, what they would probably do is just reduce that number and then you could take, take the money out and do something else with it. So I think as long as they're continuing to give you that 7%, you're probably fine. I'd say there's a high level of confidence with that. But just know that there's no such thing as a guarantee from really anything except for the U.S. treasury. And you're talking about a state. So just be careful with that piece of. But yes, if you continue with this 7%, you can go way above the 4% role. Patty in Arizona says of thumb, the rule of thumb, right.

[Clark Howard]

Wes, if I've interpreted you correctly, who's this? This is Patty in Arizona. You've said that you, you like your clients to have about three years of dry powder set aside and very safe investments like bond ETFs or money market funds. My husband and I are about five years from retirement and want to start setting that up now. Would it make sense to build a three year bond ETF ladder analogous to the CD ladder? And she gives an example there.

[Wes Moss]

Cd, right.

[Clark Howard]

And is now a good time to start or would you wait until we're closer to retirement?

[Wes Moss]

Patty, here's where that rule comes from. There's some math behind it and it's based on history. We know that on average, and there's been bear markets that have taken longer to come back to where we were before we fell. But on average, bear markets recover and we get back to where we were the old high in about three and a half years. That's where the three years of dry powder comes from. Because we, that should get us through most bear markets. And if we don't want to be aggressively pulling money out if stocks are down 20 or 25 or 30%. So the dry powder is there for that safety net so you can continue withdrawals and not have to dip into the stock side when stocks are down. And that length of time, three years worth of spending should allow markets to recover. That's where the three years comes from. When you do it technically you don't really need to do it, Patty, until you go from accumulation to distribution. So accumulation phase, we're saving money. It's, we hope it's growing over time and then you don't really need it until you're in the distribution phase. Meaning this is when I'm starting to pull money out. You're only five years from, from that. It wouldn't be crazy to start having dry powder today. From the psychology of money perspective, I think that most people are fine to have three years of dry powder as long as it's not totally interfering with being an equity investor. Meaning you don't want every single thing in super safety assets and then miss out on markets over time. But as far as how you're going to do it, I think you have the right idea. You could use one short term bond ETF as an example or one treasury money market to do your whole amount you need in dry powder. But I really like your idea of the three year ladders. There are a lot of target dates and it's different than a target date fund, but defined immaturity ETFs. They're either corporate or government bonds and you know, they mature in 26 and 27 and 28. And that that would be a really good way to structure essentially building a Treasury ladder. But you can use ETFs to do it.

[Clark Howard]

All right, Andrew in Iowa says, I have a question for Wes. What is the benefit of investing in small mid cap stocks? I understand diversification is good because you never know what company will take off and become the next Apple or Microsoft. But wouldn't the most successful companies end up leaving the small and mid cap category and and become large cap stocks anyway? If I had put money into a small cap fund when Apple was there, I wouldn't have missed out on all their gains as they left that category and became a mid and eventually large.

[Wes Moss]

Andrew, you're absolutely right. And we've gone through an environment in the last several years where large cap companies have really dominated. They've dominated the news cycle, they've dominated the return. So you start to think, wait a minute, why don't I just own large companies? Because the mechanism you described is really how it works. Companies, if they're really successful, they graduate. They'll go from a small cap fund to a mid cap fund to a large cap fund. And you're right. If you only own small caps, you would have owned Apple for a little while. But eventually it graduated and became a mid cap and then eventually graduated to a large cap. So you're right, you would miss out on the continued growth as some of these companies have gotten bigger and continued to have a really phenomenal pace of growth. So the answer here is you do want to own all three. And it makes sense to me to have. Certainly have large cap, but mid and small as well. And technically, most of the way, most of the time. I think of Russell as one of the index providers. And they have ETFs once a year. They take a snapshot of the size of the companies, the market capitalization, and if it's grown, it'll go into their. Their large cap etf. So you're right, they graduate, and that's why you want to own. You don't want to have just one of those three categories. I think it makes sense to either have both small and large or all three. Small, mid and large.

[Clark Howard]

All right, and here's one more. Gary in Florida in his book, you can retire younger than you, younger than you think.

[Wes Moss]

I love that. That's a good title, Gary.

[Clark Howard]

Wes says that the happiest retirees own a home valued at 350,000 dol. Inflation. What home value would west say is equivalent for retirees today? It's sooner than you think is the real title.

[Wes Moss]

I like younger. You can retire younger than you think.

[Clark Howard]

Same thing, right?

[Wes Moss]

Love that. I love that. That's an old book, Gary. That's old. And we've had a lot of inflation since then. The re. And.

[Clark Howard]

And that's a new one coming out next year.

[Wes Moss]

I did. I finished writing the Retire sooner Method, so that'll be coming out in 2026. But the data in the book, you can retire sooner than you think was all the way back in 2013, published in 2014. Those are old numbers. And you're right, we've had a lot of inflation from 2014 till today. If you were to look at the Case Shiller Home price Index, it's up about 100%. It's a little more than 100%. So if you were just to adjust for inflation, well, actually housing inflation, you'd have to. You'd have to double that. So. So a $350,000 house in 2014 would probably be worth 700k today. The real key here, Gary, is to have your mortgage pay off within sight or mortgage paid off. That's one of the habits of happy retirees. You get rid of that big number you're paying to your bank or your mortgage company. That's really the key. It's not as important on the value. It's about getting rid of the mortgage to be a happy retiree.

[Clark Howard]

All right, well, that's going to do it for us for today. And this week's episode of Ask An Advisor. Thank you for all your questions. Please share this with a friend and please review us on Apple Podcasts or wherever you listen. We really, truly appreciate it and it helps us to grow our audience and share Wes and Clark's knowledge with more people. Have a wonderful rest of your day.