Pod Insights The Clark Howard Podcast 01.07.24 Ask An Advisor With Wes Moss - 5 Keys To Successful Investing About this episode Saving for retirement is largely our own responsibility as individuals. As we live longer, we have a lot of time in retirement to prepare for. Plus, events in the world can be complicated which can make investing a nerve-wracking decision. Fortunately, there are basic core pillars and strategies that successful investors share. In this episode of Ask an Advisor, fee-only fiduciary financial advisor Wes Moss breaks down the five fundamental keys of successful investors to help you better navigate the path to achieving financial freedom and reaching your retirement goals. In the second half of the show, Wes takes a deep dive into one of the pillars: planning. Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the January 7, 2025, Ask an Advisor episode. Submit your questions at clark.com/ask. We hope you enjoy the first of our weekly Ask An Advisor episodes, with Christa and Wes going deeper on investing and retirement savings. Let us know what you think in the comments! Learn more about Wes, our newest member of Team Clark: Capital Investment Advisors Wes Moss, CFP® Learn more about your ad choices: megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices
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1:05 Speaker 02 Welcome to Ask an Advisor. This is a weekly episode we're doing of The Clark Howard Show where we go deeper on all things investing. I'm Krista DePias and I am here with Wes Moss, who is now officially a member of Team Clark. Welcome, Wes.
1:21 Speaker 03 Great to be here. Thank you, Krista.
1:23 Speaker 02 And you're a fee-only fiduciary financial advisor. Clark and I have known for years. And this is going to be kind of similar to the regular episodes of The Clark Howard Show where you're going to hit on a couple of topics and we've got some investing questions for you from the audience. And if you want to ask Wes a question or Clark a question, you can go to Clark.com/ask. But somebody just wandered in from off the street on his day off, so I'm going to get out of here for a second.
1:49 Speaker 03 Oh, you're leaving?
1:51 Speaker 04 Clark, it's supposed to be your day off.
1:52 Speaker 03 Hey, it's great to see you. But I'm so excited about this. I think this is absolutely a great opportunity because you know more about investing in your pinky than I do in my whole body.
2:05 Speaker 04 I don't know if that's true, but...
2:07 Speaker 03 And we get so many investing questions, which I think about my career going back to the 1980s. I didn't used to receive an investment question at all. I mean, when I started in broadcast, people still had pensions. Nobody knew what an IRA was or 401K. Nobody knew what that was. So, things have changed so much with this personal responsibility for people's own well-being instead of it being a collective thing through an employer or through a pension they might have from government. So, it's a whole different era we live in. And I realize there are questions people are asking me that I need us to be able to go deeper on, and that's why you're here.
2:51 Speaker 03 What are you thinking you're going to start with today?
2:53 Speaker 04 Well, first of all, just to kind of take that a step further, not only has the pendulum shifted towards our responsibility, right? From the company saying, "Now, we're going to take care of you," to, "Hey, no, you've got to take care of yourself in retirement." So, that's been a huge shift over the last 30 years. And just longevity in retirement in general. So, I was looking at a pie chart of the amount of time we spend in retirement in 1970 versus today. We spent about 10% of our lives back then in the 70s, not that long ago. And now, we spend about 30% of our lives in retirement. So, we've got a lot of time we need to be planning for. So, I think what I wanted to do today is the world is always so complicated, Clark.
3:36 Speaker 04 There's always so much uncertainty in markets, and it's a nerve-wracking thing for a lot of people. It's a big responsibility. So, I wanted to go through, I really have five fundamental, there's five fundamental keys to being a successful investor, and I wanted to go through those five today and then maybe expand on a couple of them. So, I think that's a great place to start.
3:55 Speaker 03 All right. Well, I'm all ears. Can't wait to hear.
3:58 Speaker 04 Enjoy your day off.
4:00 Speaker 03 Thank you.
4:01 Speaker 02 That was super fun. I'm so glad Clark could come in. That was awesome. His hair looks a little different than it does on show days. It's so funny.
4:08 Speaker 04 Well, I hope he's enjoying his day off, and I'm glad to be here to help.
4:13 Speaker 02 Yeah.
4:13 Speaker 04 We want to start with kind of this five, what I think are really important keys to investment success.
4:19 Speaker 02 Yeah, let's dive in.
4:20 Speaker 04 So, first of all, the world has gotten more complicated, and we've got a plan for Really long periods of time, 10, 20, maybe 30, ideally 30 years. In order to simplify how we think about this, a long journey we've got, we've got to go on. You've got to have some pillars or some corners to stick to. So here, here are my five that I've seen work for many decades now. And I think they're a really good starting place fundamentally to, to remember. So the, the first one, these are keys to being a successful investor and keys to having a successful retirement and being able to do the things you would like to do for as many years as you would like to do. So financial freedom in retirement and beyond the financial part of this, and we'll talk about this in other episodes.
5:03 Speaker 04 A huge believer in having a, also a happy retirement. And that's a whole nother layer that we'll talk about after we get to investing. So here are the five things that we'll talk just a little bit about each one. The first one I call stocks mostly. The second one is that we've got as a, as an investor, we have to have massive diversification. It is something again, we're, we're able to do today better than we've ever been able to do. Number three is patience and longevity. And we've got to be able to be in the game of investing for a really, really long period of time. Number four on the list is investing is both easier and harder today than it's ever been. And we need to figure out a way to be able to avoid or ignore the headlines to some extent.
5:49 Speaker 04 And then really the last one is all about planning. What kind of plan do you have? Because if you have no plan, you're going to be in trouble no matter what. Investing is already hard enough. So we want to have some level of plan. But let's start with stocks mostly. When I say stocks mostly, we know that over time, the, the best elixir to fight against inflation is owning equities. Right? Not only have stock prices, if we're looking at the S and P 500 grown at on average, depending on the time period you look at, let's call it 10% on average over time. The last 10 years have been even higher than that. But let's say 10%. That is way above inflation. And that is what we're trying to do here is being able to make our money and our purchasing power.
6:34 Speaker 04 Last. So remember mathematically, if we make 10% a year, that means our money doubles every, call it seven to seven and a half years. So that's, that in itself is powerful. However, not everybody can have 100% in stocks just because of the volatility of it, particularly as your balances get higher and higher and you get closer to retirement. A five or 10% move in stock values can be jarring for folks. So when I say stocks mostly, even though I think that's one of our best long-term inflation fighters, is that we want to have some level of what we, I call dry powder, which is just safety assets. This can be bonds, it can be treasuries, it can be, money markets pay a fair amount right now, four to 5%. So we know
7:17 Speaker 04 that if we have some dry powder, it allows us psychologically to deal with the ups and downs of stocks. So the dry powder part of this is that ideally, and you don't have to do this right away, but as you get closer to retirement, if you look at your overall allocation, you may want to have something like three years' worth of dry powder when it comes to spending. So if you're spending 50 a year, 50,000 a year, times three is 150. So of the portfolio, I think it makes sense to have about three years' worth of dry powder. So on a million dollars, that'd be 15%. At $500,000, three years of spending would be closer to 30%. So that's stocks mostly. The
7:58 Speaker 04 second piece here is massive diversification. The good news here is that in any given ETF, when we look some of the broad market ETFs, the S and P 500, as an example, has 500 companies. The total, many total stock market indexes have three or 4,000 stocks in them. So we can get diversification in a really big way, better than ever today. The third piece here, again, these are all almost equally important. You almost have to have all five of them for the whole journey to really work, is patience and longevity. And if we think about we're constantly, you cannot avoid
8:38 Speaker 04 Hearing about the price of gold, or the price of Bitcoin, or the price of the best stock that's performing, or what has done really well this month. So we're always getting pulled to do something else, because there's almost always, in fact, I would say, there's always some investment that's doing better than the investments you have. And that pulls us as investors, just humans, we're humans. We want to do the best we can. So we're often pulled into something that has already done well. And we abandon what can be a tried and true strategy. And we all turn into a guy we all know. His name is Fomo Freddy. He's the guy at the cocktail party that always has done better with his investments than
9:22 Speaker 04 you. Your 401k, it's been a great year, it's up 20%. Well, Fomo Freddy's been in Bitcoin all year, and he's up 100%. So there's always something better. And we, not only do we not want to be Fomo Freddy, we want to avoid Fomo Freddy at the cocktail party, because he's going to always make us feel like we're missing out.
9:39 Speaker 02 Yeah, plus he sounds annoying.
9:41 Speaker 04 He's the worst. We get cornered by Fomo Freddy. The next piece of this, and this to some extent contributes to Fomo Freddy, is that we want to, investing is both easier and harder than it's ever been. It's easier because there's low-cost products, and there's thousands of them to choose from. So that makes things easier than the 1980s, like Clark was talking about earlier today. And there's all of this information that's out there that also makes things somewhat easier, but it also makes it harder, because you're pulled in all these different directions. And then the headlines of the world about what is about to go wrong, or what is currently going wrong, that permeates to everything. So it makes it really hard for stock investors, because you can always make a case that, hey, the world's about to fall apart, that means the stock market's going to go down, the economy's
10:25 Speaker 04 going to go into recession, there's a jobs number, inflation number, what the Fed's doing. It's okay to understand what's happening in the world, but we can't let the headlines constantly knock us off course. So we have to, we have to figure out a way mentally to somewhat ignore the headlines. And then the last piece of this, again, equally as important of the last four that I shared. Is to start with some sort of plan. The world is uncertain, but when we do planning, we can bring some certainty into our lives because we can control how much we're saving every year, how much we're spending every year, how much we think we might want to spend in retirement. When are we going to start our income streams? We could start social security at 62, but if we do some
11:10 Speaker 04 planning, maybe it makes more sense to wait for a higher security amount, our social security number amount per month and wait till we're 67 or maybe even age 70. There are enough variables for us to control, and I think there's really five core. You can add a couple extra to the list of planning. So you're talking about five to 10 variables. That's still a lot to keep just mentally in line in your head, particularly when it's got to be over a timeline, a 20, 30 year period. So whether you write down a financial plan, I'm a big believer of writing down a one-page plan, drawing out a timeline, seeing when our different income streams are going to start depending on our age.
11:52 Speaker 04 So whether it's we draw it out or we do this through financial planning software, again readily available. If we're able to to put something in place, and it doesn't have to be overly complex, it really helps us, guides us on that journey. It helps us with avoiding FOMO, Freddie. It helps us with patience and longevity and investing, and it brings all these pieces together. And I think it gives you a really good shot at achieving your goals of financial freedom in retirement and what most importantly, give you more peace of mind so that you end up with a happy retirement.
12:27 Speaker 02 I love it. All right, we're going to give you a couple of questions now, Wes. You ready for those from the audience?
12:32 Speaker 04 Hundred percent.
12:33 Speaker 02 All right, this one comes in from Kathy in Oregon. Kathy says, I wonder-
12:37 Speaker 04 I've never been to Oregon, first of all. So Kathy, I'm just going to tell you that right now.
12:41 Speaker 02 It's beautiful. Okay, Kathy says, I wonder if a 1.41% management fee with Fidelity is a fair amount to charge for my $400,000 403B rollover.
12:51 Speaker 04 1.41%.
12:52 Speaker 02 Correct.
12:52 Speaker 04 Got it.
12:53 Speaker 02 I retired in 2019 and live on my pension and other income. I have no debt and plan to draw RMD at 73. For the last two years, all my money was in CDs, but I think it may be time to get help. My Fidelity rep contacts me once a year to review my account and what I feel is a sales pitch for their services. I'm not knowledgeable about investing and would rather not deal with it. What is your opinion on the fee or do you have other suggestions?
13:19 Speaker 04 Okay, so a couple of things here. If you're paying a fee, you should be getting comprehensive advice. So if you're going to be paying a, let's call it in the industry, a fee of anything more than 1% is high. Kathy's paying almost 1.5%.
13:36 Speaker 02 Right.
13:36 Speaker 04 So it's a pretty high fee for just being in a fund, which doesn't necessarily give any advice, right? It's just a vehicle to park your money. So I think right out of the gate, we've got to say that yes, Kathy, that's pretty high. And mutual fund costs have come down over the last 20 years significantly. And then ETFs or exchange traded funds, they've brought the cost down even more. So to pay 1.4% for just sitting in a fund, that seems really high. And there's a lot of other options that she can find, probably very equivalent funds that are 90% less than that. So that is, I think, the first place to start. The second thought here for Kathy is when you're dealing with a representative from
14:18 Speaker 04 one of these big investment firms, they really are trying, and I'm talking about the big guys, Fidelity, Schwab, Vanguard. They want people to have a plan. They want people to be in the right investment products for them. So yes, sometimes it probably does feel like a sales call, but it also may just be a motivator to say, hey, let's do some bigger picture planning. And what Kathy can also do is find a fee only advisor. And Fidelity and Schwab and these big companies can typically point their clients to this and they actually are happy to do so.
14:51 Speaker 02 Right, and they'll be a fiduciary of that.
14:52 Speaker 04 And you can, right, and you can find a fiduciary, which means that that advisory firm that's now working alongside Fidelity, Schwab, is only allowed to look out for your very best interest. This is a confusing point in the financial industry. It's not just about, you would think, well, isn't every advisor looking at your best interest?
15:10 Speaker 02 No.
15:11 Speaker 04 There's a whole other set of standards that just says the investments have to be prudent, which is another nice word for saying they just have to be okay.
15:20 Speaker 02 Right, right.
15:21 Speaker 04 So I think what she could do is find a fee environment that is a lot, is less or a lot less, find an advisor through some sort of fee-only advisory firm that is looking out for her best interest. And then, most importantly, looking at the bigger picture and not just the vehicle. Hey, here's a fund that works, but here's a strategy that is less expensive. And let's also talk about your taxes and your state planning and all of those things. So, yes, I think that at least she's been invested and that's 80% of the battle. At least she's been doing that, or that's half the battle. I think that she can really improve that, which will be a much more efficient path for her to reach her retirement goals.
16:02 Speaker 02 Awesome. Okay. And then we've got this one that came in from Vanessa in Alaska. This question is for Wes Moss. Both my husband and I are state employees with no pension. Since our state doesn't participate in social security, we will not receive social security benefits when we retire. Both of us are in our late 40s. Since we don't have any fixed income when we retire, how would we allocate our retirement funds? Should we do anything different than those who at least have a part of their annual expenses covered by fixed incomes? We've had this concern for a while and even lost some money getting in and out of bad annuity products. Currently, we don't have any annuity or insurance products other than our term life insurance.
16:44 Speaker 04 Krista, we could probably do a whole show on Alaska, right? This is still the wild frontier. And when this question came in, I was thinking, wait a minute, you've got no social security. So if you're in the private sector and you're paying into social security, yes, you're going to still get social security in Alaska. But it's very unique that the state employees, like Vanessa, they don't get social security, which is a big chunk of retirement savings for people. It was something like, in 2006, the state employees went from having a defined benefit, meaning a pension plan, like Clark was talking about earlier today, to say, hey, like, this is on you. They moved to a defined contribution plan. They said, look, you've got to save your own money. So to some extent, what does
17:29 Speaker 04 she need to think about differently? She's not going to have social security. That could be the loss of...
17:36 Speaker 04 $2,000 a month, $2,500 a month for her and if her husband is working in the system as well. So that's a big gap to fill. So there's a couple of things. One, Vanessa's got to rely on the system that they do have, which is a pretty good defined contribution plan for the state of Alaska or the state employees. I believe the way it works there, and again, this is another state I have not been to.
17:59 Speaker 02 Mm hmm.
17:59 Speaker 04 I'd love to go.
18:00 Speaker 02 You gotta go there.
18:01 Speaker 04 I'd love to go to Alaska. Is that they want you to, or they require you to put about 8% of your earnings into their defined contribution plan, like a 401k. So that's a lot. The good news is they match a big portion. Depending on whether you're a teacher for TRS or state employee, they're going to give you 5% to 7%.
18:23 Speaker 02 Oh, that's good.
18:24 Speaker 04 So that get, if you do eight plus seven, you're 15% in savings. So that's a lot in itself. But again, it's taxing, right? It comes out of your paycheck. But there's really, there's no other option for Vanessa. The one thing that is uniquely good about Alaska, and I'm sure Vanessa and anybody from Alaska listening knows this part of it, is that there's this very unique system called the permanent fund in Alaska. It's an $80 billion fund that the state has. And I don't know if it was originally derived from oil revenue and...
18:55 Speaker 02 I was going to say, that sounds like oil money.
18:57 Speaker 04 Yeah. But now it's invested. It's a giant plan that pays out a dividend. It's the permanent fund. I think it's the PFD, the permanent fund dividend. And every single person that lives in Alaska and has been there, I'd say a year or more, and this is for little kids too, receives money from this fund in any given year. So it's a little bit like social security. Last year, it was something like $1,300 per person. I think this year it was something like $1,700 per person. So it's like social security, but you get it your whole life. So at least she has that to make up some of that gap. And, and we know Alaska is one of the most expensive states. So housing's pretty cheap in Alaska. It's pretty inexpensive, but everything else is through the roof.
19:42 Speaker 04 Food is double, transportation is double. It's expensive. Expensive to live in Alaska, so she's gonna need to really, she's gonna really have to rely on that defined contribution plan in the state so that she's saving her own money. And then there's one cool cherry on top when it comes to state employees in Alaska, and that's an additional plan called a 457 plan. She can put another big percentage of her salary into the 457 plan. So, thinking this through, if she's doing eight with the defined contribution, she's getting a match of seven, that's 15. If she does, let's say, another 5%, and I know Vanessa, this is a lot of money, but another 5% of savings on top of that into the 457 plan, which is very much like a 401k
20:26 Speaker 04 plan, then that might be enough to make up for the strange situation you find yourself in, which is no social security.
20:37 Speaker 02 And I have to ask, because you know, Clark's answer to everything is freeze your credit or Roth IRA. Is there any room for a Roth IRA or anything like that in here?
20:45 Speaker 04 I don't know the specifics about the 457 plan up there, but I would not be surprised if there's a 457 Roth option. And if she has that, it's probably a good option for her to go with.
20:58 Speaker 02 Okay, great. Well, I think we'll take a break.
21:00 Speaker 04 You know this stuff!
21:01 Speaker 02 Oh, no. Everything I've learned, I've learned from you and Clark. So, all right, we'll take a break now, and then when we come back, what are you gonna talk about?
21:08 Speaker 04 I wanted to dive into some of the metrics around planning, and maybe because we ended with that, we'll go into how to create a plan. It's not as complicated as we think.
21:18 Speaker 02 I love that. Okay.
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23:35 Speaker 04 All right, welcome back. I wanted to talk about planning because again, we live in this so uncertain world. And if you think about planning over the course of time, there's just so many variables swimming around in our heads and the media that takes us off track and FOMO Freddy at the Christmas party who wants us to, we should have been invested in something else. I can't believe you missed that. So the whole journey is really hard and it's not just hard in any given time, it's always hard. It's, we're always running into walls and we're running into things that make the journey uncertain and then it throws us off track. So what we almost have to do is, and this is number five on my list of five keys of fundamentally sound investing and retirement planning, is we've got to have a plan.
24:19 Speaker 04 And you've got this uncertain world with unlimited variables of things taking us off track. But the good news is, when it comes to planning, there's only so many variables and we can control them. I really think there's five. There's five, you can make more than that, but if you think about what it takes to set a course and get to the point you need to get to in retirement, it's a couple really core things. First of all, it's a timeline. So thinking about it over the course of 20 and 30 years, and then the really important keys that come up, like, when do I get social security? Or when do I have my mortgage paid off? Right? So we think about it in the course of time.
25:00 Speaker 04 Secondly, this goes back to, what are the big variables? One, how much money we have already saved? Number two, how much can we save per year? Three, what is our assumed rate of return, depending on how, what kind of investor you are? Could be conservatively four or 5%. If you're a super conservative investor, it could be 7, 8% if you're going to be an all-stock investor. So you've got to pick that number, but you can control it. And then, of course, what we would like to be able to spend, like, what's our goal? How much can we spend in the future? And then we apply, when we look at our savings, what it will be in 10, and 15, and 20, and
25:42 Speaker 04 30 years, then we apply the 4% rule, which is another topic we'll talk about. But very simply, we can apply, well, I know I can take 4% plus inflation each year and have a really good chance of not running out of money for 30 years. So that's another variable. It's somewhat of a, even though it's a rule of thumb, it's more of a constant. And again, we want as many constants as we can, and things that we can control in this mapping process of this plan. The way I like to do it, because I feel as though you really understand what you're doing, if you draw it out, so I draw out a timeline, and I start with the current year, let's call it 2020. Twenty twenty five and in five years, let's say you're you're going to be sixty five. Well, that's a year you might be you're going to get Medicare.
26:27 Speaker 04 And maybe that's when you want to start your social security. So you say, well, I'm going to start social now and my wife is one year younger. So she could start social the next year. So we started to drop in these income streams that really matter. If we live in Alaska, we drop in the permanent dividend fund like we talked about. Then we we also start with, well, what's our nest egg today? Maybe it's fifty thousand, maybe it's two hundred fifty thousand. And we say, well, in ten years, if I add a thousand a month or twelve grand per year, and it's at a five percent rate of return, well, we get a number. We know that, well, in ten years, we'll have a million and a quarter or a million and a half or whatever that number is. And then we say, well, we can take four percent of that and that'll be in addition to my social security.
27:10 Speaker 04 Or maybe I have a pension that I dropped into that timeline. And now, guess what? We have approximately what we think we can spend on an annual basis in retirement, divided by twelve. Now we've got a monthly budget in retirement. So if you think about it, there are really only about five to six, call it a half a dozen, really important variables that need to go into this plan. Six is a lot lower of a number to control than infinity. All the things that we can't control are kind of infinity. Yet if we're looking at the basics here, what I have saved today, how much I am going to spend or save each year, my rate of return is and what I'd like to spend and my four percent rule
27:54 Speaker 04 and when my income streams come in. It's still a lot of variables, but it's at least it's manageable. So we can either draw this out. You can have a fiduciary retirement advisor help you draw it out or you can do it via software. So there are lots of tools online that'll lay this out for you over time. You can go to any financial planning firm should have the software to put all this together. One of the critical pieces here is to understand that. Let's say our budget's $5,000 a month today, or $8,000 a month today. That's not going to cut it in 20 years. So one of those variables, in addition to our rate of return assumption, is that we've got to be able to plan for inflation.
28:35 Speaker 04 And that's why it's helpful to utilize some of these more robust software plans that help map out what things are going to look like in 10 years, in 15, in 20 years, in 30 years. So if we're able to do that, whether we do it as a, just a sheet of paper, Krista, or we do it with an advisor and we use software to do it, it lays the foundation for you to be able to reach your goals. And more importantly, it can keep you on track. It makes investing easier. And I think it's just, it is a critical piece to be able to make retirement successful.
29:09 Speaker 02 I love it. Okay, so we're going to go to more questions. This one came in from Gerald in Alabama.
29:15 Speaker 04 These are all over the country, by the way. I love this. Oregon.
29:18 Speaker 02 Alaska.
29:20 Speaker 04 I have been to Alabama.
29:21 Speaker 02 All right.
29:22 Speaker 04 Have been to Alabama. I was just at Buc-Ee's in Alabama.
29:25 Speaker 02 I've never been to a Buc-Ee's. It's been a discussion.
29:28 Speaker 04 Buc-Ee's is the largest gas station that I've ever seen. I couldn't even, there are probably, there are 100 gas pumps.
29:35 Speaker 02 Oh, don't get Clark started on Buc-Ee's.
29:37 Speaker 04 Does he love Buc-Ee's?
29:38 Speaker 02 Loves it.
29:39 Speaker 04 I got my ugly Christmas sweater at Buc-Ee's.
29:41 Speaker 02 Oh, my gosh.
29:42 Speaker 04 And some candied, the lady that was there, she was making the candied nuts, and she let me try the different flavors. The almond, the cashew, they're all so good. They may actually have more sugar that runs through Buc-Ee's than they do pump gas in any given day.
29:59 Speaker 02 I bet you're right. All right, so Gerald has two questions for you. First, I'm retired with a 403 and 457 with my old employer invested in this company. Both funds have been doing okay with a mix of stocks and bonds. I'm 69, I plan on leaving the funds alone until I have to start RMDs at 73. Do I need to convert them to anything now or wait until the year I have to start taking them? And second, I have a small pension in social security. I have a little left over after all my bills. What is the best thing to invest slash put my money in? I have an ample emergency fund and one CD.
30:33 Speaker 04 So a couple really critical pieces of info here. Gerald is 69. That's important because there's some age differences between when you can utilize a 457 plan versus a 403B plan, but he's past all of those ages. So that kind of makes it so that he can focus in and look at both of those and say, he is free and open access to both of those plans. That's retirement money. He can start taking it at this point at any time and not pay any penalties. So that's great. Of course, he does have to pay taxes and he's looking four years out into the future for his required minimum distributions. That's when the IRS says you've got to take out around 4% or
31:16 Speaker 04 so in that first year and pull money out so that you pay taxes on it. Doesn't mean that you have to spend it. It just means you have to take it out of a retirement account. Now, if you can imagine having two accounts or three or four different retirement accounts, how do you keep track of your RMDs? And if you don't take your RMDs, it's a massive penalty. It's like 50% penalty. So if you're supposed to take out $10,000 and you didn't do it, you've got a $5,000 penalty, which is crazy. So you've got to do the RMDs and you've got to keep track of them. I think the easiest way to do that, and again Gerald doesn't, we don't want to mess around with RMDs. So to make it easier, he can put all of those retirement funds, whether he has two or three or five different retirement
31:59 Speaker 04 funds. And if you're thinking about this question as well, listening or watching us, the more different retirement accounts you have, the more confusing it is. So just consolidate them into one. So Gerald can open up a self-directed IRA, not a Roth, because that has tax implications, but an IRA and roll in a tax-free way his 457 into that, his 403B into that. If he has another retirement account, he can put that into that. So now he's just got one account to manage, easier to do, and it makes it a lot easier when it comes time to taking out those RMDs because it's coming from one account and he can make sure he doesn't miss
32:40 Speaker 02 All right. This one came in from Lucas in California. Of the funds I have now in Vanguard, I have five total holdings. VTI, VGT, VHT, VXUS, and 2055 TDF. My combined expense ratio is 0.39%. Is this okay? Should I consider something different like consolidating? Am I diluting my money? Am I even thinking about this the right way? I'm interested in your opinion for a situation such as mine for a long-term investor just getting started within the last few years.
33:13 Speaker 04 Okay, so Lucas in California. So first of all, we talked about number two or three on our list. Massive diversification. Lucas has got it. This is a great thing about what he's doing. I think you listed out five different Vanguard ETFs. Maybe one of them's a fund. Right out of the gate, I recognize some of those symbols. VTI is an example. That's the total stock market index. Guess how many stocks that has?
33:37 Speaker 02 How many?
33:39 Speaker 04 Over 3,500 stocks.
33:41 Speaker 02 Oh, I was gonna say 1,000. Wow.
33:42 Speaker 04 It's something like 3,600 stocks. It's amazing. It's giant. The XUS, which is a Vanguard Total Global World Index. I don't know if that's the exact name, but it's essentially almost every single company that's publicly traded outside of the US. That ETF alone has over 8,000 positions. So he's got lots of diversification. What he's thinking here, and if you go to Vanguard and you look at these ETFs, so one of these is a healthcare ETF. So it's 300 healthcare companies. A technology ETF. So he's got lots of diversification. And by the way, it's almost 100% in stock, even though one of those is a target date fund. But if you go to any Vanguard ETF,
34:24 Speaker 04 they're usually a 10th of a percent or less. So on any given one of these, and some of these are as low as the total market one is something like a 0.03.
34:37 Speaker 04 So when he adds all them up, what he's doing is he's stacking all those fees on top of each other and it adds up to almost, almost 40 basis points, which is almost a half a percent. I love that he's looking at this because cost matters, but he's looking at it the wrong way. So Lucas, you're stacking all those fees to get to your 0.39 of a percent. The reality is you've got to look at it on a really a global basis. They don't stack up on top of each other. It's 0.03 for one of them and 0.08 for another one. So all in, that collective is probably less than a tenth of a percent collectively, not four tenths like he's thinking. So his overall cost is a lot lower than he's thinking. You don't want to stack it. So that's good.
35:22 Speaker 04 So I think he thinks he's deluding himself by having all these different funds. He's not from a cost perspective. From an investment perspective, it's also not the worst thing in the world. I mean, he probably owns almost every single company on the planet. So there's probably a lot of overlap in those different funds, but that's okay. It's massive diversification. I think more importantly to note, it is almost 100% in stocks. These are stock ETFs and one of these is a target date. That's a target date fund in 2055. So it's 30 years from now. Those funds are almost all in stock as well when it's that far out. So just know lots of diversification. That's great. Your allocation is 100% in stocks.
36:07 Speaker 04 Again, okay, particularly if you're in your 30s, 40s, 50s. If Lucas is closer to retirement, it's probably a lot aggressive if you're on the doorstep of retirement. It sounds like Lucas is mostly doing the right thing.
36:19 Speaker 02 Yeah, no, I think he's definitely, it sounds like he's younger because he wants long-term advice. So that is great. And William in Washington says that he started investing 25 years ago in the Vanguard Star Fund. It's in a Roth, which I'm maxing out every year. I'm three years away from retirement. Is this fund still a good choice for my situation?
36:39 Speaker 04 Again, everyone's gonna be a little bit different and there's no way to give exact investment advice here. You guys have said that many times, but first of all, this is a great example. William has had patience and longevity and he has a nice, not only just diversification, but some diversity within the asset classes that are in that STAR Fund. So the Vanguard STAR Fund is, call it 10 different funds that Vanguard operates, and they're all in one fund. And about 60% of the assets in that fund are stock-based. So there's a US part, there's an international part. So that's good. And the 40% is in the
37:21 Speaker 04 safety side of the equation. That's a little closer to what I would consider dry powder, but the bond side of the equation is there for stability, it's there for income. And again, it makes the overall investment experience a little less bumpy, or in this case, a lot less bumpy, because 40% is a fairly high number. I would say that this may have been even a little conservative for somebody in their 20s or 30s, but 90% of the battle is being invested and having at least 50 to 60% in stocks like he has. So it's been a really good fund. It's average, I want to say, it's been over 7% or 8% per annum over time, even though it's a relatively conservative fund. Now that he's close to retirement, William, I think that this is the
38:04 Speaker 04 kind of balance you want to go into retirement with. So maybe with a little conservative 20 years ago, I think it's kind of right in the right zone for most people today. So if he was 100%, if we go back to the last question, if he's 100% in stocks now and he's on the doorstep of retirement, he may want to look at getting this balance that he has, 60% stocks, 40% bonds, but he's already there. So the good news is, I think that's an appropriate balance for a lot of people, not everyone, but I don't think he needs to make any radical shifts to get more conservative today. We still want stocks in our portfolio to outpace inflation for a long retirement.
38:46 Speaker 02 Okay. Well, thank you so much, Wes, that does it for us this week. Well, you and I this week. Clark will be back tomorrow and we'll be back next Tuesday. So don't forget, if you have a question for Wes, go to clark.com/ask. You can ask a question to Wes or Clark there. And I hope you have a great rest of your day.
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