Choosing the Right Investments for You - 512

Summary

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

Transcript

[Andi Last]

What is the risk with BDCs or business company development funds? Edward in Illinois wants to know, do Pebbles and Bam Bam in Kentucky Stone have too much invested in T bills? Are mutual funds or ETFs a better place for them to invest qualified money in the decumulation phase? Is there a difference between a traditional IRA and a rollover IRA? And Keith in Connecticut is 34 and wants a spitball on whether his investments are appropriate for his time horizon. Today on youn Money, you wealth podcast number 512 plus, Gus in Philly needs a withdrawal strategy for his dad's Mygas or multi year guaranteed annuities. Speaking of MyGas, YouTube viewer Ken thinks everyone should invest in mygas and bonds and nobody should ever pay a financial advisor. What did Joe and Big Al think? And finally, comments on your state of residence for tax purposes from Greg. The prorated sale of a primary residence and bonds versus a pension from Keith and seven Sideways tells the fellas to focus on perma already. But what is it? We'll find out. I'm executive producer Andi Last and are the hosts of youf Money, you Wealth, Joe Anderson, CFP and Big Al Clopine, cpa.

[Joe Anderson]

Edward, he's in Illinois. He's like I have been buying BDC funds. They are paying close to 10% dividends and at least recently, slight nav growth, net asset value. I don't completely understand the risk of these funds. I know they make loans to businesses that can't get traditional financing. I'm just wondering what the risk is. By the way, I drive a 2022 Toyota Highlander. Enjoy Miller Lite after golf. I played 100 rounds this year. Too bad most of them are forgettable. 100 rounds, that's a lot.

[Big Al Clopine]

And do you.

[Andi Last]

How many do you play, Joe, in a year?

[Big Al Clopine]

Let's see, you're probably close to 100.

[Joe Anderson]

I'm probably over 100.

[Big Al Clopine]

But do you wait for after the round to be.

[Joe Anderson]

No, I have my beer.

[Big Al Clopine]

That's what I think.

[Joe Anderson]

Before the round, during the round and after the round.

[Big Al Clopine]

That's what I think. By the way, BDC is business development company funds, which are risky from the standpoint that these are companies that can't otherwise get traditional finance.

[Joe Anderson]

It's almost like it's like a private credit fund.

[Big Al Clopine]

Yeah, right.

[Joe Anderson]

Private credit today is unbelievable. It is giant.

[Big Al Clopine]

It's the latest thing, right?

[Joe Anderson]

Well, there were some laws that passed in regards to the bigger banks and so for smaller companies to get financing, these banks started going private. Private lending. So BDC would be an example of that, right. Where there's smaller companies are a little bit more risky, there's probably underwriting that they couldn't get a traditional standard loan.

[Big Al Clopine]

Right.

[Joe Anderson]

And so I don't know how many trillions of dollars are in private credit.

[Big Al Clopine]

But as long as the economy is good, you're probably fine. But when economies turn, sometimes these things can have problems. Remember the subprime loans that essentially caused the Great Recession?

[Joe Anderson]

Well, if you think about return, there's no free lunch. So if you're getting a good return on the money because there's added risk, it's a loan. So they're lending these dollars out to these organizations. And if these organizations are not around because of any type of turn in the economy, well, there's the return on Monday. The return on your money is going to be zero.

[Big Al Clopine]

Right. And so said just very simply, you loan your money to a company, the company goes bankrupt, that loan is gone, you're done.

[Joe Anderson]

Right.

[Big Al Clopine]

So that's the risk, is the risk of losing principal.

[Joe Anderson]

So you're getting a little bit higher rate of return. 10%. So it's paying close to 10%, Al.

[Big Al Clopine]

That's a good rate. So there's got to be risk. And that's, that's what it is.

[Joe Anderson]

All right. Yeah. So 100 rounds. Impressive. I wonder what the handicap is. We are talking money. We got myself, Joe Anderson, we got Big Al, Andy last, Aaron Townsend. He doesn't. Just likes to stay under the radar, doesn't he?

[Big Al Clopine]

He doesn't even like to hear his name. I know, that's why we keep saying it. Hello, Aaron. And if you missed that, Townsend.

[Joe Anderson]

Yeah, hello to the YMYW team. It's a follow up from Pebbles and Bam Bam in Kentucky. Stone, following your non advice spitball from last year, here's the new skinny following up on four questions.

[Big Al Clopine]

Oh, gosh, a four parter.

[Joe Anderson]

All right, 67 years old, Pebbles is 70. All right, 67 year olds retired, Pebbles 70 in 20, 27 and 62 year old Bam Bam. House paid, no debt. Pebbles has a qualified account of $3.4 million. $1.1 million in a Roth brokerage account of 260. We got T bills of 700. We got I bond of 10 grand collecting one damn.

[Andi Last]

I bond.

[Joe Anderson]

Collecting Social Security at $4,000 a month and then bam bam. Move 401k to a Vanguard IRA that's worth a million dollars, still earns $50,000 a year and will collect Social Security at age 70. That's $3,000 a month. Right. You got all this Big Al.

[Big Al Clopine]

Yeah. So if you're keeping track, that's about $6,400,000.

[Joe Anderson]

Okay, you're good. Our goal is to.

[Big Al Clopine]

We're done with all the questions.

[Joe Anderson]

Yes. Our goal is to move money to the Roth IRA up to the 24% tax bracket as often as we can, while maintaining the cash to live off of and pay the taxes. Here's our question 1. Is this too much money sitting in T bills? Even though the purpose of $10,000 a month living expenses $120,000 a year and the estimated quarterly payments of $60,000 federal, $14,000 state, while we convert about 250,000 to $300 a year to Roth. Is it too much sitting in t bills? Number one question. $650,000 on it. No, not at all.

[Big Al Clopine]

No, not at all. Because you're using $200,000 a year for living and taxes, so you're fine.

[Joe Anderson]

Okay. Number two, during the decumulation phase, where is the better place for qualified monies to sit? Low index mutual funds OR Low Indexed ETFs? Does it make a difference? What's the rationale for either? I think either or is just fine.

[Big Al Clopine]

I agree with that. I mean, if they're exactly identical, ETFs have a few slight advantages, but for the average investor, it's almost nothing.

[Joe Anderson]

Yep, I would agree with that. Is there any difference between a traditional and a rollover ira? Yes. A rollover Iraq is where you can roll it out of the IRA. So let's say it's coming from a 401. You're going to set up a rollover IRA. You roll your 401 into the rollover IRA. If you ever want to move it out of the ira, you can roll it out of the IRA into another qualified account. A traditional IRA is something that you set up, that you made contributions and took the deduction. Or you might have basis.

[Big Al Clopine]

They have the same rules and you can actually put the accounts together. Yeah, not that big a deal.

[Joe Anderson]

Is there a better strategy to consider? What part of, hey, we don't give advice does he not understand here? He's asking very specific type of questions, but.

[Big Al Clopine]

Well, we're just spitballing.

[Joe Anderson]

All right? This is not advice, just little compliance, FYI. Okay, what are we missing? I. E? Should we be refilling cash buckets too? Love the show. Listening while walking or carrier in the woods? Pebbles loves Old Fashioned. Since we live in Bourbon country, it drives a 10 year old Lexus and Bam Bam likes the port and drives a Honda convertible.

[Andi Last]

As he's more continental.

[Joe Anderson]

Thank you. Kisses to the team. There you go.

[Big Al Clopine]

Oh, you like that, Aaron? Okay, well, is there anything else to consider?

[Joe Anderson]

I don't know. Yeah, I think you should fill up some cash as you're rebalancing the overall account. So this is where it gets a little bit more complex is he needs $120,000 a year and he has roughly several million dollars in a retirement account that he's converting. So he's converting the IRA into a Roth. You probably don't want to touch the Roth dollars. So to create the income that he needs to live off of, he needs cash that he has about $650,000 in cash or T bills that he's going to live off of as he's spending those down. He's going to run out of non qualified dollars at some point.

[Big Al Clopine]

At some point.

[Joe Anderson]

So the three month T bills, all of that dollars is going to be gone. The brokered ETFs, he's got about $268,000 there. That's probably the next pool that he needs to draw from. So all of those dollars will be drawn down and then your IRA and Roth monies will continue to grow. And then at some point you have your RMD that you'll have to take from your retirement account. And that's probably going to be over and above how much money that Pebbles and Bayman needs to live off of. But he has to look at how much money needs to come from the portfolio to have a lifestyle and then that's how much money that needs to be. Probably a little safer than your standard stock or stock ETF or index fund.

[Big Al Clopine]

Yeah, and there's some different variables here. Like BAM. BAM is still working. So 50,000 of the 120,000 spending need is already covered. And then when Social Security kicks in for both of them, it's about 80,000. So they may not need tons from their portfolio. I do agree that with the thinking which is convert as much as they can because they are going to have a tax problem. In fact, it's over $4 million in tax deferred right now. So. Yeah, no, I like what they're thinking. I agree with you, Joe, that you want to get as much into the Roth as you possibly can, but you have to be mindful that you need some of this money to live off of too.

[Joe Anderson]

And so the amount of money that you'd live off of, whatever the shortfall is right now, I think it's if they're spending $120,000 a year. So what, they need about $70,000 from the portfolio.

[Big Al Clopine]

Yeah.

[Joe Anderson]

And so maybe at 70,000 you go out five to 10 years and keep that pretty safe. So just to keep the math simple, 70,000 times 10 is $700,000 that you would want to have somewhat liquid. And he has $670,000 roughly in E bills. So I think he's right on track there. As he's distributing those dollars, he probably needs to backfill the next years of income, depending on how conservative he wants to be.

[Big Al Clopine]

Right, Right. Yeah. Makes sense.

[Andi Last]

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[Joe Anderson]

All right, we got Keith from Kentucky. I was hoping to get a second opinion on asset allocation and location. And if I'm taking on too much risk in my portfolio, if I'm in a good spot to retire at 57, that's the earliest age I'm eligible for a full pension from the government. If I wait till 62, I get a 10% raise on my pension. The multiplier becomes 1.10 instead of 1.0. I'm 34, very single, in a USPS city mail carrier. All right. Okay, very cool. That's what my aunt was, a mail carrier.

[Big Al Clopine]

Oh, no kidding.

[Joe Anderson]

Yes. Salary gross is $58,000 a year, $80,000 in a tsp. Roughly $32,000 of that is in a Roth. All right. Roth IRA is $20,000. He's got a little small cap value ETF in there. He's got some HSA cash, HSA investment. Are these good funds for my time horizon? So his funds al are like the S&P 500. He's in the total stock market. He's in some small cap. He's 34 years old. I think those funds are just fine.

[Big Al Clopine]

I do too. And TSP, he says 40% C fund, which is common stocks. S&P and 60% S funds, which is like 4,000 different stocks. Kind of more representative of the market. Yeah, I agree. That's fine.

[Joe Anderson]

Okay, so if so when should I. If I should take less risk? I have a USA pension, plus Social Security, whatever, left that. Even if it's 80% of what it could be. I currently only do the 5% match and put that into the Roth TSP. Then I max out the Roth IRA and HSA through payroll deductions. All right. Quadruple tax advantage ASAP. They match 100% of my 5%. And my insurance provider gives me $1,000 towards my HSA annually. It's got a six year CD at $6,000. Okay, no brokerage account. I had a question about a brokerage. In your opinion, if someone is not maxing out all of their tax Advantage accounts like HSA, IRAS, 401 first, should they not touch a brokerage account? I do not own a home, but may want to buy one in six years when the CD matures. I have a six year old German shepherd named Ellie. She's a good girl. Would you recommend saving for a down payment on a house? Keep renting. Stop worrying so much. How would you invest the hsa? This is just rapid fire. Big Al. A lot of questions thrown at us.

[Andi Last]

I have a dog. Should I buy a house?

[Joe Anderson]

I can buy ETFs, mutual funds, individual stocks, et cetera. How do I stop worrying? I hear on the show about all these people with like $6 million and they're wondering if they can retire. And I'm over here not even making $60,000 annually. I have no idea how much I'll spend in 30 years. I spend $2,600 a month now. That's what I take home. Roughly two paychecks. I'm healthy, I don't smoke, drink alcohol. I exercise and I drive a six speed manual. 2020 suburban cross. Check. That's paid off. Thank you. And I hope to hear my rambling message on the show, Go Huskies. Keith from Connecticut.

[Big Al Clopine]

There's a lot there, but these are pretty easy to answer.

[Joe Anderson]

So. Okay, first of all, Keith, I think at 34 years old, making $60,000 a year, you have a total of about $150,000 saved. So I think that is awesome.

[Big Al Clopine]

It's phenomenal.

[Joe Anderson]

Yeah.

[Big Al Clopine]

And the fact that you have a great pension plan, you're going to be in great shape. In fact, Joe, in many cases, the people that are government workers that have a good pension end up in better shape than all these people that saved all this money and never learned how to live within their means.

[Joe Anderson]

Right. Should he save for a home? Sure. I mean, I think you got some money sitting in a non qualified brokerage account or in your CD. $6,000. Continue to build up the cash and that will give you a nice little nest egg for down payment. Keep renting. I mean, I think if you wanted to keep renting, the only thing is just outpacing inflation with rents.

[Big Al Clopine]

Right. I think it's preferable if you can eventually buy a home. But it depends on the location that he lives. It's in Connecticut. So it depends what part of Connecticut whether it might be expensive or not. But yeah, I would say. And then the other part is, when should I take less risk? You only start thinking about that when you get much closer to retirement and you're going to need have access to the money. Or if you just can't stomach the fluctuations of the market, then you take less risk, you have more safety so your, your portfolio doesn't go up and down so rapidly.

[Joe Anderson]

I would say when you get about 10 years from retirement, that's when I would look at revamping the overall portfolio.

[Big Al Clopine]

Yeah. And you may not even make a change, but that's when you start looking. Right.

[Joe Anderson]

You're 34 now, you're going to retire at 57.

[Big Al Clopine]

And chances are with your pension, it's going to cover a lot of your expenses. So you may not need a lot of safety. On the other hand, you may want more safety because maybe you want to increase your lifestyle in retirement. So there's different ways to think about it. But for right now, growth is at age 34, growth's important.

[Joe Anderson]

But what he's doing is way more sophisticated than most. Of course he knows, okay, so he's in small value, he's in an extended market.

[Big Al Clopine]

Right.

[Joe Anderson]

You know, he's in the C fund. So what he's doing is, is.

[Big Al Clopine]

It's amazing.

[Joe Anderson]

It's pretty good.

[Big Al Clopine]

Just keep it up, know you're on a good path and then don't worry.

[Joe Anderson]

Stop. Yeah, stop worrying. We got Gus in Philly goes. Hi, Joe, Big Al and Andy. Thank you for my favorite podcast. Thank you. Great mix of information and lighthearted humor. My dad's 95 years young and still pretty active. His drink of choice is. And he drives a Buick Lacrosse. It's a tank. Drives 95. Proves it.

[Big Al Clopine]

Yeah, that's very good.

[Joe Anderson]

All right, he has a MYGA that started with a deposit of $40,000 that has now grown $192,000 over many years. It yields 4% and will mature on 1:1. 2026. He has the ability to take out $19,000 out without penalty in 2025, which we plan on doing to put into his brokerage account at his advanced age. Is it. It is unlikely that he'll be able to roll the MYGA over into another multi year option. So I'm looking for options that he can pursue that will not cause him to take a tax hit on the $120,000 gain. $198,000 balance, $40,000 principal, 19,000, 2025 plan withdrawal. 20,026 plan withdrawal equals $120,000 gain. Can you spitball some options that may allow him to defer the $119,000 gain so he can contribute to continue. Oh, so we can continue to take about $20,000 a year out of gains over time and stay in a reasonable tax bracket. Between his pension, Social Security and dividends, he already is in the 22% tax bracket without taking any gains. Thanks for the show goes from Philly.

[Big Al Clopine]

Well, first of all, MYGA is a multi year guaranteed annuity. We'll just get that out there. So it's an annuity.

[Joe Anderson]

Right. So we put $40,000 in. It's grown to $192,000. So any growth that's in an annuity is taxed at ordinary income rates.

[Big Al Clopine]

Correct.

[Joe Anderson]

So he's got a little bit of a tax issue here of saying, all right, well, I'm pulling out $20,000 a year to keep him in the 22% tax bracket. Why isn't he pulling more out? Because he's well into the 22. Just take more out to max up.

[Big Al Clopine]

And just tell us. Done. Right.

[Joe Anderson]

Because the 22 is going to go to. It could. It's slated to go to 25%. I would also look at who's the beneficiary and what is the options at death. Is it a lump sum or can you annuitize?

[Big Al Clopine]

Right.

[Joe Anderson]

And different options for beneficiary. So Gus is. Maybe he's inheriting this. What tax bracket is Gus in? Share versus his dad.

[Big Al Clopine]

Right. Yeah. And if his dad. I mean, there's nothing wrong with just taking 19,000 a year or whatever the amount is, whatever the plan should be. So you slowly get rid of it without getting into. I have a tax bracket. That's what I would do.

[Joe Anderson]

Yeah. Or you could potentially take out more.

[Big Al Clopine]

Right.

[Joe Anderson]

Just maximize the bracket. It's like if you think, I mean, if you pay 22, if you're in the 22% tax bracket and you want to get it out in the 22%, might as well max out the 22%, right?

[Big Al Clopine]

Yeah. Now, if Gus inherits it and he's in a higher bracket, maybe the father just takes a lump sum and pays the tax, calls it good. Or if there's no way out of the tax.

[Joe Anderson]

Right. Yeah. If there is no way out of the tax, you're going to have to pay the tax.

[Big Al Clopine]

There's no secret in it's taxable.

[Joe Anderson]

Yeah. The good news is you get a $200,000 gain.

[Big Al Clopine]

That is the good news. Right.

[Joe Anderson]

So, yeah, there. There is no magic bullet here. You got to pay the tax. And it's just when you want to pay the tax and minimizing the taxes, is there charitable. Speaking of charities.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Maybe you could offset some of the tax if Gus gives money to charity, maybe he could, you know, front load.

[Big Al Clopine]

Some stuff if he's above the standard deduction. I mean, there's things that can be done, but the basic answer is it's taxable. So you just have to decide how much you want to take each year to maximize whatever tax brackets you can.

[Andi Last]

All right, let's go to ken on page 24.

[Joe Anderson]

I just buy MyGas from eight plus companies on the peaks when the rates go above 5%. I have a bunch at 5.5 for five years. Good tax referral, 10% free withdrawals.

[Andi Last]

This is a comment on our YouTube channel. So I said thanks for watching and sharing your strategy. Hopefully you've got it mapped out to account for future taxation and how the mygas fit in with your overall asset mix. To which Ken replied, yes, June Roth.

[Joe Anderson]

Conversions each year, especially with the Trump tax rates as low as they are. I built a 2 million portfolio using bonds and MyGas only. P.S. i've never paid an AUM fee. No one ever should. Okay, okay, wonderful.

[Big Al Clopine]

Great.

[Joe Anderson]

Glad it's working for you. What our response was. You're just having conversations here with Ken.

[Andi Last]

Well, it's for everybody on YouTube to see.

[Joe Anderson]

Got it.

[Big Al Clopine]

Okay.

[Joe Anderson]

Now that I have safely landed in retirement with my five plus percentage conservative investments, I'll use strategic investing for my excess cash in long term efficient capital gains investments. What is strategic investing now?

[Big Al Clopine]

Whatever it means to him, it doesn't Say.

[Joe Anderson]

All right, well, I think this is great.

[Big Al Clopine]

Yeah, I do too.

[Joe Anderson]

Wonderful. Ken.

[Big Al Clopine]

I think strategy. Yeah. 5%. That's great. I mean, the stock market over the last hundred years has done 10. But. But yeah, this can.

[Joe Anderson]

If I could get a guaranteed 5%, I would take that all day long. Why wouldn't.

[Big Al Clopine]

Why not? Right.

[Joe Anderson]

It's just that you built a $2 million portfolio.

[Big Al Clopine]

Yeah. It's probably enough, right?

[Joe Anderson]

Yeah, but. All right, so here's this next comment here. How many times do I hear CFPs say past performance does not indicate future performance?

[Big Al Clopine]

Well, okay, probably often that's true.

[Joe Anderson]

Yet they always then tell you to put their money in the market, even though it could take a couple decades to recover from the downturn 2008.

[Big Al Clopine]

So we still haven't recovered. Have to wait until 2028. I think if you look at all the indexes, they're quite a bit higher than they were even at the low of 2008.

[Joe Anderson]

Yep. It's like the CYA. But then they need to get their money from their portfolio with a fees. So they put your money in the market. What do they care? It's not your money. It's not their money yet.

[Big Al Clopine]

Okay, sounds like Ken doesn't want to invite. Which is great.

[Joe Anderson]

Land your retirement by laddering 5% or higher bonds in Myga on the peaks for five or five to seven or more years after you land your retirement income stream. Then you can invest excess cash in the markets for the long term for growth and inflation protection and tax optimization.

[Big Al Clopine]

Okay, fair enough. I'm not sure that strategy didn't work for the last 20 years when interest rates were 1 and 2%. But now it's not a bad idea.

[Joe Anderson]

I'm not going to argue with him. Whatever. If that's what he wants to do, that's what he wants to do. I don't know why he's harping on A1 fees. Doesn't he know that there's probably some sort of cost in regards to the mygas that he's in?

[Big Al Clopine]

Yeah, well, that's the bonds that he's in. Good point. Yeah.

[Joe Anderson]

There's no free lunch. Everything's going to cost you a little bit.

[Big Al Clopine]

Right.

[Joe Anderson]

So then you just have to weigh out the cost of what you're paying versus the value that you're receiving.

[Big Al Clopine]

And some people say there's no cost, but it's in the return. You got lots of returns.

[Joe Anderson]

Right. How do you think banks make their money? Like a cd. Well, there's no cost in the cd. Well, they're taking your money and they're investing it elsewhere and they're getting a lot higher rate of return.

[Big Al Clopine]

Correct.

[Joe Anderson]

And it's called a spread.

[Big Al Clopine]

Right.

[Joe Anderson]

So 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. I think that's great.

[Big Al Clopine]

And especially if they're safe and you're able to pull this off, go for it.

[Joe Anderson]

Go for it.

[Andi Last]

So when he says he's never paid an AUM fee and no one ever should, what would be the reason somebody should pay an AUM fee?

[Joe Anderson]

There's multiple. There's thousands.

[Big Al Clopine]

Many people don't. Investing is a mystery. Right. So they just don't know what to do. Right. Or maybe they need help. Can I retire? Or maybe while they're retired, am I spending too much and it's ongoing planning? Or maybe I'm paying too much in taxes. What can I do to save taxes? On and on and on? I want to buy a house. Oh, I got to save for college. How do I go about that? That's why people hire advisors. Quick answer. There's more than that, but that's what came off the top of my head.

[Joe Anderson]

Pitching your services, Big Al?

[Big Al Clopine]

I'm not actually even slightly. But I'm just trying to answer the question.

[Andi Last]

Certainly not to Ken. He doesn't need it.

[Big Al Clopine]

That Andy just post.

[Andi Last]

For those wondering, AUM stands for Assets under Management. So a fee. Only financial advisor charges the clients a fee that's a percentage of the client's total assets under management. And like Joe mentioned, other types of advisors get paid by earning commissions on investment products that they sell you, like annuities. Seems like a conflict of interest to me. Pure Financial Advisors, the company that the three of us work for, is a fee only financial planning firm. But there is no fee and no obligation. When you have one of the experienced professionals on Joe and Big Al's team at Pure review your situation in a free financial assessment. When it comes to choosing investments, converting your savings into retirement income, legal strategies to lower your taxes, maximizing your Social Security benefits, or making major financial life decisions, working with an educated and experienced financial professional can give you more peace of mind. After your free financial assessment, you can decide if you want to pay the fee for ongoing financial advice and portfolio management. I've included a link in the episode description. If you'd like more details about Pure's fees and at least 15 ways that Pure can help you, then just click the get an assessment button at the top of the page to book yours.

[Joe Anderson]

We have some comments here. What are we doing here?

[Andi Last]

Yeah, you guys, the first one actually was a comment that was emailed in to me from one of our regular listeners in the rest of our YouTube comments.

[Joe Anderson]

All right.

[Big Al Clopine]

Okay.

[Joe Anderson]

Hey, guys, heard a couple of shows. Hold on, let me start over here. Hey, guys, heard a couple shows lately of people having homes in different states and where they file their taxes for residency. My buddy's 83 year old widowed mother has a house in California in Nevada. She always files her state taxes in Nevada. California audited her and wanted years worth of bills. California determined she was living in California more than Nevada from when she started and stopped her newspaper at each house. So if you have a CPA saying they will never figure it out, get a new CPA later. Wow, that's intense.

[Big Al Clopine]

Yeah. And that's from Greg.

[Andi Last]

And that pretty much confirms. Al, what I think that you said in those two episodes where we've talked about this is that they will find.

[Big Al Clopine]

Out, well, especially California. And California is very aggressive on this sort of thing. So you can Google on YouTube Nevada residency, and you can find someone that will rent you a P.O. box for $400 a year or whatever and try to say that that will work for state residency. It won't. And California is really good about catching these. Joe.

[Joe Anderson]

All right, we got Ed. He goes, hey. Please favor questions when the couple asking for a spitball has less than 6 to 12 million dollars.

[Big Al Clopine]

You know, we just read them as we get them.

[Joe Anderson]

Many of us listen for guidance, and it's ridiculous when the scenario asks whether or not they can float $21,000 a month on luxury travel. Love the show, but it's slowly becoming geared only towards Thurston Howell iii. We need more Gilligan's.

[Big Al Clopine]

We do. Then send your Gilligan questions in.

[Joe Anderson]

Love it. Yeah. Six to 12. Sometimes it's like, come on, I know you're just writing in to brag, right? Not to brag.

[Big Al Clopine]

Well.

[Joe Anderson]

And I have $50 million.

[Big Al Clopine]

And we even make fun of them sometimes.

[Joe Anderson]

It's like, yeah, you did a great job. Yeah, I want to spend like $7 a month.

[Big Al Clopine]

You're good. You didn't need to ask us permission for that.

[Joe Anderson]

All right, we got a little comment here from Keith. He goes, good video as always. Good video. Yeah, looking good. Way to go. Aaron Townsend, the first caller noted they are moving into their rental for two years to qualify as a primary residence. That may not save them as much as they think as the rules are clear that the gain in the sale is pro rata. For example, if this was a rental for eight years, then they lived there two years as a primary residence and the gain was $500,000, then $400,000 would be taxable. It may even be more if they took depreciation or otherwise lowered their basis. All right, Keith's getting in the weeds here. I like it.

[Big Al Clopine]

So, and that's, that's a true statement. And this has been true, I want to say, since like 2007, eight, nine, maybe even earlier. But in other words, it used to be you could move into your rental, live there two years, and get that $500,000 exclusion if you're married to 50, if you're single. And then the IRS started saying no, you got to do a proration between years of residence and years of. Of rental. So that's a two slima.

[Joe Anderson]

The rules different. If I lived there as a primary residence first.

[Big Al Clopine]

Yeah. Then that's what's weird, right? Yeah.

[Joe Anderson]

Because if it was my primary, then I moved out of it, I rented it out, then I moved back into it. Then the proration is different.

[Big Al Clopine]

Yeah, there is no proration as long as you satisfy the two out of the last five years. But I think what the IRS was trying to say is you can't have 10 rentals and then just keep hopping into them. Exactly.

[Joe Anderson]

All right, so, Keith. Hey, I was a bit surprised there was any discussion on $1,000,000 versus $430,000 per year as a break even is never.

[Andi Last]

This is from somebody who had asked Whether or not $1 million in bonds or a $40,000 a year pension is just like having $1 million in bonds. You could buy a risk free 30.

[Joe Anderson]

Year T bond paying 4.25 and get $42,000 per year, and 30 years later you'll have a million dollars that would go to your heirs versus zero with an annual payment. Very true. I don't remember what someone said, hey, If I have $40,000 pension, is that like having a million dollars? And I think where we were going with this is that sometimes people don't understand how much money that you would need in a lump sum to create the income of a $40,000 or $20,000 or a $50,000 pension.

[Big Al Clopine]

Right, right. Yeah, that's exactly what we were talking about. Given the choice, I'd rather have a million. DOL can create my income for 40,000 and I still have the million. A pension goes away when you pass away. So yeah, Keith, that's a True statement. I think we were. That's what.

[Joe Anderson]

But how many people have a million dollars?

[Big Al Clopine]

Not too many.

[Joe Anderson]

Right.

[Big Al Clopine]

Yeah.

[Joe Anderson]

And so. But they have a $40,000 pension, and if they might have, let's say, a few hundred thousand dollars saved, it's like. Well, no, you have a lot more than a few hundred thousand dollars saved. That 40,000 is almost like having a million dollars that you would have to invest in.

[Big Al Clopine]

Yeah, yeah. Same similar tax consequence.

[Joe Anderson]

Yeah, a lot of recency bias here with these high interest rates, too.

[Big Al Clopine]

Boy, that's for sure. Right? I mean, some of these are great strategies today, and they weren't very good three years ago and the last 20 years before that, too.

[Joe Anderson]

All right, we got another question. Here goes. The math was easy. Okay, I'm not ready.

[Andi Last]

I don't know what this is. In reference to one of our TV shows called you'd 11 step path to financial Freedom, he says the math was easy. So focus on perma after already. And I looked that up to find out what perma was, and that is actually, it's the softer side of retirement. Positive emotion, engagement, positive relationships, meaning and achievement or accomplishment. Okay, so in other words, don't focus so much on the money side of it. Focus on what you're going to do with your time in retirement and how to flourish.

[Big Al Clopine]

You know what, Andy, we don't really talk about that enough, but I think that. I think what you do with your retirement, with your time, your. What your purpose is, what gets you up in the morning, your. Your children, your grandchildren, your friends, your spouse, this is just important, as important, if not more important. But this is a financial show. That's why we focus on that. But yeah, don't forget that other part.

[Andi Last]

And that is that that whole theory of perma is from Dr. Martin E.P. seligman, in case anybody wants to look that up.

[Big Al Clopine]

Okay, good.

[Joe Anderson]

That's it for us. Shows called you'd Money, you, Wealth.

[Andi Last]

Hey, thanks for watching and listening. You, Money, you, Wealth is your podcast. Click the Ask Joe and Big Al link in the episode description to ask your money questions or to get a retirement spitball analysis of your own. And if you enjoy ymyw, please don't keep it a secret. Tell your friends and leave your honest reviews, comments, and ratings for your Money, you, Wealth in Apple podcasts and on YouTube. We appreciate it. You Money, you, Wealth is presented by Pure Financial Advisors, a registered investment advisor. This show does not intend to provide personalized investment advice through this podcast and does not represent that the securities or services discussed are suitable for any investor. As rules and regulations change, podcast content may become outdated. Investors are advised not to rely on any information information contained in the podcast in the process of making a full and informed investment decision.