06.17.25 Ask An Advisor With Wes Moss

Secret Rule To Access Your IRA Early and Top 9 Things That Bring Joy in Retirement If you want to retire early, this rule can help! Fiduciary financial advisor Wes Moss breaks down the often-misunderstood Rule of 72(t). Discover how this IRS exception can allow you to access your IRA funds before age 59 ½ without incurring that hefty 10% early withdrawal penalty. Also, Wes dives into groundbreaking research on what truly brings joy and purpose in retirement. Wes shares surprising (and not-so-surprising) truths from his latest study of over 1,200 Americans. He reveals the top categories that consistently lead to a more purposeful and joyful post-career life. Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the June 17, 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: BOOKS BY WES MOSS / 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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• 1:04Speaker 02

  Welcome to Ask an Advisor. I'm Krista DeBias from Team Clark, here with our very own Wes Moss.

• 1:11Speaker 03

  Also from Team Clark.

• 1:12Speaker 02

  Yes.

• 1:13Speaker 03

  Krista, hi, everyone.

• 1:14Speaker 02

  We're here to talk about a theme that comes up a lot, but, and you've done a ton of research on Wes, and that is retiring early. So today, you've got a couple of topics that I think are really intriguing. The first one is about how if you're thinking of retiring earlier, there's a rule called 72T.

• 1:31Speaker 03

  Right, flows right off the tongue, 72T.

• 1:35Speaker 02

  Yeah. I've never heard of this rule. I've never heard of it. So I'm excited to hear about that. And then you're going to talk about if you do retire early, what brings you joy? Is that right?

• 1:44Speaker 03

  Yes, which is one of my favorite topics. We'll start first with the technical one, because when you're in the world of try to help people retire a little bit sooner, and I wrote a book called You Can Retire Sooner Than You Think, because I think people can. And subsequently, I've done more research that just shows there's really this magic moment that does happen, and maybe not for everyone, but just overall in America. We Our happiness levels rise the minute we retire. So there's something about that period of time, which is awesome. So I think that any rule that can help us get there a little bit sooner really helps. And we've talked about the rule of 55 here. Rule of 55, of course, is if you're at an employer and you leave 55 or later,

• 2:29Speaker 03

  you could access your 401k without the 10% penalty. But there's other rules. But what if you retire even sooner than that and you're 54? And maybe you've already have a bunch of money in IRAs and you don't have a lot in a 401k. There's still hope to be able to pull money out of a retirement, an IRA, and still be able to not have to deal with that 10% penalty. We do not like tickets, penalties, fines in America.

• 2:55Speaker 02

  Sure.

• 2:55Speaker 03

  Particularly when it comes to our retirement account. So here comes the rule 72T. And 72 is the section within the IRS code that talks about IRAs. And T is the section that talks about the 10% penalty. And this 72T is an exception to that. And here's how it works. If you are, let's say, age 54 and you've got an IRA and you are no longer going to be working, maybe you've saved plenty of money to retire and you're 54, super young to be a retiree, which is awesome. And I've seen this happen many times, not a ton, but it happens. Well, the problem is that, wait a minute, aren't I supposed to be 59 and a half before I can access these funds? That's a long way off.

• 3:39Speaker 03

  That's another almost six years. So if you apply this rule, 72T allows us to take something called substantial equal periodic payments, S E P P. So the substantially equal periodic payments, it's a formula you enroll in, if you will. And this is all per the IRS guideline. And this is pretty complicated. So you really have to, this is not like a DIY thing. You need a, usually you should have somebody at your financial institution helping with this. Because once you start it, you also don't want to mess it up.

• 4:12Speaker 02

  Okay.

• 4:13Speaker 03

  So the rule goes that you calculate a formula and there's two different or a couple of different ways. That you can arrive at the amount. Usually I see people use that what's called the amortization method, which allows you to to access about five, call it five and a half percent of the whatever the account value is.

• 4:33Speaker 02

  A year?

• 4:34Speaker 03

  Per year.

• 4:34Speaker 02

  Okay.

• 4:35Speaker 03

  So think a million dollars, call it $53,000 a year, somewhere in that 5% range. And then the rule goes that you have to take those payments for at least five years, or when you reach age 59 and a half, whichever is longer. So if you start Rule 72 T at 58, that's going to carry you through 59 and a half, and you're going to have to do it for at least five years.

• 5:03Speaker 02

  I'm sorry, is it the same amount? Like if I start with five and a half, do I have to keep doing that?

• 5:06Speaker 03

  Yeah, then that's part of the substantially equal periodic payments.

• 5:11Speaker 02

  Okay, okay.

• 5:12Speaker 03

  And they're the same payments. I don't know if they recalculate a little bit per year, but it's, the point is you're taking the same amount of money, and you have to do it for five years, or 59 and a half, whichever is longer. So if someone starts at 54, and let's just use Sarah as an example, she's going to have to take that all the way through 59 and a half, even if she goes and comes into a situation where she might not need it. Maybe a pension were to have kicked in, and she doesn't need it, you still have to take it, or else then you get a penalty.

• 5:41Speaker 02

  Okay.

• 5:41Speaker 03

  So you kind of lock yourself into doing this for a pretty long period of time, but it allows you to access the money in your IRA without the 10% penalty, but only a certain amount, which again is per a table and a schedule that you're going to get from the IRS, and you have to choose the amortization schedule, if you will, on how much you can take. So think of it this way. Sarah, let's say she has two IRAs, and this is where it gets even a little more complicated. You don't have to do it on all your IRAs. You can choose an IRA to do it. Let's say she has $600,000 in one IRA and $400,000 in another IRA. Well, she can use the Rule 72 T. Let's say she needs two grand a month.

• 6:24Speaker 03

  So she could take the $400,000 IRA and apply this rule to that, which would give her around, call it 20, about $2,000 a month, which kind of carries Sarah through. Now, what if she needed more? And that's, I'm going to cut it. Maybe she says, I need four grand a month from my retirement accounts. Well, then you could either take the bigger IRA or remember within IRAs, you're allowed to roll money into each other as long as they are qualified rollovers. So you can almost right-size your IRA to the size you need that 5%, 5.5% is enough coming out in these substantially equal periodic payments. So that Sarah can kind of back into how much she would need in any given IRA

• 7:09Speaker 03

  in order to fund her retirement. And then, once she's done, you go back to the normal rules that apply. So it's a way to access IRA money early. It can be earlier than the rule of 55. This is, again, applies to your retirement, individual retirement accounts, not your 401K accounts.

• 7:30Speaker 02

  Right, okay.

• 7:31Speaker 03

  So just in the bag of tricks to get money out a little early, or maybe a lot early, and avoid that 10% penalty.

• 7:38Speaker 02

  Okay, well, I've got questions for you, of course, Wes. And if you want to ask Wes a question, or Clark, you can go to Clark.com/ask. Mark in Florida sent this one in for you. I've really enjoyed listening to you on Clark's show. Two questions.

• 7:51Speaker 03

  Thank you, Mark.

• 7:51Speaker 02

  First, I have an IRA and a 401K. Combined, they are close to $300,000. Did I hear correctly that you can move your IRA into your 401K? And if so, is that a good thing? Secondly, I'm 60 and will work for five and a half more years. I do not have a Roth IRA. Since my company does not have a match because we have a pension, should I start a Roth IRA to have an additional pool of money for retirement?

• 8:14Speaker 03

  Okay, Mark, IRA and a 401K, no Roth, has a, Mark, you have a pension.

• 8:22Speaker 03

  And I think the critical point here is age 60. So, and Mark also asked about a reverse rollover here where you, yes, you can take money that's already in an IRA account and I call it a reverse rollover into your 401k, your company plan that you're currently at, at work. If that makes sense for you and it, and you want to do it, A, maybe you like the 401k plan, maybe it's super low cost, maybe you like the investment options, maybe it's flexible, easy to see, great technology interface. So, these are all the things that we, we would be looking for in order to make that decision of rolling money to one retirement account to another.

• 9:01Speaker 03

  But the other thing is that because Mark, you're 60, you already are past the age of 59 and a half. So you don't, you would never have to utilize that rule of 55. The rule of 55 is way to access your money a little bit early without the penalty in a 401k. So, since you're already past that line of demarcation, the 59 and a half, and you don't have to worry about a 10% penalty, if you were to stop working now, you can pull money out of an IRA or 401k without the 10% penalty. So, I think the Roth is the right option here because you've got a pension coming, IRA money you already have, 401k money you already have. I think that the, when it comes to that bucket strategy of how you control your tax rate

• 9:46Speaker 03

  as best as you can, when it gets to retirement, it is nice to have a brokerage account, a Roth account, an IRA account. And it sounds like that's the one piece that you could be adding to here. So, I think the Roth, starting the Roth between now and when you retire, whether it's, Mark, you probably have a Roth 401k option as well. If not, you can always do the $8,000 a year in the regular Roth contribution.

• 10:12Speaker 02

  Okay. Chris in Virginia says, Wes, I'm 50 years old, planning to retire at 57. I'm targeting three and a half total in retirement savings. I made a mistake in late 2019 when COVID-19 was first in the news, didn't a lot of people.

• 10:25Speaker 03

  2019. So, he was, yeah. That's right. It did start in 2019.

• 10:29Speaker 02

  I let fear take hold and I moved around 15%. Of my 401k from an index fund to a short term reserve fund, somewhere between a money market and short term bond fund. Its yield ranges between 2 and 2.5 percent. I have 2 million in my 401k, so 300,000 in dry powder at age 50 seems overly conservative. I know I missed growth due to the fear I had five years ago and I can't change the past. I'm thinking I should slowly move some of that balance back to the index fund each month and wonder if I should lower my 401k contribution and instead take the difference and put it in a money market or bond fund outside of my 401k that has a higher yield. My choices in the 401k are very limited for stable value and dry powder.

• 11:11Speaker 02

  This would give me access to those safe funds without the restrictions of the 401k such as penalties and RMDs. I know I lose the tax shelter of the 401k and would pay ordinary income tax on the portion I don't contribute to the 401k. Putting it in a Roth seems to make it a wash. Should I let it ride as $300,000 is around three years worth of dry powder when I retire and around seven years? And am I overthinking this?

• 11:35Speaker 03

  Chris, no, you're not overthinking this. I think that you are like any investor that has regret because in retrospect, everything makes perfect sense. Well, remember 2019, scary pandemic's coming. Wait a minute, it's overseas. Is it coming here? Yes, it's coming here. Then you get into February and you start to see markets drop. And then all of a sudden, I remember being on a call, it was a media call with the CDC and the lady that was running the CDC at the time was freaked out and you could just tell. And they started talking about lockdowns and shutdowns and isolation.

• 12:15Speaker 03

  And I remember thinking, holy cow. And that same day, I think a bunch of journalists were listening to that call. The market was down like 2,000 points. And the next thing you know, we get into March, March Madness is canceled. Wait a minute. And the world literally shuts down. So hey, everybody just stay home for two weeks, which obviously turned into a lot longer than that. So we were all thinking like, wait a minute, there is no time in modern history where the largest economy in the world just shuts down. Like, how can this, this is? Totally unprecedented because it was and it was really scary. Well, what is that going to do to company earnings? Stock market is down. So I get it.

• 12:55Speaker 03

  I just wanted to revisit that, the reality of how scary that period was because it very, it very much was. Then all of a sudden the Federal Reserve came in and said, wait a minute. It's okay, we're going to buy everything. We're going to inject money into the system. We're going to buy bonds. We're going to even buy stocks if we need to. Again, what? So all of a sudden this big cascade bear market that we got in 30 days corrected itself super quickly. And then the world slowly, slowly healed after that. And the markets got much better and the markets got better really quickly. The rest of the world slowly healed from that and we still have effects today. I think we'll have effects for many more years from now.

• 13:35Speaker 03

  When it comes to the economy, the housing market, these are, there's still big effects from COVID. But when you look in retrospect, you think, wait, why did I sell anything? I should have stayed a hundred percent invested. But guess what? Over the last five years, there's been another couple of bear markets. And Mark, you have stayed invested. What I'm getting from this, and maybe you don't see it, but what I'm seeing is that it's good for you to have some dry powder. $300,000, A, it's nominally a good number because you know, the world goes terribly again. I still have my safe money that would help me spend if I really needed it for several more years.

• 14:18Speaker 03

  And that helps you be a better equity investor because that's the volatile part. So I would contend that first of all, 300,000, 15% of your 401k and really less than 10% of your overall assets in safety. That means you're 85 to 90% invested in stock. That doesn't seem too conservative for me as you're now in your 50s. So maybe give that balance that you forced yourself into in retrospect. Maybe you would have a little bit more money if the hundred percent invested, but you're well invested. And I think that balance really helps you. So don't discount that. The other piece of that, that I noticed in this question is that.

• 14:59Speaker 03

  Your short-term bond funds or stable market funds, they usually are going to pay prevailing money market rates. So, right now, that's around 4%, just call it 3.8% to 4.1%. If you're looking at that option and it's only been giving you 2%, a lot of, I think you may be looking at the total return. And that makes sense, too, that it's 2% is a lot lower than 4% because there were a couple of years after COVID when interest rates were at zero and those probably didn't make much. I think, so just go back and check, is your stable value, maybe it's paying more like 4% now, but it wasn't a couple of years ago. So it may not be as low as you think it is.

• 15:43Speaker 03

  So there's a lot to that question. You're not overthinking it. You're just being a normal human wishing that you had perfectly done everything, which is easy to think about and do in retrospect. But that balance, my friend, I think it makes you a better investor moving forward.

• 15:59Speaker 02

  And how about the idea of lowering the 401k contributions and contributing to a Roth to have that dry powder more accessible?

• 16:07Speaker 03

  I don't see that as a bad idea either. I mean, there's so much flexibility around a Roth. It's the ultimate account. Now granted, you do have to wait till you're at retirement age still. You still want to be 59 and a half before you access it. You're getting there.

• 16:22Speaker 02

  You can withdraw your contributions in an emergency.

• 16:25Speaker 03

  And you can do contributions. So I like the idea of funding a Roth. Very few situations where a Roth isn't a good idea. So that could be something to do as well.

• 16:36Speaker 02

  Okay, Ed in North Carolina says, "I was surprised that Wes recently approved of a young investor using an S&P 500 fund. It's not diversified and has a lot of exposure to just a few stocks. I'm sure that none of Wes's clients are invested in only the S&P 500. If Wes wants to keep it simple for Young Investor, there are globally diversified funds he could recommend. Or if people are reluctant to invest globally, there are many total market index funds. Wes did recommend at the end of the discussion that people should invest in other sectors outside of the S&P 500, but didn't give much detail. Why not recommend a total market index fund?"

• 17:10Speaker 03

  You know, Ed, you could almost put this on a Wes Stinks.

• 17:13Speaker 02

  I know, we don't have a Wes Stinks, but maybe we'll... Well, we read another one, but I don't know.

• 17:19Speaker 03

  It was somebody that didn't like my apple choices.

• 17:21Speaker 02

  Yes.

• 17:21Speaker 03

  Wasn't it? So Ed, I'm surprised that you're surprised that I talked about having a young person in S and P 500 index fund. Of course, that can make a lot of sense. So yes, we, and I've done some segments here that the S and P has gotten really top heavy. It's call it 30, I think it's 32% today of the total S and P 500 is moved by the top 10 stocks because it's cap weighted. But if you look back over the last 20, 30 years, it's usually 20, 22, 25% in those top names. It's just the way the index works. So it's almost a success biased index. The really good companies that are performing, they get bigger and bigger,

• 18:05Speaker 03

  and then they carry the day. Yes, it's more top heavy today than it's ever been. So I share that same concern. The thought, though, around saying, well, let's just look at a total market index in the United States. I've done that. And if you look at a total market index, so S and P 500 is 500 companies. Total market index might have 3,000 companies. But guess what? Those are cap weighted too. And if you look at a total market index fund in the United States, and I'm generalizing here, and an S and P 500 fund, the top 10 holdings are pretty much the same anyway, because they're, again, they're mostly cap

• 18:44Speaker 03

  weighted. So any sort of total index, unless it's specifically designed to be equally weighted, and there's a lot fewer of those out there, or equal sector weighted, and those are even more rare, easy to find, but, but not, they're not trillions of dollars in these investments, then you're, you're still, you end up with a lot of concentration at the top just because of company size, market cap size. But at the same time, I don't disagree. So I think if you're in your twenties, there's so much power in picking something and setting it and forgetting it and just adding and just adding and just adding. And then you look up and you're 30, and you've given this great amount of time.

• 19:27Speaker 03

  And I think there's a lot of power just in doing that. Keep it, making it simple, and an index fund can do that. Now, I agree that I like having other sectors. So there's very, very limited exposure in the S and P 500 to utilities. Very small percentage of S and P 500 is energy. Very small percentage is real estate. So to counter that, you can either look to add those specific indices or index fund ETFs with those sectors that are underrepresented. So you can start to counterweight very tech-heavy S and P 500 or total market index. And you can go back and look at the more equal weighted indexes, which will have the same amount in each stock.

• 20:12Speaker 03

  Still, you are weighted towards techs because there's more technology stocks than anything else. And you can go back and look at equal sector funds. You've got to usually do a little more digging. And oftentimes, they're not available in a 401k. If you go to your average 401k in America, it's going to have 15, 20 funds. It's going to be more rare to have all these equally weighted options. So now, almost any 401k you look at is going to have some international. So you absolutely can counterweight just having US with an international fund typically. So I'm a big believer in balance. I don't want everything in just an S and P 500 fund.

• 20:55Speaker 03

  But for somebody younger, it's a good place to start.

• 20:59Speaker 02

  Okay.

• 21:00Speaker 03

  Thank you, Ed.

• 21:01Speaker 02

  Next, you're going to talk about something that we need to think about no matter what age we are. And I've really been thinking about this lately. What is actually going to make us happy? What actually does bring joy in retirement?

• 21:12Speaker 03

  Activities, core pursuits. This is kind of the opposite of the technical conversation we just had around 722. This one's maybe more fun.

• 21:20Speaker 02

  Yeah, if you have a lot of money and you can't enjoy it, what's the point?

• 21:24Speaker 03

  Yeah, exactly. We're going to talk about that right after the break.

• 21:26Speaker 02

  Okay.

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  Restrictions apply.

• 23:43Speaker 02

  We're back and Wes, you're back with brand new hot off the press research.

• 23:47Speaker 03

  It is. This all got started about 15 years ago and I started researching the habits of happy versus unhappy retirees. It came from the thought of happiest baby on the block.

• 23:58Speaker 02

  Yes.

• 23:59Speaker 03

  And I thought, well, why don't we know what makes babies happy? Which, by the way, I don't think that book worked. I don't know. But I do think the research we found about what makes retirees happy versus unhappy, I think that does work. And it's all in the context of retiring just a little bit sooner, I'm fine with. And or just having that in mind. But when we get there, regardless, as you said earlier, all the money in the world doesn't necessarily make for a happy retirement. It definitely helps. And that's a whole nother part of the research on different asset levels. But once we're there, there's some really clear behavior that works and leads to a happy retirement. When I'm comparing these two groups, I'm always looking at the top two quintiles of

• 24:44Speaker 03

  happy respondents versus the bottom two, and then comparing those habits. We take, I actually take out the neutral. So we're looking at the habits of happy versus unhappy. And one of the things I'm very interested in, and this is, this should be the fun part about retirement, is something I call core pursuits. I also call them hobbies on steroids. Our friend Joe Saul-Sehi from Stacking Benjamins, he calls them super activities, which I actually probably like more than any of the things I've come up with. But a super activity or a core pursuit is something, it's not just a hobby that you do once in a while. It's something that really fills your time, your schedule, your week, your month, your

• 25:24Speaker 03

  year, that you really have a real, you have a, I would say, passion for, but I'm sometimes, I like to limit that word because not everything we do has to be this massive passion. But I think collectively, our core pursuits can add up to what essentially becomes your new life purpose over time. And you don't have to start a charity in another country to help the homeless. And it just, you don't have to do something world changing to be a purpose. Your purpose can be doing in regular patterns, all the things that you love to do, and they bring you purpose, and they bring you socialization, they bring you joy in retirement.

• 26:08Speaker 03

  So in my most recent study, I studied 1,200 Americans across the map to the US Census. And there was one open ended question, which is what brings you the most joy, purpose, happiness in retirement? The answers were somewhat surprising, but not so surprising, but it's really interesting to look at what people said. So first of all, and I'll back up, the number of these things you have, core pursuits, does matter. So happy retirees tend to have five or more. My old research actually showed a little bit less than this, but the brand new research in 2025 shows to have a higher propensity to be in the happy retiree camp, we want

• 26:51Speaker 03

  to have five or more of these core pursuits. And unhappy retirees tend to have four or less on average. So that's you want more is better when it comes to core pursuits. Even more importantly, the amount of time we spend on them per week matters a lot. And this is statistically significant data that shows, and I'm rounding here, the average happy retiree spends about 18 hours a week. That's a big chunk of time on their core pursuits and things they love to do. Unhappy group spends about 13. So it's about a six hour per week difference. It's 280 hours a year. It's a big chunk of time. So it's not just the number of core pursuits, it's the amount of time we spend doing them is are we structuring our week around these? But here's what showed up. And I look at

• 27:36Speaker 03

  it in these open ended responses, which is really fun to read through, to boil down to what are the top categories? Well, the top categories of what people said here, there's this is the core pursuit that makes me the happiest. This is what I like to do the most. So at the very bottom, the out of nine, nine out of nine, the least amount came back to work. So there was some gig work in there, but there I didn't see a lot of it was the least important thing to folks. And again, happier retirees can be doing part-time work. That's part of why that's in that spiritual is on the list, learning on the list, family. So some people just said, literally, I just want to be with my family, spend time with my family, kids, grandkids, that's it.

• 28:17Speaker 03

  Social, some people just said, I, what brings me the most joy is I just like being with my friends and being in my social groups. That's it. Physical activity is getting near the top. Some people just said, exercising makes me feel great and it is the number one thing when it comes to my retirement. Volunteering is on the list as number three. Number two, with the most, second most mentions out of this entire research study was the adventure category. What's in that category? Travel. Travel is in that category. RVing shows up a lot. People traveling around the country. And then the number one category, a little surprising to me, was creative.

• 28:57Speaker 03

  Now, part of it is that I took the liberty of categorizing actual activities. So I, so some people said music, some people said gardening, some people said walking, running, bike. Those got categorized. Those are actual activities that got categorized into these bigger categories. And I had to put gardening somewhere. And I couldn't figure out if gardening was physical activity. Is it learning? The learning category was actually in here as well.

• 29:27Speaker 02

  Form of being in nature.

• 29:28Speaker 03

  So I put it in creative. To me, that's the best category for it because it is a very creative thing that you control. You could have three beds, five beds, 100 beds. You get to choose what you're cultivating and what you're growing. And it's almost like you're working on a painting in real life as you do it every single day or every couple of days. You're in the garden, you're creating. So I think of it as creative pursuit. But those are the main categories. Creative shows up as number one as the, the main category of what brings us joy. And there's a bunch within creative. Gardening is one. Music is another, as an example. Painting showed up a bunch. Art showed up a bunch. Adventure, as we can imagine, travel, and then volunteering. And what I would say is that seven out of

• 30:12Speaker 03

  those nine categories, the real theme in all of them, socialization.

• 30:17Speaker 02

  Community. Yeah.

• 30:19Speaker 03

  And our community. And that is the overarching theme of all of these. Most people that said travel, they also stated. Travel with my, fill in the blank, travel with my physical activity was very often golfing with my, walking with my friends, neighbors. So the theme in seven out of the nine main categories, the underlying theme was socialization. And that is what brings us joy in retirement. So the money part of this, of course, gives us the flexible freedom and time to be able to do these things. You don't need all the money in the world, though, to be social at all. And that's, that is a key takeaway when it comes to doing what we want to do. These are, this is what Americans report back is the things that bring them the most joy. It

• 31:04Speaker 03

  brings them purpose. And I hope we can do the same. And you're thinking about all those things.

• 31:09Speaker 02

  I sure am.

• 31:09Speaker 03

  Not that you're retiring anytime soon.

• 31:11Speaker 02

  No, but I think it's important to plan. And you don't want to just start when you're retired. You want to learn what you like and what brings you joy before, I think.

• 31:18Speaker 03

  Very true.

• 31:19Speaker 02

  All right. I have lots of questions for you. I'm going to start with Jay in Missouri. To Wes, I love your segments and the common sense approach to most of the issues raised. I obtained a quote for an immediate annuity that will pay out approximately 6.65% of the amount deposited for the joint lives of my wife and me. This is significantly more than the safe 4% withdrawal rate from my IRA. That seems like a pretty good deal. It is fixed for our lives, so it will not increase with inflation or earnings in the stock market, and it goes away at our deaths. So it would eliminate any residual for our kids, but it would be a large boost to income in the early years. Any other things to look at?

• 31:59Speaker 03

  Jay, really, that's a, again, first time I've gotten an immediate annuity question here. And you're right. And that sounds about right. And I don't know your exact age, but I would suspect you're probably retirement age now. And you're thinking, okay, well, if I can use the 4% rule, or this annuity overhears essentially, and again, this all goes back to the claims paying ability. And we say, there is, there really are no guarantees ever, anywhere, ever. And when we do an immediate annuity, we are counting, of course, on that, hopefully, very highly rated company that you're getting annuity from. So, and yes, there's even backups to the annuity companies if something happens. So there's a very high

• 32:42Speaker 03

  probability that it, the promise would be fulfilled, but it is a guarantee, quote, just from a company. It's not from the US government. It's not from, it's, it's from a company. So just remember that, number one.

• 32:57Speaker 03

  Number two, I just, I want to make a distinction. This is important. You said 4% withdrawal rule. There's a big difference between a 4% rate of return and a withdrawal rate. And you're conflating the two here. You're saying, well, I can only take 4%, but I can make 6.65%. Those are two different things. So just remember that that's apples and oranges here. The withdrawal rate, so let's compare these two. I would be thinking, well, it boils down to this. 6.65% or 6,650 bucks per 100K you're getting from an immediate annuity and no liquidity or no money.

• 33:39Speaker 03

  So that 100 in my example is gone, but you get 6,650 a year. Now, also, you made the great point that in 20 years, $6,650 is going to feel more like four grand today. So it's going to be eroded. The purchasing power of that is eroded. And that's part of why this calculates, it's right on the surface, wow, 6.65, that's 2%. Now, here's what also makes the 4% withdrawal rate confusing is that right now, the quote, "risk-free" rate is around 4%, meaning that's about what you can get in US Treasuries with very, very little risk. It's backed by the US government, not insurance company.

• 34:19Speaker 03

  You're also conflating that I can withdraw 4% and not run out. So here's the other option. Option A is no cash and a payment. Option B is taking 4% approximately, and that can vary from 4, 4.5 depending, and you still have all your money. That's a consideration here. So I'm not totally against an immediate annuity because I believe more income streams are better with Happy Retirement Research. We want differentiation and diversification in our income streams. So the way I would look at this is, Jay, I would look at taking a portion of your IRA money. Maybe it's 20%, maybe it's 30%, and you're getting rid of that liquidity.

• 35:02Speaker 03

  And there's no money inherited. That money for your heirs goes away too. It's just you and your spouse. When both of you are gone, the money is with the insurance company. So I would consider using that for a portion if it boosts your overall income or how much you can really take each year. 4 is a little too little for you. 6.5 does the job.

• 35:25Speaker 03

  I wouldn't go all to the six and a half. I would be looking at maybe taking a portion in an immediate annuity and then utilizing the 4% plus rule, which is a rule of thumb, and at least keeping a healthy portion of your overall investments still under your control, not the annuity company.

• 35:43Speaker 02

  Okay, Sean in Nebraska says, "My wife and I are both 38 and plan to retire between ages 55 and 57. Our retirement income will consist of our pensions and my VA disability compensation, which together should cover approximately 70% of our projected gross income at retirement. We are currently maximizing our HSA and Roth IRA contributions. I have the option to contribute to a 457B, but there's no employer match. We are considering whether to invest the 457B or a brokerage account to further supplement our retirement income from pensions and VA disability until we reach age 59 and a half and social security benefits begin. My concern is potentially increasing our tax bracket by contributing too much to the 457B.

• 36:28Speaker 02

  Will it be better to focus on the brokerage account? And is this general rule of thumb we could use between these two accounts? Is there a general rule of thumb? And I just want to say really quickly, first of all, thank you for your service, Sean. And how impressive that they have this plan in place when they're 38 years old.

• 36:44Speaker 03

  It's pretty awesome.

• 36:45Speaker 02

  I bet they know their core pursuits and what those are going to be, too.

• 36:48Speaker 03

  Hopefully, I give you some good examples today to think about. So you guys are young, Sean in Nebraska. You get, it was a VA-

• 36:56Speaker 02

  VA disability.

• 36:58Speaker 03

  Pension, social security, which would be, it could start at 62, now it's 59 and a half. Okay, so Sean, this is what I would think here. The 457, we haven't gotten a ton of questions around that, but just as a reminder, that's essentially like a 401K for public service, folks. 401K, 403B, typically more teachers, doctors, nurses, 403B, but, but public service is going to be 457. The cool thing about a 457 plan is that the rules around when you can start withdrawing the money and not have the 10% penalty, they essentially go away. And I don't know if this is that a lot of public service folks are getting pensions

• 37:41Speaker 03

  a little earlier, 50, 55, so their retirement age is can be a little bit earlier. And maybe that's why the 457 was designed that way, but you could stop working at 55, get a pension, and then you could still tap your 457. So you have a lot of flexibility with that account. You're doing your HSA, you're doing a Roth account. Even though you're not getting a match, I still like the 457 because it's it's a retirement type account, you can do it habitually over and over and over, contribute every month, and it should grow in the next 20 some years by the time you're ready to retire. So I still like the 457. I think also remember about taxes today versus tax tomorrow.

• 38:25Speaker 03

  Today, you're in a high tax bracket. You're, I don't know exactly your income, but I'm sure you're paying Nebraska state tax, which is I think is similar to Georgia. Once you make over, I don't know the exact numbers, but over 50,000 a year, you're paying almost 6% in state tax. Your earnings will keep going up, but you have, let's say your earnings are higher today than when they will be in retirement. In retirement, your VA disability won't be taxed. On your earnings, today, we're paying FICA, we're paying, I'm not sure if he, yeah, he would be paying into FICA, I believe. That's another 6%, 6.2%. So when we get into retirement, your tax bracket should drop because your working earnings will go down, even though you have a pension.

• 39:09Speaker 03

  The VA benefit to disability should not be taxed. And then your social security should, at least from a state perspective, shouldn't be taxed in the state of Nebraska. So. I wouldn't be too worried that your tax bracket is going to be the same or higher in retirement. I think it'll be a little bit lower, maybe a lot lower. And that wouldn't dissuade me from doing the 457 B. I still like that as an account. It's hard to say that having some brokerage money is a bad thing. So if you have the capacity to do it, I would also be funding the brokerage. Maybe it's a couple hundred dollars a month. And that is a pot of money you can get to that's got its own tax treatment, that by the time you're in

• 39:53Speaker 03

  your 50s, you're going to want that liquidity too. So kind of all the above approach here, but the crux of your question, I wouldn't discount the 457, just because you don't get a match.

• 40:03Speaker 02

  Okay. And then James in Georgia says, is there any scenario in which it's a good idea to purchase whole or variable life insurance? Clark is generally a big never not ever on this topic, yet there's still an entire industry around these products and it can't be 100% a scam. The one situation that seems to make sense are the ultra wealthy who exceed the estate tax threshold and thus can invest money tax free and outside of the estate. Are there any others? Thank you, Wes. You and Clark are both financial studs.

• 40:31Speaker 03

  Oh, that is so.

• 40:33Speaker 02

  I'm gonna have to pass that on to the Clarkster.

• 40:35Speaker 03

  Pass that on to Clark. What would Clark say about that?

• 40:38Speaker 02

  He would giggle.

• 40:39Speaker 03

  I'm giggling too. Thank you, James. You're right. It's a giant industry. And I know Clark is never, but there are some reasons you would do this. So first of all, you're right, the ultra, imagine, and this is a great problem to have.

• 40:55Speaker 02

  Sure.

• 40:56Speaker 03

  You have a $50 million farm or estate, big, big property. Well, the estate exemption right now is it's almost 14 million a person. So 14, 14, husband, wife, that's 28. Imagine you have a property worth 58 million and the family has this giant property. After the estate settles, they say, wait a minute, that's, that's $30 million over the exemption.

• 41:26Speaker 03

  And what are the taxes on that? It's something that's called approximately 40%. I think it's 45, but let's say 40% of 30 million is what, Krista? 12?

• 41:35Speaker 02

  12 million.

• 41:36Speaker 03

  Look at that.

• 41:37Speaker 02

  Fast math. Thank you, Wes.

• 41:39Speaker 03

  So wait a minute. Does the family have 12 million bucks in cash to pay the taxes?

• 41:45Speaker 02

  No, they've got it in a farm, right?

• 41:47Speaker 03

  They've got it in a farm. Can they go and carve out 40% of the farm and say, hey, here's some land. Here's some land. Can you do that? So you have a net worth? Great net worth, but not enough liquidity to pay the taxes. And then you're in a real problem. This is why a whole life policy that is designed to fund really the taxes to be able to keep the farm. That is a great example, and you brought this up, James, of why whole life still really holds a holds a place.

• 42:21Speaker 02

  But that sounds like a super small percentage.

• 42:23Speaker 03

  It's pretty small.

• 42:24Speaker 02

  Beyond tiny.

• 42:25Speaker 03

  But here's what starts to get a little more mainstream. Buy, sell of a, if you own a business with a couple of people and the business has a bunch of value. grows, you started, it's worth not a lot in the beginning. 30 years later, it's worth 10s or 20, 30, 40, 50 million dollars. And what happens if one of the partners dies? How do you pay out? Now, you can still do that with term insurance, but you'll see some businesses that will fund a buyouts through this. So that's another potential reason. And then having a guaranteed amount of money coming in if you have a child, let's say that has a disability. So you really want some certainty around that.

• 43:07Speaker 03

  Again, you can say, well, Wes, you could still fund that in term insurance. And that's precisely probably why Clark is a never, because most of these things can still be funded with term. So I'm a big believer in term insurance. It's so much less expensive. You should be able to take what you would be paying in insurance, whole life premiums and invest it. Buy term, invest the rest, still stands. But the industry really does have its place and at least I want to give it credit for that.

• 43:34Speaker 02

  All right. Well, that does it for us today on Ask an Advisor. Clark will be with us tomorrow and then Friday is his special birthday show. I've got a little bit of a surprise up my sleeve for that.

• 43:45Speaker 03

  Happy Birthday Clark.

• 43:46Speaker 02

  Thank you for being with us. Please share this episode with a friend if you learned something. I certainly learned a lot of things today and hope the rest of your day is fantastic.

• 43:58Speaker 05

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