04.01.25 Ask An Advisor With Wes Moss

Should You Withdraw 5% From Retirement Accounts? and How Corrections Impact the Market If you think about the most important fundamental in retirement planning, it’s determining the amount of money we can withdraw and still not run out. Fiduciary financial advisor Wes Moss discusses the longstanding 4% rule and runs the numbers on the probability of running out of savings if you bump it to a 5% withdrawal rate – or more. Also, it’s never fun to watch our portfolios drop. Wes walks us through historical corrections and why we shouldn't panic. Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the April 1, 2025, Ask an Advisor episode of the Clark Howard podcast. Submit your questions: 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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• 1:16Speaker 02

  Welcome back to Ask an Advisor, where we go deeper on all things investing. I'm Krista DeBias, here with you, Wes Moss.

• 1:24Speaker 03

  Hi Krista.

• 1:25Speaker 02

  Great to be with you again, Wes. Very much looking forward to today's show. I understand you're going to talk about, first of all, can we withdraw 5% a year from our retirement account?

• 1:35Speaker 03

  5%?

• 1:36Speaker 02

  People are like, no way, listening right now. And then also, what happens one year after we have a market correction?

• 1:45Speaker 03

  We got our first official correction of 2025, down 10%. And the question is, where do we go from here? Historically, what do markets look like?

• 1:53Speaker 02

  And I have a lot of questions for you. If you want to ask a question to either Wes or Clark, you can go to clark.com/ask and Clark will be back tomorrow with a brand new show. So let's go ahead and start with that 5% rule.

• 2:06Speaker 03

  It's really, it's a financial heresy, 5%. Crazy number. And this is the great debate within financial planning. And we'll never know the exact number today because we don't know what the world's gonna throw at us. We don't know how long we're gonna live. We don't know what our rate of return will be over the course of our retirement. Or at any point in any period of time, wouldn't it be nice to know exactly what our rate of return would be? What inflation will be? So when we're doing financial planning, we've got a dozen at least really important variables that make up a cash flow plan, a long-term plan to make sure that we're safely not ever worrying about running out of money. It's still a top fear in the United States. Running out of money is a very scary thought for anyone.

• 2:50Speaker 03

  But we go through this long period of time, 20, 30 years of, 40 years of saving. But if you were to boil down all those variables when you're running a financial plan, it comes down to, one, I would say the most important variable is your rate of withdrawal. Because your rate of withdrawal is saying, okay, how much of the savings that I'd spent 30, 40 years accumulating, how much can I use in any given year? Which means, how much can I spend? What's my standard of living gonna be when I'm in retirement? So that is the crux of all financial planning. What is, for the most part, been agreed upon is this 4% withdrawal rate. William Benning, the kind of the godfather of the 4% rule,

• 3:31Speaker 03

  ran a bunch of studies, ran market studies all the way back to the depression and looked at different withdrawal rates. Because what we're all trying to do, and I think of it this way, is max out without running out. Max out what we're withdrawing from our portfolios without having the fear of that going down to zero at some point when we still have a lot of years left on this planet. So there's gotta be some sort of optimal number. Now, anytime either market returns look as though they're not gonna be good, anytime interest rates are low, because part of most people's withdrawal strategy needs to be a balanced portfolio. The 4% rule says you've gotta have at least 50% in equities.

• 4:12Speaker 03

  That's the engine that allows us to increase our spending for inflation over time. So if we assume that Benning's original work, which I've redone his study over and over and over again, and kind of brought it up into the 2020s. And it still works, and I actually call it the 4% plus rule. But this past fall, Barron's made a big splash. And it came out with an article that said, you may be able to do, or really, they said, you can do 5%, you can have a 5% withdrawal rate. Now, the counter to that, and there's several financial folks in the financial planning community that'll come out and say, no, no, no, no. If you really want to be safe, just pull out 2.5%.

• 4:56Speaker 03

  Or that's your max withdrawal rate. And when that starts to happen, that, that kind of frustrates me because of course, if you barely take any of your savings out over time, of course, you're not going to run out. But then what's the point of the savings? So there's got to be this happy medium. So Barron's comes out and says, 5%, you can do that. Well, how did they get to that point? One, they cite that recently, some of the big Wall Street firms have come out and said, because interest rates were higher at the end of last year, that means your bond should produce more over time. So those expectations are higher. The equity market should do 8% a year, according to, I think it was JP Morgan or Morgan Stanley, one of the Wall Street firms.

• 5:40Speaker 03

  So those return assumptions are pretty healthy. And if both sides of your equation, stocks and bonds, both do well, well, then maybe you can pull out more money. The way Bengen said, and this is from a year or two ago, he said, you could give yourself a retirement raise by adding in some small companies that typically have a higher rate of return over time. So he's suggested that 4% is even too low. So I wanted to go back and see what makes this possible. And, and we ran the numbers. So I'll look historically, well, I'll share with our listeners and our viewers, what does it look like if we start out with 5% and withdraw 5% plus inflation every year over time? What's our probability of never running out of money?

• 6:23Speaker 03

  The first point in all of this, whether you subscribe to 4% or 4.5% or 5% or even higher. Is about flexibility because in the real world, Krista, we don't turn on our financial spigot from our accounts and say, okay, I'm getting my four and a quarter percent and I'm going to perfectly ratchet that up exactly for CPI or inflation every single year until the end of time. That's just not how it works in real life. So flexibility is the key, meaning that we may go through a period of time where markets are really good and they're really strong and they're beyond our expectations. And you can say, gosh, I think I can take out a little bit more money or we can go on an extra trip or two that I hadn't thought I could budget for.

• 7:08Speaker 03

  Same thing when we go through a protracted stretch of not great markets and really low interest rates, we want to be able to be flexible to say, well, maybe we spend a little bit less. That's the real world when it comes to managing your withdrawal rate. But what do the numbers say? And our team has run every single calculation that you can think of. 4% with different portfolio allocations, 5%. We've looked at 6%, which money does run out pretty quickly at a higher percentage of stretches. That one, I think, is probably a little bit too aggressive. But if we're just looking at the numbers and we look at a 5% withdrawal rate. Now, what's interesting, if you look at 5%,

• 7:52Speaker 03

  your best opportunity to not run out at least for 30 years is actually looking at an all stock portfolio. Now, a balanced portfolio works as well, but here are the numbers. If we're looking at a 30-year period of time, a 5% withdrawal rate plus inflation, using the same metrics of this rule, money still doesn't run out 83% of the time. So eight out of 10 times you turn on the 5% withdrawal rate, and this is going all the way back into 1927. And imagine you retired in any given year over that entire stretch of history. So eight out of 10 times, 5% rule actually works based on history. Now, You're going to say, wait, well, I don't want to go into retirement thinking, I got

• 8:37Speaker 03

  an eight out of 10 chance that I'm going to be okay and not run out of money. So it is riskier, but that's where the flexibility comes in. And I think that if you start out with a higher percentage withdrawal rate, you just know you have to be flexible if things turn and we go through really rough stretches. However, here are the scary numbers and why you may not want to subscribe to 5% is that there, if you go and look over that hunt, almost 100 years of data, you do have some rough outcomes. And there were, the worst outcome is money ran out in 12 years. That's no good.

• 9:09Speaker 02

  Wow.

• 9:10Speaker 03

  The fifth worst outcome was that money ran out over 19 years. However, again, 83% of the time, money lasted for 30 years plus, 80% of the time, 35 years plus, and 79% greater than 40 years without running out of money. So the way I would look at it historically, looking at market data and making sure you had a portfolio that that is, now, in this case, this was 100% stock portfolio, which is where we typically over time get our best rates of return. I would say it's very possible to do, but it's just a riskier approach to take. If you go to a balanced portfolio, Krista, where you have 60% stocks and 40%

• 9:52Speaker 03

  bonds and you use a 5% withdrawal rate, it is still 83% of the time it lasts 30 years plus. And then the percentages drop a little bit as you start making things last even longer. 35 years, it's only a 70% probability that it works. And a 45 year period, it's only a 55% probability that it works. So money does run out quicker, obviously, because we're starting at a higher withdrawal rate. So the key to me goes back to flexibility. I still believe 4% is a safer route to take, and it's trying to max out what you're withdrawing without running out. Those probabilities are, that's where you get into the 99% probability

• 10:35Speaker 03

  that you're not going to run out. So it's possible. It's just a little riskier path to take. And it's a debate, by the way, that will be never ending.

• 10:44Speaker 02

  All right, we'll go to questions now. This came in from Chip in Texas. I'm an avid listener and love Clark's approach to saving and spending less than you make. My kids all have benefited from his sage advice. This is probably for Wes, and I love the new dedication to financial information.

• 11:01Speaker 02

  My wife is two years older than I am and will not earn the 40 quarters needed to get social security on her own. I'm not sure how to think about when to take social security. I think I've been concentrating too much on when she reaches 70 and I'm 68 that I should take social security. If she was my same age, I wouldn't have that thought. So is it still worthwhile to take social security when I reach 70 to get my full amount and half of the 67 amount for the spousal benefit? Or are there other considerations? Our parents lived long into their 90s, so I am planning to pass the crossover points that seem to be in the 80s.

• 11:38Speaker 03

  Longevity, Chip, God willing, and I pray that you also have lots of longevity. It's one of the things I think about every day, longevity. I pray for that every day. Longevity for all of us and everyone around me. So I'm with you on that, Chip. I would say this, when it comes to planning for social security, we hear a lot about maximizing social security. And that's easier to do because we know, well, it's not perfectly easy to do because we don't know how long we're gonna live. But if you knew you're gonna live into your 90s, Chip, then the best way to do this is just wait till 70, wait to take for you for 70, and then, because hopefully your wife has lots of longevity, she gets a full

• 12:18Speaker 03

  50% of that, the highest number you can get. But really, the way I think about social security is not about maximizing, it's about optimizing it, meaning that you want it to be the right fit for you, and you want to start taking it in the right year. So to me, it's not about maximizing, it's optimizing for your particular financial situation. Now, in your case, and I'm keying in on this, if you're like your parents and you do live into your 80s and 90s, you got a long way to go. Meaning that if you do wait, you should have the years to make up with these now higher payments because you waited for the years that you didn't take social security. I think the way you're thinking about this,

• 12:59Speaker 03

  she can't collect social security until you start taking your social security, and she'll get 50% of whatever you're getting if you wait till your FRA, the full retirement age. And it sounds like he's already there if he's 68. So sure, you could go ahead and take it, you hit your FRA, she should get 50% of that. But it's 50% of a lower number. So this goes back to, in this case, I would lean towards waiting till 70. Because first of all, those numbers get to be really significant. You wait till 70, and I don't know the exact number for you, Chip, but I've seen 3,000, 3,500 over. I see people get over $4,000 a month if they're waiting all the way to 70. And then you get half of that.

• 13:44Speaker 03

  So that's, let's call it you get four, she gets two. You get $6,000 a month, which is really significant. And then the next benefit of waiting and having that higher number, if you do pass away first, she now assumes your higher payment. So the waiting then also benefits her almost as a little bit of an income insurance policy. So it's not the perfect and black and white right answer to say, wait till 70. However, I would lean towards that, knowing the longevity in your family and the situation that your wife is not able to collect social. I'd be leaning towards waiting.

• 14:20Speaker 02

  This came in from Andy in Idaho. Wes, a couple of weeks ago, you suggested to a listener to spread out the Roth conversions over a number of years to minimize the balance in the tax-deferred accounts before RMDs kick in. Is that really the best way to go? Sure, depending on if you have other income streams, the RMD might increase the tax burden. But wouldn't it be a benefit to leave some funds in the tax-deferred accounts to be able to use the standard deduction for RMD conversion after the age of 73? And if so, how much should be left in the accounts?

• 14:53Speaker 03

  Andy's not totally wrong in that, in that thinking. I still say, yes, you want to spread out your Roth conversions. And it's still about taxes today versus taxes tomorrow. And yes, for a lot of people, RMDs, the required minimum money you have to take out of your IRAs, it does lift people's tax bracket because you're having to take out money. So practically, by the time you're 73, you not only have your social security and maybe a pension and your RMDs, you're gonna have a fair amount of money coming in. And usually, you want to have most of your Roth conversions done by then because now you're being forced to pull money out of your retirement accounts. Now, if you've done most of the job, think about it.

• 15:35Speaker 03

  If you only have 50,000 or 30,000 left in an IRA, by the time you're 73, your RMDs aren't going to be that much anyway. So it's not going to be a huge amount of income. So, and again, I'm going to couch this with a little caveat here is that taxes are super complicated and there are these rolling progressive tax brackets and every bit of income you assume or receive in a year, it's not just a black and white calculation. It's a progressive and rolling calculation. So you've got to run the tax calculation, meet with your CPA and speak with your tax advisor on this. But the way I look at this is when you're doing a Roth conversion, you're creating income. And if you are creating

• 16:19Speaker 03

  income and it's still at a relatively low amount, then sure, your standard deduction could work. I know of folks, I've sat with people that have done this in lower tax years. Let's say you're a student and you're not making any money, you're waiting before you really get employed. Well, you've got a pretty easy Roth conversion there and your standard deduction can really offset a bunch of it. Now, you can't do $100,000 conversion, but if you're doing $15,000 and your standard deduction is $15,000, then sure, there's going to be a really big offset. So Andy, it's actually a good idea and a good thought, even when you get to 73, if you still have some converting left that you'd like to do, the standard deduction could help.

• 17:04Speaker 02

  Okay. Patrick in Massachusetts sent you this one. I get shares of my company's stock as part of my compensation. I'm not planning on keeping these as part of my investment portfolio and I typically donate the shares. Does it make sense to wait and see at the end of the year if the shares are up and donate as they will have more value or down and sell using capital losses to offset tax, then donate the cash equivalent? Or should I just donate regardless?

• 17:31Speaker 03

  I think just donate regardless because this, we don't know where we're going to be at the end of the year. If you knew that, hey, I'm just going to wait till the end of the year when my shares are higher. Well, then we would also, we put all of our money into those shares if we really knew they were going to be higher. So that would also require a crystal ball. And if you've got one of those, I'd love to take a look. But he's right. And this is for anybody thinking about donating stock. If it's appreciated, so if you paid $10 for stock, and even if when you're getting stock from a company, you're still going to have a basis on this. And if it's higher, then you are in a, usually a better situation to donate that,

• 18:13Speaker 03

  if you're looking to donate money, because you don't have to sell, pay taxes on the capital gain, and then donate the cash. You're allowed to donate the appreciated stock, and you get the deduction amount for the full value. Subject to, by the way, 30%, you can only do up to 30% of your adjusted gross income. So if you make $100,000 a year, the max you can do, if it's stock, is 30%, $30,000. The max you could do for cash, cash, is 60. So if you make $100,000, you can get a deduction up to $60,000. You can donate more, Krista, if you want to give away more than that. So, those are the parameters. 30% for stock, appreciated, 60% for cash.

• 18:55Speaker 03

  But he's totally right, thinking about, if the stock is lower today, or if you wait a couple of months, then you don't have a capital gain event to sell it, and you can actually take the loss. And a loss is an asset, because you can offset other gains. You could even, on your taxes, again, consult your tax advisor, but you can take about, you can take up to $3,000 of a capital loss against, and you can use that on your taxes. So if it's down, you're better off selling it, donating the cash. If it's up, appreciated stock, better to do it that way. And we don't know where the stock is going, so I usually would just advise, if you know

• 19:36Speaker 03

  you're going to make the donation, then I would do that as soon as it is available to do.

• 19:42Speaker 02

  Okay. So, coming up straight ahead, you're going to talk about what happens a year after a correction in the market.

• 19:49Speaker 03

  Let's talk about markets.

• 19:50Speaker 02

  All right, we'll be right back.

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• 22:05Speaker 03

  Don't miss huge deals dropping every week. Welcome back to Ask an Advisor. I'm Wes Moss here on the Clark Howard Show with Krista Devias. Hey there.

• 22:15Speaker 02

  Hey Wes.

• 22:16Speaker 03

  Where are we going? Just right into it?

• 22:17Speaker 02

  Let's get into it. What happens after a correction?

• 22:20Speaker 03

  Let me ask you this question. Markets correct 10%. Scary worries tariffs, the Doge, what's happening to the economy recession? What's your worry level when this happens? On a scale of one to 10, 10 freaked out, 1 just no care whatsoever. Love it.

• 22:35Speaker 02

  You know, I would say because I've worked with Clark and I've known you for so long, I don't panic. I really don't panic.

• 22:42Speaker 03

  What about down 20%?

• 22:44Speaker 02

  I don't because I still feel like I have a long view. I want to work for a long time, but I understand why people get very, very panicked.

• 22:50Speaker 03

  Does your anxiety go up at all or literally just stays flat line?

• 22:54Speaker 02

  I'm pretty flat line with it because I just, I don't even look at my accounts when it's like this. I just try to steady as I go as Clark has always. I mean, it's, I've worked with Clark for almost 28 years and it's, he's taught me that and I've seen a lot of ups and downs. And I just try to keep putting my money in every month and trust, trust this process. Yes.

• 23:17Speaker 03

  So unlike Krista, if you have human emotion here, then, and again, I think it's great because really you've been educated from this and you have a high level of conviction. And that's part of why educating and reading markets and market history, it really works. It helps to understand. Right? It's not that you don't have emotion, of course, it's that it doesn't, doesn't bother you, but it bothers a lot of folks. And that's just called being humans. It's human emotion. It's not enjoyable to see your account value drop. The pain of loss is four times as impactful as the joy of gain. And so we win a hundred dollars, we have a two on the excitement meter, we lose a hundred dollars, we have a negative, you know, eight on the pain meter.

• 24:01Speaker 03

  That's just how we're wired. So it's important to kind of understand that as we go through market corrections. And I think you guys have been really good here on the show of educating over all these years. So a lot of folks may be like, oh, it's 10% correction. I get it. However, it does raise eyebrows and it does worry people. And I know that because we get lots, I get lots of emails about this anytime the market has almost any hiccup. So we've had a full blown correction. It's in the books as one of now probably 49 since we've had World War II. So we had originally almost 50 corrections of 10% or more since World War II. Happen a lot. And the question is not so much the 10%, it's more, hey, wait a minute, is this going to go to 20? Are we getting into a bear market?

• 24:46Speaker 03

  Or remember when we went through the early 2000s, right after the 99 stock market tech bubble? The S and P 500 went down almost 50%. Now, that's tough. I think even you might get a little nervous about that.

• 25:00Speaker 02

  Sure, I would.

• 25:02Speaker 03

  And then that happened to get into the great financial crisis. We were down almost 50% for the S and P 500. Now, it didn't last long when we got to that level, but those hurt. And so the natural question, I think, is, well, what happens normally when we do go down 10%? And if you pull statistics from, if you go all the way back to the 40s, we've had, call it now, these are statistics before the most recent correction, but statistically, we've had 48 of them before this past one. And 75% of the time, Krista, it did not turn into a bear market. So 75% of the time, three quarters of the time, it did not go to the 20% or worse mark.

• 25:45Speaker 03

  So to me, that's a, it doesn't mean we're not going to go, continue to go further down. It just shows that most of the time, 10% corrections just don't turn into full blown bear markets. So that's one data point I think it's interesting and important. Secondly, if you go back again, this one goes back to the 1980s, and we've had 21 corrections since then. Well, where returns, six months later, a year later, and I think that's really instructive too. So there's two kinds of corrections. You've got a correction that's not accompanied by a recession. So that's just general market fear, economy's still going, everything underlying, it's still strong, but we're just nervous and maybe stocks are overvalued and they pull back. If you look at that type of pullback, then a year later, stock markets are up 12%.

• 26:33Speaker 03

  Up 12%, 12 months later. Now, if you were to look at all of the

• 26:37Speaker 02

  From the low?

• 26:39Speaker 03

  From the minus 10% threshold. So, once you go down 10, and you look at that level, we're up 11 to 12% a year later. Now, if you do look at the corrections that are accompanied by a bad economy, by a recession, we're not dramatically higher a year later, but we are actually at least a little bit higher. So, historically, we're up 1% to 2% 12 months later. So, that's the data. We do recover.

• 27:08Speaker 02

  I have to say also, Wes, just a note, like Clark always likes to say, "Well, when things are low, they're kind of on sale." And so, you keep putting, you know, dollar cost averaging. You put your money in, you're buying at a lower price. And I remember during a big correction, when my kids were really little, I had some cash and I decided to put it in their 529 accounts.

• 27:30Speaker 03

  When markets were down.

• 27:31Speaker 02

  And it really benefited me over time, since especially because my daughter went to a very expensive college.

• 27:37Speaker 03

  There's a quote I like about this period of time, which is about corrections, is that "The stock market is the only store that people run to the exits when prices go down." Right? It's just, but our natural intuition is not that prices are on sale, it's that they're going to keep going lower. I think that's really, that's really the fear. Here's another, if we go back over economic history, we actually have not had a period of time where we've had three bear markets. So, again, we're worried, most people are, we're dealing with 10% correction, but is it going to get to a bear market? Is it going to get worse? And the reality is, over the past, going all the way back to the 50s,

• 28:18Speaker 03

  we have not had three minus 20% within five years. So, again, it would be improbable because we had one in 2020. We had a bear market. Then we had another bear market in 2022. So, to have another one here in 2025, again, history doesn't point to that. And then probably, Krista, the, I think, which is the most practical part about looking at these corrections and why we don't want to sell out and go to cash. If you look over the course of economic, stock market history, and you were to do a tiny little dot for every day, whether we're up or down, and you go back, and you look at an 80 or 100-year period.

• 28:57Speaker 03

  Almost every single time you find a big down day or a big, heavy correction that happens quickly, it almost always lines up within days, or weeks, or certainly within months, that we have a big snapback. So almost every really bad down day or down week is accompanied in close proximity by a really big up day. So that just goes to show that the speed of declines, and this was the fifth fastest 10% correction we've had in history, really happened quickly. And I think that also worried people. But over the course of stock market history, the faster the decline, usually the faster recovery, which just goes

• 29:40Speaker 03

  to the fact that it's almost impossible to be able to time getting out and then getting right back in to get these snapbacks. So we can't really time it. It's almost impossible to do so. So we have to have your perspective, Krista, which is conviction that over time, markets will do well because the American economy is hard to stop. I think of it as the army of American productivity. A, the army of American productivity doesn't panic, and B, it just keeps marching forward.

• 30:09Speaker 02

  All right. And now we'll go to some questions. This one came in from Sri Ram in Washington. One, what is your opinion about the S and P 500 being top-heavy? Top 20 stocks make up about 50% of the total value, which is unprecedented historically. How can investors protect their portfolio in this scenario? Two, is passive investing the reason for the top-heavy market? And the link's to an article. And three, do you expect the future stock market returns to be comparable to historical returns? How does the low Fed interest rate affect returns?

• 30:43Speaker 03

  Okay, there have been a lot of articles about this recently. So first of all, if you go back over the last couple of years, you're absolutely right that we've had more concentration in the top 10 and 20 names than we've seen historically. Now, it is not rare to have 20, 25% concentrated in the top 10 names. That's pretty normal because the S and P 500 is cap-weighted. It's weighted by size, and the biggest companies at the top typically do take up 25%. The top, just those 10. What's happened is it's got even more concentrated. So that was a big story over the last couple of years that

• 31:23Speaker 03

  The mega cap companies were now are getting 30%, 32%, where are we today? Almost 35%. Is it because of passive investing? I don't think it is. I can see how you could make an argument that yeah, passive investing is pushing up the top 10 names. I don't think that's the case. I think that the companies that have emerged to be the biggest have gotten there because they have such incredibly strong businesses that investors have flocked to that. Now, it hasn't hurt that more people have been putting money into passive indexes and strategies that continue to feed that, but it's not that new of a phenomenon. I'd say it's just, it is even more so the case, concentration at the top.

• 32:08Speaker 03

  But again, a lot of that is because of the properties of the companies. The second thought here is, is that a problem? Is passive investing a problem? And is it creating this imbalance? And my opinion there is that it's important to know this, is that you, we think, oh, the S and P 500, it's super diversified, which it is, but is it that diversified when 35% of it, or 50% is really only 20 names? So I think it is important for investors to know that and understand that. I don't think it's a problem. There is some commentary out there that it's creating a bubble that will take down the stock market. But if you look, and there's no perfect answer here.

• 32:50Speaker 03

  We have $30 trillion in investment assets in the U.S. And almost, you could make the case that almost half of that is in some sort of passive vehicle, but there's $145 trillion in assets under management around the globe. And only about $15 trillion that's index fund passive here in the United States. So really, that's only 10%, which means there are millions and millions of people and trades and trillions and trillions of dollars that are still active managers looking for price discovery. And we're getting to a price that investors are agreeing upon. I don't think the passive movement, which has been around now for three decades, I

• 33:32Speaker 03

  don't think that's creating a bubble necessarily. However, this is a very important point.

• 33:40Speaker 03

  By only doing, let's call it the S and P 500, you should know that half of your money really is in 20 stocks, which leads us to saying, okay, how do you diversify around that? The short answer here is it's super easy to do. There are hundreds and thousands of other options out there, other ETFs, other low-cost funds that are not indexed to the S and P 500, and they're not overly top-heavy. In fact, you can find equal-weighted indexes or ETFs, equal-sector ETFs. You can buy individual ETFs that don't have as big of an exposure in the S and P 500. So I do like to have, even though I do own some S and P 500, I like to have other ETFs

• 34:24Speaker 03

  that make it so that I have a better balance, knowing that that index is top-heavy.

• 34:29Speaker 02

  And the third part of that, do you expect the future stock market returns to be comparable to historical returns?

• 34:34Speaker 03

  No, I can't answer that. I don't, I don't know.

• 34:38Speaker 02

  No crystal ball?

• 34:39Speaker 03

  Nobody, we had a, we had a question earlier that maybe he had a crystal ball. Nobody can tell you that. Nobody knows where we're going to be in a year from now. But if you're a student of market history and the US economy, we know we push forward. So I'm a big believer in reversion to the mean, meaning that what we've seen over 100 years will continue to play out over time. So I don't know if the market will be up 9% or 10% in any given year, but I still believe over time, and this is why I still invest and believe in it, is that I think our average returns will still be there as long as we're in the game for long enough.

• 35:15Speaker 02

  How many times a day do you get that question from clients?

• 35:18Speaker 03

  Most people do ask that. Well, how are we going to do this year?

• 35:21Speaker 02

  Yeah, yeah. Okay. This one came in from Patir in New York. Question for Wes, I'm 35, married, and we both started maxing out our Roth 401k contributions this year. We also max out our annual HSA contributions and invest in, invest the funds. Both the Roth 401k and HSA investments go entirely towards a target date fund.

• 35:41Speaker 03

  Schwab target date fund.

• 35:42Speaker 02

  The 2055 specifically.

• 35:44Speaker 03

  2055, that's way out there.

• 35:46Speaker 02

  Is the diversification in these funds enough to keep us covered as we save towards retirement? Or is funneling 100% of our retirement investments into a single target date fund a bad idea?

• 35:57Speaker 03

  The short answer is it's totally fine. I think it's a good solution for a lot of folks. I'm not saying this particular fund, but like most target date funds, this one, if you're going out 25 year or 30 years, 2055, the target date fund will be heavily weighted towards stocks. I think this Schwab one is probably 93% in equities and the rest is in fixed income. So it's just a small amount. So we have a little bit of dry powder, but mostly towards equities and he's 35 and it's US and it's international and small cap. I believe there's different sectors. Actually, I think the way these work, these target date funds are funds of different ETFs for the different sectors. So it's almost like a fund of low cost ETFs.

• 36:42Speaker 03

  So I'm not commenting whether it's a good or a bad investment. I'm just saying that any target, almost any target date fund for somebody that young and 35, that's appropriate. It's appropriate and super diversified. It's the, if you look and see just any one of those individual ETFs that are stock based are super broad, three, four, five, 700 different positions. So we had a lot of diversification within each sliver of that overall pie chart. Now, the only time I really have problems with target date funds are my main issue is that if you were to be in one of these target date funds, that's a 2025,

• 37:25Speaker 03

  the this year that we're in, and this is your retirement year, many of them are 60% in bonds. So you're starting out this retirement journey, which God willing is another 30 years. I think way too few with too little exposure to equity markets, which are really our inflation fighting elixir. Bonds can keep up with inflation and they should over time. Equities are there to outpace inflation so we can give ourselves a raise. So in these early stages, you want to be mostly equities anyway, if you have the risk tolerance for it. But I run into issues with target date funds when I'm getting close to that retirement

• 38:07Speaker 03

  date. I think they can get overly conservative for most people, not everyone.

• 38:11Speaker 02

  All right. That does it for us.

• 38:13Speaker 03

  That was a three parter.

• 38:13Speaker 02

  That was a three parter.

• 38:15Speaker 03

  No, the one before that was.

• 38:16Speaker 02

  The one before it was, yep.

• 38:18Speaker 03

  They're all really cool questions. The reason I've always liked doing this, Chris, is that even though you don't have the question and you're listening, it might pertain to you in some way. And I think when you're hearing other people that are having a struggle or a question, or you're in a financial quandary, and we're working through that, I think people can relate to that. And I think that's why these can be helpful.

• 38:41Speaker 02

  Absolutely. And again, if you have a question, go to Clark.com/ask. And thank you for joining us today. We hope you have a great rest of your day, and we'll see you on next week's Ask an Advisor.

• 38:57Speaker 04

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• 39:09Speaker 05

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