Nov 28, 2018
Welcome to our Q & A series where we are going to dive into some common questions we receive from listeners. As you can imagine, we receive all sorts of questions on a variety of topics; relating to both retirement and non-retirement topics.
Today we are going to talk about the economy, what’s going on in the markets, what’s the best spend down strategy: Roth or Traditional IRA, Precious Metals, Fees, and of course.. social security!
(1:15) Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you’re a client I can’t give you advice because I don’t know you. Think of this as helpful hints and education only! And please, before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.
Practical planning segment:
(2:50) What do you see as the next big thing affecting the economy?
Well, we don’t have a crystal ball. But this is a very common question that we get from folks all of the time! First of all when we talk about our economy and the world economy, there is a vast amount of things that can affect either one, or both. This makes it extremely difficult to predict and that’s why with our philosophy, we don’t do it!
If you watch the news, the hot topics lately are tariffs and interest rates. Right now, the Fed is in the mode of raising interest rates and they are doing it for a couple of reasons. The number one reason that the Fed raises interest rates is to control the rate of inflation. They use forecasting models, and if they forecast higher rates of inflation, then they are going to raise the interest rates to combat that.
In one way, this helps investors if their money is in a savings account or if they purchase a CD (Certificate of Deposit), then the investor is getting a higher rate of return. On the other hand, if you are invested in stocks, sometimes when the Fed raises interest rates you’ll notice that stocks will generally drop in price. The market participants tend to move towards safer investments over the short-term assuming they are going to get higher returns. However, this usually corrects itself over time when positive earnings come out.
If you are a long-term investor, you should not let interest rates drive your decision making on whether to invest in the market or invest in something like a CD or fixed income. When you’re invested in the market there’s always some risk involved; Stocks go up, they go down, and overall the market can seem extremely volatile if you look at a short time period. You might even have a negative year! However, if you look at historical rates of return, they exceed rates of inflation and usually exceeds returns from any type of fixed income. Remember, think about your long-term investing goals!
(8:30) Tariffs: Will the Trump administration and China come to some sort of agreement about tariffs?
We all know that President Trump is a negotiator and a business man, and he is using tariffs as a negotiating tool. He has gone on record saying that he doesn’t want any tariffs and he would be happy with zero tariffs on either side. This negotiating tactic has worked on 3 occasions: Europe, Canada and Mexico. However, it’s not currently working with China, which is our biggest trade deficit. Approximately $200-250 billion in tariffs are set to go in place at the beginning of 2019.
The question is, is that information already priced into the market? If you believe in the efficient market theory. Then yes, this information is already known, and the threat of tariffs is already factored into market pricing. On the other hand, some people believe that the implementation of these tariffs at the beginning of 2019 will have a significant impact on the markets.
Now, China and the U.S. are scheduled to meet at the G20 summit this weekend (Nov. 30th-Dec. 1st) So there could be some updates after that. Again, we don’t have a crystal ball and we can only speculate what could happen.
To wrap things up with our first question, the two biggest things I see affecting the economy right now are interest rates and tariffs. I want to reiterate that if you are a long-term investor, think long-term! Don’t worry about these short-term trade wars or short-term interest rate fluctuations. Keep your eyes on the long term!
(12:05) Are precious metals a good investment?
Someone must have watched William Devane’s commercial about turning your IRA into Gold! In our humble opinion, gold and silver are great for jewelry! But not great for investments. We believe in building globally diversified portfolios and when you do that, you are participating in the precious metals market by owning different companies. For example, a globally diversified portfolio might include some mining companies or publicly traded jewelry companies in which you would profit from based on dividends or gains. However, if you simply buy the commodity of gold or silver, you have to buy low, sell high and time the market. Precious metals are actually a very volatile commodity!
Oddly enough, gold is typically marketed as a safe investment, as a hedge against inflation or a hedge against national debt. Those that are selling gold as a safe investment argue that due to the national debt, the dollar is worthless or eventually will become worthless. Think about this in a logical way: What are they taking in exchange for that Gold that people would buy from them? DOLLARS. If gold is such a safe haven and a dollar isn’t worth anything based on their belief, then why are they taking your dollar? Hmm.
On a lighter note, we do love the Burl Ives song Silver & Gold to get us in the holiday spirit!
(17:00) What is the best ‘spend down’ strategy of 401k, Roth, Social Security… which first?
This enters the realm of proactive tax planning and this question can come down to an individual’s unique circumstances, so we recommend that folks speak to their own personal CPA. We are not a CPA firm and cannot give tax advice. However, we’re going to talk in general terms to give folks an idea of what they might want to discuss with their own CPA.
‘If an individual needs income, where should they draw from first?’ is somewhat of a loaded question and typically leads to several more factors such as age, employment status, personal financial situation, how much is in each account, social security, marital status, etc.
Let’s use an example of a 62 year old, married, retiree that has a 401k that has yet to be rolled over into an IRA and also has a Roth. If this person is no longer working and they need the money as income, it may make sense to start social security early. If their sole income is just social security and it’s enough to pay for general living expenses, the social security will have zero tax. Now let’s say this person wants to draw from other taxable accounts, such as a 401K or a Traditional IRA, in addition to collecting social security. When money is withdrawn from these accounts, it could possibly incur ordinary income taxes. If the withdrawal is below the standard deduction, it may not incur income taxes. However, withdrawals from these taxable accounts could potentially trigger taxes on the social security being collected! You have to be careful about withdrawing from these accounts in combination with collecting social security.
The Roth has different rules, which we will get into at a later show. Let’s assume you have had the Roth for at least 5 years, you are over 59 ½. Any money that comes out of the Roth that is a qualified distribution is tax free AND as a bonus, it is not counted as provisional income (which determines if Social Security is taxed). So this might be a good option depending on the situation, and an individual might want to take money out of each account.
When you contribute to a Roth, the money has already been taxed. So if you are over 59 1/2, even if the Roth hasn’t been open for 5 years, you can always take out that original contribution without penalty. What you do have to be careful about is withdrawing the growth and earnings of your account. We usually don’t have to worry about this however, because when money is withdrawn from a Roth, all custodians distribute your contributions first, not the interest earned.
(25:00) Do you think 401k to Roth IRA conversions are a good idea?
First of all, you cannot convert a 401k directly into a Roth IRA. What you would have to do first is rollover a 401k to a traditional IRA. There are some benefits to doing this. 401k’s are notorious for the fees charged and people aren’t typically aware of those fees. There is a very helpful website: Brightscope where you can put in the company plan name and it will list all the fees and assets within the plan. It is still somewhat difficult to really figure out what exactly you are paying because there are still other fees involved. So, one of the benefits of rolling over your 401k is that you have more control, more options and you get to clearly examine exactly what fees you’re paying.
(27:30) Once the money is in a traditional IRA, does it make sense to convert it into a Roth? Another loaded question! So in general terms… any time you take money out of a traditional IRA, whatever amount you’re converting you’re paying income taxes on. You should consider whether it will push you into a higher tax bracket, will it trigger social security taxes? For this reason, most people don’t convert the entire account but rather do several scheduled conversions.
You should also consider your age. Let’s say you retired early, say age 60, and rolled over your 401k into an IRA. At age 60, you would have until age 70 ½ until you have to start taking distributions (RMD’s) which means you have about ten years for that IRA to grow. During that time, you could have some type of schedule where you convert small amounts at a time into a Roth. If managed correctly this could be a great strategy because over that ten-year period, you have time to convert a good amount into the Roth, little by little. With a Roth, there are no required minimum distributions and if you do withdraw, it does not trigger taxes on social security.
Once again, there are so many moving parts to conversions and ultimately, we encourage you to speak with your CPA about your unique situation.
(31:00) How do I know how much I am paying in fees?
Unfortunately, in this industry, most people don’t know the answer to this question. We just discussed the fees embedded in a 401k that are very difficult to see. One thing that you can do, is make sure you are working with a fiduciary. A fiduciary is going to disclose 100% fee transparency. Also consider your investment strategy: Passive vs. Active. With passive management, chances are, you are paying fees to an investment advisor. This is usually based on assets under management and could be anywhere from 1.5-3% depending on who you’re working with. With active management, you have to be a little more careful with hidden fees. Let’s say you’re using an active manager who puts you in an XYZ mutual fund. The fund company charges an expense ratio. If the fund manager is actively buying and selling stocks within the fund, every transaction has fees such as the spread and commissions. With this strategy, you could have an advisory fee, the mutual fund expense ratio fee, transaction fees, and commissions.
We recommend having a true fiduciary analyze your portfolio for existing fees. Also, compare the portfolios risk and return to a passive portfolio, apples to apples.
Closing Segment: We appreciate you joining us today for this episode of The Fiscal Blueprint. Be sure to visit fiscalblueprint.com to access the most recent content available including all past shows.
Remember it’s not about the money but about your life! Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!
Final Disclaimer: “Opinions voiced in this recording are for general information only and not intended to offer specific advice or recommendations to any individual. All performance references are historical and no guarantee of future results. All indices are unmanaged and not available for direct investment.”