Episode 512: Choosing the Right Investments for You

Release Date: January 14, 2025

In this episode of Your Money, Your Wealth (YMYW) podcast, hosts Joe Anderson, CFP®, and Big Al Clopine, CPA, delve into the intricacies of selecting appropriate investment strategies tailored to individual financial situations. Delivered with their signature blend of humor and expertise, Joe and Big Al address a series of listener questions, offering insightful analyses and practical advice on various investment vehicles, risk management, retirement planning, and tax considerations.

Understanding Business Development Company Funds (BDC Funds)

Listener: Edward from Illinois

Edward inquires about the risks associated with Business Development Company (BDC) funds, noting their attractive 10% dividends and moderate NAV growth. He questions whether BDC funds are too risky given that they lend to businesses unable to secure traditional financing.

Joe Anderson explains:

“[02:24] Private credit today is unbelievable. It is giant.”

Big Al Clopine elaborates on the inherent risks:

“[03:10] Remember the subprime loans that essentially caused the Great Recession?”

Key Insights:

• BDCs offer higher returns by investing in riskier companies, similar to private credit funds.
• Economic Downturns can significantly impact BDC performance, potentially leading to losses if borrower companies default.
• Higher yields come with increased risk; investors must weigh the potential returns against the possibility of losing principal.

Investment Strategies for Decumulation Phase

Listeners: Pebbles and Bam Bam from Kentucky Stone

Pebbles (67) and Bam Bam (62), both retired, seek advice on their investment strategy during the decumulation phase—the period when retirees draw down their savings.

Key Discussions:

1. T-Bills vs. Mutual Funds/ETFs:
   • Pebbles holds $650,000 in T-bills for living expenses and tax payments.
   • The group discusses whether this allocation is too conservative, given their annual needs of $120,000.

Joe Anderson reassures:

“[10:38] With $670,000 in T-bills, they're on track.”

2. Traditional IRA vs. Rollover IRA:

• Joe clarifies the differences, emphasizing that a rollover IRA is used to transfer funds from a 401(k) without tax penalties, whereas a traditional IRA involves direct contributions and possible tax deductions.

Big Al Clopine concurs:

“[07:26] They have the same rules and you can actually put the accounts together.”

3. Asset Allocation and Roth Conversions:

• Pebbles and Bam Bam aim to maximize Roth IRA conversions while maintaining sufficient liquidity to cover expenses without tapping into their Roth funds.

Key Takeaway:

• Maintaining a balanced approach with a sizable allocation in T-bills ensures liquidity for immediate needs, while continued Roth conversions can optimize tax efficiency for long-term wealth growth.

Assessing Investment Appropriateness for a 34-Year-Old Mail Carrier

Listener: Keith from Connecticut

Keith, a 34-year-old USPS mail carrier, seeks a "spitball" on whether his current investment allocations are suitable for his long-term goals, including early retirement at 57.

Keith’s Financial Snapshot:

• Salary: $58,000 annually
• Savings: $80,000 in TSP (Thrift Savings Plan) with a $20,000 Roth IRA
• Investment Allocation: 40% in the C Fund (common stocks), 60% in the S Fund (total stock market)

Joe Anderson praises Keith's savings:

“[16:09] It's phenomenal.”

Big Al Clopine agrees:

“[16:10] And the fact that you have a great pension plan, you're going to be in great shape.”

Investment Advice:

• Growth-Oriented Portfolio: At 34, Keith’s allocation in growth assets like the S&P 500 and small-cap ETFs is appropriate for his time horizon.
• Risk Management: As retirement approaches, a gradual shift towards more conservative investments is advisable, typically starting around 10 years before retirement.
• Diversification: Maintaining a mix of asset classes ensures both growth potential and risk mitigation.

Additional Recommendations:

• Saving for a Home: Keith is encouraged to continue building his cash reserves to prepare for a down payment.
• Brokerage Accounts: Opening a brokerage account can provide additional investment flexibility once tax-advantaged accounts are maximized.

Withdrawal Strategies for Multi-Year Guaranteed Annuities (MyGA)

Listener: Gus from Philadelphia

Gus seeks guidance on developing a withdrawal strategy for his 95-year-old father's Multi-Year Guaranteed Annuity (MyGA), which has grown from $40,000 to $192,000 with a 4% yield, maturing in 2026.

Gus’s Situation:

• Current Withdrawal: Planning to take out $19,000 in 2025 without penalties.
• Tax Implications: The withdrawal represents a $120,000 gain, potentially pushing him into a higher tax bracket (22%).

Joe Anderson advises cautious withdrawal:

“[20:37] Just maximize the bracket...”

Big Al Clopine emphasizes tax management:

“[21:04] So you just have to decide how much you want to take each year to maximize whatever tax brackets you can.”

Strategies Discussed:

• Tax Bracket Management: Withdraw amounts that keep the beneficiary within a desired tax bracket to minimize tax liabilities.
• Beneficiary Considerations: Evaluate whether to take a lump sum or annuitize the remaining funds based on the beneficiary’s tax situation.
• Charitable Donations: Offset some of the tax burdens through strategic charitable contributions if applicable.

Conclusion: While there is no way to entirely defer the tax on MyGA gains, strategic withdrawals and tax planning can help manage and potentially minimize the tax impact.

Debating the Efficacy of MyGA and Bonds vs. Financial Advisors

YouTube Viewer: Ken

Ken advocates for investing exclusively in MyGAs and bonds, arguing that one should avoid paying financial advisors.

Ken’s Approach:

• Asserts he built a $2 million portfolio using bonds and MyGAs without incurring Assets Under Management (AUM) fees.

Joe Anderson counters:

“[26:06] There's no free lunch anywhere. If you're happy with whatever return that you have….”

Big Al Clopine acknowledges the validity of Ken’s strategy but points out the trade-offs:

“[27:32] Investing is a mystery. … people hire advisors for comprehensive financial planning.”

Key Points:

• Cost vs. Value: While avoiding AUM fees can preserve returns, professional financial advisors offer comprehensive planning, tax strategies, and personalized investment advice that may outweigh the cost for many investors.
• Investment Flexibility: Relying solely on MyGAs and bonds may limit growth potential compared to a diversified portfolio that includes equities and other asset classes.

Hosts' Stance: Joe and Big Al emphasize that while simple investment strategies like Ken’s can be effective, particularly for those comfortable managing their finances, many individuals benefit significantly from professional financial guidance.

State Tax Residency Challenges

Commenter: Greg

Greg shares a cautionary tale about his 83-year-old widowed mother who owns homes in both California and Nevada. Despite her claim of Nevada residency, California audited her, concluding she primarily resided there based on her newspaper subscriptions.

Big Al Clopine warns:

“[29:45] California is very aggressive on this sort of thing.”

Key Takeaways:

• Residency Rules: California meticulously enforces residency for tax purposes, making it challenging to claim residency in another state without substantial evidence.
• Documentation: Simple measures like renting a P.O. box are insufficient to establish residency; factors such as physical presence, primary residence, and habitual abode are critically examined.

Advice: Consulting with a knowledgeable CPA and maintaining thorough documentation of residency can help avoid such disputes with state tax authorities.

Evaluating Pension vs. Lump-Sum Investments

Listener Query:

A listener questions whether having a $40,000 annual pension is equivalent to holding a $1 million bond portfolio.

Joe Anderson clarifies:

“[33:12] [...] a pension goes away when you pass away.”

Big Al Clopine adds:

“[34:02] I'd rather have a million… a pension goes away when you pass away.”

Insights:

• Longevity Risk: Pensions provide guaranteed income for life, mitigating the risk of outliving savings, whereas a lump-sum investment offers more flexibility but requires careful management to ensure sufficiency throughout retirement.
• Estate Considerations: A lump-sum portfolio can be bequeathed to heirs, unlike pensions, which typically terminate upon the retiree’s death.

Conclusion: While pensions offer stability and predictability, a diversified approach that includes both guaranteed income sources and flexible investment accounts can provide a balanced retirement strategy.

The Importance of PERMA in Retirement Planning

Listener Insight:

A listener refers to PERMA, a framework developed by Dr. Martin E.P. Seligman, emphasizing Positive Emotion, Engagement, Relationships, Meaning, and Achievement for a fulfilling retirement beyond financial security.

Big Al Clopine acknowledges:

“[35:34] What you do with your retirement, your time, your purpose… is just as important.”

Key Message: Financial planning should encompass not only investment strategies and wealth management but also the pursuit of personal fulfillment and meaningful activities to ensure a well-rounded and satisfying retirement experience.

Final Thoughts and Community Engagement

Throughout the episode, Joe and Big Al reinforce the importance of tailored financial planning, the balance between risk and return, and the value of professional advice. They encourage listeners to engage with their content, ask questions, and participate in community discussions to enhance their financial literacy and retirement preparedness.

Notable Quotes:

• Joe Anderson: “There is no free lunch anywhere. So if you're happy with whatever return that you have and you're happy with the investments that you're in and you landed your retirement, then God bless.”

• Big Al Clopine: “Investing is a mystery. So they just don't know what to do.”

Closing Remarks: The episode concludes with a reminder of the importance of holistic retirement planning, integrating financial strategies with personal well-being to achieve a secure and fulfilling post-retirement life.

Stay Connected: For more insights and to ask your own financial questions, visit YourMoneyYourWealth.com and engage with the YMYW community on Apple Podcasts and YouTube. Don’t forget to leave your reviews and share the podcast with friends seeking financial wisdom delivered with a touch of humor.