02.25.25 Ask An Advisor With Wes Moss

How much money do you need to retire? Fiduciary financial advisor Wes Moss outlines two straightforward methods to determine the amount you'll need for a comfortable retirement. Wes walks you through factoring in income streams like Social Security and pensions, alongside your individual spending goals, to arrive at your target number. Also, "doom and gloom" headlines can often dominate financial news. Should you listen? Wes shares his perspective. Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the February 25, 2025, Ask an Advisor episode of the Clark Howard podcast. Submit your questions at clark.com/ask. Mentioned on the show: Calculators - Clark Howard We hope you enjoy our weekly Ask An Advisor episodes, in which Christa and Wes discuss investing and retirement savings in depth. Let us know what you think in the comments! Learn more about Wes: 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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• 1:21Speaker 02

  Welcome back to Ask an Advisor. We go deep on all things investing. I'm Krista DeBias, here with Mr. Wes Moss.

• 1:28Speaker 03

  Wes Moss, hi Krista. How you doing?

• 1:30Speaker 02

  I'm great.

• 1:31Speaker 03

  Good.

• 1:32Speaker 02

  I'm excited about today's show.

• 1:33Speaker 03

  I know. Hopefully, we've got questions flooding in.

• 1:36Speaker 02

  We do. We definitely have a lot of questions, but I hear the first thing you're going to talk about is something we're all wondering, like, how do you figure out how much you need for retirement?

• 1:45Speaker 03

  You know, I think that even if you know how much you need for retirement, you don't think about it every day. So you kind of forget. So you might do it, and then you think, six months later, wait a minute, how much do I need for retirement? And then you do it again, and you think, okay, I got it. For some reason, it's because we're not focusing on it all the time, you can lose track. And then when you lose track of how much you need, there's a little uncertainty and... Financial planning is tough and investing is really tough when you're uncertain. So it's always good to kind of have this certainty around the goal. Here's my goal.

• 2:17Speaker 02

  I always panic too because I think, what if I'm wrong?

• 2:20Speaker 03

  How much do you need?

• 2:22Speaker 02

  I don't know. That's the thing. I want to hear what you have to say, but I know I've thought I had a number in mind like say 10 years ago. And then I'm like, wait, is that number really going to be big enough? Inflation, you know, it's just so I'm.

• 2:34Speaker 03

  So there's a practical way. This is, I think, a simple way. I'm going to share two really, let's call it straightforward ways. Some people really like this. I think it's super simple, but I brought up this concept in one of my earlier books. You can retire sooner than you think called Filling the Gap. And then it became FTG. And then I have folks that I've worked with over the years, send me these spreadsheets and they'll say, this is my FTG analysis. Because it's a really nice, easy way to remember how much you will need and then how much you'll need to spend. So we're going to start with some spending numbers, some income numbers, which then rolls up to the big picture number of how much you'll need in savings to fund all that. So this is how FTG works. We start, we're filling the gap.

• 3:19Speaker 03

  We start with what you know that will be steady in retirement. So we start with our income streams. We're going to start with social security. Maybe you have some sort of pension or maybe your spouse has a pension. So let's just give a round number here to start out. Imagine you and your spouse each get $2,000 for social. That's four. And somebody gets a thousand. So now in a pension, that's 5K a month. Okay. And you look out five years and you look at what you're spending right now and you think, well, I'm spending $7,000 a month today. But in retirement, I might need 8,000 for some cushions, some travel, some inflation.

• 4:01Speaker 03

  So you set a goal, a spending goal of $8,000 a month. So we take 8,000, which is the need, minus the guaranteed income streams, and we're left with 3K a month. That's the gap. We've got to fill it. So we take $3,000 a month, times 12 is $36,000 a year that we would need to fund. Now, we can use the 4% rule and say, well, what amount in my investment accounts, my retirement accounts would then be 4% to back into getting me that $36,000 a year or $3,000 a month? Or you can do the simple math, which is just multiply it by 25. So we just take 25 times our $36,000. And what do we get?

• 4:45Speaker 03

  We get 900 grand. So in this scenario, if your gap is three a month, $36,000 a year, multiply that by 25, we know that you would need a retirement account. If you're pulling out 4% a year, that would be $900,000. So that's your number. Okay. It's that simple. The other way I would say to make it, you could even further simplify, and it's just another version of filling the gap, is you say, again, we'll use big, round numbers. You need $150,000 a year, and you're going to get $50,000 in social security. So your gap's 100. $100,000 a year. I've got to fund for the rest of my life in retirement, for 20, 30 years, God willing.

• 5:30Speaker 03

  So 100K times 25, 2.5 million. So now you know why I need 2.5 million dollars. That would help fund my need of $150,000. 50 is coming from social, 100 comes from the investments, and it's that simple. So financial planning can be super complicated. You can do a 40-page analysis about it, and there's a lot that goes into it. But I like to just start with something really simple, really easy to remember. That way, you can kind of always stay on top of what your number is that will fund your life so that we're not worried about ever running out of money.

• 6:06Speaker 02

  I love that. And we also, if you're trying to do some calculations on, I have this much money, if I put in this much a month, how much will it grow? We do have a ton of really good calculators at Clark.com. You just go to Clark.com/calculators. We were playing around with that earlier.

• 6:20Speaker 03

  Yeah, and I like, I think this is another good thing to remember, because if we can keep our planning and our investments just top of mind, we don't have to think about it incessantly every single day, but if we keep it top of mind, I think that's really helpful. Here are two, again, rules of thumb. If you were to save, right now, I like round numbers, because people would remember them. I can remember them. A thousand bucks a month, if we're saving a thousand bucks a month, if it's growing at 7% a year, in, let's say, a balanced portfolio, on average over time, then if you did that for 30 years, if you started at 30, and you did it until you're 60, and you had zero to start with, $1,000

• 7:01Speaker 03

  a month for 30 years at 7% gets you to about a million and a quarter, over time. Let's say you had a shorter timeframe, and you had only 20 years. You're 40, you want to retire at 60. $2,500 a month will get you there. So if you have 20 years of saving, $2,500 a month, 7% a year compounded annually, your savings gets you to about a million and a quarter. So one's less money, longer time, one's more money, shorter period of time. But that, to me, is a way to think about how, saving a million dollars, that sounds impossible if I'm starting from scratch. Well, if we give it 20 years, it doesn't sound as impossible. Give it 30 years, it sounds way less impossible. And I think it's just a good rule of thumb to remember. The tax side of this, we do ultimately want to

• 7:46Speaker 03

  do this calculation net of taxes. The one thing that doesn't get talked about a whole lot about taxes, this is in a lot of states, particularly in the southeast, where you have lower tax rates, zero state income tax rates in some states. A state like Georgia will have a big exemption. So once you hit 65 in the state of Georgia, you have a $65,000 state tax exemption for you and your spouse. So what I find is that...

• 8:14Speaker 03

  Really regardless of the state, a lot of retirees end up in a much lower federal bracket and state bracket when they get into retirement. So that you're used to paying 25, 30% when you're working. Very often that number gets cut way down. So your net take home goes up, tax rate's lower, but that's another calculation for another day.

• 8:36Speaker 02

  All right. This question came in from Mark in Lisa in Texas. Hi Wes, my wife Lisa and I are both in our mid 50s and we are starting to seriously think about retirement in the next seven to 10 years. We've been good savers and we think we're in decent financial shape, but we're struggling with two big questions. Do we have enough money to retire comfortably and what will we actually do once we stop working? Here's our situation. Combined income $275,000, 401k accounts $2.1 million combined, Roth IRAs $225,000, taxable brokerage account $400,000, HSA of $80,000, cash savings of $150,000.

• 9:17Speaker 03

  HSA is 80. Okay, so that's separate, okay.

• 9:20Speaker 02

  And cash savings $150,000. Primary home will be paid off in the next year or so, valued at $750,000 and no big debts. Car payments only. We are targeting retirement between 62 and 65 and we estimate our spending will be around $120,000 per year in retirement. We're unsure if this is too conservative or too aggressive, but we know we don't want to feel restricted. The financial side is one thing, but maybe the bigger challenge we're wondering about is figuring out what we really want to do in retirement. We've spent decades working hard and while we love the idea of more freedom, we don't have one clear vision of what our day-to-day life will look like. Lisa enjoys volunteering and fitness. I love golf and travel, but we're not sure if this will be enough to fill our days. We've heard you talk about core pursuits and the happiest retirees having three or

• 10:03Speaker 02

  more income streams. Should we be thinking about some type of part-time work or side business?

• 10:08Speaker 03

  Whoa, okay. That's a lot from Mark and Lisa in Texas. To me, that's like the coolest...

• 10:14Speaker 02

  It's a great big picture, though. Thank you for providing all that info.

• 10:17Speaker 03

  It's a cool big picture, yeah. We've got to find our full purpose in retirement and that's all these core pursuits that I've talked about over the years. More accurately, we don't have to find our purpose. I think that's a scary word for a lot of people. It's like, well, what's your purpose? So I'm going to save all the river fish in northern Alberta and start a nonprofit. We don't have to do something that dramatic. And I think people feel that pressure to do so. We can just think about our daily things that we love to do, which I call core pursuits or super activities that they're going to fuel our schedule and our day. And they can absolutely be. They can create what your daily purpose is. We've got to fund it. We've got to fund the purpose. So we're going to create it, but we've got to fund it.

• 11:02Speaker 03

  We'll start with that right out of the gate. And Mark and Lisa gave a nice recount. I'm like scribbling here on jotting down these numbers. Did they say what they're spending, what they would want to spend?

• 11:16Speaker 02

  They said they estimate it to be 100 and I think it was 20,000 a year. Yep, 120,000 a year.

• 11:22Speaker 03

  In the spend? Okay. So think of it this way, and this is a little bit like a filling the gap that we just talked about. Let's assume that a couple that's both working, making a big living, 235,000 is a couple. They're making lots of money. So they're probably going to max out social security. Now, depending on when they take it will determine the amount. If they take it early, it'll be less. If they wait, it'll be more. It would be safe to say between a couple that's working, they're going to get $50,000 a year in social. So think of that as your, one of the quote guaranteed income streams. I think that's a good estimate. The next estimate would be then, what would the 4% rule or the 25X rule? What would it? We're going to use a 4% rule here on the assets that they have already saved.

• 12:07Speaker 03

  So they've got 2.1 in a 401K, a little over, a little less than a quarter of a million in a Roth, 400K in a brokerage account, 150,000. From my math, that gets them to about 2.87 million. It's a lot of money in retirement. So if you're listening, you think, of course, they can retire. All depends on the spending. If they needed 250 grand a year in spending, that wouldn't be nearly enough. If they need 80 grand a year, they only need 30 more than social security, this would be super easy. I think this kind of falls somewhere in between on 2.875, 2875 at 4%, that's 115,000 that they could utilize with the 4% withdrawal rate in year one. Remember, we get to increase that for inflation. Mm-hmm.

• 12:53Speaker 03

  So we're at 115, plus 50, we're at 165. Now, we mentioned taxes and I'll look at, remember, the gross number is great to figure it out, but you got to, we're spending net dollars, we're not spending pre-tax dollars, we're spending net dollars. So if we've got, if they have 165K, and Texas has no state income tax, right? So it's just federal. Again, we'd have to do a tax calculator here on this, but I would, as a couple, they're not going to be paying, I think, more than 20. I would say it'd be less than 20% in federal taxes, all in. So 165 times 0.8, being conservative, they'd be netting about 130, 132.

• 13:38Speaker 03

  That's just assuming a 20% tax rate, and that may even be a little bit high. So they're netting 130 after tax, they need to spend 120. They're good. Yeah. So market leases are good. Now, who knows with their budget, are they building in $10,000 or $20,000 a year for travel? And really, their spending is 100, but they've got another 20 for travel. That's how I see a lot of, we call it happy retirees do it. They've got their spending amount, and then they've got their fund travel amount, because that's usually a pretty big number. So, funding retirement, from what I can tell here, they're totally on track, and they've got some time. They've also got seven-plus years. Right. The next question, and for some people, I think scary is probably the wrong word,

• 14:22Speaker 03

  because it's very solvable to figure out what we want to do. Just like you don't want to start saving when you're 60 so you can retire at 65? It doesn't work. There's a lot of truth to saying like you don't want to just start figuring out all the things you want to do the year before you retire.

• 14:41Speaker 02

  I'll golf when I'm retired.

• 14:42Speaker 03

  Yeah, oh, I'll just do that when I retire. I'll just, I'll just play a bunch of pickleball when I retire. The Harvard Business Review did a study about this and tracked retirees and then measured their level of how satisfied they were with retirement, a year out and two years out. And the families that planned a roadmap of what they wanted to be doing. And it's this nonprofit and this library and this family here and this, visit these friends here and these five activities I love to do. And the folks that had just a visual map of that, whether it's colored pencils or stick figures or whatever it might be, they were the ones that ended up with the retirement

• 15:27Speaker 03

  that they were highly satisfied with, that they really enjoyed, they loved. So what I would say to Mark and Lisa is just start practicing that now. Like, don't wait. This is not a big ask because it's fun to do. Start testing out three, four, five, six different hobbies on steroids. It doesn't matter what they are at all. But if they ultimately, over the next couple of years, figure out they do love to garden, they do love pottery, they do love woodworking, they do love hunting, fishing, they do love golf, they do love pickleball, those are the things that we're going to be excited about and they're filling our schedules once we stop working. And I think the combo of this amount of money coming in and a full list of things that

• 16:08Speaker 03

  Mark and Lisa want to be doing, pretty tough to end up not having an awesome retirement.

• 16:13Speaker 02

  I love it. And also maybe consider going part-time the last year or two of work, just to see, right? Just ease into it.

• 16:20Speaker 03

  Yeah, I think of that as a retirement gray zone.

• 16:22Speaker 02

  Yeah.

• 16:23Speaker 03

  Right, forever, growing up, I think we still think of retirement as stopping work. I see a huge benefit of people slowing down work and going from five days to four to three to two, and doing that for a couple of years, A, you're making more money, B, you're easing in retirement. I see people love doing that.

• 16:45Speaker 02

  All right, one more question we can get to here. I think Tracy in Florida says, "We just met with an advisor from Fidelity. He recommended direct indexing separately managed accounts for our taxable investing in order to take advantage of tax loss harvesting. But what are your opinions on this?" He said the fees range from 0.3% to 0.8%, but shows a higher annualized return net of fees when taking taxes into account. He said this wouldn't make sense in our tax advantaged accounts, but it may be something to consider in our taxable account, which currently has over $200,000 in it. Some additional background, if you want, "We're both planning to retire this year using the Rule of 55. Estimated annual

• 17:23Speaker 02

  expenses 120 to 125K. Total savings approximately $2.6 million. 401(k) traditional, and they break that down into where all those are. Thanks again for all you do for us. Clark's advice over the year has helped us save tons of money, take lots of trips, and be able to retire early. I'm glad Clark is also starting his phased retirement, and love the addition of Wes to the show, as I've read his books and love his advice for a happy retirement." That was Tracy in Florida.

• 17:50Speaker 03

  Well, I love Tracy, so thank you for saying that, Tracy.

• 17:54Speaker 02

  Thanks, Tracy.

• 17:55Speaker 03

  Tracy saved a bunch, $3 million. They've saved, they've listened to Clark. They've accumulated a ton of retirement cushion. I think of it as a giant engine. That's a big, that's a lot of horsepower to produce income for the rest of your life. There are two things here. The one is about early retirement, and that's the question around the 50, the Rule of 55. 99% of conversation when it comes to when you can access your retirement money is about the 59 and a half, 59 and a half, 59 and a half. That's when you can pull money from your IRA or 401(k) without worrying about a 10% penalty. But if you work at a company and you stay until you're age 55, and then you leave after you've already turned 55, and you leave the money in that company 401(k),

• 18:41Speaker 03

  You can invoke the rule of 55, which allows you to tap the 401k. It doesn't work if it gets rolled into an IRA. But if it's still in the company 401k, then you can access those funds without the 10% penalty early. So that's four years early, or yeah, almost five years early. So I love that rule, particularly for early retirees. Secondly, we've been getting more questions around SMAs, which are, I've always known as separately managed accounts. I think of them as private mutual funds. Like, if you have a mutual fund, you've got 200 stocks in a fund, but you just see the five symbols in your Schwab Vanguard Fidelity account. You have no idea what's inside that fund.

• 19:24Speaker 03

  Well, you know what's in it, but you don't see it. A separately managed account is a fancy way of saying you've got your, it's almost a privately managed fund, you've got a manager or some sort of strategy, and you get to see all the components. And go back even five years, you really heard very little about direct indexing unless you had millions of dollars. But the advent of almost no trading costs, the advent of technology, artificial intelligence, it's now become really easy to replicate an index, whether it's the Russell 3000 or the S and P 500 or a dividend index. I mean, you can get really specific using direct indexing, and the difference here is that you own the individual companies.

• 20:08Speaker 03

  Now, I don't know exactly what she was asking about on the fee, which she cited, but the industry essentially is going to be anywhere from, I think, as low as a 10th of a percent a year to as high as a half a percent a year. So a half a percent a year is a lot for an index fund, when Vanguard funds or most index fund companies are 0.1%. Or even less than that in a lot of cases with ETFs. So you do pay a little bit more just to get an index when you're doing direct indexing. She's right, you don't, you don't need to worry about it in an IRA because there is no tax loss harvesting inside of an IRA. You don't get any benefit.

• 20:51Speaker 03

  So you have a loss and you don't get any penalty or tax if you have a gain. It's all sheltered until you, you pull money out of a retirement account. A Roth, again, no tax when it's getting pulled out. But on a, an after-tax money that I do think that there's some, I actually do use some direct indexing. And that's because if you want to pull from that amount, if it's just in one ETF and it grows, then by and large, you're just, you're paying long-term capital gain taxes on, on the gain. So if you, you put in 100K, it grows to 200K and you say, well, I need to take 20,000 out, you're going to be paying taxes. On direct indexing, because if you think about this 500 stocks all in your account

• 21:35Speaker 03

  and they are always harvesting the ones that are at the, let's call it the losing positions, even though the whole account's growing, they're harvesting losses so that when you do need to take some funds, they can offset your capital gain. The theory over time is that your net take home, if you need to pull money out of it, because you can avoid some of the taxes by offsetting them with losses, you could end up with more net money. Now, you're paying for it, but I, I do think that these are good strategies as long as you're keeping the cost in the, call it 10, 20 basis point, 10, 20, 30 basis point range.

• 22:12Speaker 02

  When we come back, you're going to talk about something your mom actually called you about, right? Super scary headline?

• 22:18Speaker 03

  Scary headlines, they happen every day. It's only, but only once in a while I get a text from mom about it.

• 22:24Speaker 02

  Okay.

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• 24:42Speaker 03

  Welcome back to Ask an Advisor with Krista DeBias.

• 24:45Speaker 02

  And Wes Moss.

• 24:46Speaker 03

  That's me. What do we got? On tap?

• 24:48Speaker 02

  I want to hear what made your mom, your sweet mom, text you.

• 24:53Speaker 03

  Is a text from an article, scary article.

• 24:56Speaker 02

  Scare lines.

• 24:58Speaker 03

  The coming crash is what it is. The coming crash. I look it up. It's the same. First of all, I don't fault the authors of these things. There always could be a crash. There could always be the market going down. The market goes down all the time. So it's not as though I fault these authors. It's everyone that has a right. You can look at the economy and then slice it a thousand different ways and you can come up with a conclusion that, hey, things aren't going all that well and they're going to get worse. Or you come up with a conclusion that things are going to be pretty darn good. I mean, I studied economics. It's a social science. It is not a perfect science. So when you're talking about a crash, you're talking about a bad economy and you're talking about a stock market and/or, in this particular case, real estate.

• 25:43Speaker 03

  And this latest article, The Coming Crash, I look at it, you know, when you get a text from your mom, from anybody, you usually will see the image of the article. The image of the article is that famous bronze statue of a man in the bread line during the Great Depression. Every time you read about a crash, you see some sort of bread line and you immediately think, oh, are we going back to the depression? Are we going back to a terrible economy? So it gets your attention, scares you a little bit.

• 26:14Speaker 02

  Sure. I mean, everything's going to be fine is not a catchy headline.

• 26:18Speaker 03

  Yeah, everything's going to be great. Goldilocks is back and she, everything's great. The porridge is just right. The author of this particular article, it's also a recycled article. So I looked it up and you can find it on Yahoo and, you know, five other places. But it's, it is a really well-known author, Robert Kiyosaki. He was the author of Rich Dad, Poor Dad. And he is a super bestselling author. I mean, Rich Dad, Poor Dad, super famous. I read those books back in the 90s. I thought those books were great. So I think that he's had some good advice over the years, but he's also been kind of a pretty much one of the kings. He's not the king, but the king of doom and gloom.

• 26:59Speaker 03

  And to your point, headlines and things, everything's gonna be okay. They don't sell, nobody reads them. So he purposely is trying to get your attention. But if you go back and look at his track record on the crash is coming, he essentially said the crash is not over in 2011. Well, the crash, that stock market cycle had really ended and we moved higher from there. September of 2015, he said, I've been predicting since oh two that we would see another stock market crash in 2016. Again, a year later, market up 9.5%. 2017, another sign a real estate crash is coming. I looked at the Case Shiller Home Price Index back then, which is a measure of home

• 27:44Speaker 03

  prices in aggregate in the United States. It was at 192. Today it's at 323. Home prices are 70% higher than when that tweet or that headline came out. August of 2018 predicted the biggest crash of all. Instead, 2018 onward since then, S and P 500 is up 140%. Now, we did have a big downdraft during COVID. The market's down 33%. Technically, that was a bear market that happened really quickly and violently. So these aren't totally wrong. But the point here, why, keep going here. October 28th of 2020, everything crash is coming.

• 28:27Speaker 03

  September 26, 22, everything, everything crash is coming. Everything is in, all different assets are gonna lose huge value. 2023, severe shock market crash coming. December 10, 2023, get some cash out of banks. This may be the start of the biggest crash in history. So you get the point.

• 28:44Speaker 02

  Yeah, just scare line after scare line.

• 28:47Speaker 03

  Scare line, scare line, scare line. And they all have.

• 28:52Speaker 03

  Some DNA or shred of, well, remember Silicon Valley Bank? That bank went under. So the great thing about being a scary headline writer is that it's not really hard to find actual, real-life scary things, because they happen all the time. So you can extrapolate that. In one respect, I do appreciate newsletter companies and authors that are keeping people on their toes. There's plenty of people that say things are going to be good. I'm one of those people, the army of American productivity, and I think we're going to get through this. And I'm, over time, I'm long-term optimistic on the US economy and stocks. As an investor, I think it's one of the few places you can really outpace inflation.

• 29:36Speaker 03

  But if you are listening to scare headlines, you'll be scared away from ever really investing anyway. It's already hard enough. You've got to take scare lines, scary headlines with a grain of salt. Understand who they're coming from, and that way you at least can not get completely knocked off track in the long-term sport that we're all in, which is the marathon, wealth accumulation investing.

• 30:02Speaker 02

  Looking at history is always...

• 30:04Speaker 03

  Stock markets, housing market. Again, since he started making these forecasts, the one I go to first back in 2011, S&P's up about 280% since that first doom-z day prediction.

• 30:20Speaker 02

  All right, we'll go to some questions for you. This one came in from Mary in Michigan. Mary says, "I would like to have a secondary source of income other than my W-2 job, and I'm curious about your thoughts on whether I should invest in rental properties, including hiring a property management company or dividend-yielding ETFs. My goal is to have a secondary income stream of around $60,000 a year within the next 10 years. I'm leaning toward rental properties, but I've been hearing more about dividend-yielding ETFs and want to make sure my money is going to the right place to achieve my goal. Would the monthly income from rental properties with around 6% to 9% cap rate be greater than the monthly income from a dividend-yielding ETF? What should I consider with this decision?"

• 31:04Speaker 02

  And Wes, we've had a few questions come in just this past week, people wondering about having real estate as one of those income streams that you talk about.

• 31:14Speaker 03

  The answer is yes. I've invested in real estate and I've seen it work for people over and over and over and over again. It's a lot like the equity markets because it takes a ton of time. It does depend on what the market looks like. So first of all, let's talk about this word cap rate. The way you look at a rental property is similar to how I would look at a dividend stock. Now, one takes a lot of work and one takes no work. You're not going to get similar yields, but if you think about a property that is paying you, let's just do round numbers here. Let's do a $500,000 property and it's paying you, you're getting $30,000 in net rent. So it's net operating income, right? If you've rented 50, but you have to spend 20 to maintain the property, you're really only getting a

• 31:58Speaker 03

  net of 30. So this is the cap rate. The net income divided by the price. Just like you'd look at a stock yield or a bond yield. Same thing with real estate. How much cash are you getting for the investment you put in? If that property is $500,000, that's a cap rate of 6%. And that to me is about the floor. Really, 5% to 10% is the rate of yield you want in order to make a property worth the time, the trouble, the energy, and that's a pretty good rate of return. But that's also just the yield. And this is that we're all after total return. Total return equals growth. It's income plus growth. So imagine you have a property that's appreciating at 3% a year as well. 3 plus 6 is 9 over time.

• 32:42Speaker 03

  That's a pretty darn good rate of return and a great way to diversify for retirement. And the way I've seen this work, when it really works out, is that you end up accumulating one property, maybe the next year or two years later, another property, and you do that over 20 or 30 years. And by the time you're getting to retirement, most of the properties are paid off and then you get this net cash flow. But it takes a long time for that to all work out. But once you have the property paid for, you've got this, what can be a really nice yield coming in. And it's truly mailbox money, right? It's just coming in every single month. Now, there's a lot of work involved.

• 33:24Speaker 03

  And if you think about, real estate investors are not just going out and saying, hey, I want to go find a property. And they look at a few places and they say, usually it's just like anything else that turns out that's hard to do, that's profitable. It takes a ton of searching and scouring the landscape. So you're going to go look at 10, 20, 30 properties to find one that has a good cap rate. If you have a $500,000 property and the rent in that area is not all that good, and you end up with $10,000 in rent on 500, you know, that's a 2% cap rate. That's just not worth the time, the trouble to go find a renter. Once the renter leaves, you got to find another renter. Problems with the toilets, the roof, the windows.

• 34:10Speaker 03

  So it's an active sport. But if you find a cap rate that's 5% minimum, the way I'd look at it, or higher, then I think that's when you want to start getting interested. Just like a bond, though, if the cap rate is way high, like 12, 15%, that means there's something going on, too. So you've got maybe a risky property as well. So I like that sweet spot, 5% to 10%, that's cap rate. And I think that can make a lot of sense for anybody. It just takes a lot of time.

• 34:39Speaker 02

  And a lot of markets, I mean, I'd say around the country still, like, you know, we saw the huge run up in property values. But do you have concerns about the fact that, you know, a lot of markets seem pretty high right now?

• 34:51Speaker 03

  Well, again, I'm just looking at the Case-Shiller Home Price Index. It's gone essentially straight up. And that's the measure of home prices in general in the United States. I mean, I'm looking at a chart right here. There was a tiny little dip after COVID. And then it's essentially just been straight up. I mean, even if you go back to January of 2020, before the pandemic, index was at about 210, it's at 323. So home prices are up 30, 40, 50%. In some markets, they're up more like 100%.

• 35:31Speaker 02

  Right.

• 35:32Speaker 03

  So I think that we've got to be careful, particularly in those markets that have doubled versus up 30, 40%, and it's all relative to how much rent we can, how much rent we think we're going to get. The other thing is that the real estate dynamics, in my opinion, are pretty favorable for property. We've underbuilt in the United States for, really since the 2006, '07, '08 financial crisis, housing crisis, hit the housing industry just like an absolute brick wall. Your housing activity went down 80, home building went down 80%. And it's never really, really recovered and caught up for that. So we're a little bit of this shortage for the number of homes, the number of people who would like to get

• 36:16Speaker 03

  homes. So I think that housing is still a, has solid fundamentals because we're kind of underbuilt, but it's hyper-local and wherever you are asking from, you're going to know your market, you're going to know the economy of your hyper-local market, and you're going to know how easy it is to rent places out.

• 36:35Speaker 02

  So true. Okay. Sherry in Oregon sent this in for you, Wes. "I'm a beginner in the investment world and looking for short-term investment options, only because my project viability in the USA currently is for about two to three years. I might need to move out of the country in case my project doesn't get an extension. Currently, I have around $30,000 in a 401(k) invested in the S&P 500 in Fidelity. I have cash of around $30,000 in a Fidelity brokerage account. I'm 40 years old. Kindly advise on the below queries. One, should I keep or take out money from the 401(k) considering short-term visibility? I know about the early 10% withdrawal penalties and taxation. If you suggest keeping the

• 37:19Speaker 02

  money in, would there be any complications if I try to withdraw money after the age of 60? In this case, I'm thinking to keep it in there for the kids' education in the USA. Two, I'm also planning on buying some low-cost funds. I need advice to know if it's worth buying, considering my short-term visibility. Do you have any other suggestions for low-cost funds and how about T-bills? And three, I also want some exposure to cryptocurrency. So I put $500 into Bitcoin and Ethereum. I hope that should be fine."

• 37:50Speaker 03

  I think that would be fine. It's not a ton of money, and I think that, again, I'm not a big believer in I don't have a ton. I have a little bit too, probably just like her, that I bought many years ago, but it's just not a big part of how I invest over time. It's just, I don't, it's just too hard to value it as an asset. I know that some people are crazy, love crypto, and then you still have Warren Buffett's of the world says it's terrible, you can't value it. The answer probably lies somewhere in between, but I just don't, can't value, don't like it, so don't really own much of it at all. But I would say a couple of things. Sherry, I don't think you want to tap the 401K or too young. The very simple answer is that you want to wait until you are of age to be able to not get penalized.

• 38:35Speaker 03

  That's 50 and a half, so you get some time there. You don't want to be taking money out just because you think you need to leave the country. I don't see how that would work. Secondly, I do like this idea of keeping money safe because you're in a short-term and highly uncertain position. So when you're in a short-term, highly uncertain position, meaning you don't know if you're going to have your project renewed and you might have to move to another country where you're from, that's expensive and you need some flexibility and some cushion for that. So I would want to leave that 30 she has. I would want to have most of that in cash. Maybe put 10 of that in a low, I like that she said low-cost funds. I like low-cost funds too.

• 39:18Speaker 03

  Some sort of low-cost, highly diversified index fund, but I would be leaving 20,000 in some sort of money market. So she mentioned T-bills. Again, any sort of government money market is essentially investing in T-bills. So if you're buying a government money market, they're investing primarily in super short-term treasuries, which are T-bills. And usually those are super low-cost funds. Right now, where the Federal Reserve has interest rates, they're paying about 4%, so you're getting something. And I would want to leave that and keep that dry powder ready if she does end up not getting renewed on a project and has to move.

• 40:02Speaker 03

  It's expensive. I would keep that money, at least 20,000 of the 30, in some sort of money market. Keep it safe. That's my take, Sherry.

• 40:10Speaker 02

  All right. Well, that does it for us today. We'll be back next week with a new episode. Clark will be back tomorrow. Hope you enjoyed this episode of Ask an Advisor. Thank you, Wes. Have a great day, everyone.

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