Pod Insights The Clark Howard Podcast 08.12.25 Is the 60/40 Rule DEAD? and Inheriting Money The Right Way About this episode Is the 60/40 Rule DEAD? and Inheriting Money The Right Way Is the 60/40 investing rule dead? Fiduciary financial advisor Wes Moss tackles this question by looking back at research and revealing what a $500,000 portfolio would look like today. He shares why balanced investing is still critical for a comfortable retirement. Also, with the largest wealth transfer in history underway, Wes provides a reality check on inheriting money. He gives you a simple checklist for receivers and givers to make sure you're prepared. Plus, Christa shares your #AskWes questions and Wes gives his take. All this and more on the August 12, 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
Transcript 0:00 Speaker 00 This episode is brought to you by Indeed. You're ready to level up your business, but the pressure to find the right person to make that happen is intense. Indeed sponsored jobs can help carry the load. It boosts your job post to help it reach quality talent fast. Cut through the chaos with Indeed sponsored jobs. Get a $75 sponsored job credit at indeed.com/podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed sponsored jobs.
0:34 Speaker 01 Welcome to Ask an Advisor, where we here at Team Clark go deeper on all things investing, saving for your retirement. Krista Devias here with Wes Moss.
0:44 Speaker 02 Wes Moss. Hey Krista.
0:46 Speaker 01 What are you talking about today Wes?
0:48 Speaker 02 First one is a really important overarching topic. I think it applies to pretty much any investor that's watching, which is the headline you'll read and it's perennial, or I'll see it a couple of times a year. Is the 6040 dead is the question. Really what they're pointing to is that is balance investing not work as well as it used to work. And as an investor, we want balance. Most investors want some sort of balance and that has to do with how stocks are doing and what could be happening with the bond market. That's the balance part. And I want to go over that because it's an, I have some insights on it here as we are now in deep into 2025.
1:28 Speaker 01 Mm hmm. Great. Cause so many questions about that. What should my balance be? What depends on your age, of course, and then lots of other factors, right?
1:37 Speaker 02 Right. So here's the way I would talk about it is that I don't know the exact balance, the right and perfect balance for anyone ever, because it's a little bit of a moving target and it evolves. So first of all, 6040 really is just to me synonymous with a balanced portfolio of stocks and bonds. And it could also include some other areas that also produce income. And there are lots of other areas that are technically a little bit different than bonds, a little bit different from stocks. I think about real estate investment trusts. I think about the Oddity sector, I think about preferred stocks, closed end funds, lots of other energy pipeline companies. So there's lots of other areas, but if we're just looking at those two,
2:19 Speaker 02 anytime you're not 100% in bonds or 100% in stocks, you have a balance. And the question is, what became popular 30 plus years ago is the concept of having risky assets like stocks paired with more conservative assets. And let's just call those bonds. Those are the two easy ones to pick out and there's lots of different options to do that. The idea behind it is predicated on, we want stock or equity exposure to be able to outpace inflation. But we also want this conservative side that does pay us income or interest from bonds that is there to offset and not go down while stocks are going down.
3:00 Speaker 02 So if we have a bad stock market, ideally the balance will, you'll have a big portion of the overall pie that's actually climbing a little bit. So it really takes the overall volatility of the whole pie chart, if you will, your overall investments and it's supposed to smooth it out over time. So I think of that balance as making it easier for people to be stock investors, which we know has worked most fruitfully over time to be able to outpace inflation. But again, there's a constantly a drumbeat. Is that model dead? Is it antiquated? And I go back to when I was doing research for my first retirement book, which was you can retire sooner than you think. That was back in 2013. Published, I think it ended up coming out in 2014.
3:45 Speaker 02 And the research way back then, so almost 15 years, showed that an investor, and these numbers have changed, but back then, getting to $500,000, $500,000, half a million, was a really important inflection point for folks to end up in the happy retiree group. I know it may not sound like an extraordinary amount of money, liquid money. This isn't that worth to retire on, but in my research, it said it worked. And I went back very recently to see how someone would have done if they just did a good old fashioned 60% stock, 40% bond allocation with $500,000,
4:27 Speaker 02 retired back in, let's call it 2013, and then took out 4% a year from day one, and then ratcheted up for inflation, good old fashioned 4% rule. So that would have been $20,000 year one, 4% of 500,000. Well, over the years, over the last 12, 13 years, that 20,000 is now closer to 30 per year because of inflation. And what happened to the balance? And I'm not talking about any particular fund. There's a lot of funds that would look very similar to what its outcome was. But it's just shy, the individual would have just shy of a million dollars. So the 500 is now worth almost a million.
5:06 Speaker 01 Wow.
5:07 Speaker 02 At the same time, remember, we're taking withdrawals, 20,000 and plus every single year, a little over $300,000 in withdrawals. So a good old fashioned balanced account worked. That's just, that's the reality of what happened.
5:23 Speaker 01 So if that was just cash, they would have $200,000 right now.
5:27 Speaker 02 Essentially, they'd have about $200,000.
5:29 Speaker 01 Yeah.
5:29 Speaker 02 Instead, they have a million and they've taken about 300,000. So, so balanced investing, if you were to go back then, and this is where the question is always about, well, what about the next 10 years or 15 years? So what about today moving forward? Well, if I go back to 2013 and I look where interest rates are, which is really the most important determinant of how bonds would do, they were less than half of where they are today. So the 10-year treasury back then, starting in a balanced portfolio, big chunk of it in bonds, the 10-year treasury was yielding less than 2%. Today, it's yielding around 4 and 1/4%. So it's more that the interest rate environment,
6:14 Speaker 02 even though it's not all that high relative to the last. 50, 60 years of history, it's still markedly higher, the interest rate environment of where we were back 12, 13 years ago. If the 60-40 balanced portfolio worked back then, and we can't predict the future, then it's maybe set up to do, the history continuing to repeat itself. You're probably saying, wait a bit, Wes, what about the other 60% stock? Well, the stock market has had a pretty good run over the last 12, 13 years. Is that same run gonna happen exactly like it happened over the last 10 to 15? We don't know. But I am a believer in long-term equity investing that that works over time. So I don't think
6:58 Speaker 02 the 60-40 is dead. Are there other iterations? Are there other pieces to add into that over all pie? Absolutely. But I just don't think balanced investing is dead by any stretch of the matter.
7:12 Speaker 01 Right. I love that. All right. Well, we have lots of questions for you. So I'm gonna start with this one from anonymous in Florida.
7:18 Speaker 02 Okay.
7:19 Speaker 01 I've appreciated Wes Moss's expert advice. My wife and I are retired in our mid-70s. We have no children, no debt, and live comfortably on our state pensions and social security, allowing us to maintain our lifestyle, including travel, without relying on our savings. Our state will eventually be divided between relatives and charities. Through disciplined living, savings, and investment, we have accumulated $3 million plus real estate and personal property. Since 2018, we turned most of our liquid assets over to a fiduciary financial advisor, who has broadly diversified our investments, yielding an average of 8.3% a year, for which he charges a half percent a year, or $14,000 each year on 2.8 million. That's a lot of money. We frequently hear that index funds outperform most actively
8:03 Speaker 01 managed portfolios over time, require minimum oversight, and come with significantly lower fees. Given that we don't have the expertise or desire to manage our investments ourselves, we want to strike the right balance between professional guidance and cost effectiveness. Would you recommend we continue with our current strategy, or would a diversified mix of index funds offer a simpler, more cost-effective alternative?
8:27 Speaker 02 It sounds a little bit like your advisory is probably using some low-cost index options.
8:33 Speaker 01 Right.
8:34 Speaker 02 It's very, very likely that there are some index options in there, probably low-cost ETFs.
8:39 Speaker 01 Half a percent is pretty low, right?
8:42 Speaker 02 So the landscape is, it's, it's a pretty wide landscape. It just depends on how you look at it. Anywhere from as low as a quarter or a third of a percent to a little over 1%. So half a percent is actually at the low end of the spectrum, the, the first part. But I picked up a couple of words there that matter. And there's a lot of information in that question. $3 million, real estate, social security, pension, the cost of having an advisor, a fiduciary. The first thing I'll start out is I think people sometimes forget I am an advisor. I'm a fiduciary, you know, you said that on the show.
9:23 Speaker 01 So yeah.
9:23 Speaker 02 The, there's a little bit, the Warren Buffett always says, if you ask a barber, if you need a haircut.
9:27 Speaker 01 Yeah.
9:27 Speaker 02 He's going to say yes. The reality here is that I'm biased towards saying yes to that question because I really believe in the financial advisor community. Not every financial advisor is great or worth the half a percent or the 1% they might charge. But a lot of them are. And here are the couple of words I picked up on it. One was you said desire. There was the, I don't know if I have the desire to do this and keep up with it and manage it and look at all the pieces. Number two, I don't know if I have the expertise to do so. And we can pretty much do anything on our own, Krista, in this world. We can pretty much DIY any, almost anything we want. We can build our own deck.
10:13 Speaker 02 We can take care of our own mechanics in our car. We can wash our car. We could do, we could take care of our yards. We can, we can almost self-diagnose and help ourselves almost from a health perspective. I mean, there's really very little that you can't DIY, can't do it yourself. If you have the desire, the interest then leads to the expertise. Because I've been doing this for almost half of my entire life. I maybe take for granted all the different pieces that go into planning. But to me, it's much more than just the portfolio.
10:49 Speaker 02 And in retrospect, and first of all, you've done pretty well, over 8% a year on average over time, pretty darn well during that relationship. And it's put you in a really good position. To me, the advisor serves a lot of different roles. The advisor should help you with the overall planning and that cash flow, and that helps you be a better investor over time. It almost forces you to lock into a goal and know you're an understanding of strategy, so you stay on the path. And that is just so valuable. And you could always look back and say, well, I could have just done that. But what about all the iterations along the way? What about the integration of estate planning and figuring out what the legacy should be and how, what your overall
11:32 Speaker 02 estate should look like can be set up? What about the tax strategy on where to pull money from at any given time? Because there's different times you need money. Sometimes it's steady amounts, sometimes it's a big chunk. Who helps you work through all of that? So to me, of course, we can all DIY and do it ourselves. And half, I don't know, there's, I've never gotten an exact perfect number on how many people do their own investing, million dollars and up. The statistics I've seen are half of all people do it on their own. And a really large portion, they get some help doing it because it can be really valuable. And it may not be perfectly and visibly valuable every single day or week or month, but over
12:13 Speaker 02 the course of time, to have some sort of relationship where you're understanding the journey, making you that much better and taking the emotion out of it, I think is very important. And I think it can be very worthwhile. I don't do 100% of all of my things on my own. I like to consult with some of my colleagues who are advisors, because I like other opinions. Think about the biggest, most important, besides your health, cog in your overall life, socialization, health, finances. To fly totally blind in that one giant area when you don't have the desire, nor maybe the expertise to do so, that creates anxiety in its own light. That makes you a worse investor potentially.
12:58 Speaker 02 And then the whole thing could unravel or it could be great. And I just want to, I want to put as many guardrails in there for families to make sure that the journey has the best chance of success. So that's my take on it.
13:11 Speaker 01 I'll just throw in my little two cents, which is I use an advisor myself, but I think for someone like I just recommended to a friend who has enough assets for this, and they certainly have them, the person who ran the question, you could always use like a Vanguard, Vanguard's internal service or Fidelity or someone like that too. You have to be careful with Fidelity because they're selling life insurance now too, but.
13:34 Speaker 02 There are lots of other options, right? So Vanguard has an option and you're going to pay a certain part of a percent. I don't know the exact percent.
13:41 Speaker 01 Right. It's not, I don't think it's quite 0.5.
13:44 Speaker 02 Depending on the amount of assets. But the thought that Vanguard was the ultimate low cost, take away all possible costs as an investor, also offers a service that has an advisor that is a percentage base per year. I think that right there says a lot.
14:02 Speaker 01 Yeah. Okay. Next question from Chris in Texas. I need help with the tax situation I'm trying to figure out. My wife and I are in our mid and late 30s. The plan is to have enough money to retire sometime in our 50s or earlier. That's our goal. Because we'd be retiring early, I'd like to take advantage of the Roth conversion ladder from my traditional 401k. I'm wondering what the mechanics look like when doing this. Will I need to only move the amount I want to convert that year to my traditional IRA and then convert that amount to the Roth? The goal would be to keep taxes to a minimum or zero if possible, and if there are enough years to do so. I've heard things about what I think is the prorata rule, which I'm guessing would affect the Roth conversions if I transfer the whole amount into the IRA and then only convert
14:47 Speaker 01 a portion. Is this going to depend on my employer's 401k plan when it comes to allowing only transferring a specific amount and not the entire balance to make these conversions happen and keep the tax bill low? I don't hear much discussed about this topic. I'd love to know now if I'm planning correctly, since I would like to take advantage of these conversions when the time comes.
15:09 Speaker 02 Chris is, is kind of right about something is that we don't talk much about. Folks that have all 401k money and then moving it into a Roth.
15:18 Speaker 01 Right.
15:19 Speaker 02 It's almost you just assume, well, with your IRA money, do you convert into a Roth or not? It's a thoughtful question and that actually is probably the situation that a lot of folks are in in their twenties and thirties. The money you have, it might very well all be in a 401k. So this is why questions are cool because they're coming from areas that we maybe hadn't thought about. When you're 50, you've probably had two or three 401ks and they're probably rolled over into IRAs. And that's why it's IRA to Roth focus, not 401k to Roth focus. So, good question, one, two, Chris. The answer would be if your 401k plan allows for an in-service rollover while you're still working,
16:01 Speaker 02 then the answer is you could do this very likely in any given year. And you would just take a portion, again, depends on if your plan allows it. Move, let's say it's 10,000 of the 401k into an IRA and then that gets converted. The pro rata rule comes into effect when you have both after-tax and pre-tax contributions inside an IRA. It doesn't sound like that would be something that you'd have to be worried about right now. It's nicer to have a clean IRA where it's just pre-tax money. Otherwise, if you co-mingle the two, then you're worried about a pro rata tax on the ratio of the pre and the post-tax money all in the IRA. It doesn't sound like that's an issue for you.
16:44 Speaker 02 The reality, though, is if your plan doesn't allow for that, the way I've seen it in practice, real life more often is yes, you'll end up one day doing a 401k rollover. Then you map out the right amount to convert each year. That's the latter part. But I guess the third option here would be if you're allowed an in-service and they say, yeah, sure, you can roll over 90% of whatever's in your 401k. Just because you, let's say it's 100,000 in the 401k, just because you roll over 90,000 into the IRA, doesn't mean you have to convert 90 into a Roth. So then, once you make the direct rollover so that you're not worried about taxes, then you can determine whether it's 10,000 or 20,000 or 30,000 in any given year.
17:29 Speaker 02 You can convert and still stay in the appropriate tax bracket. By the way, you choose as well. You choose how much you want to convert. Relative to how high you want to go on the tax ladder, if you will. So it's a combination answer, but one I think you can probably do. It's not unlikely that you can do in-service and then convert that amount each year, or do a larger amount, but really what matters is only what you convert out of the IRA. You're going to pay taxes on it to get it into the Roth.
17:59 Speaker 01 I can't tell you how many questions we get about Roth conversions. It's just so confusing for so many people, for sure.
18:06 Speaker 02 It is because there's no set it and forget it on a Roth conversion anyway, because your income changes every given year. Nobody knows exactly what you're going to make until the year's over. You don't know exactly what you're going to make. You don't know your exact tax bracket. And then you've got to factor in what you're going to pull out and then what estimated tax bracket you're going to be in. And maybe that is another important point here. Chris says that as much as taxes seem like the most exact science, it's a very unexact. And good tax planning is getting an estimate and an idea that's pretty darn close to what it's going to be. That way, you're not paralyzed making decisions.
18:47 Speaker 01 All right, one more here. Steve in Pennsylvania says, "Some 401k providers offer the ability to invest 401k money in a self-directed brokerage account to access investment options beyond the few pre-selected ones in the 401k. Is this the same as a self-directed 401k? By new employer's provider, which is Fidelity, I can move all or some of my 401k to a self-directed option within the 401k plan. The provider claims I will pay no additional fees. It seems too good to be true. What is in it for the provider and/or my employer? And what is the gotcha I'm not seeing?"
19:24 Speaker 02 Steve in PA, my home state, I would tell you that there's probably not a gotcha here. There's not some hidden hook that these companies are looking to do. I think they're really giving you optionality, and that makes for a better 401k plan. And a lot of people's opinion that, hey, if you really want to go beyond the 10 funds in the plan, we'll let you do that. They call it a self-directed brokerage, but also we use the terminology self-directed brokerage when you're looking to put real estate or other hard assets or different assets inside an IRA. So there's kind of two uses for the word self-directed. Really, this is a self-directed brokerage 401k.
20:08 Speaker 02 Sure, you get more optionality. You get to do the ETFs of the stocks you want as opposed to just the funds of the 401k. Where does the company benefit from this? I think it just gets you into the ecosystem of the company. There's a perception that your 401k provider, whether it's Vanguard, Fidelity, Schwab, any of the big providers, is that you're still in your work 401k and you're not really as much of a client of the institution like Vanguard, Fidelity, Schwab. When you have your own account, and again, just to make sure there's no confusion, the self-directed 401k is not a solo 401k either, which is different. That's where you would be setting it up on your own, contributing.
20:52 Speaker 02 This is not that. This is just to manage some of the assets that otherwise would have been in your company 401k. Now you can do it in your own account. But I think it gets you exposed to that company. You open an account at that company. Maybe you open another account that's an after-tax brokerage account. So they kind of get you into their ecosystem. And I think they have a better chance of keeping you as a client for life. If that's the gotcha, I think that's the gotcha. But not that I know of some backend hidden fee that they're going to get you. It's more about exposure to what they could offer over time. Great questions.
21:28 Speaker 01 So we're going to take a quick break and then when we come back, you're going to talk about inheriting, inheriting money or you might be leaving money to children.
21:37 Speaker 02 The great wealth transfer. Supposedly it's $84 trillion.
21:43 Speaker 01 Wow.
21:44 Speaker 02 Trillion over the next 20 years and 16 trillion over the next decade. We'll talk about those numbers.
21:49 Speaker 01 Lots of pitfalls to watch out for, right? Whether you're the inheritor or you're planning on reaping money. Yeah.
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23:11 Speaker 02 Welcome back to Ask an Advisor on The Clark Howard Show. Wes Moss here along with the great Krista DiBiase. We're a team.
23:19 Speaker 01 We're a team.
23:20 Speaker 02 When I'm falling down, not answering your step.
23:24 Speaker 01 You never fall down. You never fall down. I'm your assistant.
23:28 Speaker 02 I'm your intern. All right, so where are we going next?
23:31 Speaker 01 You're going to talk about inheriting money and all the pitfalls. The Great Wealth Transfer, you called it, right?
23:37 Speaker 02 It is the Great Wealth Transfer. Just read an article this past week from Market Watch that talks about, we've all heard about the Great Wealth Transfer. And the opening paragraph, I think it was according to Sorelli and Associates, said that $84 trillion will be passing from one generation to the next and $16 trillion over the next decade by 2035. So you just kind of brush through that and I think your brain says, oh, $84 billion's a lot.
24:07 Speaker 01 Yeah.
24:07 Speaker 02 $16 billion's a lot. And then you say, wait a minute. No, no, it was trillion. And that starts to not even make any sense. $84 trillion? So I went down a rabbit hole just to see how that was possible. And it kind of makes sense because over the next 20 years, there's going to be a lot of people passing away. That's a long time and that's about half of the wealth in America. So if you look at the total wealth in America, it's, and again, these are just estimates, it's about $130 to $160 trillion of wealth in America. And it makes sense. Over the course of the next 100 years, it's all going to transfer, right? To the next generation. So the numbers are giant. If you look at the Gen Xers, something like $29 trillion over that long 20-year period. Millennials, $27 trillion.
24:52 Speaker 02 Gen Z, $15 trillion.
24:55 Speaker 02 So the numbers are massive. Now, the reality check here is that 70% of people don't or are kind of any inheritance. And a lot of that's concentrated in the top 1% and the top 10% of wealth in America. But again, this is very likely, our audience and our, our network of folks that listen to the Clark Howard Show are great savers. They're great investors over time. So you're very likely to be on one end of this and pretty much everyone listening is on either one of the two ends. Either a receiver of an inheritance or the giver of an inheritance over time. So I really think this applies to everyone. The average, I looked up, I like to try to get some context around this. I think the
25:37 Speaker 02 average inheritance is something like $68,000, depending on the generation. So all wealth will transfer at some point. That is just the reality of the world unless we live forever and we don't, we don't. So it's going to transfer. And I think about the conversations that I have with my own family, my parents, my own wife and kids. And then I think about the families I work with. Nobody really wants to talk about it.
26:05 Speaker 01 I would say that's so true. Yes.
26:07 Speaker 02 It's just not a comfortable situation. It's even harder than life insurance. I had to get life insurance last year and I just didn't wanna, I just didn't even want to do it because you're, the whole topic is around you dying.
26:20 Speaker 01 Sure. And doing a will, Clark talks about that a lot, trying to get people to do a will and their estate planning and, or talk to your parents. I mean, I know that that's something my parents don't like talking about, but we did like have a lot of conversations several years ago. They did do wills and they already had some wills, but they did the power of attorney for healthcare and financial stuff, which ended up being very helpful. My dad had a stroke almost a couple of years ago.
26:45 Speaker 02 So glad you had it.
26:46 Speaker 01 Yeah.
26:47 Speaker 02 At the time.
26:47 Speaker 01 Yeah.
26:48 Speaker 02 Here's a, this is from the Bank of America study of private wealthy individuals or wealth in America. They say that among even, this is even wealthy folks, and you would think the wealthier you are, the more likely you would have a will and trust, set up durable power of attorney. Among the wealthy and older, this is the older group of Americans, which they define as 44 and up, with $3 million or more, only 54% have a basic estate plan.
27:14 Speaker 01 Wow.
27:15 Speaker 02 Even half of wealthy people don't have this and it's because we don't want to talk about it.
27:19 Speaker 01 Right.
27:20 Speaker 02 So a couple of things, if you are the receiver, there are going to be millions and millions of people that receive something over the course of the next, call it, generation. Maybe this year, maybe the next 20 years. Is that, first of all, you don't need to do anything right away. With one exception, there's the thought, I'm getting an inheritance, oh, what do I do with it now? You don't have to do anything right away. And I think it's, there's a lot of power in saying, for six months or 12 months, I'm just going to think about what this might mean for me and my family. The exception would be if you're inheriting something that's highly concentrated, like one stock, and it's a lot of money. Or one particular property that is, has a whole lot of value to it.
28:03 Speaker 02 I think with that exception, because you do need to understand and take action, is the inheritance also at risk of, of a price decline? And if that's the case, you do, you may want to quickly figure out if you want to diversify that. So that's my one exception to kick your top. The second part here is, as a receiver, it's okay to think it through, but I would say the majority of folks I've worked with and done financial planning with over the years, they don't want to put it in a financial plan. And I get that, I get that. So better is, is opposed to saying, I think it would inherit a million dollars. So why don't we put that in XYZ year out here? I think it's better to do your own financial plan, make retirement on your own terms.
28:48 Speaker 02 And if it's an inheritance, then it's, it's extra cushion. And it just adds to the overall plan and life plan that you've already put in place. It just makes it that much easier and that much more cushioned. And discussing it, and discussing it. As a receiver, even though your, your family might not want to talk about it, I think it's the, the part of both the receiver and the giver to try to engage in that conversation. And do it, obviously, in a tactful way. And, and the other thing is that when you do inherit funds, know what you own, because you've got, there's tax that, different inheritance buckets, whether it's an inherited IRA or an after-tax account, those, those buckets are going to have different tax treatments for you moving forward.
29:33 Speaker 02 So understand that piece of the equation. On the giving side, here's what I hear from families. I want to spend all my money. I'm not worried about leaving it to my kids. Or, just heard this recently, I would like to spend my kids inheritance with my kids while I still can, which is a cool way to think about it. And then there's another combination would be, I would really like to leave a lot to my kids. So we have some really strong thoughts about it. There's another study I read of something like 98% of all accounts, this is a big brokerage house, said they planned on leaving money to someone, but only 18% of that group actually had plans on who it was going to go to.
30:15 Speaker 02 So as a giver, someone that it will be passing money down to the next generation, the number one thing we can do is think through with you and your spouse. First of all, I'd say that the blocking and tackling, Krista, is just having a will or having an estate plan, which includes a will, some sort of trust, and a durable power of attorney. If, just like with your father, you get incapacitated, stroke, dementia, you need someone to be able to care for your assets while you are, if you're not able to, but you're still living.
30:49 Speaker 01 And make medical decisions for you too.
30:52 Speaker 02 So I know we don't want to do that, but it doesn't have to be an expensive, overly in-depth proposition. You can find an estate planning attorney. There are a lot of great ones in every major city, and beyond major cities, and you can spend a few hours with one of them and you can get a lot of that work done. And then you get this peace of mind, knowing where your assets are going to go, and you're taken care of. The other thought about a trust. So the will, this is the way I would look at, why do we, financial advisors always talk about a trust versus a will? So you have a will, that's great. At least that's step one. The will, once you pass, it's like giving a set of instructions to a judge, a probate court,
31:35 Speaker 02 and saying, here's what I'd like to have happen. You're the judge. Now you adjudicate all of it and try to do what I said in the will. And it has to go through the courts. If you put money in a trust, then the trust is the owner of those funds. And it could be cash, stock, bonds, real estate. You get to stay the trustee and you still direct it. But if you pass the trustee that you have named, once you pass, it's as though you've given them a letter that says, here is exactly what I want to have happen. You're the trustee, now just go do it. So you skip all of that probate and the court, and you're appointing someone, while the sky is blue and you're still healthy, that you trust to carry out those wishes.
32:16 Speaker 02 And that can make the transition to the next generation so much better. Ultimately, the real solution for this is to discuss it, just to talk about it. And maybe today is just a reminder to nudge mom or dad, or if you're mom or dad listening, to talk to the kids and say, hey, guys, what do you think we should do with the house? You guys want to inherit this house and hopefully in 20, 30 years? Or would you, nobody would really want to live here anyway? So you're going to sell it anyway. Just that conversation about the assets you have, and then that bleeds into the family values of like, here's what we'd like to see done with this money. So it becomes a greater, larger family values conversation. It doesn't really have to be that awkward.
33:00 Speaker 02 It's a responsible thing to do. And I think it helps both the giver of the assets and the receiver. So you end up making smart investment decisions. And the article in Market Watch said that these generations aren't ready for it. They're going to bungle it, they're going to fumble it. Not this audience, because we're okay to talk about money. And that's 90% of the battle.
33:22 Speaker 01 All right, well, thank you for that. I think communication is so important, all the stuff you've said it. There you go. All right. John in Georgia has a question for you, Wes. He says, I've heard it said that you shouldn't put traditional target date mutual funds in your taxable brokerage account for tax reasons. But what about the new target date ETFs? For those of us who appreciate simplicity, but also want to invest tax efficiently, are these a workable solution?
33:50 Speaker 02 John, John is asking, again, another question I don't think I've ever had, which is the tax efficiency of a well-known, not-so-tax-efficient strategy, a target date fund. That's almost exclusively been in a mutual fund format. What about putting in an ETF, which are their new ETFs that are doing this? I had not used them, full disclosure. Would they be better? And the answer is not, maybe a little. And this is just my opinion on this. I think they might be a little bit better. And here's why they would be maybe a little better, but not dramatically. The worry we have about mutual funds is that any sort of activity inside of a mutual fund
34:34 Speaker 02 creates a transaction and that transaction creates a tax bill, whether it's a gain or a loss. At the end of the year, they reconcile it and they, the fund distributes all of those taxable events out to each shareholder. And if you think about an actively managed mutual fund, there's going to be lots of trades and then you get a lot of distribution in any given year or could be. The minute they invented an index mutual fund, still mutual funds here, the transaction, the distributions went way down because, not because the structure changed, but because there was very little activity inside the fund, just a few changes from the S and P 500 in any given year. So there wasn't a lot of movement or transaction, not a lot of rebalancing needed, so not a
35:18 Speaker 02 lot of pass through or distribution. Now, in a target date fund, by nature, they're changing their allocation, maybe not a whole lot in any given year, but at certain points, they're going to shift from 70% in stocks, they're going down to 60%. They've got to sell stocks in order to do so. So it's going to create transactions and then in turn distributions. Well, an ETF, then they came along. ETFs are exchange traded funds, so it's a, it's a more efficient version of a mutual fund. Those were mostly passive, so they didn't have a lot of trading and they got well known to not distribute a lot of gains because guess what? They weren't doing a lot of activity. There's also a structural difference for an ETF though versus a mutual fund.
36:01 Speaker 02 A mutual fund is a custom order. You put $100,000 in a mutual fund. The fund gets it. They gotta go out and buy the stocks that they either they already have and add to them or buy new stocks. At ETF, the structure is different. They use authorized trading participants. So you put $100,000 in an ETF. That ETF provider is going to almost a reservoir that's holding a bunch of the same stocks they own. They go to the authorized participant and they may be just swapping funds or stocks or different assets. They don't create a transaction fee or a transaction that then creates taxes. So the structure of an ETF in general is more about swapping securities, which leads
36:46 Speaker 02 to less transactional or realized gains or losses. So the structure itself is better. However, you still are going to have this drift of going from lots of stocks to less stocks and you're buying something else. So, and by the way, ETFs still distribute out their taxes. These are some.
37:06 Speaker 02 So I think that the target date ETF might be a little bit better just because of the structure when it comes to distributions, but not necessarily or dramatically better. And that's my take.
37:19 Speaker 01 All right. Niti in North Carolina says, "I recently received a newsletter from Fidelity and it mentioned their fully paid lending program. I'm curious to understand what this program actually is, but I'm having trouble making sense of it in simple terms. Could you please explain in layman's terms?" There are five things that Niti would like explained. I hope I'm saying them all right. One, what does this program do? Two, what kinds of investments are eligible for it? Stocks, CDs, ETFs, et cetera? Three, what are the pros and cons? Four, is it something worth considering? And five, and if so, who is it best suited for?
37:55 Speaker 02 So I've only read about the fully paid lending programs. I have not used them. I'm glad you brought it up. Think of it this way, is that in order for, one of the ways brokerage companies make a lot of money is they allow people to short stocks. So when you're shorting a stock, you're essentially selling short. You're selling, let's say you get $10 in and you agree to buy the stock back. So if the stock drops to $5, you get to buy it back at 5 and you make the difference. That's shorting. But if you think about it, it has to be done on margin because you're selling a stock first and then you're in this contract of buying it back.
38:37 Speaker 02 Stocks, the brokerage firm, in order to allow people to short stocks, they've got to have inventory of those stocks and essentially the collateral for those stocks in order to allow other people to do it. And they make a ton of money by letting people short stocks. So these lending type programs, they're saying, well, if we've got all these clients that have hundreds of different securities and they're just sitting on them and they're not planning on selling them. Well, these fully paid lending programs can allow them to be in the margin program. And that's valuable to a brokerage firm. So what they do, and I don't know the exact structure on this, but I think they're splitting the money that they're receiving from this. So they're going to pay you, just like they get paid. They're going to pay, maybe let's say they split it 50/50. I'm sure it's different for different firms.
39:22 Speaker 02 But they're making revenue by allowing another client of the firm to short that stock. And guess what? You already have it in your account. So it takes care of a lot of the mechanics for them. So they're making money and they're sharing it with you. Now, where do you really make any money on this? And the answer is it's really different depending on the stock. So if it's a big, widely held, super stable company, that there's tons of ownership. Think of an Apple or a Microsoft. Those rates you're going to get to be in the program are super low. It might be like a third of a percent a year. So a million dollars, you might get three grand for the entire year.
40:01 Speaker 01 Okay.
40:02 Speaker 02 Could be up to 3% for a stock that maybe gets shorted a little bit more. So now you're talking 30 grand on a million. But what's interesting is that stocks that are high demand to be shorted, the brokerage firms are making a lot of money on those. Think of the really volatile, maybe even meme-like stocks. Those rates can go up to something like 20, 30% a year.
40:23 Speaker 01 Wow, okay.
40:25 Speaker 02 But what's the con or the risk? The risk is you're holding a super risky stock that a lot of people are otherwise betting is going down.
40:31 Speaker 01 Yeah.
40:32 Speaker 02 So there's like, obviously, you're going to get paid 20% in a lending program to keep holding a stock. It's probably because a lot of people are shorting the stocks. You have the great risk of that stock going down.
40:43 Speaker 01 Too rich for my blood.
40:45 Speaker 02 It's a lot of moving parts. I, again, I haven't participated in it. I'm glad Niti asked about it and I'm going to look more into it. So maybe a follow up in a couple of months about that.
40:55 Speaker 01 Perfect. Mary in Wisconsin wrote in with this one. Love your show. It's a great addition. I'm the durable power of attorney for my elderly aunt, aged 88, who is currently in a memory care facility, suffering with Alzheimer's disease. Sorry, Mary, that is very tough. She has approximately two more years of long-term care insurance coverage left, depending on how much the rates increase annually. The current cost is about $108,000 per year, with costs rising 10 to 14% per year. She has about $850,000 in assets and receives social security and two small pensions, adding up to about $2553 per month, which is more than covers any additional expenses not covered by her long-term care insurance.
41:39 Speaker 01 Her mother lived to 98 and a half, and her older sister, my mother, is currently 91. Both suffered from the same diagnosis. She is pretty darn healthy, other than the dementia. In your opinion, what percentage of her assets should be in dry powder versus equities? Thank you.
41:57 Speaker 02 Hey, Mary. Mary is a caretaker and it's a tough, it's a tough job. It's a special person that's able to do that. And you're also very clear about what the situation is. It actually makes it pretty easy for me. You read off a lot of stuff.
42:12 Speaker 01 Right.
42:14 Speaker 02 But here's what I heard. Two years left of long-term care. So right now, everything's getting paid for. Great. In two years, that's gone. Right now, it costs 108 grand in two years at 10% a year. Let's call that 130.
42:27 Speaker 01 Mm hmm.
42:27 Speaker 02 So, starting in two years, when your aunt will turn 90, it'll be about 130 all in. And she's getting 2,500 a month, which will still be there. And that's, that's about 30 grand. So, the gap is about 100. It looks like, Mary, your aunt will need about 100K a year in order to continue on and be taken care of. On the 850, 100 into 850 is eight and a half years. So, if you do, if you just keep the money in cash, that would then get your aunt another, that would last, call it from 90, and then there's some other inflation.
43:09 Speaker 01 Almost 99.
43:10 Speaker 02 That gets her to her later 90s. So, you could keep this super conservative and do 100% in dry powder, Mary. And that really buys her to the later 90s. My approach would be slightly, just a little bit different of that. So, I think that's a fine approach, in my opinion. I would likely look at it a little bit, a little more balanced, meaning that, and I'm thinking about the efficient frontier. Stocks are risky, 100% stocks, super risky. Bonds are way less risky, right? But what's riskier or more volatile over time? 100% in bonds or 80% in bonds and 20% in stocks? What's safer or less volatile?
43:55 Speaker 02 It's actually having a little bit of mix. It's a balance. It's kind of the inverse of what we talked about earlier in the show.
44:02 Speaker 01 Right.
44:02 Speaker 02 80% bonds, but a little bit, 20% in equities, can actually smooth out the ride over time and be an inflation hedge, at least a portion. So.
44:12 Speaker 01 What about like CD laddering in there somewhere?
44:16 Speaker 02 Yeah, well, let me, let me get to the next part. But thank you for prompting that, CD is a question mark.
44:21 Speaker 01 Okay.
44:22 Speaker 02 I would be looking at 20% in, let's call it dividend stocks or some sort of index, and then 80% in the dry powder area. Now, to your question, Krista, and Mary's question, see, here's what's happening with interest rates today. They're at, the 10-year Treasury is at 4 and 1/4 approximately, and it's been bouncing there all year. If you leave all this in a dry powder money market, safe, but the rates are going to go down if rates go down. So if the Fed takes rates down to 2%, now you're going to go from 4 down to 2. Where we are in this environment, you can lock in, whether it's a CD, a five-year CD at 4%, I would take advantage because it mostly solves and helps your aunt get through
45:07 Speaker 02 this, her funding needs, is that take advantage of where rates are today and you can lock them in. A money market will just go wherever rates are. They go down, your money market immediately goes down in yield. But the 10-year Treasury is essentially locking in for 4 and 1/4%. Well, depending, 4 and 1/4% for every year for 10 years. So think about locking in some longer-term bonds or CDs if you can get that 4% plus rate. 4% on 850,000 is about $30,000 a year in the early years. That covers a couple of months every single year. Now, it'll get spent down and it'll be less and less interest over time, but it really does help.
45:52 Speaker 02 And 4% is a heck of a lot better than if money market rates go back down to 1, 2, or 3.
45:58 Speaker 01 Okay. Well, thank you, Mary, and thank you to everyone who sends in questions, and thank you to everyone listening and watching. If you enjoyed this episode, I hope you'll share it with a friend. Please subscribe or follow the podcast, and we really appreciate you so much. Clark is back tomorrow, and we will see you with another Ask an Advisor one week from today.
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