07.08.25 Ask An Advisor With Wes Moss

Avoid This Potentially BIG Roth Blunder and 3 Keys to Happy Retirement Success Don't make this potentially HUGE Roth mistake! Fiduciary financial advisor Wes Moss reveals a little-known rule about rolling over your Roth 401(k) into a Roth IRA that could cost you big. If you've only contributed to a Roth 401(k), you need to hear this to avoid a costly blunder with the 5-year rule. Also, Wes recently received a retirement love letter from a couple who are self-proclaimed “happiest retirees on the block.” He shares the letter and the big keys to happy retirement success. Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the July 8, 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

• 0:00Speaker 00

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• 0:31Speaker 01

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• 1:04Speaker 02

  Welcome to Ask an Advisor. Krista Debiass here with my friend Wes Moss, fiduciary. You are genius.

• 1:11Speaker 03

  Come on.

• 1:14Speaker 02

  I'm starting to sound more like Clark.

• 1:16Speaker 03

  Okay, that's what Clark would say.

• 1:17Speaker 02

  But it's true. It's true. You're very smart. And you're going to answer a bunch of questions today, which you can find our forum to ask questions to Wes or to the Clark Howard at Clark.com/ask. Today, you're going to talk about a couple of interesting things. One is, there is a big blunder you can make with a Roth IRA that I wasn't aware of, and I'm sure many people are not aware of.

• 1:40Speaker 03

  Right. In a world of heavy Roth usage in 401Ks, it's probably not overly uncommon if somebody doesn't even have a regular Roth IRA. So what does the role of her look like way out into the future? If you're just opening up a brand new Roth when it comes to retirement? And we'll go into the nuances of that really tricky and special situation.

• 2:00Speaker 02

  Yeah. And then also, you're going to talk about a letter you received from a couple who have just nailed it with retirement happiness.

• 2:10Speaker 03

  Think of it as almost like a retirement love letter, but from happy retirees.

• 2:14Speaker 02

  That's awesome. And they read your books and they listen to you. And I'm excited to hear what their recommendations are. They're saying, yeah, there are the like, three main things that make you happy.

• 2:23Speaker 03

  Yeah, they have a very cool story and they, they essentially started with nothing.

• 2:28Speaker 02

  No inheritance, right?

• 2:29Speaker 03

  But they're now living in early retirement and happy, very, what I would consider happy retiree lifestyle. And they just wanted to share that. And I think it's really fun to share here on the show. So why don't we start with this rule that came up very recently? And my investment advisory team came to me and said, this is a situation we've never seen before. And what, what do you think the rules are here? And I had to go to the dark corners of the internet to really get this because really, and this is about Roth, this is about a Roth and really a Roth 401k. And the potential to roll it into a regular, good old fashioned Roth, which was this scenario that this particular family was asking about. So I'm just going to make up a name and a state, Bob from Texas.

• 3:14Speaker 02

  Okay.

• 3:14Speaker 03

  Is 68 and over many years put $300,000 into a Roth 401k. And it's grown to about 600. So think 300 contributions, 600 total value. And he wants to roll it into a regular Roth account now that he's retiring. Sounds pretty normal and standard, but because Roth and Roth 401ks have got, have gained a lot of popularity in the last, call it 10 or 15 years. I think we're going to start seeing more and more people that the only thing they ever did was open up a Roth 401k. You see folks that only have a 401k and they never opened an IRA.

• 3:53Speaker 03

  Well, why wouldn't the same thing be starting to happen more and more with, hey, I've got this great Roth 401k. And I can put a bunch of money in it, but I couldn't contribute a lot to a regular, good old fashioned Roth. So I never opened one. That's a situation with Bob. So what happens? Can he roll the money over into a regular, good old fashioned Roth and start taking money right away? Or does he have to worry about the five-year rule? That's what's so interesting about this. Now, I'm going to not bury the lead and say, here's the, the way to always avoid this blunder. Not always, but this is a way I think to just not ever have to worry about this, getting stuck in this little Roth trap, is just open a Roth for

• 4:38Speaker 03

  a hundred bucks and let it sit, even if you're not really going to use it. Because, once it gets to its five-year number, then you're good to go. But if you've never had a Roth, and you're, and you're Bob from Texas and you're 68, and you open up a new Roth, well, it's a brand-new Roth, and you still have to worry about the five-year rule. Meaning that you've got to worry about taxes on the growth, or maybe, and that's what we're going to get into here. So, here are the way the rules work. So, how much of a Roth can he use if he rolls his money over? Well, there's two situations. One, if it's a qualified roller, one, if it's a non-qualified rollover, and then there's the, the other solution, which is the Roth could be older than the 401k. More

• 5:23Speaker 03

  vintage is probably the better word. So, Bob, in this situation, is 68, so he's well past 59 and a half, and he's had the 401k for a decade. So, he meets a five-year rule in his 401k, and he meets the 59 and a half rule. So, him rolling money into a Roth IRA is qualified. Now, if it's a brand-new Roth, that starts to limit him a little bit, but the good news is for Bob in this situation, is the whole 600 counts as a contribution. It was qualified in the 401k. And he can take not just the, what were contributions, but also the growth of that 600. Now, the nuance here is that if the 600 grows to 700, that $100,000 in gain, that still hasn't

• 6:08Speaker 03

  had the five years of vintage. So, there is, there are potentially some taxes on that gain, until the Roth gets to be five years old. So, not the worst situation, because he can still use the vast majority of that money if he rolls it over. But if, let's say, he only had the 401, new situation, it's non-qualified. He only had it, he had the Roth for only a couple of years, didn't meet the Roth 401k, less than five years, and he has a brand-new Roth IRA, and he rolls the money in. Then according to my research, and again, I think this is the way this works. It's a pretty complicated and nuanced rule is that that rollover, because it was non-qualified

• 6:49Speaker 03

  401k Roth to regular Roth, it keeps its quote same character, meaning that the 300 is just a contribution. You can, in a Roth, you can take your contributions out, no taxes. But the growth, there would be an issue there. So that would be taxed, the 300 of growth would be taxed because he's in a brand new Roth and it doesn't have five years. Again, he still could access his contributions, but those are the two different scenarios. Again, what's the, what's the solution here? It still goes back to, hey, open up Roth and make sure you have it for at least five years. Then you don't even have to worry about this problem. This is really only a problem for Roth 401k folks that have never had an

• 7:29Speaker 03

  actual Roth IRA. And now they're just opening. Now, one other scenario, let's say that Bob had opened up a Roth account six years ago. His Roth 401k is only four years old. Here's the cool thing, even though that's a non-qualified rollover from the Roth 401k, I don't know a good term for this, but if he rolls it in, the older Roth kind of fixes the problem for it. It's kind of has the, the vintage that it's already, his Roth IRA is over five years old. It kind of solves the issue and now the rollover meets the, he's not going to have to worry about, because he is over 59 and a half and the Roth IRA has been open

• 8:10Speaker 03

  for over five years, he should be good to go when it comes to withdrawals. I told you that was technical.

• 8:15Speaker 02

  Tricky.

• 8:16Speaker 03

  Don't hold that one against me, but it's real life and I think it's going to come up more and more. And I'm pretty sure that's the way this special rule works.

• 8:26Speaker 02

  All right. Well, we'll go to some questions that were sent in for you, Wes. Kirk in California sent this one. I've experienced a recent run-up in a particular stock price in my IRA account, and I'd like to know when and how I should rebalance my account. Are there some basic rules of rebalancing that we should be aware of?

• 8:43Speaker 03

  Sure. Again, I see this happen. You buy.

• 8:47Speaker 03

  There are a couple of stocks over the last decade that have just been absolutely phenomenal, you know, up 1,000, 2, 3, 4, 5,000%, depending on how long you've held them. And it can really become a big part of your retirement accounts. It's a good thing. And it's a really good problem to have because it's really not a problem. Because inside an IRA, there's no worry about rebalancing. You can sell that stock, reinvest it somewhere else. And because it's in the crock pot and the lid's on, you don't have to worry about that current taxation. It's only when you pull money out of the IRA. And the rule of thumb is, and this is, I've had the same rule of thumb for 20-plus years, is 10%. And even that's a lot to have in one stock.

• 9:32Speaker 03

  But that, to me, is the demarcation line. If you're getting way too heavy into one company, even if it might be the most stalwart company in the world, still beyond 10%, I start to get nervous there. So you could do a couple of things. Just cut it back to 10%. You could look at it every time it goes to 12% or 13%. You take a small rebalancing and always keep it around 10%. It's not something you need to do every day. But I would say, as you're reviewing your accounts throughout the year, my rule of thumb that I like to stick to is no more than 10% in any given stock. And it's easy to make that happen inside an IRA, a retirement account.

• 10:12Speaker 02

  All right. And this came in from Neva in North Carolina. I have a question about social security benefits for police officers and their spouses. My husband is considering a career as a police officer, and it looks like in our state, he won't pay into social security, but rather into a local government pension fund. Of course, we need to research how those two benefits would compare when he retires. But my real concern is my potential spousal benefit under social security. For the foreseeable future, I'll be focusing mainly on raising our children. So I'm working just a few hours a week freelance and bringing in $10,000 to $20,000 per year. My understanding is that my spousal benefit would likely be higher than the benefit. I think maybe she means than the benefit from her husband.

• 10:56Speaker 02

  On my own earnings, if I continue to work part-time for many of my working years, any advice on researching the pros and cons of social security versus law enforcement pensions, specifically with a much lower earning stay-at-home spouse? Obviously, being a police officer is not a get-rich-quick scheme, but we need to be smart, even if we're not in it for the money.

• 11:17Speaker 03

  Thank goodness that you're not in it for the money, and thank goodness we have police officers.

• 11:21Speaker 02

  I know.

• 11:22Speaker 03

  God bless you.

• 11:23Speaker 02

  Putting their lives on the line every day.

• 11:25Speaker 03

  Every day. And the compensation long-term, I'm not able to say I know exactly what a police pension is gonna be. But if you're there for a long period of time, and you've had relatively significant earnings in your later years in the serving, then that pension should be as good, or maybe a little better, depending on than social security. Again, adjusting for age and when you start taking it. So let's assume that your pension will be as good or better, let's say. Because you're not paying into social security, and I can't see why any system would be set up where it'd be worse than social security. Okay?

• 12:08Speaker 03

  But there is a legacy problem that people probably still think is a problem. And that is, Aniva, you're worried about, what if your benefit is, let's say you're getting a spousal benefit, or there's some sort of, let's say he passed away, and then you're getting the spousal amount from your husband. Well, let's just go way out into the future. The pension, the pension side. Well, there used to be these two really unfair rules. One was called the government pension offset, and one was called the windfall elimination provision, the WAP. And the GPO is what you would have been worried about, because the government pension offset said,

• 12:52Speaker 03

  if you're receiving a pension, and again, let's say you do work part-time, 20 years, 20K a year, part-time, part-time. Your social security's still not nothing. And this is a rough estimate, but 20 years at 20K, it still probably ends up being a grand a month, roughly. So it's not nothing. But if, let's say your spousal benefit from your husband's pension, he had passed and now you're collecting, the GPO takes that number and says, takes two thirds of it, and that wipes out what your social security payment is. So a lot of Americans that are getting spousal benefits from social security were wiped

• 13:37Speaker 03

  out because of pensions. And in 2025, the government passed a brand new bill, the Social Security Fairness Act, that went retroactively all the way back to the January of 2024, that stopped that nonsense. So it's still a legacy worry because it's been the case for 20, 30 years and people are worried about it. The good news is that I think your husband will have a good, solid pension from the police force, and it might come from the state, will come from the state. And the worry that you're going to get hit by the government pension offset at any

• 14:17Speaker 03

  point in the future, that worry is gone. And don't discount your own social security. And if he works in the private sector, let's call it 20 years, and he does 20 years on the force and 20 years in the private sector, the windfall elimination provision and GPO, they're gone and they don't, they're not going to impact your private sector earnings towards social security. So both of those provisions are gone now. It makes working in public service for something like the police force incrementally a little bit better than it used to be in relation to dealing with what happens with your social security. So that's the best way I can describe this interesting situation. Thank you, Neva.

• 15:01Speaker 02

  Thanks, Neva. Okay, Mike in California says, my wife and I are planning to retire in two years when we're both 62. Our goal is to delay pulling from social security as long as possible. We both have pensions and we have a combined IRA dollar amount of about 1.2 million. Our plan is to use the IRA money to get us to age 65, then start pulling from the pensions, then use pensions and IRA money. To age 70, but start pulling from social security. I've been using Fidelity's retirement income projection tool with the setting of assuming significantly below average market conditions to see how valid my plan is. The tool says we're good. The worst case scenario shows our IRA amount dropping to about 700K at age 70. My questions are, what do you think of retirement income projection tools?

• 15:45Speaker 02

  And does our plan sound reasonable to you?

• 15:48Speaker 03

  All right, so Mike, yes, I do rely on those tools because you're putting a lot of variables here. And if you're modeling this out, that would be eight years that the longer I think these plans go. And the more conservative you put the variables, which you stated that you were going to do. You put the lowest amount of rate of return. Then the more likely you're going to be as good as the plan says you'll be, or even better. Now, yes, there are special situations. What I don't see these retirement planning software is not great at saying, well, what if you get a a huge drop the year of retirement and we have a bear market? And some plans will do this and they'll model out sequence of return risk.

• 16:32Speaker 03

  But as long as you're balanced, that also helps with that. So if the investments are 100% stock during that period of time, then you are subject to these big market swings. But let's assume you have more of a balance, which helps with that. But if you're using a conservative assumption, whether you're using a well-known plan like Fidelity or any other robust retirement planning tool. If you're putting in conservative assumptions, then I don't see that you're taking a big risk of your situation being a whole lot worse than what you modeled out. And if you're, if the 700 is okay, because now you have a pension and you have social security, you waited till 70, which I know those numbers get pretty high, over $4,000 a month. If you wait till 70 for a lot of folks.

• 17:15Speaker 03

  Sounds like you've got a, that you'll have a really nice multiple stream of really stable income with social and pension. And then the 700, you could still use a 4%, even 4% plus rule on that. And you, it sounds like you'd be in great shape. So I like those plans. I put a lot of faith in them. They're not perfect, but they really do a good job.

• 17:36Speaker 02

  All right, straight ahead, we're going to talk about the three keys to retirement success.

• 17:42Speaker 00

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• 18:13Speaker 04

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• 18:42Speaker 02

  We are back and Wes, you're going to talk about a letter you received from a couple who probably read one of your books. Which one do you think it was?

• 18:51Speaker 03

  I don't know. Probably what the happiest retirees know.

• 18:53Speaker 02

  They said they read one of them, right? And they also listened to your podcast, maybe?

• 18:56Speaker 03

  Retire sooner podcast, potentially, yeah. And I would call it kind of a retirement love letter. And I think what the reason they shared it, this is Joe and Cindy from Indio, I-N-D-I-O, California. And I think the reason they wrote in was that they wanted to, to say that it's possible. And they're, they're having, to me, like they're having an amazing retirement. They retired early, a little bit early, so late, mid, late 50s. They live in a new location that they kind of scouted out. It's in California. If you, I looked up where that is in the world and it's kind of near the Palm Springs area, which is kind of a beautiful place to live.

• 19:40Speaker 03

  They're, they're kids and they're just thriving. They're thriving, but they also started with zero. What they wanted to share was that if you really think about all the main components to make up a happy retirement, the financial. The lifestyle, core pursuit and the social area. If you think that all through, and it really does lead to a pretty awesome place in life, but it's hard to get to, it takes some time. So I want to maybe read, and but again, I think our audience really cares about that. Otherwise they'd be listening to, you know, true crime podcasts or comedy. So I took this 1,000 plus word letter, which is really awesome.

• 20:20Speaker 03

  And I truncated it down into a couple hundred words and we'll show these three keys. I think they're embodying. So, hey Wes, after reading your books and listening to you on air, my wife Cindy and I wanted to share our ATRAB story. ATRAB stays our happiest retiree on the block. We both retired last May, Cindy 57 and me 60. We were born and raised in the same town, met in middle school, married in 1998, three kids, all through private universities, but off the payroll or off the payroll. Cindy worked as a critical care nurse, mostly night shifts. And I started as a software engineer and finished my career as a VP in IT. When our kids were young, Cindy would come home from her shift in the morning as a night nurse,

• 21:04Speaker 03

  hand off the kids, and then I'd make the 90 minute commute to work. So they avoided daycare, but it's a pretty rough schedule.

• 21:13Speaker 02

  That is brutal.

• 21:14Speaker 03

  Avoid daycare. Over time, we invested aggressively in our 401ks. We built a retirement plan. After years of traveling and exploring, we chose Indio, California and moved there in the spring of 22 before retiring. That early move let us get settled, buy cars, furnish the home and purchase an RV storage condo. I don't know if that, yep. So RV and storage.

• 21:37Speaker 02

  They have, they have actual car condos. So I think that they bought a place to store their RV. There are like these, that's a business now, like condos for cars, like.

• 21:47Speaker 03

  RV storage condo, right. All before they touched their retirement fund. So now they're debt free, six income streams, six income streams, which is cool between us. Pensions, IRA, dividends, they're counting their investment income, deferred comp, and soon social security by 2029. We'll have about 300K in annual income to support a 240K lifestyle. That's a good rich ratio.

• 22:12Speaker 02

  Wow.

• 22:13Speaker 03

  Money coming in easily supports money. Going out. We've built a net worth of nearly 6 million all on our own, no inheritance. These days, we're busy with travel in our Newmar Dutch Star motorhome, which is like, that's a really nice motorhome. Biking, hiking, golf, volunteering. They have a ton of core pursuits that I'm not even listing here. Cindy's in book clubs and exercise groups. He's on the HOA committee and a wine club. We have 15 plus core pursuits between us.

• 22:39Speaker 02

  Wow.

• 22:40Speaker 03

  A lot of hobbies on steroids. Our kids are close, two within driving distance, one a short flight away. Life is good out here in the desert.

• 22:50Speaker 02

  Wow.

• 22:51Speaker 03

  Thanks for helping light the path. And really, all he's referring to is just, I've done a bunch of research about the lifestyle of a happy retiree. And it kind of goes down into these three main areas. And I think this is what Joe and Cindy have really done. So one, they have their financial, call it zero to financial freedom. That's what Americans want to do. We want to get to financial freedom. That is the goal as soon as we can get there. By the way, Cindy started at $9.93 an hour.

• 23:21Speaker 02

  Wow.

• 23:22Speaker 03

  As a nurse. Joe started 27K a year, 27 grand a year as a junior software engineer. So it's the financial side, the lifestyle design, all their core pursuits, which I love. And then the, the power of how they plan this thing out, which is, I think the really cool part that kind of is a glue that sticks all this together. So one, didn't make a lot of money in the early years and then steadily climbed their salaries and income over the years. They maxed out the 401Ks. When you do that for 40 years, it, it just works. It just plain works, particularly if you're invested in, let's say, an index. And if you go back over the last 30, 40 years, that money grows dramatically. And if you're

• 24:03Speaker 03

  30 today and you feel like it's impossible to get to 3 million, 5 million, they have a $6 million net worth, it's not. But it's a really long way away. It's a really long way away. But I don't know why it wouldn't work as long as America stays an amazing place for business around the world, then our markets hopefully will reflect that over time. So they ended up with 4.2 million IRA, 350 in a taxable account and a million three in real estate. They have pension IRA, they have dividends, social security that hasn't even turned on yet. And their spending is about 240. It's a big number, but with all these income streams and their retirement assets, they easily cover that. So again, it took four decades.

• 24:48Speaker 03

  There's no magic there, no inheritance there. Forty years. That's what it takes. Number two, lifestyle design, right? They've got 15 core pursuits. They have connection with their family and their community.

• 25:03Speaker 02

  They sound super fun, by the way.

• 25:04Speaker 03

  And I think they're fun.

• 25:05Speaker 02

  I want to hang out with them.

• 25:07Speaker 03

  They're pickleballers, which more and more Americans are doing that. It is the most social of all the sports. It's more social than tennis. It's more, I think, it's a little bit more, it's maybe equally social and quicker than golf. So it's an hour, hour and a half, not four or five hours for golf. I love it for the the social connection part. It's actually a little dangerous because you're really like moving quickly and stopping. Lot of busted Achilles. Lot of hamstring pulls, lot of broken rest. So be careful when you're playing pickleball. Hope Joe and Cindy are. They're in a 55 plus active adult community. So they've got everyone around them that is in a similar age range, which makes it a lot of fun. There's plenty of people to do all these different activities, hiking, biking, walking, running, swimming,

• 25:52Speaker 03

  volleyball, tennis, pickle. Doesn't matter what they are, but if you have people to do them with, that is a full joyful retirement situation to be in. And they were intentional because now they're driving distance of their two kids and they're a short flight away from their third. And I love the Newmar Dutch Star. Love the Newmar Dutch Star motorhome because that they can cruise all around the country wherever they want to go, wherever they want to go adventure wise. And it's creating experiences and the adventure of that plays very well. It's actually, this is a hint to some of my new research. One of the few core pursuits, because I've always said it doesn't matter what your core pursuits are, as long as you have them, have them and spend time doing them.

• 26:34Speaker 03

  There is one that correlates more heavily towards happy versus unhappy retirees. One, not surprisingly, is, is exercise and physical activity. But number two is adventure. There's a high correlation between adventure, so that means travel, RVing is an example. It has a high correlation to those who are happier versus unhappy in retirement. But all of this, step three, took the power of some foresight and some planning. You don't just move from the north, I think they were in the northeast, all the way across. Moving to California is a big deal. Moving 45 minutes away is a big deal, let alone 3,500 miles or 4,000 miles. Northeast to southwest of America. But they really thought about this.

• 27:19Speaker 03

  They found a place that would give them socialization in the active community. They wanted to be near their kids. And they did all this very intentionally, along with their retirement planning. So they got to the numbers that gave them financial freedom. And all of that was really, it was really thought out. And so you think about this really fun, talk about a retirement life map to draw out with colored pencils. Like this, they did it and it's working. And provided they continue to have great health, which I pray for everyone to have that and longevity. This is, by the way, a pretty, this kind of environment promotes a lot of longevity. Then I think they have so many good years, hopefully decades of a happy retirement being H. Robbs.

• 28:00Speaker 03

  And to me, that dedication and steady effort, all that leads to being in the spot they're in. Some happy retirees and a place I think a lot of folks would be pretty psyched to be in as well.

• 28:13Speaker 02

  Yeah. H. Robb again means happiest retiree on the block from your book title.

• 28:17Speaker 03

  Yeah, okay. And the reason for that is that it was, the idea for the book came from a retirement survey that I did that showed these habits of happy versus unhappy retiree. How do you fall into one camp versus the other? And I was around the time I was, I had really young kids and there was a popular book called The Happiest Baby.

• 28:36Speaker 02

  Oh, yes, I remember that book.

• 28:38Speaker 03

  On the block.

• 28:40Speaker 02

  Okay, we're gonna go to questions now. Elizabeth in Colorado says, "Wes says that people reach their peak spending by late 40s or early 50s. I'm going to disagree with that statement since people are having kids later in life. We should reach our peak spending by the late 50s or early 60s."

• 28:56Speaker 03

  Look, she's not wrong. Elizabeth, you're not, you're not wrong about that. There are plenty of families. I mean, I'm one of those. My peak spend, you're right. I mean, I'm, I think about when my kids are gonna be finished college, I'll be like 60. So, you're right about that. And, you know, I think about my, I mean, my mom was in her early 20s when she had me. So, it really worked out. That's very much correct for them. They were in their, my dad was, I think, 42, 46 when I was done college. But then my subsequent siblings, he was in that demographic and his peak spending was called probably 50. And you're right, as, as we wait, and demographics moves pretty slowly, though. So, it's not like this changes

• 29:41Speaker 03

  dramatically. And if you look at the statistics, if you go back, I think these are from 2013, 2014. So, it's still 10 years ago. The range was 40, I think, 48 to 54. So, it is a range, but you're right. I think as time goes on, it's just gonna continue to climb higher. So, very good observation. She's probably not wrong.

• 30:03Speaker 02

  All right. Mike in North Carolina says, "I'm working with a fiduciary advisor and one of the recommendations is they continue to present to my wife and I are buffered index-linked notes. I've asked them the question about the fees and they indicate that there are none. This sounds too good to be true. And when I look at the prospectus, the only expenses I see are underwriting discounts. It does not appear transparent to me. Can you explain whether these are good investments or whether to avoid them?"

• 30:30Speaker 03

  Mike, they're not inherently bad. First of all, of course, they're not free. There is no such thing. I mean, you get a big Wall Street bank, usually these are the investment banking arms of the big brokerage companies. Those are the ones that create these products through options. So a buffered note typically is going to have a call and a put, some combination of that at different prices so that you get some of the market upside, but then limit some of the downside. So it buffers your returns. And for some folks, that's not necessarily a bad investment profile. The reality, though, is that, of course, there's costs because you're using derivatives. A buffered note is basically a financial derivative burrito.

• 31:13Speaker 03

  You've got a call and a put, you wrap it all into one thing. And the cost in there, and of course, the investment bank gets paid because they're the ones that are creating the product and they set the pricing so that whatever they're selling it for, they're keeping a chunk of it. And now technically, once it's sold and your advisor is buying that for you in your account, the inherent cost isn't necessarily, you're not getting a fee inside of it, but there was cost to get it and set the parameters of those derivatives inside of that financial burrito. So it's not, it's not free, but there shouldn't be ongoing costs if it's in your account. Again, that doesn't maybe count for the advisory fee that you may have, but it's a product.

• 31:58Speaker 03

  Think of it this way, you could have an ETF and your advisor isn't making any money off an ETF, but if it's charging you a 10th of a percent per year, that money is going to the ETF. It's not going to the advisor or the fiduciary. Here, it's, I think, a similar situation where the fee goes to the investment bank and then your advisor's using that within your allocation. They're not necessarily bad. It really is on a relative basis to what.

• 32:26Speaker 02

  I challenge you, one day I want you to do like a whole thing where you're comparing. Like ETFs, index funds, all that stuff, and you have to use like burrito, quesadilla, taco.

• 32:36Speaker 03

  On the Clark Howard Show here, we have come up with some fair amount of food.

• 32:41Speaker 02

  Yeah.

• 32:42Speaker 03

  We've got crock pot.

• 32:43Speaker 02

  Crock pot.

• 32:43Speaker 03

  Skillet.

• 32:44Speaker 02

  Yeah, that was a good one.

• 32:45Speaker 03

  And now burrito.

• 32:46Speaker 02

  Yep. All right. Jimmy in Florida says, this question's for Wes. How should I think about the value of my pension and my overall retirement plan? My wife and I are now in our 30s and contribute 15% of our income to workplace 401ks. I have 11 years of pension service with my employer with average earnings so far of $75,000 per year.

• 33:05Speaker 03

  Pension formulas are, they're somewhat standard. They're going to give you years of service, how much time you spent, 10, 11 years, 20, 30 years, times a multiplier. It could be a kind of standard, maybe it's one and a half to 2%. So let's say 2% of your salary. Now, sometimes it's your highest three years, your last three years. It's usually something like that. But if you do some math, Jimmy, what do you think this thing is worth?

• 33:38Speaker 03

  And again, today. So if I did the math and did $75,000 times 2%, 1,500 times 11 is $16,500. So that's $16,500 per year, which is, which is pretty, that already is not insignificant. Assume you, you live to receive that for 25 years. $16,500 times 25 is $412, a little over $400,000. So just already, that's, that's what you would be getting paid in the future. Now, that's, those are tomorrow's dollars. So you technically have to discount it, use

• 34:20Speaker 03

  a discount rate of, let's say, five or so. What, what is that worth in today's dollars? This is obviously not perfect math, as I'm doing this in my head. I would say that that already is worth about a quarter of a million dollars, 250K, if you're using around a 5% discount rate. That's how I'd look at it.

• 34:39Speaker 02

  And that is, he did actually attach the plan document and it's 2% times the years of service, up to 30 years.

• 34:46Speaker 03

  Up to 30, yeah. But which is, that's a pretty standard formula. Let's do this for fun. 20 years times 2% and you end up making 100K in the number that they do. What would this thing be worth, Jimmy? 20 times .2, 40,000 bucks a year. That's pretty awesome. Times 25 years, it's a million bucks in payments that you would receive. So that's probably worth, I don't know, close to 500K already if you were to do that. So I think it's super smart to think that through and know that, gosh, I'm getting 2% of every single of my salary for every single year I worked. It adds up to a really significant number.

• 35:29Speaker 02

  Great questions, everyone. Remember, if you want to ask a question, go to Clark.com/ask. That's going to do it for us today, Wes.

• 35:37Speaker 03

  Oh, we're already wrapping up? I thought we had a whole nother segment. It went that quickly.

• 35:42Speaker 02

  It went that fast. Time flies when you're having fun. Clark will be back tomorrow. Hope everyone has a great rest of your day.