Choosing Your Retirement Income Style and Top 5 Ways to Manage Market Volatility - 522

Summary

Your Money, Your Wealth Podcast – Episode 522 Summary

Title: Choosing Your Retirement Income Style and Top 5 Ways to Manage Market Volatility
Hosts: Joe Anderson, CFP® & Alan Clopine, CPA of Pure Financial Advisors
Release Date: March 25, 2025

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Introduction

In Episode 522 of the Your Money, Your Wealth podcast, hosts Joe Anderson, CFP®, and Alan "Big Al" Clopine, CPA, delve into essential aspects of retirement planning. This episode features an insightful interview with Dr. Wade Pfau, CFA, RICP, co-founder of RiseProfile.com, followed by a practical discussion on managing market volatility. Additionally, the hosts address a listener’s retirement scenario, providing tailored advice on withdrawal strategies and Roth conversions.

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Section I: Interview with Dr. Wade Pfau

A. Understanding Retirement Income Styles

Dr. Wade Pfau introduces the concept of Retirement Income Style Awareness (RISA), an initiative aimed at helping individuals identify the most suitable retirement income strategies based on their preferences and financial goals.

• Four Broad Retirement Income Styles:
  1. Total Returns: An investment-based approach utilizing strategies like the 4% rule, focusing on building a diversified portfolio to generate distributions.
  2. Income Protection: Establishing a floor of lifetime reliable income before investing for discretionary goals.
  3. Time Segmentation (Bucketing): Dividing assets into different "buckets" based on time horizons and investment strategies.
  4. Risk Scraping: Combining income protection with growth-oriented investments to balance market growth and downside protection.

Notable Quote:
Dr. Pfau explains, “The RISA is meant to help people, as a starting point, figure out what sort of retirement strategy resonates best with them that they're comfortable with using in their retirements” (01:22).

B. RISA Profile Tool

The RISA Profile Tool is an assessment comprising 12 questions designed to evaluate an individual’s comfort and suitability with each retirement income style. This personalized report guides users in selecting a strategy aligned with their retirement objectives.

C. Impact of Secure Act 2.0 on IRAs and Roth Conversions

Dr. Pfau discusses the implications of the Secure Act 2.0, particularly the elimination of the stretch IRA, which now mandates a 10-year distribution window for inherited IRAs. This legislative change emphasizes the importance of Roth conversions as a strategic tool to minimize future tax liabilities for beneficiaries.

• Tax Planning Insight:
  “If you accept the reality that we have to pay taxes someday, then let's look for opportunities to pay those taxes at a lower rate, that’s when the opportunity to do Roth conversions arises” (05:33).

D. Annuities in Retirement Planning

Despite their controversial reputation, Dr. Pfau advocates for the strategic use of annuities to secure lifetime income. He differentiates between various types of annuities, emphasizing the importance of selecting those with fair pricing and low fees.

• Types of Annuities Discussed:
  • Simple Income Annuities: Provide a guaranteed monthly income for life.
  • Deferred Annuities with Living Benefits: Offer flexibility and additional benefits while ensuring lifetime income.

Notable Quote:
“Insurance companies can do the math on this—how long the average customer is going to live—and those who end up not living as long help subsidize payments to those who live longer” (10:30).

E. Evaluating Withdrawal Strategies

The traditional 4% rule is critiqued for its rigidity and lack of adaptability to individual financial circumstances and market conditions. Dr. Pfau emphasizes the need for flexible withdrawal strategies that adjust based on portfolio performance and personal circumstances.

• Flexibility Over Rigidity:
  “The 4% rule maximizes market risk for your portfolio because it doesn’t give you flexibility” (15:11).

Notable Quote:
Joe Anderson summarizes, “The 4% rule is an interesting way to gauge whether you're in the ballpark of having enough assets. But it's not going to be the distribution plan that's going to probably be the best for you” (16:09).

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Section II: Top 5 Ways to Manage Market Volatility

Following the interview, Joe Anderson and Big Al Clopine present their Top Five Strategies to manage market volatility, ensuring a resilient retirement portfolio.

1. Assess Your Overall Portfolio

Evaluate the current risk level of your portfolio to determine if it's aligned with your financial goals and risk tolerance. Understanding your exposure to different asset classes is crucial during volatile times.

2. Manage Risk Through Rebalancing

Rebalancing involves adjusting the proportion of assets in your portfolio to maintain your desired risk level. This can mean selling overperforming assets and buying underperforming ones to "buy low and sell high."

• Notable Quote:
  Big Al advises, “When the market starts to go down, you want to do just the opposite… rebalance by buying more stocks, selling some of your bonds” (18:10).

3. Understand Asset Location for Tax Efficiency

Strategically placing different asset classes in taxable, tax-deferred, and tax-free accounts can optimize tax efficiency.

• Asset Allocation Strategy:
  • Roth IRA: Hold high-growth assets for tax-free growth.
  • Tax-Deferred Accounts (e.g., 401(k), Traditional IRA): Place income-generating assets.
  • Taxable Brokerage Accounts: Utilize for tax loss harvesting and hold assets suitable for capital gains treatment.

4. Utilize Tax Loss Harvesting

In volatile markets, selling underperforming assets can create tax losses that offset capital gains, reducing overall tax liability.

• Practical Application:
  “Assets go down, you sell and buy something similar. You're still in the market, but now you've created a tax loss that you can use against any other capital gains” (22:17).

5. Execute Roth Conversions During Market Downturns

Converting traditional IRA funds to Roth IRAs when the market is down can lock in lower tax rates and maximize tax-free growth potential.

• Strategic Timing Insight:
  “If the market’s down 10%, that is a phenomenal time to convert… all of that recovery is going to go into the Roth” (24:37).

Conclusion of Section II:
These strategies emphasize the importance of a disciplined, flexible approach to managing portfolios amidst market fluctuations, leveraging tax efficiencies and strategic asset allocation to enhance retirement readiness.

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Section III: Listener Scenario – Al Bundy’s Retirement Planning

The episode features a detailed analysis of a listener, "Al Bundy" from St. Louis, Missouri, who presents a comprehensive retirement scenario seeking advice on withdrawal strategies and Roth conversions.

Listener’s Profile Highlights:

• Age: 61
• Profession: Gynecological Oncologist
• Assets:
  • 401(k): $1.6 million
  • IRAs: $3.3 million
  • Roth IRAs: $75,000
  • Brokerage Accounts: $4.2 million
  • Total Liquid Assets: Approximately $10 million
• Fixed Income: $4,000/month at 67
• Expenses:
  • Essential: $175,000/year
  • Desired: $275,000 - $300,000/year
• Additional Assets: Whole life insurance, gold bullion, fully paid-off homes

Advice from Hosts:

A. Roth Conversion Strategy

Given Al's substantial retirement accounts, a strategic Roth conversion is recommended to manage future tax liabilities, especially considering the impending increase in tax rates post the sunset of the 2017 tax cuts.

• Suggested Approach:
  Convert portions of the IRA to Roth IRA within the 12-24% tax brackets, leveraging the current lower tax rates to minimize long-term tax burdens.

Notable Quote:
Big Al explains, “You’ll be better off if you did the conversion and you lived off your brokerage account… You increase your Roth where it's tax free” (39:17).

B. Withdrawal Strategy

Adopting a flexible withdrawal strategy tailored to Al’s income needs and tax situation is advised over a rigid 4% rule approach.

• Approach Details:
  • Fixed Expenses: Ensure essential expenses are covered with reliable income streams.
  • Discretionary Expenses: Utilize a dynamic withdrawal rate that adjusts based on portfolio performance and market conditions.
  • Tax Efficiency: Prioritize withdrawals from taxable accounts to preserve Roth IRA benefits and minimize tax brackets impacts.

Notable Quote:
The hosts emphasize, “You want to spend a little bit more when the market does well and spend a little bit less when the market doesn't do as well” (35:14).

C. Managing Required Minimum Distributions (RMDs)

With hefty retirement account balances, Al must prepare for substantial RMDs upon reaching the requisite age, necessitating proactive tax planning to mitigate high tax bracket exposures.

D. Future Tax Considerations

Anticipating potential future tax rate increases, the conversion strategy aims to lock in lower tax rates now, providing Al with greater control over tax liabilities in retirement.

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Conclusion

Episode 522 of Your Money, Your Wealth provides a comprehensive exploration of retirement income strategies and effective management of market volatility. Through expert insights from Dr. Wade Pfau and practical advice from hosts Joe Anderson and Big Al Clopine, listeners gain valuable knowledge on:

• Identifying and aligning with appropriate retirement income styles.
• Leveraging Roth conversions and annuities for tax-efficient retirement planning.
• Implementing dynamic withdrawal strategies to navigate market fluctuations.
• Tailoring financial strategies to individual retirement profiles for sustained financial well-being.

For personalized retirement strategies and further resources, listeners are encouraged to visit YourMoneyYourWealth.com and access the free financial tools and episode transcripts available.

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This summary captures the key discussions and insights from Episode 522, providing a detailed overview for those who seek to enhance their retirement planning and navigate market volatility with informed strategies.

Transcript

[Andi Last]

What is your retirement income style? Dr. Wade Pfau, CFA, RICP, is the co founder of RiseProfile.com, providing investors with retirement income style awareness. He returns to youo Money, you, Wealth today on podcast number 522 to talk about four different styles of retirement income and distribution planning. Plus, what does Dr. Pfau think will happen with President Trump's 2017 tax cuts scheduled to sunset at the end of this year? What are Dr. Pfau's thoughts on annuities as part of your retirement plan? Next up, Joe Anderson's top five things to help you manage the impact of all this market volatility on your portfolio. Also, Joe and Big Al spitball for al Bundy in St. Louis. What withdrawal strategy makes sense for him and what should he do with his IRA and 401k money? To ask your money questions and to get a retirement spitball analysis of your own, click or tap ask Joe and Big Al in the episode description and send in your deets. I'm Executive producer Andi Last with the hosts of youf Money, you, wealth, Joe Anderson, CFP and Big Al Clopine, CPA.

[Joe Anderson]

We have Dr. Wade Pfau on our podcast today. Wade, thank you so much for joining us.

[Dr. Wade Pfau]

Absolutely, it's my pleasure to be here.

[Joe Anderson]

I think you are one of the smartest people in our industry and I can't believe you've taken time to talk with us, so we really appreciate it. So you are the founder of risaprofile.com youm even have the sweatshirt.

[Dr. Wade Pfau]

Yeah, I'm wearing the swag today.

[Joe Anderson]

What is that?

[Dr. Wade Pfau]

So the risa, it's the idea of retirement income style awareness and it's really an effort to help people when they're first starting to think about retiring. There are many retirement strategies out there and I think it's really hard for people to even know the options or to sort through that. So the REISA is meant to help people, as a starting point, figure out what sort of retirement strategy resonates best with them that they're comfortable with using in their retirements.

[Joe Anderson]

So what kind of retirement income styles are there?

[Dr. Wade Pfau]

We've identified four broad viable styles, starting with Total Returns, which is more of the investment based approach. If you've heard about things like the 4% rule where you build a diversified portfolio and take distributions, then we've got Income protection, which is more the classic. Before I start investing, I want to have a floor of lifetime reliable protected income. Then I can feel comfortable investing on top of that for Discretionary goals. We've got time segmentation. That's also known as bucketing. That's more. I have these different buckets. I'll invest differently based on the time horizon.

[Joe Anderson]

Got it.

[Dr. Wade Pfau]

And then we've got risk scrap as the fourth one. It's a cousin of income protection. It's also about having a floor of reliable income, but also having more desire to build market growth into that. So there's a desire for growth and investing, but wanting to have guardrails around that as well to help protect from the downside risk.

[Joe Anderson]

Okay, so which did most people use? Or is it across the board? Or what's the best? Or what do you think?

[Dr. Wade Pfau]

Well, I don't want to say that any of them are best because people are solving for different problems. Like, if you believe someone does want to have a fixed level of spending over their lifetime, a case could be made for the income protection idea of have protected income and then invest for discretionary goals on top of that. But not everyone's solving for that problem, so there's really no single best solution. We've done a number of national studies. At this point, the two most popular approaches are the total return investing approach and the income protection approach.

[Joe Anderson]

Okay.

[Dr. Wade Pfau]

Okay.

[Joe Anderson]

Well, how does the risaprofile.com how does it help people figure this out?

[Dr. Wade Pfau]

Well, it's an assessment tool, and for the basic RISA, there's 12 questions that go into that. So just answer those questions and get a report on. Based on the way you answer these questions, this looks like an approach that you may be most comfortable using for your retirement.

[Joe Anderson]

I think that's so important because I think a lot of people are taught how to save, but they're not really taught how to spend or how to go about it or there's a lot of confusion. I mean, saving, you pick a box, click a box on a 401k, save a certain percentage, and it's done automatically. But now you retire. Now you got to figure this out. You got to. The distribution part of this can be much more complicated.

[Dr. Wade Pfau]

Oh, absolutely. And that's really what makes retirement income different. It's still a relatively new field in that there's no standardized terminology for how these things work. But yeah, when you switch from saving, working and saving to having to spend from those assets over an unknown length of time in retirement, it really does change the problem that you're solving. You may want to use a different approach at that point.

[Joe Anderson]

Yeah, good point. Okay, switching gears a little bit. Let's talk about the Secure Act Secure Act 2.0, the death of a stretch IRA. For most people, retirement planning through IRAs has changed. And how do you think about that? What should people be considering with their IRAs?

[Dr. Wade Pfau]

Well, yeah, absolutely. In terms of that lifetime stretch, a lot of adult children will now be getting a 10 year distribution window for any inherited IRAs. That's really driven me to do a much deeper dive into tax efficient retirement distributions and looking at Roth conversions. And then for individuals in their retirement, who's going to pay at a higher tax rate? Them or potentially their adult children who will someday inherit those funds. And if I think maybe my adult children may be in their 50s when they inherit the IRAs, that may be their peak earnings years, they may have quite high tax rates. So I think it really does push the conversation towards there may be a bigger, more important role for Roth conversions.

[Joe Anderson]

That's such a good point because a lot of times with a lot of CPAs, they'll, they won't necessarily recommend Roth conversions because it increases taxes in that tax year. But when you look at tax planning over 20, 30, 40 years or maybe two, three generations, you might make completely different decisions.

[Dr. Wade Pfau]

That's right. Yeah. If you want to minimize taxes this year, you would never do a Roth conversion. But if you accept the reality that we have to pay taxes someday and so let's look for opportunities to pay those taxes at a lower rate, that's when the opportunity to do Roth conversions, you pay a higher tax bill today, but that could lower the pressure over your lifetime and have more after tax wealth for your beneficiaries.

[Joe Anderson]

Yeah. And of course Roth conversions, that's taking money out of your IRA 401, converting it to Roth. You pay the taxes on that one time, but then it sits in the Roth forever tax free income growth principal for you, your spouse, your kids, your grandkids, whoever inherits. It's a great thing. And now I think that with the current tax law, we've had lower taxes since the Tax Cut and jobs act in 2017. So Roth conversions have been easier and better just because of lower tax rates. But that's set to sunset this year. Do you see that being extended or what are your thoughts?

[Dr. Wade Pfau]

You're right. This year the tax rates are lower and under current law they're will increase next year. I think at this point it's very unlikely that we would revert back to the 2017 tax rates that are currently scheduled to return in 2026.

[Joe Anderson]

Right.

[Dr. Wade Pfau]

It remains to be seen. But if I had to make a wager on It. I would guess we're not likely to see those old tax rates return at this point.

[Joe Anderson]

Yeah, well, let's hope you're right because that would be such good news for people wanting to do Roth conversions. I mean, you look at the 22 and 24% bracket. 24, how high that goes for a married couple, almost $400,000 of taxable income. There's a wide margin for people to do Roth conversions at relatively low tax brackets.

[Dr. Wade Pfau]

And that can also then help set them up in the future as well to avoid those Medicare premium surcharges known as irmaa, potentially the Social Security tax torpedo, although that tends to impact at lower income levels, but also be in a better position to help manage with long term capital gains stacking on ordinary income. There's a nice Runway where you're paying 0% on long term gains and having ordinary income can push those gains into the 15% bracket, which you're in the 12% income bracket plus 15%. As you push into your long term gains into the 15% bracket, you have a 27% marginal tax rate.

[Joe Anderson]

That's so interesting you'd say that. I've actually been saying that for quite a while and people don't necessarily believe me, but I. Here's how it works, right. Like Social Security, good example. You get Social Security that is all of a sudden taxable because of a Roth conversion. And. Or it pushes your capital gains into tax. Well, you get that much higher rate. Yeah. And that's, you know, since we're talking about Roth conversions for those that are probably in the 12% bracket, be careful on your Roth conversions because you may be in a higher bracket than you think considering capital gains and considering Social Security.

[Dr. Wade Pfau]

Yeah. With. With both of those combined, it's possible to have a dollar of ordinary income could be taxed at over 50 cents. When you combine the Social Security impact, the long term capital gains impact and the impact of that dollar itself.

[Joe Anderson]

Yeah. And that's not even including state tax.

[Dr. Wade Pfau]

Right. Not including state income taxes that then go on top of that.

[Joe Anderson]

So be careful on that. In the past, you've recommended annuities in portfolios in certain circumstances, and I want to talk to you about that because annuities have kind of gotten a bad name in our industry because a lot of them have had higher fees. Maybe they had somewhat unrealistic rates of return that were either anticipated or maybe even promised. But annuities can work well in portfolios. Can you address maybe what types of annuities should people be looking for?

[Dr. Wade Pfau]

Well, I tend to look at annuities more from the perspective of providing for lifetime income. Whether that's a simple income annuity that you pay the premium and then you have that monthly income for the rest of your life. Whether it's more of a deferred annuity with a living benefit on top of that, that can support lifetime income but still create some flexibility. But yeah, the way I look at it, and it fits into that conversation around retirement styles, the baseline for retirement income as I could build a bond portfolio. If I want 30 years of spending, I could build a 30 year bond ladder. Now I have two ways to potentially spend more than bonds would let me spend. The one is a diversified investment portfolio with a total return. I diversify, I use stocks, I seek that risk premium from the market and if it works, I'll spend at a higher level. But the other is annuities. With insurance. There's the idea of risk pooling. Everyone doesn't know how long they're going to live. But the insurance company can do the math on this is how long the average customer that they have will live. And those who end up not living as long help subsidize payments to those who live longer. And that also can support a higher level of spending than bonds. So people do have options there. Do they want to use the stock market to spend more than bonds, which creates risks, or do they want to use insurance to spend more than bonds, which has contractual protections? It would have the risk that if I end up not living as long, I don't ultimately get as good of return out of that, but it would provide spending linked to what I'm trying to do, which is sustain my lifestyle for as long as I live.

[Joe Anderson]

Are there certain types of annuities that people should steer clear from or certain pitfalls they should know?

[Dr. Wade Pfau]

When it comes to annuities, it's not so much just certain types, it's more. Not every annuity is priced fairly. They may have high built in commissions that really incentivize. So if you're getting an ad through the meal to come to the chicken dinner or steak dinner and you get pitched an annuity at that dinner, there's probably a pretty good chance that it's not the most attractive terms you're gonna ultimately be paying for that dinner through your commission. But if you're working with someone who's not as incentivized to just sell annuities without really incorporating them into a complete retirement income plan, well, good advisors who are they have access to good annuities and those kinds of annuities, whether it's a variable annuity, an indexed annuity, or a simple income annuity, the best in class annuities, all can potentially be worthwhile for individuals as part of their planning.

[Joe Anderson]

Yeah, that's a good point because I think, like I said, the industry annuities have kind of gotten a bad name, but they're not all bad. And there's some annuities now that are very low cost. Right. So how do people find that out? What questions do they ask of their advisor to figure all this out?

[Dr. Wade Pfau]

Well, you can look at the fees that are part of the annuity and the advisor can lay out these are the different fees. But that can also get complicated because a lot of annuities, fixed annuities, they're spread products. It's like bank checking accounts where the bank may offer a free checking account because they're able to earn more interest on your deposits than they pay out to you. It's the same idea with an annuity where you may not see the fees. It's just internally the insurance company is earning more by investing those funds than they're paying out to you as the owner of the annuity. So the fees are not transparent necessarily. But what is transparent is you know exactly what you'll get if it's a fixed annuity in terms of if I put this amount in, I'll get this amount monthly for the rest of my life. And the advisor could help calculate kind of what's the implied return on that. But more importantly, if that helps you meet your spending goals over your lifetime in a cost efficient manner. And if I'm worried about outliving my money, I might be able to earmark less assets to that than I would feel like I have to hold with other investments. And that's really how to frame the problem. How much does it take to meet my retirement goals?

[Joe Anderson]

Yeah, well said. I've heard you in the past talk about distribution planning in terms of percentages. And can you talk about how? I mean, the 4% rule, obviously we know about that, but there are certain cases where you could probably do more, maybe certain cases where you would do less. Is that age driven? Portfolio driven. Let's chat about that.

[Dr. Wade Pfau]

Sure, sure. Well, the 4% rule, it's really just a research simplification. It's not a retirement spending strategy because nobody has such a simple financial plan. Basically, if I was 65, I wanted to plan to live to 95. I had a million dollars in a Roth IRA because taxes are not part of the calculation. I could take $40,000 a year plus inflation and expect to not run out. But no one's financial plan is that simple. People have Social Security, they have other cash flows. Their tax bill is not growing every year by inflation. So real life financial plans can't really consider something like the 4% rule. But also, the 4% rule doesn't have any built in flexibility to adjust spending based on market performance. So like you're saying, if you have some flexibility, if I can cut my spending if the markets are down, that can help me support a higher initial level of spending because I have a way to manage that market volatility risk of if markets are down and I'm having to sell more of the assets I have left, I dig a hole for my portfolio that's difficult to recover from. So the 4% rule maximizes market risk for your portfolio because it doesn't give you flexibility.

[Joe Anderson]

Yeah. So I think what you said is such a key. It's flexibility. It's not this hard, rigid 4% every year. I mean, maybe you have certain years where you spend a little bit more and maybe some years a little bit less, but you gotta be flexible based upon what's going on with your portfolio. What's going on potentially with your, with your life. I mean, if all of a sudden your life expectancy is shorter than what you expected, then obviously that changes it too.

[Dr. Wade Pfau]

Yeah, yeah. The 4% rule specifically is calibrated to a 30 year horiz. So if you're already old enough that 30 years seems unrealistically long, then yeah, the 4% rule doesn't apply at that point.

[Joe Anderson]

Yeah. I think we like to think about, at least in our company on the podcast, 4% rule is an interesting way to gauge whether you're in the ballpark of having enough assets. But it's not going to be the distribution plan that's going to probably be the best for you, Right?

[Dr. Wade Pfau]

Absolutely. It can be helpful when you're far from retirement to gauge approximately what you need to be doing. But it's not a retirement income plan.

[Joe Anderson]

Yeah. And then things happen. The market corrects. Right. Your life changes. All kinds of things can happen. And so flexibility, I think is important when it comes to distribution planning. Yeah. Well, very good, Wade. I really appreciate this time with you.

[Big Al Clopine]

My pleasure.

[Joe Anderson]

You really are one of the best and brightest minds in the industry and it's been a pleasure talking with you.

[Dr. Wade Pfau]

Thank you. It's been a pleasure talking with you.

[Joe Anderson]

Thank you.

[Andi Last]

All right, thanks to the American College of Financial Services for making it possible for us to bring insights from all of these thought leaders like Dr. Wade Pfau. Right to you, our YMYW audience from the Horizons conference earlier this month. What are the three predictors of retirement happiness? Find out next week in Big al's interview with Dr. Michael Finka, CFP. If you missed the forecasts on Social Security from several of the college's financial brainiacs, you can watch them on our YouTube channel. Subscribe and turn on notifications so you don't miss the rest of the series.

[Unnamed Speaker]

All right, we're seeing a little bit of market volatility big now.

[Big Al Clopine]

Yes, we are.

[Unnamed Speaker]

And so I was thinking about this this morning in the shower.

[Big Al Clopine]

Oh, well, that's dangerous.

[Unnamed Speaker]

I know. That's when I do my best thinking, apparently. But a couple of things, couple of items that people should be thinking about given a volatile market. So here's Joe Anderson's top five things. What do you think about that for a catchphrase?

[Big Al Clopine]

Wow, that sounds like something I would do.

[Unnamed Speaker]

All right, so first you have to assess your overall portfolio. A lot of times in times where you see increased volatility, people don't want to do a thing. But I think the first thing that you have to take a look at is just assess what you currently have. How much risk are you actually taking in the overall portfolio? Because it might not be as bad as you think, even if you see some bigger swings in the overall portfolio. One, assess, two, manage the risk in the current portfolio. What does that mean?

[Big Al Clopine]

Well, you want to think about the rate of return that you need.

[Joe Anderson]

Right.

[Big Al Clopine]

To cover your goals. And you want to have the probably the least risk portfolio to make that happen.

[Unnamed Speaker]

But here's the problem with that, and I agree with you 100%. But let's say markets get volatile and someone has a decent portfolio. The last thing you want to do is make like wholesale changes.

[Big Al Clopine]

Well, right.

[Unnamed Speaker]

And most people won't make wholesale changes. They would much rather put their head in the sand. But you can still manage the risk in the current portfolio. And it's just looking at a rebalancing strategy of how much money you have in stocks versus bonds and making sure that you keep that or slowly get into the portfolio. At think that you mentioned is what is the appropriate mix of stocks and bonds to get you your target return.

[Big Al Clopine]

Yeah. And Joe, when, when you have that mix, then it's like the market goes down and you kind of feel like, gosh, maybe I should just kind of stay put or even get out of the market, you kind of want to do just the opposite. As the market starts to go down, stocks are cheaper. You want to rebalance by buying more stocks, selling some of your bonds, some of your safer investments, or maybe currently international stocks are doing better. You want to rebalance because you're buy cheaper.

[Unnamed Speaker]

I think you look at it, globally diversified portfolio makes so much sense. And for the last several years it's like, well, I don't want a globally diversified portfolio. I want Nvidia or I want the Magnificent Seven. Because you're going to have such a huge rate of return. And maybe just the S&P 500 has outperformed, let's say value stocks or growth stocks have outperformed value stocks. Small companies haven't necessarily performed as they did in the past. But when things get more volatile, you want to have more asset classes. Because right now, let's say large cap growth is underperforming, international is overperforming. So what do you want to do at that time? You want to buy more large cap growth and sell some of the international to keep you in balance. So you're buying low and selling high. Most people don't do that because they don't have a disciplined strategy to do so. Plus the emotion gets in the way. It's like, well, no, these are going down. I don't want to buy more than more of them, I want to sell more of them.

[Big Al Clopine]

Right.

[Unnamed Speaker]

All right, number three, you have to understand asset location. Now, this is where taxes come into play. So asset location means you want certain asset classes in certain pools. If you look at pools of money that you can invest in, there's a tax free pool, which would be the Roth ira. There's a taxable pool or capital account, a brokerage account, and then of course your tax deferred pool, which is your IRAs, 401s, 403s, tsp, anything that's deferred, that's going to come out as ordinary income. You want to hold certain assets in each of these different pools differently to take advantage of taxes. For instance, what I usually see, what Big Al usually sees, is that if I have a Roth IRA and I have a deferred account, and I have a brokerage account, it's almost the same portfolio in each of those different accounts. So just assume it's 60, 40, 60% stocks, 40% bonds. We look at the Roth IRA, it's 60, 40, you look at your deferred account, it's 60, 40, YOU look at your brokerage account, it's 60 40. You don't necessarily want to do that. What you want to DO is a 6040 portfolio and set it on top of all of those different pools to take advantage of taxes. And what I mean by that, Roth ira, what type of assets do you want in your Roth?

[Big Al Clopine]

Yeah, I mean, a Roth grows tax free. So wouldn't you want your asset classes that have the highest expected rate of return because you get the biggest bang for your buck?

[Unnamed Speaker]

Because if it grows at 12%, all 12% is yours. Tax free. Tax free versus, let's say if you have something like a bond or a CD cash that's growing at 2 to 4%. Well, I would much rather have that, my deferred account, because I'm going to be taxed the highest.

[Joe Anderson]

Yeah.

[Big Al Clopine]

And you think about, so your 401k, your deferred account, then you don't necessarily want those asset classes that have the highest expected returns because you pay the most taxes out of that account. Ordinary income.

[Unnamed Speaker]

All right, your brokerage account. Tax loss harvesting.

[Big Al Clopine]

Yes. So what that means, Joe, is that when you have positions that you know they're going to go up, they're going to go down, but when they go down, you have an opportunity to sell them, create a tax loss on your portfolio, buy something similar. So you're still in the market, but now you've created a tax loss that you can use against any other capital gains.

[Unnamed Speaker]

Volatile markets are your friend from a tax perspective. Assets go down, you sell that asset, the IRS gives you a tax break. In regards to the stock market, if your assets go down, you want to sell, but you don't want to sell and go into cash. You want to sell and buy something similar. You sell Coke and buy Pepsi, sell mutual fund A, buy mutual fund B, still have the same integrity of the overall portfolio. But what you're doing is you're creating those losses that will sit on your tax return and those will offset gains. $$ Most people don't realize that. It's like, well, I only get a 3% write off if I have a $20,000 capital loss and I have a $20,000 Capital gain. Those offset 100%.

[Big Al Clopine]

Yeah, 100%. Short term, offset short term, long term, long term. But you still have, if you still have extra, your short term losses can offset long term gains and vice versa. Plus you can set, you can offset all those gains and still take another $3,000 loss against Ordinary income.

[Unnamed Speaker]

So in volatile markets, it's like, all right, well here I could have my cake and eat it too. As Long as I'm disciplined, I'm managing the risk. I'm assessing my overall portfolio to make sure that it's set up appropriately. I don't have to make wholesale changes. You could do all of this with your existing portfolio and slowly get it into the appropriate portfolio because this is where people feel that stomach of risk. If I'm seeing my portfolio go down 5%, 10% or you see a lot of noise in the overall markets on a day by day basis, if my anxiety level goes up and then I look at my balance and I don't like the movement of the account, you're probably taking on too much risk. You loved it on the upside. But people are twice as fearful to lose a dollar than they are to gain. So it's assessing the risk that you're currently taking, managing that risk and then slowly getting into the portfolio that you should be getting into. Then position the portfolio from an asset location in tax loss harvesting opportunity. And then finally, of course, you got to Roth it.

[Big Al Clopine]

Get as much money in the Roth IRA because that's tax free growth in the future. And put those asset classes that have higher expected returns, stocks, certain kinds of stocks, like smaller companies, value, right, Merging markets, tend to have higher expected returns over the long term.

[Unnamed Speaker]

So think of this. If the market's down 10%, that is a phenomenal time to convert. Because then all of that growth, that all of the recovery of that asset class or mutual fund or stock, whatever that you convert, all of that recovery is going to go into the Roth. So you're converting at a 10% discount or a 5 or 20%. Whatever asset class that you convert, you don't have to sell the asset class. You can convert shares as long as it's IRA to Roth ira. You have Nvidia. Move Nvidia shares into the Roth ira, pay the tax on the current balance today, and then have all of that recovery grow 100% tax free or whatever stock or mutual fund ETF that you're holding. Also, if you haven't made a Roth contribution yet, do it when the market's down, right? If you haven't done a backdoor Roth, do it when the market's down. If you haven't converted your after tax for the Megatron backdoor barnyard, do it when the market's down. There's a lot of opportunity for those disciplined investors that don't necessarily care about market timing. All of these are phenomenal strategies that you could do to manage the portfolio that have nothing to do with the crystal ball of picking the right stocks or understanding when the market's going to go up or down. Whatever you feel comfortable with volatile markets, you can take advantage of it versus freezing and then like putting your head in the sand.

[Big Al Clopine]

I think that's well said. There's opportunities in down markets and so take advantage of them.

[Unnamed Speaker]

All right, well, hopefully that helps and hopefully we can stay cool and not freak out.

[Andi Last]

So many different IRS rules can cause you to pay more taxes than necessary on your required minimum distributions, Social Security and Medicare, long term capital gains, your investments and more. Learn to escape these 11 tax traps and you'll save in retirement. That's the name of this week's brand new episode of youf Money, you, Wealth tv. Joe Anderson, CFP and Big Al Clopine, CPA will show you the escape routes from these tax traps so you can keep more of your money in retirement when you need it the Most. Watch YMYW TV and download the 2025 Tax Planning Guide. You'll find links for both in the episode description and hey, don't keep this free financial gold mine a secret. Share the YMYW podcast, the TV show, and all the downloadable resources with anyone and everyone who needs them. You'll be a hero.

[Unnamed Speaker]

We got Al Bundy in St. Louis, Missouri. Al Bundy was actually in Chicago.

[Andi Last]

This one's in St. Louis.

[Big Al Clopine]

Yeah. Well, Married With Children.

[Andi Last]

I guess he sees himself and his wife as being like them, perhaps.

[Unnamed Speaker]

Got it. Big Married With Children fan.

[Big Al Clopine]

I saw a bunch of them.

[Joe Anderson]

Yeah.

[Unnamed Speaker]

Yeah. Andy, you loved that show, didn't you?

[Andi Last]

Not at all. Not a big fan.

[Big Al Clopine]

Not a fan.

[Joe Anderson]

Did you watch it, Joe?

[Big Al Clopine]

No, not really.

[Unnamed Speaker]

No.

[Big Al Clopine]

Yep.

[Unnamed Speaker]

I like Christina Applegate.

[Big Al Clopine]

It was. It was kind of a ridiculous show, but let's see. It was. I thought it was slightly entertaining.

[Unnamed Speaker]

It was kind of like a kickoff of what? All in the Family.

[Andi Last]

All in the Family. Yeah. It's supposed to be the. What's his name? Archie Bunker. Thank you.

[Big Al Clopine]

Yeah. Of that generation. Yep.

[Unnamed Speaker]

Done it. All right, Al Bundy, let's go. What do you got? Hello, Joe or hello Al and Joe. I got turn on to your podcast through my AI assistant about five months ago. Wow, AI Assistant. What the hell is that?

[Big Al Clopine]

I don't know, but it sounds impressive.

[Unnamed Speaker]

You got an AI assistant, Andy?

[Andi Last]

No, but hey, I'm glad to hear that AI assistants are actually giving advice to people to listen to. Ymyw. That's pretty cool. So thank you, AI.

[Big Al Clopine]

Yeah.

[Unnamed Speaker]

Love the good info and the humor. Also love hearing Joe struggle with some of the words. Thank you. Just kick Me, right in the old. You know where I have two questions for you. I don't know why people like. I mean, I would never listen to this podcast because I'd be like, who is this idiot that can't even talk?

[Big Al Clopine]

Well, it can be funny.

[Unnamed Speaker]

That's not. It's embarrassing is what it is.

[Andi Last]

It makes you sound very real. You're not AI. Clearly.

[Unnamed Speaker]

I should practice. I should read this stuff. I should prepare.

[Big Al Clopine]

It's funnier when you note that.

[Unnamed Speaker]

Yeah, it's great. It's good times. All right. You always use 4% or less for withdrawal rate. You never discuss variable withdrawal rates such as Vanguard and Guten withdrawal rates. Guyton.

[Big Al Clopine]

Guten, I think. I don't know.

[Unnamed Speaker]

I never heard of the Guyton. Is that because you're just spitballing and keep it simpler? Or number one or number two, am I struggling with what to do with my IRA? Let me digress. 61 years old, gynecologist, oncologist. Okay.

[Dr. Wade Pfau]

Wow.

[Big Al Clopine]

Gynecological oncologist.

[Unnamed Speaker]

Gynecological oncologist.

[Andi Last]

Al Bundy. As a gyno ankh, can you even imagine that would be scary just from the perspective of a woman?

[Unnamed Speaker]

I had a problem with too much debt in med school and took me a few years to dig it out. Since my first job, ages 25 to 40, I live below my means and saved about 22% of my pre tax salary and 50% of my bonuses. I plan to retire at age 64 so I can cobra health insurance. Kids are grown up and out the payroll and have really good jobs. I set them up with Roth accounts. Daughter has $85,000, son has $70,000. So I don't feel I need to leave them any significant assets. Peggy and I have the following assets. 401, $1,600,000 IRA, $3,300,000. Okay, Peggy. IRA $215,000. Roth IRA, $75,000 IRA and 401 or 6040 equity bond brokerage, 4.2 million. Come on here, Ed.

[Big Al Clopine]

So we got. We're getting up to almost 10 million.

[Unnamed Speaker]

And $450,000 in emergency bond, but overall, 8020 equity bond. So we have total liquid assets of 10 million.

[Big Al Clopine]

Yeah, $9,800,000.

[Unnamed Speaker]

All right, we got whole life worth $700,000, death benefit of 291,000. Cash surrender value 91,000 is taxable. 70 ounces of gold bullion for dark times. Houses worth 2 million paid off, essential expenses $175,000. But I like to spend $275,000 to $300,000 to enjoy the fruits of my labor. Now, that's calling real good living.

[Big Al Clopine]

That's like you.

[Dr. Wade Pfau]

Oh, yeah.

[Unnamed Speaker]

Half of me, I'm working 0.75 full time and making $500,000 a year. So I'm puzzled as to what to do with the IRA and the 401. I'm eligible to roll the 401 into my IRA now. Can't do Roth conversions until I retire. Would you suggest doing Roth conversions to the 24% tax bracket or simply start drawing down from the IRA only once I retire? Please spitball and let me know. I had asked different advisors and got different answers. All right. I love bourbon red wine in the winter and a nice little Chablis or vodka in the summer. Is that right?

[Andi Last]

Chablis? Yeah.

[Big Al Clopine]

Yeah, you're right.

[Unnamed Speaker]

I killed it. Totally guessed on that one. I was gonna.

[Andi Last]

Wow. That was a guess.

[Unnamed Speaker]

I did that on purpose. I guarantee he wrote that just to have.

[Big Al Clopine]

Just to see what you would do.

[Unnamed Speaker]

Yep. Crap the bed. A nice ipa, works on a hot summer day. Had big dogs all my life, but end of life situation breaks my heart. Thanks. Keep up the good work. Follow up. My only fixed income will be $4,000 a month at 67 Peggy at $1,700. Brokerage account, throws off $73,000 in dividends. P.S. please mention to Joe that I find his voice soothing, that I listen to reruns of the podcast at night to help me fall asleep.

[Big Al Clopine]

Really?

[Unnamed Speaker]

Perfect.

[Andi Last]

That's the first time we've ever gotten that one.

[Big Al Clopine]

I'm guessing he's got you and me confused.

[Unnamed Speaker]

Yeah. Remember Tax Chat with Big Al?

[Big Al Clopine]

That was going to be your go to sleep podcast.

[Unnamed Speaker]

Tax Chat. Okay. Al Bundy. Well, congratulations on all your success. $10 million. So 4%. Okay. Couple things with the 4% rule. The 4% rule is kind of. It has nothing to do with distributions. It's just to give us an idea. And it's a spitball. Totally. Back of the envelope. To see how much money that you should have accumulated to create the income. There's been a lot of different studies. Burger, what was this?

[Andi Last]

I can't. Bill Ban.

[Unnamed Speaker]

Yeah. Bill Bangin right here in San Diego. And then Wade Pfau, then all the guys. Right. And so I think now it's closer to three, three and a half. But it's not like, all right, take 4% out of your portfolio every single year. I think you want to have a dynamic withdrawal rate. You actually want to have more of a structured strategy in regards to your withdrawals. You want to look at how much money that you're trying to spend. You want to spend $300,000, then you have to come up with a Strategy to pull $300,000 out a year with the least amount of tax and the least amount of risk. The 4% rule is like more of an accumulation. So if I want to retire in 10 years and I want to spend $40,000 a year from my portfolio, well, at least I need a million dollars saved. At least some people will say, all right, Well I want $40,000 a year and I have $300,000 saved. I think the market does 8%, 10%. So it's just a very high level rule of thumb that I would not recommend a withdrawal strategy at all from the 4% rule. It's just a gauge to see how much money you should have.

[Big Al Clopine]

100% agree. And he was talking about a Guyton, Guyton, Klinger, Guten Giten Guyton. I think Klinger. That's a flexible withdrawal rate, just what you described.

[Unnamed Speaker]

Yeah, we call that the Anderson.

[Big Al Clopine]

The Anderson method. Yeah.

[Unnamed Speaker]

Did you get the white paper?

[Big Al Clopine]

Anyway? Yeah, so that is, I think a much better way. I mean, when you're in distribution mode, right? So maybe you do some analysis to figure out based upon your life expectancy, based upon your investments, based upon your goals, you know, how much can you pull out of your portfolio? And then it's. And let's just say it's 3%. And then maybe you have an upper limit of 5% and a lower limit of 2. Or maybe it's 4%, an upper limit of 5 and 3, whatever, right? So you're able to spend a little bit more when the market does well and spend a little bit less when the market doesn't do as well. Have some that's dynamic withdrawal strategies. And when you think about that, the best way I think to do that is look at what expenses are fixed that you have to spend. Maybe it's 2/3 of what you spend. 80%. Maybe the other 20, 25% is discretionary. Maybe in certain years you do a little bit more than that, 25%. In certain years you need less. You got to be flexible. That's what I think increases your chances success.

[Unnamed Speaker]

So he has right now 3, 4, what, $5 million in a retirement account. You need to do conversions. Today he's got $500,000 of income. He's 60 some years old. You could go to the 32% tax bracket, I think at $5 million, if that continues to Grow. I don't know what we want to grow that at, but his RMD alone is probably in the 200s plus another hundred thousand of dividends.

[Big Al Clopine]

He's going to be, it's going to be high. I mean, if he doesn't do much of anything, the 5 million in retirement accounts by the time RMDs kick in could be he's 61, could be 10 million.

[Unnamed Speaker]

Right.

[Big Al Clopine]

So 400,000 of RMDs, plus dividends and Social Security. So basically you're in a high bracket. That's why you want to do Roth conversions. Now we low rates right now. So 24% certainly, maybe even more, maybe 32% if you want, if you do retire in a few years, then you, you really can sort of front load it and get a lot more in. That's assuming we get the, the tax cuts extended, which Joe, I talked to several experts yesterday. They all felt they would be extended at least on some level and at least the tax rates.

[Unnamed Speaker]

But yeah, so I think if I was Al Bundy, I would do a conversion into 30. He's 61, so he's got plenty of time. And I don't know where tax rates are going to go, but I think tax rates at the higher level or the rates are going to come down in a sense of that. Right now the 24% tax bracket is giant and it jumps to 32. And I think it goes in the 32% bracket at, I mean, the start of the 32,000 is $400,000 or the.

[Big Al Clopine]

End of the 400 for a married couple, $400,000.

[Unnamed Speaker]

So $400,000, he's at $500,000 of income minus whatever he's saving. I don't know. He's probably right. In the 32% tax bracket, I would do a conversion this year and I would do conversions because he's got $4.5 million in a brokerage account that he could live off of his 350. I'm guessing he got two answers. He's like, well, no, you probably want to take, take the distributions from the retirement account to a certain level and then top off the rest of your living expenses with your brokerage account. I would run the numbers both ways, but I think you'd be better off if he did the conversion and he lived off his brokerage account. Or you could do a conversion and live off of some of the brokerage.

[Big Al Clopine]

Let's say you some of the ira.

[Unnamed Speaker]

Some of the ira. Maybe you convert or you pull to the top of the 15 or the 12% tax bracket to live off of, which is what, $100,000, 150,000 out of the 250 or 300 that you need. Then I would convert to the top of the $24,000 and then I would live off of the brokerage account with everything else.

[Big Al Clopine]

Yeah, then you keep it in the 24% bracket. Yeah, I think there's a lot of strategies, but the reason why you do that is because if you don't, you can pull the money out. And I guess in some ways you could get the same impact. But basically you're growing your brokerage account instead of your Roth. I'd rather live on the brokerage and increase the Roth where it's tax free than some of these advisors are telling you is just withdraw to the IRA for your living expenses. Then you don't really increase your Roth. You increase your brokerage account in the sense that it's going to grow, but that's going to be taxable with dividends and capital gains.

[Dr. Wade Pfau]

Yeah.

[Unnamed Speaker]

If you think about it, you have two pools of money. You have a brokerage account that any future growth is going to be subject to a capital gains tax. Or you could have it all into a Roth IRA that you're never, ever going to be taxed on it again. Let's see if one of the spouses dies, Right. You got the widow or widower tax. Now you have a huge RMD that you or Peggy needs to take. But now you cut your tax brackets in half. So that RMD is going to shoot to probably the highest tax bracket. You got 5, $10 million or 8 million or whatever that thing grows to over the next 10 years, particularly.

[Big Al Clopine]

I mean, so you think about 14 years from now, what are the tax rates going to be?

[Unnamed Speaker]

Who knows?

[Big Al Clopine]

I think most people realize that our country needs. At some point we'll need to get that debt under control, which probably means higher taxes. At some point in the future, you're.

[Unnamed Speaker]

Taking the uncertainty of taxes off the table. The other only issue that I see here is that at $5 million in a retirement account, the IRS really likes those big fat retirement accounts. And if that continues to build and grow, you know, they could. What. What's the dollar figure today on those larger IRAs?

[Big Al Clopine]

Well, yeah, they were spitting around. They were. They were thinking 10 million. That didn't really become law, but that was discussed. Right. Your IRA is over $10 million. It's going to be. You have to start taking money out.

[Unnamed Speaker]

Start taking distributions, even if you're not.

[Big Al Clopine]

Even if you're not retirement age, Right? Yeah. Yeah, but it didn't. Didn't pass. But it's been discussed.

[Unnamed Speaker]

Right.

[Big Al Clopine]

And the other thing too is, you know, hopefully Al and Peggy, you live a long life, but if one of you predeceases the other, now all of a sudden you're in the single tax brackets. Now this is even way worse. So just think about all that.

[Unnamed Speaker]

Yeah, I just said that. I guess you don't really listen.

[Big Al Clopine]

No, not really.

[Unnamed Speaker]

My voice is soothing.

[Big Al Clopine]

I. I went to sleep.

[Unnamed Speaker]

Yeah, you fell asleep.

[Big Al Clopine]

Yeah.

[Joe Anderson]

Right.

[Big Al Clopine]

Yeah, you just said that.

[Unnamed Speaker]

I did.

[Big Al Clopine]

I don't know what I was thinking. Yeah, I was thinking about my next. Next thing I was going to say, which is the same thing you were.

[Unnamed Speaker]

Saying you were thinking about. Man, I Wish I had $10 million. Oh, that's right. I do have the big ass wallet. Like Big Al.

[Big Al Clopine]

I need a bigger wallet.

[Unnamed Speaker]

Yeah, you do. To fit all that money.

[Andi Last]

Your money, you, wealth is presented by Pure Financial Advisors. Meet with one of the experience professionals on Joe and Big Al's team at Pure for a financial assessment. It's a deeper dive than a spitball. There's no obligation and it's free. Call 888-994-6257 or click or tap the link in the episode description to schedule yours. Pure currently has 10 offices around the US where you can meet in person, and we're growing every day. But you can also get your free assessment right from home via Zoom. No matter where you are in the world, the Pure team will help you create a detailed plan that's tailored to meet your needs and your goals in retirement. Pure Financial Advisors is 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 contained in the podcast in the process of making a full and informed investment decision.