03.18.25 Ask An Advisor With Wes Moss

Retirement Accounts in Panic? and Your Secret Weapon for Volatile Markets Are you seeing unsettling headlines about 2025? You're not alone. Reports show a surge in retirement account trading, with a staggering 40% of people moving to stable value funds. Fiduciary financial advisor Wes Moss explains why "Tariff Terror" is driving these decisions – and the incredible reason why we should navigate uncertainty with confidence. Also, with market dips and volatility on the rise, how can you protect your portfolio? Wes introduces the "Dry Powder Principle” -- your strategic reserve of safety assets. Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the March 18, 2025, Ask an Advisor episode of the Clark Howard podcast. Submit your questions: https://clark.com/ask 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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• 0:45Speaker 01

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• 1:20Speaker 02

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

• 1:28Speaker 03

  Hello, Krista DeBias. How you doing?

• 1:30Speaker 02

  Good to see you.

• 1:31Speaker 03

  Good.

• 1:31Speaker 02

  So today, obviously, last week, a lot of volatility. I mean, there's volatility. We're going to expect more volatility, probably, in the stock market.

• 1:40Speaker 03

  Sure.

• 1:41Speaker 02

  So you're going to kind of tell us how to tariff proof our finances. Is that right? I mean, our retirement accounts.

• 1:47Speaker 03

  Tariff proof. I would say that's a little strong. I don't know if I can tariff proof anything, but I think we can really, we can. I think I want to address that today because it's been in the headlines all year.

• 1:56Speaker 02

  And we're not going to be political because we never are on this show, but we, it's important to talk about how we can help our retirement accounts stay healthy.

• 2:04Speaker 03

  And there's real evidence right now. And there was a report on CNBC recently that showed. From Empower and Empower is a giant retirement plan company and they have 19 million participants. They know what's happening inside 401k accounts and what we've seen so far in let's call it early 2025 is that people are they're making a lot of moves within their retirement accounts. Trading is doubled inside of retirement accounts. And even though you still see 60% or so people that are in target date funds are staying the course. There's a huge amount of people that have been selling and trying to go into safer assets.

• 2:43Speaker 03

  So we've seen this report from Empower says that 40% of folks have sold stocks or large cap US stocks. And where's that money going? It's going into the stable value fund, which is really the same thing is kind of cashing out and just stashing money away. So we know that there's been huge activity and it's really because of all the uncertainty that we're seeing in 2025. So that is the reality of what's happening and that's the reality of what investors do. When headlines go from normal scary to kind of almost monster scary. There's a couple of things here where I have a solution to that. It's not a proofing of that. Okay. But tariffs and then the thought of tariffs being in the headlines, that's probably going to be with us for a while.

• 3:27Speaker 03

  Doesn't look like anything's getting solved anytime too soon, but a couple of thoughts. One, we've already had almost a essentially saw a 10% correction already in 2025. I go back to the long-term chart of the market. And if you look at the last 80 years, you're going to see every single year, there's a period of time where markets are down. Because the stock market is certainly not, it's not an escalator, it doesn't just go a little bit higher every day. We have fits and starts and fits and starts. And the average for any given year is about 16%. The average normal year, we see a 16% pullback. And what feeds that? The scary headlines, I think you call them scare lines. Scare lines. Scare lines. And these are the kind of the monsters that make us nervous about the world that we

• 4:11Speaker 03

  live in. And if you think about the last, call it three or four years, there's always been a monster theme that has been out there for the media to get as many clicks as they can. I don't blame the media. I mean, we're, we're media here. But the news media really wants to scare you, make you nervous, and you click on something and you read it. And if you go back to 2022, what was the fear headline was recession, recession, recession. Every 110% of economists said, we're going to go into recession. There were hundreds and hundreds and thousands of headlines that said that recession is imminent. That was the cycle in 2022. In 2024, I think the media and the market got totally obsessed with Fed

• 4:53Speaker 03

  cuts. The Fed had raised rates too much. Interest rates are high. Mortgage rates are at seven or eight percent. We can't afford credit card debt. We can't afford card loans. We can't afford mortgages because rates are way too high. That was the prevailing drip of fear. And it was all about Fed cuts and the market was obsessed about it. And we got a few cuts and that conversation is gone. By the way, the recession conversation kind of went away. Now we're into, let's call it the third year in, I'm looking back over the, the main headlines. Now we're in tariff terror 2025. Everything is about tariffs and how they're creating uncertainty. The fact that we haven't figured out what the tariffs are going to be, that's creating even more uncertainty. And then what is

• 5:37Speaker 03

  that going to do the economy? Our consumer is going to spend less and our employer is going to lay people off and we're going to have less employment and then we're going to spend even less. And then we go into a recession. So tariff terror 2025 leads into the potential or the worry for recession, which by the way, there's always a worry of going into recession. The answer to this though, and I'm not going to tariff proof, but how can you keep investing through all this? And I've mentioned here on the show a couple of times, this army of American productivity. And really what that means is this, if you think about the workforce that we have in the United States, it's 170 plus million people. That are going out there every day for a variety of reasons. Some people have to work and they're scared to lose their job.

• 6:22Speaker 03

  So they're doing as best as they can at work. Some people do like their work and they're there and they get some benefit out of it. And then there's a portion of folks that really love work and their purpose in life is to make their division of their company or their small business a little bit better every day. And imagine though, 170 million people doing that every single day. Big companies do it too. So I think about some of the reactions around tariffs. Well, I think about companies like Hasbro, the giant toy company. They've had a ton of their product made in China. Well, what happens if we have even worse tariffs in China? They have been diversifying their supply chain for some time now. They're going to other countries. They're going to Vietnam. They're going to India.

• 7:06Speaker 03

  They're going to other places to try to figure out a way to still do their business and still have a net margin and still make money. Apple's been doing the same thing. Home Depot, Walmart doing the same thing, trying to figure out how do we shift our supply chains so that we're less impacted by tariffs? It's just another example is no matter what gets thrown at us, what gets thrown at companies, you got a huge amount of people that are all trying to figure out that maze and still have the business grow, still have prosperity. And I don't know if that tariff proves anything, but it certainly is the path that we've seen for over 100 years.

• 7:47Speaker 03

  No matter what problem of the day, year, week, decade gets thrown to companies, they figure out a way to cope with it, deal with it and thrive no matter what. So to me, I know that we're in one of those periods of even greater uncertainty, but the army of productivity doesn't get scared out of markets. It keeps going and neither should we get scared out of our 401ks like we're seeing in the Empower numbers. You've got to be able to be long-term investors and ultimately that's how we get our gains over time.

• 8:19Speaker 02

  I love that. I learned a lot right there. That was awesome. Like, I didn't know those companies were doing that.

• 8:24Speaker 03

  And that's, that's the tip of the iceberg. Every company CEO, management team, leadership team, division head, department head, team lead, they're trying to figure out how to deal with the cards they're dealt.

• 8:35Speaker 02

  And by the way, I would put myself in the third camp on people who, I really do love my job, obviously. I think anyone listening would know, I'm so lucky to work with Clark and to work with you and, and that we do something to help people. Yeah, very, very lucky. So I hope everyone listening feels the same way about their job. So we'll go to some questions now. Greg in Alaska says, hi Wes, I'm an index fund investor and wanted to know how the S and P 500 index gets weighted for its stocks. How do companies like Schwab, Fidelity, and Vanguard add the percentage of a single company's stock into the fund? Like, how does a company like Apple get a higher percentage in the index than a company like Home Depot?

• 9:14Speaker 03

  This is a really good question, and it's so important. It's like, this is a fundamental. I think I maybe take it for granted, or if you're an index fund investor, you do take it for granted. The averages are very different. Now, most of the big averages, the S and P 500, of course, is kind of, is the biggest representation, or the most notable, I wouldn't say the biggest, the most notable representation of US companies. But then there's the Russell 1000, 2000, the Russell 3000. And for the most part, those indices, Greg, are made up on a capitalization weighted basis. So very simply, the bigger the company, the bigger the weight. Why this is a question is because not all indexes do that. The Dow Jones is

• 9:57Speaker 03

  totally different. They have a totally different way of doing it. The Dow, which is only 30 companies, also supposed to be representative of the United States, general economy, so technology, healthcare, finance, all within the communication, all within the Dow.

• 10:14Speaker 03

  But the way the Dow does is it actually looks at the price of the stock. So that if a $200 stock is in the Dow, it has 10 times the weight as a $20 stock, which is interesting because a stock could just split and all of a sudden, because it has a lower price, it now has less weight within the Dow. So that's why this is a question. Well, the different indexes or indices do it in different ways. The S and P 500 very simply does it on a cap weighted basis. You take the numbers, shares, times the share price, and you see the overall size. So what that means is that a trillion dollar company, and there's several of them now,

• 10:54Speaker 03

  has 10 times the weight and the pull and the sway of the S and P 500 than a $100 billion company. And a $100 billion company, lots of those in the S and P 500, in fact, that's considered not even that big, has 10 times the sway as a $10 billion company. You really go down the list and you start looking at company number 300, 400, 500 in the S and P 500. It's not that they're not billion dollar companies and it's not that they're not big enterprises, it's just that they're so small relative to the top part of the index.

• 11:31Speaker 03

  In fact, here we are today, the top 10 companies out of 500 make up about 30, almost 35% of the weight. They really matter on what the index does. And that's why you see two giant companies, I think he asked about Apple and Home Depot, both massive companies, but Apple's even more massive and it has a bigger weight and a bigger sway in the S and P 500. And that's how all the index providers do it. So yeah, and I think it's important to note that an index fund from Vanguard, Fidelity, Schwab, they're not going to be perfectly identical, but they're going to be super, super close because they're trying to mirror what's in the index itself.

• 12:12Speaker 02

  Okay, great. And this question came in from Scott in New York. I'm a relatively new investor and have come across the municipal bond. I live in and will likely retire in New York, a high tax It seems like investing a portion of my bond allocation in New York municipal is a no brainer because of the exclusion of federal and state income taxes. I'm not sure how to buy them directly, but there are several bond funds such as, and he names one at Vanguard, Nuvi, BlackRock, and iShares. Hoping to learn more about these and if this is a wise investment and if so, what percent of my bonds should be in in-state municipal bonds?

• 12:50Speaker 03

  Okay, I really like municipal bonds too. I, full disclosure, I invest in them as well. And this is the way you look at this. First of all, you always have to look at safety first. And the gold standard or the safest, besides being in an FDIC insurance CD, if you're looking at a bond investment from a credit quality, the paramount is the US government bond. What would be next on that continuum of safety? Municipal bonds. So a state is backing, the state needs to build a water treatment facility and they need $100 million to do it. They issue $100 million in bonds. We buy them and the state gets the $100 million in cash and then they pay us back our coupon,

• 13:33Speaker 03

  four, five, six percent, depending on where we are, over, let's call it a seven, 10, 15 year period. And then you get your full principal back. That's how these municipal bonds work. So they are for state and local projects and they're backed by, in various ways. Sometimes it can be backed by the revenue. Sometimes it can be the full, the credit of the state itself. And depending on the rating of those bonds, they can be super safe. So you can look for double A or triple A rated municipal bonds. And they're technically not as safe as government, as US government bonds, but they still have a high credit.

• 14:07Speaker 02

  Like I remember some states filing for bankruptcy in the past.

• 14:10Speaker 03

  Exactly.

• 14:11Speaker 02

  Okay.

• 14:12Speaker 03

  But then there's a big credit, there's a big ladder where you can go from the triple A, which you're going to pay the least because of the safest, all the way down to shaky rated states. Like we know the state of Illinois has pension problems and, and they have promised too much money to, too many of their workforce. So there's some questions in some of these states. So not all states are created equal. That's why I want to start out with credit. New York State, again, they have, there's a lot of high-quality bonds there. But again, not every bond is high-quality. So you do have to worry about that. The second part of this is that they are tax-free. So if you live in the state of New York and you buy a New York bond,

• 14:55Speaker 03

  not if you buy a Texas bond, if you buy a New York bond, then you get, the interest you get should be federally tax-free and state tax-free. Now, if you were to live in a state like New York and buy a Texas bond, it would still be federally tax-free, but you wouldn't get out of the state income tax. So the way I look at this is that you have to find what is the tax-equivalent yield on a municipal bond relative to a taxable bond? So what do you do? You take your, and typically municipal bonds will pay a little bit less than a treasury, and they'll certainly pay less than corporate bonds, because the marketplace knows you're getting, you're getting to keep all of the interest. So you have to look at it on a tax-equivalent basis. So let's say your municipal bond is 3.5% yield.

• 15:39Speaker 03

  That might not sound a lot if it's a taxable bond. You get 3.5% on a taxable bond, then you still have to pay taxes. So what you do is you take your yield and you divide it by your tax rate, or 1 minus your tax rate. In this case, 37% is the federal, 10% state, that's 47. And 1 minus 47 is .53. You take 3.5% divided by .53, and you get about 6.5%. So really, on an equivalent basis, you're getting 6.5%. And this is a hypothetical example. Then for somebody in a high tax bracket, that can make a lot of sense. Now, if you're in the 10% tax bracket and you're in a zero-tax state, then it makes it much more, less attractive to be municipal.

• 16:24Speaker 03

  So higher-income federal, higher-income state makes municipal more attractive. I also wouldn't put everything in my bond portfolio into just municipals.

• 16:34Speaker 02

  Right.

• 16:35Speaker 03

  So I would just be careful about overloading in any one category, because it's just one of the categories within bonds that are supposed to be our safety belt, our dry powder.

• 16:45Speaker 02

  So you don't want to say a percent specific?

• 16:48Speaker 03

  I think the rule of thumb is that within your bonds, you don't want any more than 50% in municipal in your exact state. That's just your rule of thumb.

• 16:58Speaker 02

  Sounds good. Gene in Washington says, Dear Wes, a question regarding unrealized gains. I generally have $1 million in unrealized gains. This accounts for roughly 40% of the account total. I'm out of work, so will not be getting a W2 this year. Should I generally reduce unrealized gains as circumstances allow? And now specifically, as I have no other income? If I do, I would probably just reinvest in stocks for more growth, possibly some amount in less risky investments? Or should I just let the gains grow and fluctuate with the market and not take the tax hit?

• 17:31Speaker 03

  You don't want the tax tail to wag the investment dog.

• 17:35Speaker 02

  Nice.

• 17:35Speaker 03

  You don't, you don't want the tail, which is less of the dog, to really manage the whole situation. So you don't want to just say, well, because I want to get rid of some of these gains, I'm going to do it. The investment side is more important. Now, the good news here for Gene is that he can start to manage his tax bracket. A lot of these questions we get here go back to managing your bracket and taking advantage of periods of time when you maybe have less income. So he's going to be a year of no income. Because you're in the, in a low or zero income from, let's call it a year, you actually have a lot of room to sell and take realized gains and still not pay taxes. That's the cool part about long-term capital gain rates is that,

• 18:20Speaker 03

  yes, you hear mostly they're at 15%, but they're also at 0% if you have very little or have lower income. And they're also at 20% if you really have a lot of income. So it's not a static rate. When you sell though, Gene, it also adds to your income. So if you have zero income, it doesn't mean you could sell a million dollars worth of gains and still pay no taxes. The gains themselves will start to put you in a higher bracket. And this is super rough math, but if you're a couple, married, filing jointly, you have room for about $127,000 worth of gains because you have a $30,000 deduction. And that can keep you in a zero to super low bracket. So I would at least consider that. You have to talk to a CPA here and you've got to run a tax projection.

• 19:05Speaker 03

  But he could, if he wants to eliminate some gains.

• 19:11Speaker 03

  You don't do it just because you want to eliminate gains from an investment portfolio. But if you have the room and you can pay very little to no taxes and you want to do that from an investment perspective, which is the priority, then by all means it's a good strategy to do it. The second thing I would say for Gene is pull up my favorite tab, which is the unrealized gain-loss tab. So any brokerage firm you're in, you don't just look at the positions, you go to the cost basis tab. And invariably, what I would suspect here is that he probably has a ton of stocks and the two-thirds or maybe even 75% of them have done really well and have big gains. But there are probably a few that are flat or maybe even lower. It's those you can sell. Take a little bit of a loss.

• 19:55Speaker 03

  That actually gives you some leeway because a loss will offset a gain. That'll help him identify how much room he has to sell so that he could maybe start paring back some of the positions that have gotten too overweighted or too heavy in the portfolio. So there's just a couple of things to do. Know your tax bracket. How much if you sell in gain will push you into the higher brackets and manage your taxes by selling some of the, or harvesting some of the positions that haven't done as well. That is what the direct index funds are trying to do. When you own your stocks, they are looking at the ones that haven't done well. So they're creating some losses to offset future gains.

• 20:40Speaker 03

  It's not a way to never pay any tax. It just helps to try to reduce if you need to sell.

• 20:44Speaker 02

  Okay. And coming up next, you're going to revisit your dry powder principle.

• 20:49Speaker 03

  We'll get a little bit more into dry powder, how to do it, and particularly in a period of uncertainty, I think it's a good time to talk about it.

• 20:56Speaker 02

  And more questions coming up right ahead.

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• 23:15Speaker 03

  Welcome back to Ask an Advisor. I'm Wes Moss along with the Christa DeBias.

• 23:20Speaker 02

  Wow, the.

• 23:22Speaker 03

  We're going to a topic and then we'll go some questions. We have a lot of really good questions coming up. The next topic I want to talk about here on today's podcast, this goes back to all the uncertainty we have in the marketplace this year. And you think about layoffs and how we've seen a spike in that to some extent. We know that there's been tariff headlines. There's lots of uncertainty around that. I don't think that's going away anytime too soon. So we talked about the Empower study where we see a huge chunk of people selling their stocks inside their retirement plans and trying to go to find money markets and safety. Trading activity is up. There's some real consternation right now for investors and I see it, I feel it. My conversations are, you know, when I sit down with families, I get the first question, are we going to be okay?

• 24:07Speaker 03

  The world seems like it's falling apart. I'm scared. Is my money going to last? I mean, that's the, I can feel that sentiment happening right now. It's different from a couple of years ago when the market was just steadily higher and nobody was worried about anything. Those are great periods of time, but they just don't last all that long. And we're back to uncertainty soup is where we live most of the time, particularly with, as investors. We've seen the market be down 10% already in 2025. We've seen a thousand point Dow, a thousand points in a day. Now, the percentage is not nearly as bad as it would have been 15 years ago, but still that gets our attention. It kind of gets the hair standing up on the back of our neck. And I'll have families ask me, hey, how much dry powder do I have again?

• 24:52Speaker 03

  What's dry powder? And we've talked a little bit about this, but dry powder back in, let's call, let's go back to the Revolutionary War. When we use gunpowder, if it was wet, didn't work. Dry powder means it's something you can use almost as how do I protect myself? This is what's going to keep me safe, but it's got to be dry. So dry powder, the way I think about this from an investment standpoint is these are your safety assets. Question is, how much of that in the overall portfolio should you have? Now, the way I look at this is that we know we go, we have corrections very frequently. We have bear markets relatively frequently and that means down 20 plus percent.

• 25:33Speaker 03

  But the average bear market recovery, and that's I think the important timeframe here, is 2.6 years. Let's call it, let's round that up to three. So we do know when markets go down, if we don't want to spend the money that we have invested in stocks or equities, it may take on average, three years before we want to start dipping back into that. To me, I think what helps people feel secure and feel safe while still having stock market equity exposure is to have about three years worth of dry powder. What goes into dry powder? First of all, this is anything that's safety oriented. It's not perfectly safe. It doesn't

• 26:13Speaker 03

  mean it has to be in cash. I like using bonds, fixed income here. There's a bunch of categories, government, municipal, and corporate. I wouldn't put high yield bonds in this category. It's not dry powder because high yield bonds are risky and they move a lot more like stocks. But if you're looking at treasuries, municipals, and money market, a money market absolutely counts here. But particularly with bonds, it's not just that they should hold their value in a stock market correction, but the majority of the time, again, not 100% of the time, but the majority of the time, they're actually non-correlated, or they're inversely correlated, meaning that we go into a stock market correction, bond prices typically go up. So if we have that in the portfolio, not only does it stay steady, but it actually

• 26:58Speaker 03

  rises and can really help to offset some of the the stock market side of the ledger losses. So dry powder can be multiple things, but these are investments with with a relative degree of safety. They can be inversely correlated to the stock market. And the question is, how much do you do? So what's three years? So take how much you need per year. So let's, I'm just going to use round numbers. You need $50,000 a year. You have $20,000 a year in social security. So we have guaranteed, take your spending need annually, minus your guaranteed income flows. That leaves us with $30,000. That means you know that you need $30,000

• 27:41Speaker 03

  of extra money out of your investment, the whole investment pie every single year. Well, we're in a period of time, let's say that the markets aren't good. You don't want to pull from the stock side. So you're pulling from dry powder. So 30 times 3 equals 90. So we need $90,000 to $100,000 worth of dry powder in the portfolio, to say the least, or to kind of add a minimum. That means if you have $300,000 invested, about a third of it would need to be in dry powder. If you have $1 million invested, you may not, the percentage is much lower. It's really about a dollar around here so that we can get to it when we need it, when the stock side of the market, which is erratic,

• 28:22Speaker 03

  isn't behaving like we'd like to see. And that's how I think through dry powder. Not inversely correlated, it gives us a peace of mind and it accounts for the time it takes for stocks to come back when we go into a bear market.

• 28:35Speaker 02

  Great. All right. You ready for some questions?

• 28:37Speaker 03

  Yeah, let's do it.

• 28:38Speaker 02

  This came in from Tim in Florida. This is about sector weighting. I'm being pitched a service from my 401k provider to review all of my accounts for sector weighting. They have 10 sectors they feel should be evenly distributed. The one in particular they mentioned to me was the technology sector. My investments have about 28% in this sector. I've noticed that broad market indexes like VTI have about 30% in there. How important is sector weighting? FYI, I'm a couple of years for retirement. I have 300K of dry powder.

• 29:10Speaker 03

  Oh.

• 29:11Speaker 02

  I am about, I have about $3 million in investments, so 10%, just like you kind of said in that example would have been. Our current spending is just over 12K a month and I don't foresee a big increase in retirement. The kicker is this sector management, they want me to move my IRAs into their investment house and that's the name of the investment

• 29:31Speaker 03

  house. This goes back to, we had a question about indexes and the S and P 500 versus the Dow, why one company has a bigger weight. It just goes back to most, not all, but the majority of large indices, and we don't invest in indices, we invest in funds or ETFs or index funds that are trying to mirror the indices, right? So naturally, because technology stocks are the biggest companies, those are the trillion dollar companies. I think there's a few. Others that get to a trillion, but the majority of the big, the super mega cap companies in America are tech oriented. That's why there's a really high tech weighting in almost every

• 30:14Speaker 03

  index. The S and P 500 is 35%. You can make an argument that the communication sector, which is not in tech, is also a lot of tech. So you can make the arguments more like 40 or 50, 45% in tech. So I don't think it's a bad idea to think about equalizing your sectors a little bit. On the other side, so we have 11 main sectors, tech, healthcare, financials, that those are some of the really big ones, industrials. But we also have utilities and we have real estate. And even though we know the big utility companies and they're billion dollar companies, remember a billion doesn't mean a lot when you're weighting against trillion dollar companies.

• 30:56Speaker 03

  So they have a really small weighting in these large broad index funds because it may only be two or three percent of the total. So there is some real value, in my opinion, of looking at a more balanced sector approach in the world that we live in today because tech has dominated so much of the marketplace. And you can do that. Now, you don't have to have a company do it for you. There's a couple of different options that Tim can do. You can find an equal weighted index where they're weighting every stock the same amount. That brings the imbalance down dramatically. And then you can find an equal sector weighted ETF or fund where they literally will say,

• 31:40Speaker 03

  we're going to have 12% in all, in all the sectors, the exact amount. That way you have, you would arguably have utilities have the same weight as tech and the same weight as healthcare and same way as financials. Over time, the equal weighted where you're looking at, and I've looked at this many times over the years, and more and more as the market's gotten so overweighted into one area, the equal weighted market indices actually do really well over time. They just haven't done as well as the cap weighted indexes because tech has dominated and tech has done really well. So I think it's a good idea to look at that. But Tim, you can find that in your own funds or ETFs that are doing that job for you.

• 32:21Speaker 02

  Okay. This came in from Tony in California. My wife and I plan to retire next year. I'll be 55 and she'll be 54. We have a unique retirement situation as we've both been public educators for over 25 years. After calculating our state pension formulas, I've determined that if we file for our pensions at age 63, we will be in great financial shape, living off our inflation protected state pensions. We are disciplined savers and have accumulated over $600,000 in our Fidelity sponsored 403B accounts. Our plan is to take advantage of the rule of 55 exception, using our 403B savings to cover expenses from age 55 to 63, after which we will rely on our pensions. We also plan to work during

• 33:04Speaker 02

  retirement and continue contributing to our Roth IRAs, delaying withdrawals until required. Beyond researching online, I would like to learn more about the rule of 55. Currently, we're invested in Fidelity's 2025 Target Date Retirement Fund. And we also wanted to know if we should work with a CPA.

• 33:20Speaker 03

  Most people should work with a CPA. I believe in that. I think it's because just taxes aren't fun. We don't like paying taxes and then you don't like paying somebody to then pay taxes. But I think a CPA, as you can tell Krista from so many of our conversations, the question might be an investment question, but it comes back to taxes and your bracket and managing your tax rates. The short answer, yes, I think you need a CPA. I think most people need a CPA. So the question then is the rule of 55. Doesn't get a lot of press because normally what you see in this economy over the last 20 years, people change jobs

• 34:01Speaker 03

  a lot and you have two, three, four, five different 401ks and any one of them isn't going to necessarily move the meter. But in this situation.

• 34:11Speaker 02

  What is the rule of 55?

• 34:12Speaker 03

  Most people think when I get to retirement, I want to use my 401k. It's 59 and a half, right? And then that's when you can start pulling money out of an IRA or 401k without the 10% penalty. The rule of 55 is unique where it is if you are age 55. And you leave an employer after you turn 55 and you leave your 403B account or your 401k account at the employer plan. You can't roll it into your own IRA and use this rule. Then you can access it 55, not 59 and a half without the 10% penalty.

• 34:46Speaker 02

  Got it. Okay.

• 34:47Speaker 03

  So it's just a, it's a more of a rare situation because it's rare. Tony in California has been a, been a teacher, been contributing in the system for 30 years. It's not rare for a teacher, by the way. It's rare for a lot of other industries. So you can absolutely use it. I love the early retirement planning here. I mean, 55 and 54, that, that's awesome. You could retire sooner than you think.

• 35:11Speaker 02

  Yes.

• 35:12Speaker 03

  If you do what Tony in California and his wife are doing.

• 35:14Speaker 02

  Title of your book?

• 35:15Speaker 03

  Yeah, one of my books.

• 35:16Speaker 02

  One of your books?

• 35:17Speaker 03

  If you retire sooner than you think. Was it Five Secrets of the Happiest Retirees? It's so long ago. I don't even remember. I have to think about the title for a sec. So this is an exact situation I've seen and it works. Short answer is it works. The world of 55 works and it bridges until you get to this great pension and that pension is cola adjusted. So you don't have to worry about inflation. It sounds like he said they're setting themselves up to be able to really stop working pretty early. That's like music to my ears. The nuance of this is that they're thinking about continuing to work some, contributing to Roth IRA and pulling money out at the same time. Now you definitely need a CPA. Tony, you definitely need a CPA because that gets complicated. So you're, to some extent,

• 36:01Speaker 03

  you're paying taxes on money you're pulling out of the 403B and then you're working and then you're putting after-tax money into Roth. That can work if you are able to not pull a massive amount out of the 403B and keep your tax bracket low. I think that can work. And I don't know the exact numbers here, but if they're having to pull out a really significant amount from the retirement plan every single year and they're in a relative and that puts them in a higher bracket. Then the Roth contribution may not make as much sense. I would say it's almost a creative way to do a Roth conversion here. It's pull from the IRA, fund the Roth at the same time, as long as they're working. It's creative.

• 36:42Speaker 03

  I think it can work as long as you are judicious about what you're pulling out of the 403B to keep your tax bracket low.

• 36:48Speaker 02

  All right. This question came in from Molly in New York. My kids, age five and 10, have $4,000 that was gifted to them by a relative. I bought I bonds with it in 2022. Do you know if I can roll this money into 529s for them without triggering a taxable event? And if so, how do I do it?

• 37:05Speaker 03

  Yeah, this is more of just about the rules for Molly in New York. And again, I think you can find, it's easy to find these rules, but essentially as long as there's ownership for a full year, and it sounds like, because this is back in 2022, there's ownership for over a year. So that, check that box. They have to be registered in the parent's name, not directly in the children's name. There, let me just see, did she, did she say whose name these were in?

• 37:34Speaker 02

  She did not. They got the money. She bought I bonds with it.

• 37:38Speaker 03

  So it sounds like it's still probably her name.

• 37:40Speaker 02

  Molly's name.

• 37:41Speaker 03

  So if it's in Molly's name and held for 12 months, those are the two boxes to check. And the third box is your tax bracket. Going back to taxes. So the, there's some income limits here for married filing jointly. It's the 145 to 172 bracket. So if she's under, essentially, I'm sorry, 175, under that, then she would qualify to be able to roll those into a 529. So you go to the US Department of Treasury, you cash in those bonds, and within 60 days, Molly, you've got to get that money into the 529. And that's the way you would want to do this.

• 38:19Speaker 02

  Okay. Jason in Oklahoma says, this question's for Wes. I'm about 20 years from retirement and I'm not 100% satisfied with my 401K options that my company offers through Fidelity. They aren't bad, but it looks like Fidelity offers similar funds with lower fees. I'm currently in a 2040 retirement fund with a 0.21% fees. But would like to move to a 2050 target fund. It looks like access to Fidelity's broader options of funds with lower fees. To get into those, I would have to sell my current holdings and use what they call brokerage link. My two questions are this. One, can I make these changes without incurring penalties or taxes? And two, if this isn't a good option for now, can I just switch from one of my company's

• 39:01Speaker 02

  target fund offerings to another, even though the fees would stay the same?

• 39:05Speaker 03

  Jason, the short answer is yes. I don't see any reason that you would not be able to do that because remember, under the umbrella of a retirement plan, any sort of changes you make, they're not reported as taxable income. There's no gains or losses or dividends you get. It's all stays in the pot of the retirement fund. So you should be able to just move from a 2040 to 2050, not worry about taxes. Now, if you want other funds with lower fees, then to some extent, I think Fidelity by having brokerage link available is putting the onus on to you. And so it's a little more work on your part. You've got to make the decisions. You've got to be comfortable with how you're trading or where you're investing.

• 39:50Speaker 03

  But you're not taking the money out and putting it into another account when you use brokerage link. The money still stays in the retirement plan, but brokerage link allows you to then go out to their universe and use their other funds. Same thing, it's still within the retirement plan. So if you make a change, you sell one target fund and buy five other funds, you shouldn't have to worry about incurring any taxes or capital gains here. The only thing to think about is that anytime you take, remember, just taking money out of that, anytime you pull money out of a retirement plan, you get a check and you spend it, that's when it becomes taxable. And in his case would be because he seems to be underage 59 and a half would have the 10% penalty.

• 40:33Speaker 03

  But again, short answer, I don't see any problem with you doing either within a retirement plan, shouldn't have to worry about taxes.

• 40:39Speaker 02

  Great. Well, that does it for us today. Yeah, if you have a question for Wes, you can go to Clark.com/ask and you can pose a question to Clark or Wes there. Thank you for being with us today and I hope you have a great rest of your day. Clark will be back tomorrow.

• 40:59Speaker 01

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