Anonymous wants to retire early and often. They’re going overseas, where they’ll make their annual salary within six months. Where should they put their extra income?
Anonymous also wants to know: how can they find a financial advisor they can actually trust?
Another anonymous listener wants to know – is it possible to spend more while minimizing taxes in early retirement?
JuanCarlos asks: is $20,000 too little to invest with a financial advisor?
Angela is wondering how to create a Roth IRA account for a teenager.
Rose is thinking about switching from mutual funds to index funds because it means encountering less fees, but her and her husband are in their 60s. Does this make sense?
Ari has $700,000 to invest in a taxable brokerage account. He wants to know if a 90 percent total stock market index and 10 percent bonds is a good asset allocation.
Dave and his wife want to use their defined benefit plans as their primary income stream in retirement, and supplement with Roth and 457 incomes. Where else should they be saving?
Myself and former financial planner Joe Saul-Sehy answer these questions on today’s episode.
Enjoy!
Rose asks (at 3:00):
My husband and I are in our 60s and retired. We have a financial consultant that charges a one percent annual fee for a portfolio of about $1M. We have a few mutual funds in this account. At this point, is it worth it building a portfolio with index funds?
Our financial consultant says index funds are riskier than mutual funds, because with index funds, you own the whole market, so if the market goes down, so does your portfolio.
Following your Week 23 advice, I checked the fees on our mutual funds, and only three out of 11 have expense ratios of 0.50 percent or less. Additionally, my small Roth IRA has three funds with expense ratios of about one percent.
I just found out that Vanguard charges .03 percent for management fees. I’m wondering if it’s worth transferring my account to Vanguard to lessen the fees and simplify my portfolio. What do you think?
JuanCarlos asks (at 43:44):
I have $20,000 in cash for future investments, so I’ve been looking for a CPA or financial advisor for help. However, when I let them know that I have $20,000 to invest, they seem uninterested. Am I being too eager in looking for a financial advisor? Should I be seeking someone with a different title? How will I know when I’ve found the right advisor for me?
Anonymous asks (at 50:50):
How can I spend more while minimizing taxes in early retirement?
I was fortunate enough to retire early at age 46 with a net worth of $3M. Six years later, my net worth is $4M. I’m single and I have no heirs. While I live comfortably now, my simulation suggests that I can spend another $6,000/month based on life expectancy. The downside is that doing so would require withdrawals from tax advantaged accounts. I’m 52 and have no desire to be the richest man in the graveyard.
I’ve considered 72-T withdrawals and a Roth conversion ladder, but these options would push my income higher and eliminate my ACA subsidy. I like my home – it’s paid for, and I don’t want to sell. Therefore, I don’t see a good option to tap the equity.
I live on approximately $20,000 of long-term capital gains and dividends, and withdraw an additional $35,000/year from Roth IRA contributions. I’m in a minimal tax bracket and qualify for the full Obamacare subsidy. I have additional Roth contributions and enough money in a taxable account to maintain my current spend rate until 59.5 years old, but not enough to increase my spend up to what the simulation suggests that I can safely withdraw.
How do I most tax-efficiently get an additional $6,000/month?
Ari asks (at 34:44):
I’m 43 years old with no children. I’m getting ready to sell a house that I co-own with my brother. I will have about $700,000 from the sale, which will be tax-free due to a step-up basis and a $250,000 gain exclusion.
I plan to put the $700,000 in a taxable brokerage account and draw down on 3.5 percent annually. Do you think an asset allocation of 90 percent total stock market index and 10 percent bonds is a good asset allocation for what I plan to do?
Here’s some extra information: I already have $80,000 in a Roth IRA invested 100 percent in a total stock market index, and I plan to continue working part-time on my side business that brings in around $20,000/year. Additionally, I plan on being a renter versus buying a house going forward.
Dave asks (at 25:55):
My wife and I are 38, live in California, and earn about $95,000 net annually. We have no debt other than our mortgage, and a savings account with $32,000 in it.
I work for a county government with a three percent at 60 defined benefit plan, and my wife works for the state with a defined benefit plan as well. We started our jobs at age 22 and want to stay until retirement.
We have Roth IRAs with a combined total of $43,000, and we contribute $11,000/year to the Roth. I also have a 457b plan with $52,000 in the account and contribute $7,200/year.
We want to use our defined benefit plans as our primary income stream in retirement, and supplement with Roth and 457 incomes. Where should we go next in retirement planning? What else should we be saving/investing in?
Anonymous asks (at 57:48):
I have a two-part question. The first is: how can I find a financial advisor that I trust?
The second: I had an opportunity at work to go overseas, and I’ll be making my annual salary within a short six months. What should I do with the extra income that I’m getting?
Here are some details: I’m 25, I make roughly $70,000/year, I have about $40,000 in debt, and I have $20,000 in my TSP. My goal is to retire early and often, and I’d like my investments to be as hands-off as possible.
Angela asks (at 1:02:51):
Do you have any advice for someone looking to start some type of IRA for a teenager who is just starting to work? I’m looking for feedback on specific companies or Roth accounts that can be opened for a child to take advantage of how much time they have until retirement.
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Kat
I think Joe is forgetting that one can withdraw from 457 accounts at any time without penalty, meaning that Dave in the Central Valley doesn’t necessarily have to open a taxable brokerage account in order to be able to access retirement funds prior to traditional retirement age.
Stephen
I agree with Paula. The only ndex find will outperform the majority of the time.
Joe is taking the person who flipped a coin 10 times and got heads 7 times. Then claiming that that is evidence of skill, and of the future results.
Jeff Beranek
Oh Paula, I loved your argument with Joe over active versus passive and I am so on your side! Joe is great, but on this I think he is wrong. The evidence shows that there is no reliable way to predict which fund will outperform in the future. In fact, the evidence suggests that the best way to ensure success would be to select a bunch of the worst performing funds, because they are more likely to recover towards the mean market performance – but who has the guts to do that? I’d prefer to buy the market (in the chosen access class we are discussing) because I don’t claim to have the edge, and I don’t think I have the ability to find someone else who has the edge, and just because someone has previously done well is not convincing enough evidence to suggest it will continue. Take the evidence of Neil Woodford, star UK manager who for a long time could do no wrong, but has now crashed and burned. In hindsight some say that we could have seen it coming because he changed his style of investing. But people said he was great because he was contrarian! I do admit that I’m making an active decision to tilt my portfolio more towards international stocks than a global market cap tracker, but I do it using passive funds, not active 😉
Mr. Refined
This is one of my favorite episodes.
Paula, thanks for giving Joe enough mic to develop his point. This is what makes you an awesome interviewer. Differing opinions is what makes this a valuable conversation.
Joe, I completely hear your point! Thank you for speaking up! I would rather bet on “A” students and a Probowl quarterback. I am familiar with the statistics of mean reversion but you have a solid point. We don’t date/marry average people, we don’t hire average employees, we don’t buy below average real estate, why should we settle for average investments? Why accept the “C” and below students if you don’t have to?
I don’t understand the argument in FIRE to forego 3% alpha to save on a 1% fee? Where is the logic in that?
“You cannot consistently have a QB that wins every single Superbowl.” True, but that is not the goal. There is a significantly higher probability that Payton Manning or Tom Brady will win. I don’t need “every single” win, I just need more wins than the market. Warren Buffet was a crappy investor at 8 years old and arguably will be through his 90’s. But there are a lot of years between. Throughout the prime of his career, he is a far better probability than the market. Same for Peter Lynch, Ben Grahm, Joel Greenblatt, Payton manning, etc. The law of averages only applies given enough time. Superbowls seasons happen when you hire great QB’s in their prime. Harvest in the right season, before the mean reversion.
Statistically, ~4% of the best stocks produce the majority of returns in a portfolio. You can’t dismiss the outliers. That is “cheery picking” them out. They are part of the dataset.
David W
Enjoying the show, Paula. Joe’s argument in favor of active managed funds made me think of the bet Warren Buffett had with a hedge fund manager. The hedge fund manager picked five of the best funds (I.e. “A” students) and still couldn’t beat the S&P Index fund. I love his passion for a flawed argument but he did lose a little credibility in my book.
Rikki Racela
I don’t know man, I still agree with Paula and not Joe. I love the football analogy! Joe has such a financial adviser mentality when going for higher expense ratio funds, but again it’s not like football- even Tom Brady hasn’t won half the superbowls over the past decade (although has come close). And football is a very skill type game and past performance does indicate possibility of future performance, whereas market investing doesn’t really have skills that will reward you given the efficiency of the market. And given the expense ratios with an active vs. a passive fund, it’s as if Tom Brady is playing with missing a lineman! The active fund Tom Brady will have to do that much better than it’s index quarterback on the other team. And then count in the tax implications of an active fund, it’s as if Tom Brady only gets 4 points for every touchdown rather than 6 (depending on the investor’s tax bracket).
Joe, I would have liked to hear the overall gain of this active fund compared to a passive index when expense ratio and taxes are taken into account.
And I don’t like that A student argument- I’m sure many if not all fund managers (I hope) were A student’s in business school.
Beth Agnello
Hi Paula, I was so glad you called Joe on his analogy between students and funds–you’re exactly right, they aren’t the same.
I was disappointed that you didn’t give Juan Carlos (and even anonymous) a bigger hand in finding a financial planner who works on an hourly basis. Planners who work on an hourly or project basis are a tiny subset of the fee-only world and may not be easy to find. Those of us with the Garrett Planning Network (www.garrettplanningnetwork.com) are fiduciaries who make financial planning accessible by not having asset size requirements or requiring long-term commitments (though we do thrive on building relationships with our clients). Many of us publish our rates on our websites and give firm quotes before an engagement starts. Please help get the word out!
Jon
Paula,
Jack Boyle would have been proud of your data driven argument in favor of low expense index funds / etfs vs. high expense ratio active funds. As Mr. Bogle liked to say (paraphrasing here) “Don’t try and find the needle in the haystack – just buy the haystack!”. Keep fighting the good fight!