Pod Insights The Clark Howard Podcast 05.27.25 Ask An Advisor With Wes Moss About this episode 10-Step Checklist BEFORE You Retire and How Spending Money in Retirement Actually Works Ready to retire? Fiduciary financial advisor Wes Moss walks you through the essential 10-point checklist you should complete before leaving the workforce. Also, Wes breaks down the often-confusing topic of spending money in retirement. How do you actually access your funds, and what's the smart way to manage different account types? Learn the strategic way to tap into your different retirement "buckets" to make your money last and minimize taxes. Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the May 27, 2025, Ask an Advisor episode of the Clark Howard podcast. Submit your questions at 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
Transcript 0:05 Speaker 00 Welcome to Ask an Advisor. We're back.
0:07 Speaker 01 We're back.
0:08 Speaker 00 We're back. Wes Moss and Krista DeBias. And we're talking about investing, retirement, all sorts of great stuff. Today, we're going to get to your questions, which you can submit anytime at Clark.com/ask. You can ask a question for Wes.
0:23 Speaker 01 I've been noticing a lot of the questions are Wes and Krista.
0:26 Speaker 00 That's very nice.
0:26 Speaker 01 Which is cool.
0:27 Speaker 00 So please send those questions in. And then today, you're going to have a couple of really interesting topics. One is something people ask a lot, like, when am I ready to retire? When am I going to be ready to retire? And you actually have like a checklist.
0:39 Speaker 01 A 10-point checklist.
0:41 Speaker 00 Yeah, so that's, that's pretty awesome. And then you're also going to talk about transitioning from saving to retirement and what the spending in retirement really looks like.
0:51 Speaker 01 Yeah, how do you really, how do you start taking what you've been saving forever? How do you start withdrawing? And it sounds simple, but there's a lot to it.
1:00 Speaker 00 Awesome. Okay, well, let's get to it.
1:02 Speaker 01 We'll start with a checklist. And if you're thinking about retirement, you're, it's almost a little overwhelming of like, there's infinite things to think about and do. And I think it's important to consolidate that down so you're not, your head's not spinning around such a big situation. I'm going to stop working. When do I start withdrawing cash? Do I've got to worry about my home, kids? There's just so many things to worry about. So we'll just, let's consolidate that down into 10 things that we can stop the chaos of all the, all the different questions circling around that. And so here we go. So the first one, be counted up. Second one is map it out. Third is paint a picture of your retirement life. Four is lock in your income streams.
1:47 Speaker 01 I'll start with those quickly. The first one is, when I say count it up, you need to do an inventory of all of your different assets. That is the first step. And that is, it's, some people don't love to look at every different account. There's a little bit of a, there's some comfort with head in the sand. But that doesn't really work when it comes to planning out the next 20, 30 years of your life. So it's really you, and if you have a partner, sitting down and counting it up and saying, oh yeah, we have this account over here. And oh honey, don't you have this old 401k over here? So you get an inventory of that. And then with that same inventory would be your real estate, not just your investment accounts, but your real estate and any sort of debt. So that is the first step we've got to do.
2:30 Speaker 01 We've got to be honest with ourselves about what we have and what we don't have and then our liabilities. The second would be the thought around mapping out a retirement game plan. And this is one that I think just will calm everyone's fears down. And I've done a lot of research lately. I'm always studying happy versus unhappy retirees. One of the things I see in retirement planning is that it's pretty easy to do a retirement plan. And when you get to that stage where you're within a year, it's better to do it 10 years prior or even 20 years prior, but getting to retirement, it's pretty doable to do a plan.
3:11 Speaker 01 And there's great comfort for folks when you're getting into retirement to just get it done. The industry will provide, whether it's a website or an online planning calculator, or you sitting down with an advisor, a fiduciary that can help you map it out. The plans really work because they take in all the main variables that you need to understand. And then your spending, so you've got a, that part of that inventory is, hey, what are we going to spend? And that can be just a round number. It doesn't have to be exact. It needs to be directionally right. And then the plan itself accounts for an assumed rate of growth, an assumed rate of inflation,
3:49 Speaker 01 and puts all of those into a really comfortably clear way to figure out. And I think that reduces a bunch of anxiety. So I think mapping it out is number two. And again, that can be pretty comprehensive, your withdrawal strategy, your taxes, but that's all in number two. Number three, this is less about the numbers and more about painting a picture of your retirement life. I did this exercise with my dad and my stepmom called a couple of years ago. And I was just visiting Pennsylvania and on the refrigerator was her retirement roadmap, which I had them do in colored pencils.
4:27 Speaker 00 Oh, very nice.
4:28 Speaker 01 And that, it's a really fun exercise is to sit down and think of the things that you want to do. All the fun things that you're looking forward to doing, all of your corporate. Pursuits, all of your socialization, family, friends, hobbies, core pursuits, I call them. And I almost like to do a map of the United States or the world and you can point to where you want to go travel. And it's a really fun way to clarify all the fun things you want to do. I call it just a retirement roadmap. But if you do it in colored pencils, it may end up on the refrigerator wall. That was pretty cool to see. Number four, lock in your income streams, meaning that part of this may be in the planning,
5:08 Speaker 01 but they may not all be turned on, right? So you can have social security be turned on at any given point in the future up to the age 70. And you've got to make that decision. What about a pension from somewhere else? Maybe you have some sort of annuity that kicks in or a potential inherit. I see this a lot, folks that don't have annuities, but their parents maybe had annuities. And now they've inherited that income stream. So spend some time understanding those income streams. They're so important in retirement. They are, they're like kind of the lifeblood of spending without you tapping your investment account. So that's number four to me is lock in your income streams. Number five is something you can totally control.
5:51 Speaker 01 And if you don't, I've seen this spin out of control. Number five is finish big projects. Particularly with housing and this is super clear when you see somebody who retires. I've seen this. They retire and they say, well, we've got to have a little bit more time. So we're going to renovate the bathroom.
6:10 Speaker 00 Oh, man.
6:11 Speaker 01 Or we're going to renovate the kitchen and it's not a big project or we're just going to do the floors. And then it spins out of control. So it's doesn't, it's not just a budget thing, which that's a whole nother story that can get out of control.
6:24 Speaker 01 But it's a, it's a project problem too. It's, well, it's the floors and it's the kitchen, the bathrooms. The next thing you know, you plan on spending $50,000 and it's 250 and you've stopped working. So you don't have time to cushion that and say, well, wow, we really overspent here. And maybe I'm going to work another year to kind of pay for that. So get the big things done before you, you know, you're going to stop working. So the one to two to three years prior to retirement, get those big housing projects done.
6:57 Speaker 01 Number six is craft a plan to kill the mortgage. It is well documented in our research that retirement levels of happiness go up when your mortgage is either paid off or payoff is within sight. Again, not everybody is fortunate enough to pay off the mortgage before you retire, but have a plan to pay it off in those early years of retirement. Number seven, get your healthcare ducks in a row. There's a huge jump when you go from having your own private insurance prior to age 65 to getting onto Medicare. When you get onto Medicare, you're going to need to get some sort of supplemental program. And when you get your Medicare supplement program, you've got to figure out what doctors
7:40 Speaker 01 stay, what doctors are not in this plan. That will take typically meeting with someone that specializes within that space. Now, you can research and pick it on your own, but I think it's super important to get with someone, whether it's a referral from your advisor or a help, but find a healthcare advisor and make sure that you've got the right supplemental plan for your state.
8:01 Speaker 00 So I'm just curious about that real quick. A healthcare advisor, are there, do you have to be really careful that it's somebody who's really not trying to sell you on one specific plan?
8:11 Speaker 01 Healthcare advisors, nobody's making a big fortune. This is, they're not selling annuities. There's no giant commission when it comes to this.
8:18 Speaker 00 But you want someone who's more of a broker who's going to look at many different companies. So you don't want some repping a company.
8:25 Speaker 01 Options and supplemental options.
8:27 Speaker 00 Okay.
8:27 Speaker 01 In your state. And again, I think it's a, it's a hard industry to be in. It's not like these people are making huge amount of money helping. It's not free, but I think it's an important service.
8:38 Speaker 00 Okay.
8:38 Speaker 01 Number eight, this is where you tune up your estate plan. And this can, again, before you retire, it's really important to make sure that even if you have wills, are they up to date? Maybe you did a will and your kids were young and now they're grownups. Things change, beneficiaries change, the amount of assets you have change. So you're going to want to check this off the list of sitting down and making sure your will planning and your trust planning is in line with what you want if something happens to you and your spouse. Again, it's one of these things that'll swirl around in your head and giving investment and I'd say financial anxiety until you get it done. And that'll take an estate planning lawyer as well to do that.
9:23 Speaker 01 Number nine, rethink your insurance. You don't want to go into retirement without being properly insured. And that, again, it's a different phase of life. When you're in your 30s and you're trying to protect your kids with life insurance, maybe you don't need to do that anymore. Make sure your property and casualty insurance is up to date. Make sure you have some sort of umbrella policy when you're heading into retirement. The last thing you want to do is have some sort of weird liability for somebody that gets hurt at your house. So this is about protection. Insurance really is about protection and it's something you need to check off the list. And then number 10 on my list to check off is the digital side.
10:04 Speaker 01 So do a digital review and make sure that your investment accounts all have dual authentication. Make sure that your bank accounts have dual authentication. Make sure there's an area where your passwords are somewhere safe. And whether it's in an app or someplace in the house, that if something happens to you or your spouse, you can make sure that you can still get into your bank accounts.
10:27 Speaker 00 Or somebody else can.
10:29 Speaker 01 Or somebody else can. So getting some digital security, a lot of these are just getting our head out of the sand, facing up that we need to get them done. You go through that 10-point checklist, you're going to have a lot less anxiety when it comes to pulling the retirement trigger.
10:44 Speaker 00 Great. All right, I'm going to ask you a couple of questions and then everyone who listens to Clark, we have a West Stinks, a fun West Stinks I'm going to read.
10:52 Speaker 01 Y'all already have a West Stinks.
10:54 Speaker 00 Yes. This one's from Brian in Colorado. Some background on us. My wife and I are both 53, have been aggressive savers over the years. Our home cars and credit cards are paid off. We have no debt. When is it safe to call it quits and enjoy some of what we have worked so hard to save? We have three kids and hope to fund the cost of their undergraduate education. One child's finishing his sophomore year in college, so we have four plus four plus two equals 10 years of tuition remaining to cover. With the status of the economy and the potential of ageism, should we lose our jobs? I daydream about the possibility of an early retirement. Here are their savings. Retirement savings, mostly traditional. Some Roth IRAs, 401Ks and HSA, 2.7 million.
11:38 Speaker 00 Taxable investment accounts, a mix of index funds and dividend producing large cap stocks, 1.4 million. Cash, CDs, money markets, 1.1 million. We are slowly feeding this into the market, maybe 50,000 a year, but it never seems like the right time for a big purchase. 529 savings, 400K. As a follow-up question, when does it make sense to have a professional manager of accounts? I hate to pay someone 50K per year, 1% of 5 million, only to be disappointed when they can't outperform an S and P 500 index fund.
12:09 Speaker 01 Hmm, okay. It seems like, this is Brian in Colorado, I think it seems like education is paid for, for the most part. I mean, 10 years is a lot to pay for still, but $400,000 already in a 529 plan, that should cover most of it, unless they're all going to expensive private schools. And that's a really good point here, is that maybe I should put it on the retirement checklist. It should say, get your kids through college first. Now, most folks are already done with that, but when you're a really early retiree, you maybe have a crossover with kids in school. If I did an early retiree checklist, this would be on it, meaning the kid's school needs to be done. Because it's a little bit like a housing project.
12:52 Speaker 01 You never know how much the year or multiple years will cost. And maybe the kids go an extra year and they say, I still need, I still need more money for school. So you want to get done and independent before you're gonna, the daydream, which I love to hear about this, comes to reality. So that's one, I'd check that off the list. It sounds like it's mostly ready to be paid for. Number two, I mean, the assets add up to, I mean, 271411, they add up to a little over 5 million. 4% rule means that you could spend $200,000.
13:27 Speaker 01 You could spend 200 grand right out of the gate forever and then increase that by inflation. Let me make sure I'm doing my math right here. So 5 million times, let's call it.
13:37 Speaker 00 When you say the amount you can pull out, you mean gross, right?
13:40 Speaker 01 Right. So 4% of 5.1 is $204,000 a year. That's the gross amount that you could be withdrawing from your investment account. If you're an early retiree, the income streams aren't going to kick in yet. You're not going to be getting social security if you retire in your mid to late 50s. If you have a pension, that probably won't be kicking in. So it really is withdraw from the portfolio. But if that still covers the bills, the net amount after that 200, I think you're in completely fine shape. So I think that retirement is absolutely possible. There's two other quick questions. First of all, when you have that much in assets, 5 million level, you're usually not paying 1%. You're usually in the 0.9, 0.8, 0.7.
14:22 Speaker 01 Again, this totally depends on who you're working with, but it's still significant. 0.7 on 500 million is 35,000 a year. Absolutely. We, you're not paying a financial advisor ever to beat the S and P 500. That is not a thing. And I say that because if you want to beat the S and P 500 or any index, that's when you're either doing this on your own or you're looking at a hedge fund or a mutual fund. You're looking at an asset manager. And still, most of the time, that doesn't necessarily happen either unless you're taking a whole lot of risk. You're paying an advisor to make sure that all of those things you would like to go right over time, in fact, go as planned.
15:08 Speaker 01 And there's a lot to that. It's not just about beating the market. If you're worried about that, then you should probably just be a pure index fund investor and just get the market return and deal with the volatility that comes along with that. And that's not necessarily a bad plan either. But an advisor is going to make sure all those different areas like estate planning, asset protection, withdrawal strategy, allocation that you can live with in retirement. You get into retirement, investing gets scarier. It's just the reality. Again, more recent research I've looked at.
15:40 Speaker 01 Number one worry, even above health, Krista. Now, it's almost tied, but statistically, it's a lot. The number one concern in retirement is your finances and dealing with an uncontrollable situation like the economy going bad. And advisors are to get you through that, and that should be manageable to small percentage, can really pay dividends over time. Otherwise, you can just find a fund or two, or a hedge fund that is trying to, in fact, beat the market. That's, in my opinion, usually not a great strategy. And then lastly, I think he asked about dollar cost averaging in. It is a lot to put a million plus dollars to work. We're in an interesting interest rate environment where rates are not low at this point.
16:24 Speaker 01 So that's good for bond investors today, this kind of environment we're in. But investing a tiny bit of that to take a couple of years, I think if you're going to get invested in a balance plan, you want to do a six to nine month weighed in strategy as opposed to a multi-year way to do it.
16:44 Speaker 00 Okay. David in Massachusetts says, years ago, a financial pundit on TV talked about the power of compounding savings for retirement. At the time, I only had a checking and savings account, so I opened a self-directed brokerage and started putting a thousand dollars a month into it. I subscribed to a newsletter that followed a Buffett-style approach. Buy solid companies, hold long-term, avoid day trading. I'd invest in their monthly picks and only sell when they said to. 20 years later, I've built over $2 million. With the stock market feeling turbulent, I've been thinking about the future, specifically retirement. Considering moving some money from aggressive stocks into something more stable, so in about five years, when I retire, I won't be exposed to extreme swings. But I'm worried I'll be hit hard by capital gains taxes when I sell.
17:27 Speaker 00 Is there a smart way to shift from aggressive to conservative without a big tax hit? Would it make sense to sell from my regular brokerage and reinvest in a Roth? Since Roths are taxed upfront, would I be taxed twice? Once when selling, again when funding the Roth? Should I just leave it alone or sell what I need later? I've heard selling in a down market near retirement can hurt with no time to recoup losses, but won't leaving it in tempt fate?
17:52 Speaker 01 Yeah, look, David, this goes back to our last question. You may be an aggressive investor from 30 to 60, but when you get in retirement, you're worried about big swings in your retirement accounts. So you want to have some sort of balance there. There's two ways to look at this. One, we pull out our gain-loss tab. Now, if you've been investing and been buy and hold mostly for 20 years, you may not have any losses, maybe no losses at that point. But you certainly have, you'll have a few big winners. That's the way the market works. That's just the way that when you're diversified and you're investing, you're going to have a couple winners that really kind of carry the day, and you're going to have some that have
18:33 Speaker 01 been a little more lackluster. So you would start with anything that's even flat to down. You may not have that. You would potentially reduce your lower winners is one way to start doing that. And you do that slowly over time. So you're keeping your capital gains at a level where you may pay zero taxes, right? Certain income brackets, long-term capital gains are taxed at zero. So that's one strategy to start chipping away. And then what you're able to sell, even if it's at a gain, if you're in the right tax bracket, it could be minimal, it could be no to minimal long-term capital gains, and then you reinvest that in more safety assets. That's the way to do it. The other way to think about this would be
19:13 Speaker 01 almost reverse dollar-cost averaging, meaning that you do a schedule over time that, so this avoids really high peaks in the market and troughs in the market. You make a plan to say, look, I really want 20 or 30% of this to go to more conservative assets. So do a little bit every month, but you're selling here. So this is like reverse dollar-cost averaging. Sell 1% or 2% in any given month, and that will help ride out the market swings and give you the capital to reinvest in some of these more safety-oriented areas. Now, the Roth idea, this wouldn't be a Roth conversion because it's not coming from an IRA and putting
19:56 Speaker 01 it into a Roth. So that's not, we're not talking about conversions here. You're really just talking about Roth contributions and you can only do up if you're 50 plus, it's only $8,000 in any given year. And that would just go back to if you have earned income. If you have earned income of that much or more, you can make the contribution. But you're not going to want to say that the money from my brokerage is then going to go into a Roth. That's, that's more of a IRA to Roth conversion, but not in this situation.
20:25 Speaker 00 Okay. Now the West stinks. These are just fun. On a recent Ask Advisor.
20:30 Speaker 01 They're fun?
20:30 Speaker 00 Yes.
20:31 Speaker 01 I've seen some Clarks and some of them are kind of brutal.
20:33 Speaker 00 Well, he doesn't think so. He loves it. Wes called himself an apple connoisseur after stating
20:39 Speaker 01 Oh, this is about apples.
20:40 Speaker 00 "Crips pink apple is the best apple. He must not have tried the Sweet Tango, pronounced Sweet Tango, apple. Available from mid fall to early winter. It's the best apple on the planet. According to apple rankings.com and my own taste buds, the Sweet Tango apple is the holy grail of apples. Perfect in almost any way, scoring a 97 out of 100. The Crips pink apple scores a 42 out of 100 and is likened to horse food, according to apple rankings." And that's from Mike in Denver. And also Kevin wrote in to say, "You were incorrect with your apple choice. The snapdragons from Aldi are the best."
21:16 Speaker 01 Kevin is not totally wrong. There is a Snapdragon apple and I get these at Whole Foods and they're on a
21:21 Speaker 00 Oh, boy.
21:22 Speaker 01 No, no, no, I'm sorry. Fresh market, fresh market is where I found them. They're expensive.
21:26 Speaker 00 Clark is, Clark somewhere screaming right now. Aldi, Aldi.
21:30 Speaker 01 But there is nothing like the Snapdragon apple because they're small. They're almost like the apples we would pick off in the hometown orchard that you would feed to a horse. Like a horse would eat one of these in one bite. They're little. They're like for lunchboxes, but they're super snappy. They have a great name, Snapdragon. They're juicy, snappy. They last a long time. And the Snapdragon is really good. I'd rank it just under the pink, the crisp pink. Now, the Sweet Tango, I don't know what ridiculous website you're going to that would call a crisp pink a 42 out of 100 and be like a horse food. It's, this is the one apple you don't feed to a horse because it's so great.
22:15 Speaker 01 Horses don't, don't get the nuances between the, all these different apples. They're fine with like an old Granny Smith. You don't need to feed them a pink crisp or a Sweet Tango. I'm not saying the Sweet Tango is bad. It's a pretty good apple. The problem I have with it, I like the russeting, like it has some russeting which are like that little quirky thing. It's like the little barky thing that gets raised on the skin of an apple, kind of makes it a little more rustic.
22:42 Speaker 00 I had no idea there was such complexity to apples.
22:47 Speaker 01 You dig into a Sweet Tango and it can be a little yellowy and a little ivory oriented, and I don't like that. And they don't, they don't sit and last as well. But you may like them, and this is a preference thing. So I'm not going to disagree that the Sweet Tango is good. I'm just saying that the Chris Pink, a good one, is the best apple. It's a 99 on my scale out of 100, and it still beats the Sweet Tango. I would just, you're on the wrong website. Anybody that calls Pink Chris horse food is just, that's just, that's, I think that's heretical.
23:22 Speaker 00 Okay.
23:23 Speaker 01 That is blasphemy. That's what I'm looking for. That would be, that would be apple blasphemy.
23:29 Speaker 00 Apple blasphemy. Well, if you're still with us, we're going to get back to it coming up straight ahead, and we're going to talk about structuring what you spend in retirement.
23:40 Speaker 01 Welcome back to Ask an Advisor on the Clark Howard Show. Wes Moss along with Krista DeBias. Hello.
23:46 Speaker 00 Hello.
23:46 Speaker 01 What do we got? So I'm going right in. What are we talking about right now?
23:49 Speaker 00 How to spend in retirement.
23:50 Speaker 01 Spending in retirement. This came up, and here's why. One, I think you guys wanted me to talk about it. And two, I was doing a radio show a week ago. One of the producers who's on, on the air is in his early 30s. And he said, he goes, Wes, when you get to retirement, how do you actually take the money? Do I take it right from a 401k? Or do I have to put the money in another account in order to spend it? Because if you hadn't really thought about this, it is a question. It's not like a, your retirement accounts are not checking account. You don't just write checks out of them. So where does it go? How does it work? So that's the first question.
24:30 Speaker 01 The second question is, it's not as simple as I'm going to pull money out and just pay the tax and go. There's a lot of strategy behind this. It's incredibly important of how you use the three main buckets. And the buckets are individual or brokerage account, which could be savings account or taxable account. I call them an after-tax account. Number two is your, any retirement account, 403B, 401K, 457, and then IRA, individual retirement account. And then the third bucket is a Roth. And how you use those three really matters in managing your overall tax bracket. And the key, what we want to do is be able to keep and manage our tax bracket most efficiently for as long as we can when we get into retirement.
25:13 Speaker 01 And it all matters on which one of these buckets you tap first. So number one, we've got to get to the right age. So really, for most retirement plans, it's 59 and a half. That's the age when you can tap an IRA without paying a 10% penalty. Now, there's the rule of 55, which is if you retire from a job and you leave money in your 401K, you can start tapping without penalty at 55 plus. But for the most part, just, first of all, know the age you're able to tap these accounts. Again, mostly it's 59 and a half. For some folks, it could be 55. Secondly, we would need to recognize the three buckets. Third, let's start with a simple example. If you only have retirement accounts and you've been an amazing saver,
25:56 Speaker 01 and you've got a million dollars saved in a 401K plus an IRA, and you have $50,000 in an after-tax savings account. You still have plenty of money, but you really don't have many decisions to make. You don't want to spend your, what I call the most sacred bucket, which would be an after-tax account or Roth. But that money you can typically pull out in a very tax-efficient way. Roth, of course, it's going to be tax-free, as long as you've let it bake, as long as it needs to. A savings account that's just in cash, again, you're typically not going to have any sort of capital gains to use that. A brokerage account, this is where you can manage how you pull money out. But if you're only, most, 95% of your assets are retirement money, it just is what it is. In that case,
26:41 Speaker 01 You want to judiciously pull money out. So you only want to pull out just what you need to cover your expenses. Otherwise, you're increasing your overall adjusted gross income. And as that goes up, your tax bracket goes up. So you want to do it in a really measured way, if that's your only option. But most people are going to have a series of different accounts to decide on which to pull from when. And the general order, I would say, the way to think about this is after-tax are individual brokerage money first. Then IRA money goes next. And then you save the Roth for the bigger chunk expenses you would need in retirement. New roof, 20 grand.
27:22 Speaker 01 I don't want to take out of the IRA because I'm going to have to pay taxes on that money in order to get to it. The Roth should be tax-free. So I like to use the Roth as kind of a big expense chunk buffer in retirement. But that would be the order. Logistically, and this goes back to the 33-year-old's question, like, well, how does it really work? When you pull money from an IRA, it's typically going to go, if you're going to spend it, it's typically going to go to your checking account, where you actually spend money from. But to get it there, there's a process, which you've got to fill out IRA distribution forms, and you're going to have to elect your tax withholding. So there's a federal number, and there's a state number.
28:04 Speaker 01 Now, you don't have to withhold taxes on IRAs, IRA withdrawals. But most people like to keep their, if you know you're in the 20% tax bracket, and you're pulling money from an IRA, people will typically like to just withhold the 20%. That 20% sliver actually goes to the IRS, and then you get the net, actually. And then, let's say you're withholding. Now, if you're in Florida, you're not withholding for state. But if you're in a state with state income tax, let's call it 5%, then you're typically withholding 5% that goes to the state. So when it comes to what you receive in your bank account from a retirement plan distribution, it's typically net of the federal and the state withholding that you get to choose.
28:47 Speaker 01 If you're only in the 10%, if you're in the 10% bracket, you would typically elect to be 10%. If you don't do that, then at the end of the year, everything you pulled out will be towards your AGI, and you're going to have to pay taxes on it anyway. Now, if I looked at two different scenarios, let's say Sandy from Oklahoma and she has $300,000 in an IRA, 300,000 in brokerage and 150K in Roth, she got 750,000. And let's say she gets 30 in social security and she needs 70 to live, or she gets 40 in social and 70 to live, so she needs to take out $30,000 a year. She could elect to just take it all, day one, from the retirement account. And now her income's going to be the social security, all of the dividends and interest
29:32 Speaker 01 that she's getting already in the regular after-tax account, because that's a, I'd say a current pay-by-the-day account, anything that happens in a brokerage account, any transaction, dividend, interest, the sale, a capital gain or a capital loss, that's owed, the taxes on those transactions are owed in that given year. So by not electing to use any of that money, she's still having to pay some tax there. And she's paying tax on the whole $30,000 that she pulled out of the IRA. So that's kind of a tax bomb situation where you're, you're paying as much as you really would need to pay. Conversely, Sandy could say, "Well, I've got this 300,000 in brokerage, but 100,000
30:15 Speaker 01 of the three is in fixed income or bonds and it's mostly just pay me interest and it hasn't really appreciated." So she could elect to use that part and she's really just returning her own principal. So there may not be any capital gain there at that point. So she can pull money from that account with no capital gains potentially and not increase her income and not take anything from the IRA. So she keeps her overall adjusted gross income really low, which keeps her other tax rates low when it comes to the interest that she has to pay and the dividend tax rates are also income-based. So it makes the whole process more efficient. Two scenarios, one, not strategically thought out and higher tax, one strategically taking
31:00 Speaker 01 from the areas to keep and manage your tax bracket as low as possible. And that creates a big net difference to Sandy. So that's the way I'd look at it. Generally. Individually, individual account first, then IRA or 401K, then Roth for special occasion.
31:17 Speaker 00 Roth last. Well, not necessarily, but like you said, that makes sense. That's interesting. I never would have thought of all that. All right, we'll go to questions. We've got this one from Joe in Florida. We are 71, have about 500,000 saved in an IRA and traditional investment accounts. We have sufficient income from guaranteed sources to cover expenses and have about six months additional in a high-yield savings account. We look to our investments for additional income for play money and are unconcerned about leaving money behind. With that-
31:46 Speaker 01 That's an important piece of the equation, right?
31:48 Speaker 00 We choose to invest in dividend stocks and ETFs plus different high-yield bond funds. We withdraw 75% of earnings monthly with 20% of that sent to the IRS and the remaining 25% reinvested. With this strategy, we are easily able to average an extra $2,500 per month net of tax withholding. We've had a financial advisor tell us that we are being very foolish, that we would do better going into with an immediate annuity plus direct investment in the S and P and NASDAQ. He claims our strategy is unsustainable, even though it has worked just fine for a number of years now. What are your thoughts on this strategy for someone in our age group and situation? Never heard of one like this before.
32:29 Speaker 01 Yeah, unsustainable. The advisor's saying, is there something wrong with this?
32:34 Speaker 00 Mm-hmm.
32:35 Speaker 01 So let's just think of it, Joe. The math here is important. And on the surface, it sounds like this has been working. So he's been pulling this money out and his accounts still haven't gone down. So it's been working. So what's the problem, advisor? Well, let's do the math. 2,500 times 12 is 30,000. 30K divided by 500 is what? 6%. It's a 6% withdrawal rate. That's a little high. Those are the wrong numbers. Those are the wrong numbers to use. Because what's happening here, and this I think what your advisor's looking at, is that $2,500 is the net amount he's getting, but he's withholding
33:17 Speaker 01 20%. So really, what you've got to look at is 2,500 divided by, just for taxes, it's really about 3125 a month, times 12, is 375, divided by 500, Joe, it's 7.5%.
33:37 Speaker 01 That's why your advisor is saying, I think what he's probably saying is 7.5% is almost double the 4% withdrawal rate. It's the quote safe rate. And even though you're only receiving $2,500, it really is the gross number that's going out. It's that plus the taxes that are getting paid.
34:00 Speaker 00 But then they're reinvesting the 25% remaining. Does that make a difference?
34:05 Speaker 01 That shouldn't make a difference because he's actually not pulling from the account. So it's really just what is coming out? What is depleting the account? Now, here's the other, here's the other thought. If you go through a stretch of markets, it's pretty good.
34:17 Speaker 00 Right, which it has been.
34:18 Speaker 01 It could easily, that could easily work. You could have, you could pull 7.5% out and you still have more because you're making eight or nine.
34:26 Speaker 01 The 4% withdrawal rule is based on a long market cycle where you know that you will inevitably go through lower periods of rate of return. So it's trying to protect you when things don't go well in markets. The other thought is that you have, again, I don't know the dividend stocks here, but again, it's hard to argue with dividend stocks. I'm a big believer in that. But also if you have high yield bonds or closed end funds and they're a really big part of the overall allocation, they may pay out eight or 9%. The problem with that typically is that there is usually a principal loss because sometimes those distributions are reducing the value of the fund. If you have a $10 fund and it pays you a dollar, it's a 10% yield.
35:10 Speaker 01 Hey, it sounds great, but it's really not great if at the end of the year, the fund is at $9. It's essentially just, it's giving you your own money back. And that also could be happening here. I think that that's probably the disconnect here, Joe.
35:27 Speaker 01 So what would we do? If you do an immediate annuity, you may get a high, you're going to get a higher rate here than what your dividends will pay, but you lose your, the control of your money. You're essentially saying, look, here's my money, pay me forever until I die and/or my spouse. So it might give you a higher overall sustainable income. But it there's really not that it's not so much that there's nothing left at the end because that sounds like that's fine in your situation, Joe, but you do lose the control of being able to get to the money to go pay for a new roof if you need it. So I like keeping the liquidity and maybe just adjusting. You did say it was play money. So it doesn't seem like you have to pull out that much. So maybe you just reduce your withdrawal
36:10 Speaker 01 rate a little bit and get it closer to that four, four and a half percent range. A little compromise here, I think, makes everybody happy.
36:16 Speaker 00 All right. Akshay in North Carolina says, would you please talk about tax exempt bond funds such as VTEAX, VWAHX, or bond ETFs such as VTEB? When should I invest in tax exempt instruments like these? How can one include these types of funds in their investment strategy? And are there any risks we should be aware of?
36:36 Speaker 01 There's always risks, Ashkay. There's always risks. You're looking at tax free bonds in general, you're going to you're talking about municipal bonds. These are obligations not to the US government, but to a local government or a state. So they're pretty darn high credit. Now you look at some states that have bad credit or underwater, those municipal bonds will typically be rated pretty low. So it's just you can get a AAA rated municipal bond, or you can have an A rated, or you can have a B rated. So the credit of the municipality or the state is that goes down. So it's a rating. And you've got to be careful if you're in low rated, also higher yielding municipal bonds that are tax free at the federal level. But if you live in that same state and the
37:21 Speaker 01 bond is from that state, it's typically tax free in the state as well. So I would say that the risks are like any other bond risk. You're going to worry about the credit. Assuming you stick with really high quality municipal bonds, then it's hard to say they're the same credit level as the US government, but they're pretty close. Highly rated, let's call it state AAA rated bond, it has a that's a really high credit rating. But because they have a high credit rating and because they're tax free, the yields are lower. So the real math here, the calculus is looking at the tax equivalent yield. So if I get three and a half percent from a tax free bond. Okay, well, that's lower than I could get, let's say, in a taxable bond,
38:06 Speaker 01 but I don't have to pay taxes on it. So you have to take the tax-free yield and adjust it and make it a tax-equivalent yield. So if you're in the 70% tax rate, I take the 3.5% divided by 0.7. A 3.5% tax-free bond is equivalent to a 5% taxable bond. So that's the calculus you want to do here, is that if you net, in the end, something similar, maybe a little bit more, and keep your credit rating similar to what they would be in a corporate bond environment, then I'm all for investing in municipal bonds, and this would be outside of a retirement account.
38:46 Speaker 00 Okay. Kevin in Illinois says, "I'm 57 and have been contributing to our company's 401K and have about $90,000. Our company now offers a Roth option, and I've changed contributions to be half-traditional and half-Roth. I intend to work until 70 if I can. Should I go all Roth, traditional, or continue the mix?"
39:04 Speaker 01 Here's my rule of thumb on that, is that high tax bracket, stick with traditional; low tax bracket, do Roth. If you're somewhere in the middle, continue to do both. And meaning that if you're in the 30-plus% tax bracket, you're probably going to want to stick with the regular, good old-fashioned 401K contributions. If you're 15%, let's say, and under, go with a Roth. Make your contributions to the Roth 401K. A lot of people are in that middle ground, and I think it's a really smart way to do it, Kevin, is if you're in that middle tax range, split them 50/50 so that you have both.
39:42 Speaker 00 All right, well, that does it for this episode of Ask an Advisor. Thank you so much for listening or watching. Hope you'll stick with us, and tomorrow Clark will be back. Have a great rest of your day.
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