Taxable Income, Dividends, Roth & SMA: What's Missing in Your Early Retirement? - 527

Summary

Comprehensive Summary of "Taxable Income, Dividends, Roth & SMA: What's Missing in Your Early Retirement? - Episode 527"

Your Money, Your Wealth podcast, hosted by Joe Anderson, CFP®, and Alan Clopine, CPA of Pure Financial Advisors, delivers insightful discussions on personal finance strategies with a touch of humor. In Episode 527, released on April 29, 2025, the hosts tackle questions from listeners about early retirement planning, focusing on taxable brokerage accounts, dividend investing strategies, Roth conversions, and Separately Managed Accounts (SMA). This detailed summary captures the episode's key points, discussions, insights, and conclusions, providing valuable takeaways for anyone interested in optimizing their retirement plans.

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Listener Questions Addressed

1. Chip's Early Retirement Strategy Using a Taxable Brokerage Account

Timestamp [00:00 – 08:26]

Chip Skylark, a 33-year-old IT professional, seeks advice on using his taxable brokerage account to supplement early retirement income. Chip and his wife aim to retire around ages 50 to 60, transitioning from their high-paying IT jobs to other careers or full retirement. They have fully paid off their home, substantial savings in 401(k)s, Roth IRAs, and a taxable brokerage account totaling $160,000. Chip's primary concern revolves around the tax implications of drawing income from a taxable account, including dividends and capital gains.

Notable Quote:

• Joe Anderson [03:05]: “Aaron Markowitz. It's that for every level of risk that you're willing to take, you should anticipate a higher expected rate of return.”

2. Andy's Dividend Investing Strategy and the 4% Rule

Timestamp [17:00 – 31:20]

Andy, another listener, inquires about the sustainability of a dividend-focused investment strategy aligned with the traditional 4% withdrawal rule. He questions whether relying solely on dividends from high-yield ETFs is sufficient for retirement and seeks clarification on potential oversights or misunderstandings in this approach. Andy aims to replace his current spending needs of approximately $100,000 annually with a portfolio of $2.1 to $2.9 million, considering inflation and increased expenses due to having a child.

Notable Quote:

• Joe Anderson [20:23]: “If I want to retire at age 50, how much money do you spend today? And then it's like, all right, well how much money do you need to bridge the gap from age 50 to probably age 70 when you claim your Social Security…”

3. Don's Inquiry on Separately Managed Accounts (SMA) for Taxable Accounts

Timestamp [32:03 – 39:39]

Don from Iowa asks whether transitioning his taxable brokerage account to a Separately Managed Account (SMA) is beneficial for tax purposes and potential growth. At 40 years old, Don has $410,000 in a taxable account and seeks to retire at 55 with an income of $170,000 in today’s dollars. He wonders if an SMA could enhance his investment strategy compared to his current approach of using a globally diversified low-cost index portfolio.

Notable Quote:

• Big Al Clopine [37:19]: “I personally like direct indexing better. It's still a scenario where you're picking certain stocks, but they're trying to mimic an index.”

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Hosts' Analysis and Insights

Efficient Frontier in Investment Decisions

Timestamp [02:53 – 05:00]

Joe and Big Al delve into the concept of the Efficient Frontier, introduced by Harry Markowitz, explaining how it helps investors balance risk and return. They emphasize that for every level of risk an investor is willing to take, there should be a corresponding expected rate of return, guiding optimal portfolio construction.

Notable Quote:

• Big Al Clopine [03:05]: “There's a little graph that goes risk, and then with the more risk, you get a higher rate of return, but then it plateaus kind of levels out.”

Tax Strategies for Brokerage Accounts

Timestamp [09:41 – 13:24]

The discussion covers tax-efficient strategies for managing taxable brokerage accounts. Key strategies include:

• Tax Loss Harvesting: Selling securities that have experienced a loss to offset capital gains and reduce taxable income.
• Municipal Bonds (Muni Bonds): Investing in muni bonds, especially those from one's own state, can offer tax-free interest income at both federal and state levels.

Notable Quote:

• Big Al Clopine [10:39]: “So that's on top of his 401(k)s. Yeah. Very good.”

Withdrawal Strategies and the 4% Rule

Timestamp [18:21 – 31:20]

Joe and Big Al analyze the traditional 4% withdrawal rule, discussing its limitations and advocating for a more dynamic approach tailored to individual circumstances. They highlight factors such as sequence of returns risk, tax implications, and the importance of diversifying income sources.

Notable Quote:

• Joe Anderson [20:23]: “But in my opinion, you want to have a more dynamic strategy as you're creating income.”

Diversification and Portfolio Management

Timestamp [21:38 – 23:25]

The hosts stress the importance of portfolio diversification beyond high dividend-paying stocks. They recommend a globally diversified portfolio that includes a mix of equities and bonds to mitigate concentration risk and enhance long-term returns.

Notable Quote:

• Big Al Clopine [22:52]: “That's just not how it goes. The share price will fall as the same as the dividend.”

Roth Conversions vs. Maxing Out Roth Options

Timestamp [30:06 – 31:20]

Joe and Big Al discuss whether retirees should focus on maximizing contributions to Roth accounts or consider converting traditional IRAs to Roths. They weigh the benefits of tax-free withdrawals against the immediate tax liabilities of conversions, emphasizing the need for personalized strategies based on individual tax situations.

Notable Quote:

• Joe Anderson [30:40]: “I don't know. I don't know. Is it realistic to think I can retire? Yes. Once the house is paid off, Should I try to max out more Roth options? Yes.”

SMAs vs. Index Funds and Direct Indexing

Timestamp [33:32 – 38:07]

The conversation evaluates the pros and cons of Separately Managed Accounts (SMAs) compared to traditional index funds and direct indexing. While SMAs offer personalized management and potential tax benefits, the hosts express a preference for passive, low-cost index funds and direct indexing due to their simplicity and efficiency.

Notable Quote:

• Big Al Clopine [37:19]: “I personally like direct indexing better. It's still a scenario where you're picking certain stocks, but they're trying to mimic an index.”

Importance of Personalized Financial Planning

Timestamp [39:39 – 40:46]

Concluding the episode, Joe and Big Al emphasize the necessity of individualized financial assessments beyond general advice. They recommend scheduling one-on-one sessions with financial professionals to create tailored retirement plans that align with personal goals, risk tolerance, and financial circumstances.

Notable Quote:

• Big Al Clopine [39:39]: “In a case like this where you're talking about big numbers and a lot of years, don't take our back of the envelope analysis.”

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Key Takeaways

1. Balanced Approach: Relying solely on taxable brokerage accounts or high-dividend stocks for early retirement is insufficient. A balanced and diversified portfolio across taxable, Roth, and traditional accounts is crucial.

2. Tax Efficiency: Implementing tax strategies like tax loss harvesting and investing in municipal bonds can significantly enhance after-tax returns in taxable accounts.

3. Dynamic Withdrawal Strategies: Moving beyond the 4% rule to more flexible withdrawal strategies can better accommodate individual circumstances and mitigate risks associated with market volatility and inflation.

4. Diversification Matters: A globally diversified portfolio reduces risk and potential concentration in specific sectors or asset classes, contributing to long-term financial stability.

5. Personalized Planning: Personalized financial assessments and tailored strategies are essential for achieving specific retirement goals, emphasizing the importance of professional financial advice.

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Your Money, Your Wealth Episode 527 offers a wealth of knowledge for listeners aiming to optimize their early retirement strategies. By addressing real-life questions and providing actionable insights, Joe Anderson and Alan Clopine empower their audience to make informed financial decisions tailored to their unique circumstances.

Transcript

[Andi Last]

What are the pros and cons if Chip uses the money in his taxable brokerage account for early retirement income? Jack and Sally asked Joe and Big Al to spitball on whether they can retire around age 55 or 60 and whether they should max out their Roth or convert to Roth. That's today on youn Money, you, Wealth podcast number 527 +. April and Andy ask the fellows to spitball on their dividend investing strategy, and Don wonders if a separately managed account or SMA makes sense for his taxable account. We'll also find out what an SMA is. If you've got money question or want your own retirement spitball analysis, click or tap Ask Joe and Big Al on air in the episode description and send us your deeds. And do us a favor and watch the video on the Ask Joe and Big Al page to find out how to make your spitball a good one. I'm Executive Producer Andi Last, and here are the hosts of youf Money, you, Wealth, Joe Anderson, CFP and Big Al Clopine, cpa.

[Joe Anderson]

Okay, we got Chip Skylark from Dimmesdale. What is that Nickelodeon?

[Big Al Clopine]

Nickelodeon cartoon.

[Andi Last]

I actually looked it up because it seemed like it had to be a fake name. And yeah, it's apparently from an animated series called the Fairly Odd Parents.

[Big Al Clopine]

All right, okay, well, we would have not have known that.

[Joe Anderson]

Very cool. So let's we go. Hey Joe, Big Al, I was hoping you could help me think through some things with my taxable brokerage account. My wife and I are both 33 years old and we have one child that's nine months old, and we'd like some thoughts on any pitfalls or considerations as it relates to growing and then using a taxable brokerage account to supplement income before retirement. We Both worked in IT consulting for about 12 years, both for large firms, and make about $300,000 combined gross salary before bonuses. Neither of us really enjoy our jobs all that much, but we've stayed in the field because of the good pay and the flexibility the job provides. One thing we would like to focus on over the next couple of years is growing our taxable brokerage so that we can eventually take our foot off the gas on our IT jobs or shift to other careers entirely. We want to retire around 50. Here's our financial details. Our finances are fully combined. We own our home that we just purchased in 2019 for $375,000 that we fully paid off in January 2024. Alright, so no mortgage payments and no HELOC associated with our house we both own our cars. We have $470,000 in traditional 401s, $130,000 in Roth IRAs, $10,000 in HSA, $15,000 and 529 plans, $27,000 in company stock for my. From my wife's work, about $40,000 in emergency fund, and about $160,000 in our taxable brokerage. The retirement accounts are all invested per the efficient frontier. Oh, look at the big brain on chippy. The efficient frontier.

[Big Al Clopine]

I haven't heard that used in a while.

[Andi Last]

Will you explain that for us, please?

[Joe Anderson]

Yeah. Aaron Markowitz.

[Big Al Clopine]

Yeah.

[Joe Anderson]

It's that for every level of risk that you're willing to take, you should anticipate a higher expected rate of return.

[Big Al Clopine]

There's a little graph that goes risk, and then with the more risk, you get a higher rate of return, but.

[Joe Anderson]

Then it plateaus kind of levels out.

[Big Al Clopine]

After around 60, 70%. I mean, you get a little bit more return, higher equities. But anyway, that's the whole point, is to think about the rate of return you need and the amount of risk that you're taking to get it.

[Joe Anderson]

And then you can put that, plot it on a graph on the efficient frontier, and then that should pop out your optimal portfolio.

[Big Al Clopine]

Yeah. And then next day it'll be slightly different because the market changes, but at least you get the idea.

[Joe Anderson]

So, yeah, efficient portfolio theory. All right. The brokerage account is okay to mainly set up A S&P 500 index fund. Neither of us have pensions. He's in it. How the hell does he know about the efficient Frontier?

[Big Al Clopine]

Because he loves financing.

[Joe Anderson]

He's grinding on the blogs. He is doing everything he can.

[Big Al Clopine]

I don't think we have mentioned that in our show for 15 years.

[Joe Anderson]

Harry Markowitz. Love it. Nobel Prize winner.

[Big Al Clopine]

Yeah, we saw him speak.

[Joe Anderson]

It's pleasant if you'd like to fall asleep. We said do a little speech with Harry.

[Big Al Clopine]

It's a little dry.

[Joe Anderson]

Oh, my goodness gracious. Smart as hell, but wow. I mean, I maybe got three words there you can imagine me reading, like.

[Andi Last]

Which is amazing because you reeled off that description of the efficient frontier just like you had it by rote. So I figured that you had studied this thing backwards and forwards.

[Big Al Clopine]

Well, we learned the Cliff Notes. That's all we really needed.

[Joe Anderson]

No. Yeah. Well, no. Through finance classes. And I do have a degree in finance. I do have a certified Financial planning designation.

[Big Al Clopine]

Really?

[Joe Anderson]

Yeah, I've been doing 25 years.

[Big Al Clopine]

Got it.

[Joe Anderson]

Okay, I know I sound like an idiot on the podcast, but it's all for show.

[Big Al Clopine]

It's all for show. It's all for laugh.

[Joe Anderson]

Yeah, I do read every now and again. I read. This is. Here's my. This is my weekly reading.

[Big Al Clopine]

So if you want to join a book.

[Joe Anderson]

When's the last time you read out loud? You know what I mean? People giving all the time.

[Big Al Clopine]

I don't like reading out loud.

[Joe Anderson]

No, people read. They're not reading a novel and their books out loud.

[Big Al Clopine]

True. Good point.

[Joe Anderson]

On camera.

[Big Al Clopine]

Yeah. So if there was a book club, it would have to be questions because you wouldn't read otherwise.

[Joe Anderson]

I would never could book club. Could you? Chapter one. Well, where's the question? Oh, my God. This is. This one's going on and on and on.

[Big Al Clopine]

Our book club today is episode 469.

[Joe Anderson]

Oh, man. All right, so we paid off our house a little over four years and we saved $100,000 into our brokerage account in 2024.

[Big Al Clopine]

Wow, that's great.

[Joe Anderson]

Incredible. With all our extra funds pointing that direction. So once we have our eyes set on a financial goal, we usually hit it. Oh, no. Out chip here makes 300 grand.

[Big Al Clopine]

Yeah.

[Joe Anderson]

And he could save a hundred thousand. The other 100 goes to taxes and he lives off 100.

[Big Al Clopine]

A third.

[Andi Last]

A third.

[Joe Anderson]

A third.

[Big Al Clopine]

Yeah, that's right.

[Joe Anderson]

Pretty good. But no, he's saving 100,000 just in the brokerage account.

[Big Al Clopine]

Yeah. So that's on top of his 401ks. Yeah. Very good.

[Joe Anderson]

God, wish I had that discipline when I was 33.

[Big Al Clopine]

Yeah, I was. I was just getting married. Kids. That was. Didn't have the extra money.

[Joe Anderson]

Yeah, that was a little. A little later than that.

[Andi Last]

Last year.

[Joe Anderson]

Yeah, it's just my honeymoon.

[Big Al Clopine]

Yeah, a couple last week anniversary.

[Joe Anderson]

Our yearly expenses are usually around $80,000, but with daycare costs and other baby expenses, we're expecting it to be $100,000, $110,000 over the next few years.

[Big Al Clopine]

Okay.

[Joe Anderson]

All right. What are some of the things I should be thinking about to take into account as we continue to pad our taxable account so that we can ease off or make a change? Obviously, we'll start getting dividends and capital distributions and may need to put quarterly taxes to keep them from going to Uncle Sam. See, but outside of that, what is there? Is it as simple as building up an account as far as we think we need and then drying down and take care of expenses? By the way, my wife and I drive Subaru Foresters. No, the wife drives the Subaru. Are they from Seattle? Where are they from?

[Andi Last]

Tim's Dale From Nickelodeon land.

[Joe Anderson]

An old Honda CRV I enjoy Spicy cocktail that burns. Oh, what's that?

[Big Al Clopine]

Fireball, probably. That's one of yours.

[Joe Anderson]

Oh, yeah. I'll drink some fireball when I get a birdie. And I birdie a lot.

[Big Al Clopine]

That's a requirement on your rounds, right?

[Joe Anderson]

My wife, red wine. And we both like a little hazy ipa.

[Big Al Clopine]

Yeah, me too.

[Joe Anderson]

Thanks for your help and please keep up the good work on the show.

[Big Al Clopine]

So what else can Chip do?

[Joe Anderson]

All right, well, so let's talk about this, because I'm glad. So Chip is saving his tail off into a brokerage account. This is interesting to me because Chip has already saved a ton of money. Chip has a half a million dollars saved. More than that.

[Big Al Clopine]

Yeah. Half a million in 401 at 30%.

[Joe Anderson]

He's already got 700,000. Almost a million dollars saved in a retirement account, a Roth account. And so when people put money into a retirement account, it's like, okay, well, here I'm going to pick some mutual funds. And it's like they feel a little bit more confident saving in the retirement account. They pick the funds within the plan and then they put dollars in every week and then they let it go.

[Big Al Clopine]

Right.

[Joe Anderson]

Most people do not have the discipline or they have a little bit more intimidation by investing in a brokerage account. And it's exactly the same, Right? You invest exactly the same. You want to be a little bit more tax sensitive. And we could get into the tax strategies, but it's not like here. I want to invest in my brokerage account a little bit differently than I do with my other investments. Especially at 33 years old, you already know the efficient frontier. Find that frontier and get on the line.

[Big Al Clopine]

Yeah, I would say, Chip, you're doing everything great. Keep doing what you're doing. As far as saving a brokerage account after you've maxed out your retirement accounts in favor of the Roth ira. Right, because you got money in Roth. But. But get some more. Get favor that Roth IRA and the 401K. The Roth. The Roth option in the 401K. But as far as your brokerage account. Yeah, go ahead and continue investing as Joe said, like you do before, but now look at things like tax loss harvesting when. When stocks or mutual funds, ETFs, when they go down in value, you sell it, create a tax loss, buy something similar. So you're still in the market, but you've created a tax loss to net against other gains. As far as your bond money, your safe money, invest in muni bonds, because there's no taxes. And if you invest in muni bonds in your own state, you don't pay any state taxes or federal taxes. So those are a couple thoughts there, but mainly, Joe, I would just say keep doing what you're doing.

[Joe Anderson]

Absolutely. I mean, he's doing the research, he's overstudying this.

[Big Al Clopine]

Yeah, well, he knows the stuff.

[Joe Anderson]

The 33 you want to continue to build. And so here's another thing. If he wants to retire at age 50. Right. So I would just look at, okay, well what is the dollar that you want to spend at age 50? What is the living expenses? He doesn't, it doesn't seem like they spend too much. I think they got their expenses under control. They paid off their house in like four months.

[Big Al Clopine]

Right.

[Joe Anderson]

And then he's just jamming everything into a brokerage account. Yeah, it's all right. You want to retire at age 50, how much money are you spending today? And then it's like, all right, well how much money do you need to bridge the gap from age 50 to probably age 70 when you claim your Social Security, which would be 20 years.

[Big Al Clopine]

Yeah. And make sure you have enough in a brokerage account to age 59 or 60. Yeah, yeah.

[Joe Anderson]

You got a 10 year bridge to get from 50 to 60. So if you're spending $100,000 a year today. Right. So just inflate that until you turn age 50 and then you look. All right, well I need 10 years of that number. And it probably would be best if it was in a brokerage account that I could live off of as I'm having my other retirement accounts grow. That's the easiest way to think about this in regards to numbers and how much money that you should be saving. But I think a better way too is that you want to be diversified. And what we see a lot of times when people retire early is that they drain all of their non retirement assets in that all they have less is retirement accounts that are all taxed at ordinary income rates. So having diversity from a brokerage Roth IRA and a tax deferred account can really control taxes long term. So I think he's on track. I think he's right now over the next five years, just save as much as you possibly can in the brokerage account. Don't overthink it because it's in a brokerage account. It's closer to me. Right. I can grab at it at any time versus a retirement account. Oh, that's long term money. Think of it both as long term money and invested very Similar for growth, but you just probably want to take advantage of some tax techniques along the way. Tax loss harvesting being a little bit more tax efficient. Investments, ETFs just understand kind of distributions from dividends, cap gains that might spit out of retirement or mutual funds.

[Big Al Clopine]

Yeah, I'd also say think about potential 72t election on an IRA at age 50 as a possibility to help bridge that 10 year gap until 59 and a half. Brokerage account is a great way to do it, but the last thing you want to do is what Joe said, which is completely use up your brokerage account and then you get to 59 and a half and it's, it's mostly taxable. So just be careful of that.

[Andi Last]

Only about 1 in 10Americans are living their definition of financial freedom. 54% say that means living debt free, 50% say living comfortably, 32% say financial freedom means not having to work, and 13% define it as being rich. But too many of us fall short of financial freedom because of lack of retirement savings, salary constraints, debt, or unforeseen emergencies. This week on youn Money, you Wealth TV, Joe and Big Al put you on your 11 step path to financial freedom. Find out how to take inventory, invest in yourself, and sustain your financial dreams and goals. Our financial Blueprint tool will help you with that first part taking inventory. Click or tap the financial blueprint link in the episode description, enter your details and you'll get an analysis of your current cash flow, assets and projected spending for retirement, along with three scenarios that'll help you determine your probability of retirement success. Click or tap the links in the episode description to watch your 11 step path to financial freedom on YMYW TV and to calculate your financial blueprint.

[Joe Anderson]

We got Andy in April. Hey, Joe. Big Al. Andy. Per Andy's instructions, my wife and I have three. $366,787,000 saved in a Roth IRA. What?

[Andi Last]

Very specific. All I said was we need how much you've gotten taxable, tax free and tax deferred. And he's given it to us. To the dollar.

[Big Al Clopine]

Wow.

[Joe Anderson]

To the penny here.

[Big Al Clopine]

We need to know what day that was because it's different.

[Joe Anderson]

It's different. Today we got $305,453,453 in a traditional account and $352,543 in a brokerage account for a total of $1,024,783.

[Big Al Clopine]

Yeah, and by the way, you can round. It's okay.

[Andi Last]

Joe does all the time. I'M surprised that he's reading them completely now.

[Joe Anderson]

Six months, seven days. You're old. My wife is 33. Four months, 27 days old. So we do not plan on receiving any money from the Ponzi scheme referred to as Social Security. Oh, wow, here we go. A little political. A little bash. A political bash with a person that's super accurate with his numbers.

[Big Al Clopine]

Right?

[Joe Anderson]

Ponzi scheme. I suppose. Every 30 year old guaranteed has called Social Security a Ponzi scheme. I think I probably did when I was 30.

[Big Al Clopine]

Yeah, I probably did too. And here, here, it's still.

[Joe Anderson]

Here we are I'm, you know, five years later.

[Big Al Clopine]

Five years. Well, you.

[Joe Anderson]

You've grown up quite a bit. Okay. We currently spend $86,000 a year in lip in Knoxville, Tennessee. Oh, okay. I drive a 2012 Subaru and she drives. April drives a 2012 Subaru and I drive a 2014 Jetta.

[Big Al Clopine]

Okay.

[Joe Anderson]

Sure you guys don't live in Colorado? Portland.

[Big Al Clopine]

Portland.

[Joe Anderson]

I drink Heineken and April is pregnant with our first child, so she's not drinking, but she likes seltzers.

[Big Al Clopine]

Okay.

[Joe Anderson]

Yeah, I do like seltzers. Only. Only like Truly White Claw. Can't stand. Can't even drink it. Any other flavors? It just. They all taste the same to me.

[Big Al Clopine]

Really?

[Joe Anderson]

I tried like, Happy Dad. I thought that was kind of cool.

[Big Al Clopine]

Yeah. Because you are a happy dad.

[Joe Anderson]

I am a happy dad.

[Big Al Clopine]

So you think that I was like.

[Joe Anderson]

Yeah, this is kind of like me. I'm gonna have a little happy dad. Yeah, you have two of those. And it's like, nope.

[Big Al Clopine]

Yep. Okay.

[Joe Anderson]

So I could tolerate like the lemonade, the Truly lemonades, or the fruit punches.

[Big Al Clopine]

Okay.

[Joe Anderson]

Anything else? I'm going to Coors Light.

[Big Al Clopine]

I will stick with beers and Mai tais.

[Joe Anderson]

Got it. Okay. All right, so let's see. We're back to April and Andy. We have recently started thinking about how to plan for spending in retirement. We listen to your show. I frequently hear the 4% rule rate is considered safe. One of the strategies we have read about is living off of dividends. My understanding is that the dividend Strategy invests in ETFs, which have higher dividend yields relative to the S&P 500. The investor uses the 3.43 or 4% yield to live off of. And the principal is not eroded due to the stock value increases. This leaves us with the goal of saving 2.1 to 2.9 million to replace our current spending needs. I understand that inflation and having a child will increase our spending, but the previous mentioned funds have dividend growth rates that exceed inflation. My question is, what am I possibly missing? Not accounting for or misunderstanding if the pursuit of dividend investing strategy. I'm always entertained by your show while I'm commuting to work. I appreciate the show and the education resources. You get excited about retirement planning. Thanks. Ending April Parks in Rec reference. Got it.

[Big Al Clopine]

Okay.

[Andi Last]

I haven't watched the show, so I don't know who they are.

[Big Al Clopine]

Oh, well, we've got. You got that on the screen. Okay.

[Joe Anderson]

Yeah, that's Pratt. Chris Pratt. That's the guy from the Avengers.

[Andi Last]

Apparently he's also from Parks and Rec.

[Joe Anderson]

Yeah, Guardians of the Galaxy. You should see him now, man. He's, like, jacked.

[Big Al Clopine]

Yeah, he is. And he.

[Joe Anderson]

Yeah, all right, very cool. April and Andy. So dividend paying stock. So here's the 4% rule is that it's by no means gospel. It helps people determine, in my opinion, how much money that they should have at retirement. So if I'm looking to spend X amount of dollars, you just take those dollars and divide it by 4%. That's going to give you a lump sum. If I want to spend $40,000 in retirement, $40,000 is a million dollars. So $1 million should produce $40,000 of income. But that's a rule of thumb. You don't necessarily want to take 4% out every year because it's going to depend on sequence of return risk. It's going to be dependent on how much tax that you're actually paying, on the distribution, how big of a nest egg that you have. It's going to have a lot of different variations. But the problem is, let's say I have a million dollars. Some people will spend $120,000 a year from that million dollars.

[Big Al Clopine]

Yeah. Which would be a 12%, which would be 12.

[Joe Anderson]

Because a 4% is like, all right, this is a safe withdrawal rate. But in my opinion, you want to have a more dynamic strategy as you're creating income. But when you're spitballing to see, hey, are you close? Do you have enough money? Let's just divide it by 4% or times that number by 25. That's going to give you a ballpark number to say, all right, well, here, if you have a million dollars, $40,000 is probably a good estimate of how much income that you could probably take. The second question he's asking is that, okay, well, what should that portfolio look like now that I got my million dollars? Or in his case, 2.1 or 2 point, how should the portfolio look Should I buy dividend paying stocks and live off the dividend or should I do something different? So I think that's really the question at hand.

[Big Al Clopine]

Yeah, I think that is the question. And we've heard this a lot, and it's not necessarily a bad strategy. But here's something you might want to think about, and that is companies, public companies in the United States, their goal is to make profits. And some of those pay dividends large, some medium, some small. Some don't pay any dividends at all. And that's not reflective necessarily of their profit. Like Berkshire Hathaway, for example, Joe. They don't pay any dividends and they're very profitable. And so what you do in a case like that when you have a company stock that doesn't pay big dividends is you just periodically sell chunks of it. That's called a synthetic dividend. You create your own dividend because if you get high dividends from stocks that you don't need now you're paying taxes on money you don't really need. If you have companies that pay lower dividends, you can create the income you need by selling the shares when you need it and thereby you're getting enough to cover your needs. So that's one thing. My second quick point is this. If you're only looking at high dividend paying stocks, you're kind of missing out on a lot of companies, whether they be domestic and international. And we think you do better with a full globally diversified portfolio.

[Joe Anderson]

I absolutely love dividend paying stocks. Right. But I love a lot of other stocks too. So I want to own these dividend paying stocks, but I want to own more. Here's a couple of things that you might not understand too, is that when a company issues a dividend, the stock price lowers by the dividend.

[Big Al Clopine]

Yeah. A lot of people don't realize it.

[Joe Anderson]

For instance, let's say a company is worth $10 a share and they give a dollar dividend. The share price, as soon as they distribute the dividend goes to $9. So it's the same as if you sell a share of a stock that doesn't give a dividend or doesn't produce a dividend. And people are like, what are you talking about? There's no way that happens. It's like, yes, that's what happens. They're distributing capital or cash from their organization or company. So the share price measures whatever that dividend is and it adjusts the share price on X dividend date. But what happens sometimes is that the stock price will exceed the amount of the dividend in the day that it happens. And they're like, well know my stock price is the same or it's low or whatever. But no, how it works is the share price will fall as the same as the dividend.

[Big Al Clopine]

Yeah, I mean how many times have we heard that argument? That's just not how it goes.

[Joe Anderson]

I just want high dividend paying stocks because I'm just going to live off the dividend and the principal will stay constant.

[Big Al Clopine]

Yeah. And so by definition the stock price goes down and the stock price goes down. If you don't understand this, you might just think if you're checking it that day, you might think, oh, I guess the market's down today, that's why, because of the dividend.

[Joe Anderson]

Right.

[Big Al Clopine]

Or if your stock went up on an ex dividend date, it's because the market went up more than the dividend was. So it's just realize that whether you get the dividend or not doesn't really necessarily affect whether it's a good investment or not.

[Joe Anderson]

Yeah, good point. But I think there's a lot of really good companies that offer really good dividends. But to Al's point from a tax perspective is that you can control your dividends too. So in my example, if the company has a $10 share price and it's given a dollar dividend, so you want to live of that dollar dividend, the share price goes to $9. Let's say you have another stock that doesn't give a dividend and you don't necessarily need the income, so you have a $10 stock, it doesn't give the dividend. Guess what, that's fine. It stays at $10. So you didn't get the dollar in hand, but you didn't necessarily need the dollar. So you're not getting tax on that dollar. Or if you want the dollar, you can create that dollar at any moment in time by selling one share and taking that dollar. Now of course that stock price or that stock is going to be less $1, but it's the same as a dividend paying stock. So you want to take a look at the total expected return of the overall asset class, overall, the overall company or sector, whatever. If you're investing solely in dividend paying stocks, it's a small universe of the entire stock universe. And I think that might be maybe a little bit too concentrated, a little bit too risky. And I think a lot of individual investors, they hear dividend paying stocks and so they kind of crowd that marketplace. Marketplace. Anyway. So you look at some of these ETFs that are dividend paying stocks, retirees say, hey, I want dividends. So they're buying these ETFs and that could be boosting up the share price of those particular, you know, asset classes as well. So. All right, cool. We'll beat that one to death. Let's move on. We got. Gentlemen, Jack and Sally here. Just discovered your show and love it. We get a lot of people that just discover the show and they love it. And then we get people that listen to about two months and they hate it.

[Big Al Clopine]

We've had a few of those. I tried, I listened to a year ago. I thought I'd try it again. It's just as bad.

[Joe Anderson]

It's so bad. All right, so I'm glad that you just discovered it. Stick around. It only gets better. It's like fine wine. I could smash some cab. And my wife loves a nice little Pinot. Little cab and Pinot group here. Yeah. All right. We live in the beautiful hills of western North Carolina with our 13 year old daughter and two little pups. By the way, I drive an old Tacoma. My wife drives an old Dodge. I have two questions. Okay. One, is it realistic to think I could retire somewhere between 55 and 60 if I'm running out of juice for my job, Getting sick of it. Let's get the hell out. What's house paid off? Should I try to max out all Roth options right now or should I just focus on converting my existing traditional IRA to a Roth? I'm a teacher, so I'll try to fill up that Roth 401 and Roth 457 after the house is paid off. Or should I focus on conversions? Wag is what that is. What new Wild ass guess. Wild ass guess.

[Big Al Clopine]

I would have had no idea.

[Joe Anderson]

I had to look it up. We'd like to spend about $10,000 a month in retirement after the house is paid off. My daughter has a little 529 plan she will receive from my GI bill for college. You should choose to go with my pension. I think we're doing well as long as I stay alive. I'm actually concerned about my wife's lifestyle once I'm gone. What? I'm hoping to live a long time though. Well, yeah, me too. What is it like? We get to a certain age and we always think we're going to die.

[Big Al Clopine]

Well, we have to start thinking that way. And that's getting there. About your age.

[Andi Last]

Em's fighting words, Al.

[Joe Anderson]

Hey now. Hey now.

[Big Al Clopine]

I said about.

[Joe Anderson]

Got it. We'll need new cars and a new roof in the next five to ten years. Here's the details. Jack is 52, Sally's 51. Current pension, $100,000. When I pass, Sally gets $40,000. Current salary, $80,000. Maybe some scraps from Social Security and teacher's pension once I turn 62. We got checking brokerage, Roth IRAs, traditional IRAs, and so on. So a total of tax deferred accounts of $500,000, taxable accounts of what, $100,000. And tax free, Roth is $1,400,000, right?

[Big Al Clopine]

Yeah, about 1,400,000. Yep.

[Joe Anderson]

All right. Yeah, man. You're doing an job pension of $100,000. He wants to spend $10,000 a month. You're good.

[Big Al Clopine]

Yeah. Agreed.

[Joe Anderson]

Yeah. You could retire at $55,000. I get it. All right, so you're worried about your wife spending once you're dead. Jack. So then Sally's going to spend now $200,000, but the pension is not going to come up with $100,000. It's only going to give her 6,000.

[Big Al Clopine]

Yeah. Or 40. 40%.

[Joe Anderson]

Oh, 40%. Okay.

[Big Al Clopine]

Yeah, I think, I think this is fine, too. I, if, if, if it were me, I would try to get a better survivor benefit for my wife. That's.

[Joe Anderson]

It's already picked, selected. It's done.

[Big Al Clopine]

If you can change it. I don't. I think that's as you think.

[Joe Anderson]

That's a one CI bill, tsp. You got a tsp, ira, current pension.

[Big Al Clopine]

Well, it's.

[Joe Anderson]

I wonder where the pension's from. He's an employer now.

[Big Al Clopine]

He's a teacher. Right.

[Joe Anderson]

Oh, is he a teacher. Okay, so North Carolina Teacher System.

[Big Al Clopine]

Yeah. I mean, we don't know.

[Joe Anderson]

So instead of $100,000 pension, probably go $80,000 and give her $80,000.

[Big Al Clopine]

That's what I would do. Yeah, especially because you got the resources otherwise.

[Joe Anderson]

Right. Well, let's just see. Let's do the math. Okay, so he wants to spend. That's $10,000, $120,000 a year. And he wants. They want to retire in five years or three years.

[Big Al Clopine]

Well, he's 52, and he's thinking somewhere between 55 and 60. Call it five years from now.

[Joe Anderson]

Okay, so $120,000. All right, so let's just say five years from now, let's say 3.5% inflation. So that 120 is going to turn to 142. Let's just assume that then he passes away and she only gets 40% of her pension. So that's $40,000. So she needs to come up with $100,000 to live off of, given the same lifestyle with inflation. Right with me.

[Big Al Clopine]

I'm with you.

[Joe Anderson]

So they need about $2.5 million. They got $2 million today.

[Big Al Clopine]

Yeah.

[Joe Anderson]

I think even with the lower pension amount, if they're going to work for another three years, depending on, of course, what the market does, it's pretty close.

[Big Al Clopine]

Yeah, I agree. That's what I would do, though, if I could. That's the way I would think about it.

[Joe Anderson]

So he's not even talking about. That's the pension. So he's not even including Social Security, like some scraps from the Ponzi scheme.

[Big Al Clopine]

So I guess he's assuming it's not that much because he's a teacher.

[Joe Anderson]

Sure. Okay. Yeah.

[Big Al Clopine]

But yeah, I think it looks good. I think it looks really good.

[Joe Anderson]

Yeah. A ton of Roth money. I mean, the taxes are going to be almost nothing on any type of distributions. The RMDs are going to be nice. I think he's done an awesome job. I like this.

[Big Al Clopine]

Yep.

[Joe Anderson]

I don't know. I don't know. Is it realistic to think I can retire? Yes. Once the house is paid off, Should I try to max out more Roth options? Yes.

[Big Al Clopine]

So, Joe, here's an example of someone that will be in a higher than 4% distribution rate when they retire, but it's only for a handful of years, and then all of a sudden you got $100,000 coming in. So just think about that. Right? So, yeah, you can retire with a more than a 4% distribution rate if in just a few years you've got 100,000 pension or whatever the number is. So 4%, as we talked about earlier in the show, is just kind of a general guideline to tell you how much money you need to save for in retirement. And that's it.

[Andi Last]

Hey, Jack and Sally. Our Withdrawal Strategy Guide will tell you more about sustainable distribution rates, optimizing from which accounts you make your withdrawals and when the impact of volatility and inflation on your retirement spend down, planning tax saving strategies to make your money last longer in retirement and more. And Andy In April, our 10 Steps to Improve Investing Success contains key investing principles that will broaden your investment universe and help control risk, which can lead to higher returns in your portfolio and retiring with more wealth. Click or tap the links in the episode description and grab your copies of both the Withdrawal strategy guide and 10 steps to improve Investing Success, all free, all courtesy of your Money, you, wealth and pure financial advisors.

[Joe Anderson]

We got Don from Iowa. Does an SMA make sense for my taxable account? Hi, Joe. Big Al, Andy. I love the show. I've been listening for about five years, usually while exercising. I'm a 40 year old with income of 300,000. Spice is 38, yo. He stays in the home to manage the household with the kids. We just, we have just over a million dollars in investable assets and savings. 330,000, our traditional 401 or 403. 55 in the Roth, 58 in the Roth. Governmental 457, 170. Just say Roths. Jesus. 178,000 in our backdoor Roths. Just labeling every Roth that he has. Yeah, the backdoor Roth. We got the governmental Roth, we got the 403B Roth. In case we got the traditional Roth. It doesn't just. It's all Roth, it's one account. It's all good. $410,000 in a taxable account. I have a pension with a cola, $100,000 at $65,000. We are invested overall in a globally diversified low cost index portfolio. I'd like to have the option to retire at 55 with an income from a portfolio of $170,000 in today's dollar. I was recommended to over a few year transition my taxable account to an SMA for tax purposes and hopefully more growth. Okay, I'd love to hear your spitball on this. Thanks. Keep up the good work. Cheers. Don. Let me digest this.

[Big Al Clopine]

Okay, well, first explain what an SMA is.

[Joe Anderson]

Separate managed account. So he's 40 years old, he's got income of $300,000 and they have a total of. I mean, I get confused with this Roth, that Roth, this Roth, backdoor Roth, whatever.

[Big Al Clopine]

It's about a million.

[Joe Anderson]

Okay, he's got $1 million and he's 40 and 38. He wants to retire at 65 because he's going to have $100,000 cola. Or he wants to retire when 55.

[Big Al Clopine]

55.

[Joe Anderson]

All right, so he needs to bridge 55 to 65 and live off of $100,000, which would be. Or he wants income of $170,000 in today's dollars.

[Big Al Clopine]

So that's going to be a pretty hefty sum.

[Joe Anderson]

What the hell. So, all right, so 100, first of.

[Big Al Clopine]

All, you got to adjust for inflation. But then whatever you get, call it 250. Divide by 0.04. What's.

[Joe Anderson]

Okay, $150,000 is what he wants to spend. So 15 years, 3.5 future value. It's $284,000.

[Big Al Clopine]

$280,000. Okay. All right, what's 280,000?

[Joe Anderson]

$7,100,000.

[Big Al Clopine]

Yeah, so that's quite a hefty.

[Joe Anderson]

So can that million turn to $7,100,000? That's going to help you create the $170,000. Unless he. I don't think he needs that much.

[Big Al Clopine]

I'm seeing he doesn't. Because of the pension.

[Joe Anderson]

Yeah, because of the pension. So $70,000, let's do this. $70,400,000. So that's $1,700,000. So he needs $1,700,000 when he turns 65, he wants to spend $170,000 in today's dollars.

[Big Al Clopine]

Right. And you distribute $280,000.

[Joe Anderson]

So that's $280,000 times 10. That's $2,800,000 of income that needs to be produced over that 10 year time period. 1,700,000. All right, so he needs four and a half. He's got a million. He's got. Yeah, I think he can do that.

[Big Al Clopine]

Yeah. With the way he saves, probably.

[Joe Anderson]

So the sma, don't worry, the SMA again, is just a product. Like someone wants dividend paying stocks. And SMA is just a separate managed account. So instead of buying a mutual fund, an individual stock, or you could buy an etf, or you could buy separate managed account. They're all good and they're all bad, really, depending on what you're buying and what's the strategy, what are the costs, what are the fees? Do you know what the objectives are? Is it large cap, is it small, is it bonds? I mean, I really don't know what the SMA is. But an SMA is just a separate managed account. So that's like, hey, someone said I should get into a mutual fund. Is that a good investment? Well, is it a loaded mutual fund that's actively traded with a 2.5% internal fee? I would say absolutely not. Or is it an index fund that's covering the entire US Market? I would say yeah, that's pretty good. So the product itself, it could be really good or really bad. It's just really understanding exactly what you're investing in I think is the more important question.

[Big Al Clopine]

I would agree with that. And SMA is another manager that's managing assets for you and picking the stocks for you. I personally like direct indexing better. It's still a source who's picking certain stocks, but they're trying to mimic an index. And so Instead of the whims of someone thinking, okay, let's pick this one, let's pick that one. I kind of, me personally, I'm a little more comfortable with trying to mimic an index. The nice thing about direct indexing, you actually own the stock shares and you can tax less harvest and you can manage your account more easily that way. But you know, Joe, probably for Most people just ETFs and index funds globally, diversified is probably fine.

[Joe Anderson]

Yeah, SMAs are fine too. We offer SMEs to our clients.

[Big Al Clopine]

Yeah.

[Joe Anderson]

So it could be passive, it could be active, could be tax managed. It could be anything that you want. So I have no problem with the sma. I just don't know what you, what the objective is.

[Big Al Clopine]

Well, he wants to, he wants to get the, whatever 5 million or whatever the number is.

[Joe Anderson]

But it's like, okay, well here I would love an SMA for tax purposes and hopefully more growth. So what's, how is it going to give them tax purposes? Is it all right, the SMA is going to do tax loss harvesting? Is it? It's in his brokerage account, I'm assuming.

[Big Al Clopine]

Yeah, I think that's what he said.

[Joe Anderson]

So he's got $410,000 in the taxable account.

[Big Al Clopine]

Yep. Yep.

[Joe Anderson]

I don't know. In some cases, if it's actively traded, it's not going to be tax efficient. You're probably going to get more income and interest and dividends on the tax return.

[Big Al Clopine]

Probably. Yep. So anyway, I guess I need a.

[Joe Anderson]

Little bit more information, but he's doing a hell of a job. What Don needs to do is figure out a savings strategy and don't worry too much about the product. I agree with you, Al. I think he'd be just fine. Keep him with his low cost diversified index funds. That's probably going to produce a very good return for you. It's going to be tax efficient. What I need to understand is that, man, if you want to spend $170,000 per year from 55 to 65, that's a big nut to crack. And you want to retire in 15 years. So it's a saving strategy. It's understanding how much money that you should be saving on an ongoing basis and where you should be saving that from, either a taxable, tax free or tax deferred. And then from there, then that would be determined. What target rate of return should I be thinking about as I'm accumulating the wealth up to that time point? Is it 6%, 8%, 10%? And then from there create the diversified portfolio that you need, and then from there, then you pick the product. Should I go into sma? Should I go into mutual funds? Should I go into etf? Should I do my own direct index? Should I buy an individual stock? So I think there's a lot more steps that I would take if I were you before I jump into the product. It sounds like he's getting pitched a product by a broker or by maybe a buddy or whatever. Hey, I got this sma. It's going to be really tax efficient and give you more growth. Hey, that sounds really good, but I think there's more planning. People put the cart in front of the horse in most cases.

[Big Al Clopine]

Yeah. And I would say. And I'll just do a little disclaimer. So in a case like this where you're talking about big numbers and a lot of years, don't take our back of the envelope analysis. Get some real analysis done on this and figure out what your goals really are, what you really want to spend. The fact that you got a big pension at age 65 means that you can have a higher than 4% distribution rate for probably 10 years like you want to. It's just that you're gonna have to map all this out to figure it out. I agree with you, Joe. It's just a matter of figuring out what the goals are. And then you start working backwards. What are the investments to achieve those goals? And then you can figure out ETFs, mutual funds, SMAs, direct indexing, however you want to do it. But start with the planning first.

[Joe Anderson]

Well, thank you everyone for your questions. That's it. I got no more gas on the table.

[Big Al Clopine]

Yeah, it was. I think you did a great job, particularly considering all that you did today already.

[Joe Anderson]

Thank you, Al, Andy, thank you very much. Wonderful job. We'll see you guys next week. Show's Count you'd Money youy Want.

[Andi Last]

Tune in next week as Joe and Big Al spitball on when Ron and Veronica can slow down on saving for retirement, how Scott can bridge the retirement income gap between ages 55 and 57, whether Big Juan and Frank and Jane can retire early, and how Juan can fund college. It may seem on the surface like everyone that writes into YMYW has similar questions about when they can retire, how they should invest, and whether to do Roth conversions. Of course, it may seem like just getting a spitball is all you need, but notice how everyone has a different story, different needs, different goals. And a spitball is on average, what, six, seven minutes? Including Joe mispronouncing your name and talking about your cars and your drinks. That's not enough to base your entire future on. That's why scheduling an in depth financial assessment at Pure Financial Advisors really should be your next step. It's free, just like a spitball, and you can even participate from home, just like a spitball. But a financial assessment is a one on one with an experienced professional on Joe and Big Al's team at Pure. They'll review every aspect of your finances with you. They'll work with you to craft a retirement plan that's tailored specifically to your needs, your goals, your risk tolerance. Click or tap the financial assessment link in the episode description and schedule yours today. Future youe Deserves It. 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.