The X’s & O’s
On today’s show we answer email questions that have been submitted to us from our listeners.
Listen to the podcast episode…
Brent Pasqua, Matthew Theal and Joshua Winterswyk
Matthew Theal: Welcome to the Retirement Plan Playbook. I’m Matthew Theal, a Certified Financial Planner with RPA Wealth Management. Joining me, as always, is Certified Financial Planner Joshua Winterswyk. Josh, how are you doing today?
Joshua Winterswyk: Doing good. Ready for this podcast, Matthew.
Matthew Theal: Yeah. Are you full from Thanksgiving still?
Joshua Winterswyk: Yeah, it’s a Thanksgiving hangover that I have too much turkey.
Matthew Theal: Yeah, it’s a little too much tryptophan will kind of get you down, huh?
Joshua Winterswyk: Yeah, yeah, absolutely. And too much pumpkin pie. Do you eat a lot of pie?
Matthew Theal: No, I’m not a big pie guy. I stick with the meats and the vegetables.
Joshua Winterswyk: Got it.
Matthew Theal: And then maybe wash it down with a couple of glasses of red wine.
Joshua Winterswyk: You know, add just a little bit of sweetness to that wine and you might enjoy it.
Matthew Theal: No, not at all. I’m not sweets guy. All right, so for today’s show we have our very first mailbag edition. So we’ve been gathering listener emails over kind of the core since we started the show about six months ago. And we finally got enough good ones where we’re ready to do a mailbag show. I’m excited about it. What about you?
Joshua Winterswyk: Yeah, I am too. And I think that putting together the questions, we had a lot that were similar as well and so excited for the ones that we’re going to be answering today and looking forward to incorporating this type of podcast in the future too. I think it’s going to be very beneficial for our listeners.
Matthew Theal: Yeah, absolutely. And for those who do have a question, feel free to email the questions in to firstname.lastname@example.org and we receive the questions and we’ve been keeping track of them and keeping a log.
Joshua Winterswyk: Yeah, keep them coming. I’m excited whenever we get new questions for the podcast.
Matthew Theal: Yeah, me too. And thank you for those who sent them in already.
Joshua Winterswyk: Yes, thank you.
Matthew Theal: All right. You ready to get started with question one?
Joshua Winterswyk: I think so, yeah. Let’s jump right into it. So we have a Robert from Rancho Cucamonga ask if there’s any way to avoid taking a required minimum distribution or also called RMD?
Matthew Theal: Yeah. There’s one major or way I know about. The easy answer to this is usually no, there’s not. The government wants to tax your money, which is why the RMD was created. But if you do feel like working a long time and I mean past 70 and a half and you know well into your mid 70s or even early 80s like some people do. What you can do is roll or essentially keep all your money in your employer sponsored retirement plan. So it’d be your 401(k) or 403(b), and then you don’t have to take a required minimum distribution. If you have, outside IRAs though, the catch is you have to roll that in to your employer sponsored plan or you will be forced to take that RMD. Anything to add, Josh?
Joshua Winterswyk: No. Yeah, I think that’s good. I think generally if you’re speaking just to the retirement client out there, if you’re already retired, you’re not working. The answer to avoiding the RMD is no, right?
Matthew Theal: You can’t avoid it.
Joshua Winterswyk: But I think there are different strategies to delay accelerate, and if you’re married, there are also some other different strategies out there too that are very specific. But I think the general answer is no. And going from there to researching if any of those specific strategies apply to you to delaying it or reducing it.
Matthew Theal: Do you want to go into any of those strategies today or save them for another show?
Joshua Winterswyk: I think one that we kind of mentioned in the past too is like the charitable RMD as well.
Matthew Theal: Yeah. A QCD?
Joshua Winterswyk: Yeah. So you can donate some of your RMD to charity and that will reduce the tax liability on that RMD. And so I think that’s just one that we commonly use and when we bring it up to clients that are interested in. So if you are charitable or you’re giving in that year, looking at that strategy to help you reduce taxes and reducing that RMD amount that’s going on your tax return is a good one. So I think that’s just one that I think could help a lot of clients and looking into that would benefit them.
Matthew Theal: Yeah, absolutely. Any other strategies?
Joshua Winterswyk: We can go down a rabbit hole with this specifically, but I think for Robert in Ranch Cucamonga.
Joshua Winterswyk: Yeah. Yeah, I think so. What do you think?
Matthew Theal: I have one more point on what I’ve mentioned and if Robert owns his own business, meaning 5% or more of the company’s stock, or he has a spouse who owns a business and he’s an employee in there. He actually has to take his RMD. There’s no way around this if you are a business owner. And so that would be 5% or more of the outstanding stock of the said small business. All right, let’s move on.
Joshua Winterswyk: Sounds good.
Matthew Theal: All right. Moving on to question two. Scott from Phoenix, Arizona emailed us and he would like to know what the difference is between a fee-based advisor and a fee-only advisor. This is a fun one.
Joshua Winterswyk: Yeah it is. And I think just starting with what those terminologies mean and they’re basically the two main financial advisor fee structures. So fee-only and fee-based are two of the main fee structures that they have. And it’s important because as the consumer you want to know what you’re paying, how you’re paying the fee for the service when you’re hiring a financial advisor, I think that’s just really important.
Joshua Winterswyk: So what is the difference and fee-only financial planners or fee-only, that term, gets paid directly from the client. So the only fee exchange is coming from the client to the advisor. And fee-based planners also can charge a fee just like we just mentioned, but they also can sell or earn commissions on the products that they sell. And that’s the biggest difference is that commission. So we know fee is the common denominator between both of them, but commissions is going to be the difference between fee-only and then fee-based can actually receive commissions from the client.
Matthew Theal: Yeah. It’s very confusing and I know we’ve been on both sides of the table, because we were once both fee-based advisors. And now that we’re both fee-only advisors, I definitely prefer being a fee-only advisor. It’s just a really nice feeling when you’re sitting and talking with your clients and you’re making recommendations to them and you’re not getting compensated for it.
Joshua Winterswyk: Yeah. And it’s really tying you to that fiduciary oath that we took. Right. There’s no conflict of interest, because different products come with different commissions.
Matthew Theal: Yeah, absolutely.
Joshua Winterswyk: So I think it’s just really important, and especially for our listener and their question is, is do research and ask that advisor or find out how they’re being compensated. Because I think it really is important to understanding how the advisor is getting paid and making sure that you’re getting the best advice.
Matthew Theal: Yeah, absolutely. And I know it’s really difficult for consumers to kind of tell the difference, but the main way I would do it if I was a consumer is, usually what happens is these people who are making commissions and they’re also getting investment fees, so they’re calling themselves fee-based or they might even call themselves fee-only. They have two corporations set up. The first corporation is going to be the investment advisory firm and that’s where they’re going to be doing your portfolio for the one or 2% of assets under management. The second corporation is going to be some kind of insurance corporation where they’re selling you either annuities or life insurance and they’re making commission on that side. Does that make sense?
Joshua Winterswyk: Yeah, absolutely. And I think that what you’re trying to avoid by researching it is just to eliminate as many conflicts of interest as you can, right. You don’t want to have too many potential conflict of interest with your investment advice because you want the best fiduciary advice, you want what’s best for you. And I think that this is just a really good way to compare when you’re shopping for an advisor or looking to hire one and it’s just a really important step in process to hiring.
Matthew Theal: Yeah, absolutely. Great point. And I was actually sitting with a prospective client the other day and he was interested in hiring a fee-only advisor and he had a really great 20-30 question advisor interview booklet that he asked me to fill out. And I mean, I gladly filled it out because we have no conflicts.
Joshua Winterswyk: Yeah. Where did he get that from?
Matthew Theal: He got that from NAPFA. That’s N-A-P-F-A. So if you go there, you can probably search for it and download it and when you’re looking to hire an advisor, take it and have them answer the questions.
Joshua Winterswyk: Yeah, I think that’s also just a really good tool. Does that checklist have a fee question on there?
Matthew Theal: Yeah, it has lots of fees. It asks what percent of essentially your revenue comes from commissions and then obviously for ours we put zero. It asks you if you have any conflicts of interest. I mean, obviously you could lie. But still, it’s a good feeling for us. I was happy to fill it out.
Joshua Winterswyk: Yeah. Yeah. And being transparent says a lot.
Matthew Theal: Absolutely. Anything left?
Joshua Winterswyk: No, I think we got that one pretty good. Moving onto the next question. Number three. So Anne from Henderson, Nevada wants to know or is afraid that the stock market will crash if a Democrat gets elected, especially Elizabeth Warren. Well, what should she do?
Matthew Theal: Yeah. A lot of people are worried about Elizabeth Warren’s tax policies. That said, we’ve seen a lot of research. We work with Dimensional Fund Advisors on the mutual fund side. We use them in a lot of our portfolios and they’ve done a ton of research on presidential elections. And what the research shows is, it doesn’t matter who the president is, the stock market usually goes up. It doesn’t matter if it’s Democrat or Republican. Chances are it goes up. You remember Trump, right? The Trump election, everyone was really freaked out about him. The Democrats were freaked out just like the Republicans are freaked out now.
Joshua Winterswyk: Yeah, yeah, absolutely.
Matthew Theal: And they thought the stock market was going to crash. It didn’t crash. It’s still going up. It’s going up today.
Joshua Winterswyk: And it’s just so difficult to identify like return patterns in election years because the data shows that they go up.
Matthew Theal: Right.
Joshua Winterswyk: The average rate of return, even during election, you’re still above 10%.
Matthew Theal: That’s really great.
Joshua Winterswyk: And it’s about 10% the year after the election and it didn’t matter who was president, that’s going back till 1928. So it’s just really hard to identify some sort of real pattern that’s correlated to who’s in office.
Matthew Theal: You know, it’s funny and I really make people mad when I talk about this, especially if they’re Republican, but did you know that the last two recessions have actually fallen under Republican presidents?
Joshua Winterswyk: Yeah. And another cool fact just talking about.
Matthew Theal: Actually it’s the last three or four.
Joshua Winterswyk: Well, it’s a cool fact that we were looking up like recession research is, recessions on average only lasts about 11 months while expansions last over 60 months.
Matthew Theal: Right.
Joshua Winterswyk: It’s just so much more time that you’re baking in the good times than in the bad.
Matthew Theal: The bad times always seem really bad because they hurt the most. But yeah, the good times lasts for a long time.
Joshua Winterswyk: Yeah, absolutely. And I think this also goes back to, we both have this philosophy of making sure you have a plan, right?
Matthew Theal: Oh absolutely.
Joshua Winterswyk: For any sort of recession or election, have a plan, continue to update it, stay educated, and taking actions now to prepare for the future.
Matthew Theal: Yeah, absolutely. That’s a great point. And I do think as we get closer to the election, the election time next year, we’ll do an election-based podcast, where we kind of go through maybe what happens with the stock market a little bit more in depth.
Joshua Winterswyk: Yeah, I think that would be good. I’m curious to see if listeners are interested in that too, because I think it’d be a really good topic before this big election year next year.
Matthew Theal: Yeah. But I wouldn’t worry too much about Elizabeth Warren. I mean, I’m not a fan of her policies either, but she’s dropping very fast in the polls. She went up about as fast as Kamala Harris, and she’s just dropping about as fast as her.
Joshua Winterswyk: Yeah, yeah, she’s really dropping too. She’s like middle of the pack now.
Matthew Theal: Anything else?
Joshua Winterswyk: No, no. I think that was good. Good question.
Matthew Theal: All right, let’s move on to our final question in today’s show, question number four. And this one was sent in by Jackie from Redlands. And she has a large savings account balance. She says it’s over $300,000, and she wants to know what she can do with the money to get more interest. I mean, I know that’s kind of specific advice directed to her, but I mean maybe we could give her some tips and some things to maybe look at or research.
Joshua Winterswyk: Yeah, absolutely. I think we get this question a lot about cash, both on how much cash should we have? Do we have too much cash? Do we have too little cash? But in her situation with having a large amount in savings, first, making sure that before you take any steps for looking for higher interest, it is developing the proper amount of emergency savings that you should have. So if that’s three months of living expenses or six months. And using a safe vehicle for that money, because that is your emergency savings money. And putting that in some sort of higher yielding savings account. Right now, they’re online savings accounts.
Joshua Winterswyk: I think we’ve talked about them on previous episodes as well, but utilizing online savings accounts that are going to yield a lot higher than your typical traditional brick and mortar bank. And right now, currently, they’re around 2%, a little less than 2%.
Matthew Theal: Yeah, a little less than 2%.
Joshua Winterswyk: I think you know if you shop close to 2% now, but it’s going to be a lot more than the traditional bank. And making sure that emergency savings is safe and then yielding a little bit more, so getting some more interest than your traditional bank as well. And then any additional funds once you’ve taken that step really tying a goal to the money is really important, because then that’ll develop your time horizon of when you potentially going to need the money and then really developing an investment strategy to get some more interest once you’ve determined those things.
Matthew Theal: I think it’s important. Let’s go back to the first thing you said about the three to six months expenses. What I’ve found, and maybe you could agree or disagree with me, is most people don’t know what they’re spending per month.
Joshua Winterswyk: Yeah, yes.
Matthew Theal: So for those of you listening in your car or at home while you’re cooking, a good way to do this is take your net check. And say you have 10,000 a month coming in, most likely you’re spending 10,000 a month, if you have 10,000 a month coming in, very few times is it actually going into the savings. And then just multiply that by six and you’ll get what you need in your emergency fund. So if you have 10,000 a month, it’s $60,000 you should have saved in an easily accessible account.
Joshua Winterswyk: Yeah, that’s a good rule too. I mean just taking your monthly net income check and saying, “That’s how I’m going to calculate my emergency savings, because I need to replace three months of income if anything happens in case of an emergency.” But that’s a really good point of finding out how much you’re actually spending before you do that.
Matthew Theal: Yeah. And then the other thing that people could do in regards to kind of tying a goal to the money is if you don’t need it, you probably should consider actually investing it. Savings accounts are great and it’s really nice to have cash, but if you’re not an entrepreneur or you don’t need to buy a house, really the best bet is going to be investing your money in the United States stock market. Just like you were mentioning, Josh, on the election question, right. I mean, pretty much the stock market earns nine to 10% on average per year.
Joshua Winterswyk: Yeah, that’s a good point. Absolutely.
Matthew Theal: Yeah. That’s much better than the one and a half to 2% you can get at online savings account right now.
Joshua Winterswyk: Yeah, yeah, absolutely. And if you’re not willing to take that type of risks, I mean, still some sort of percentage towards stocks. We talk about the stock to bond allocation. Well, getting it invested and picking an allocation that’s going to potentially yield you more than that 2% savings account.
Matthew Theal: Yeah, absolutely. And I think this year or almost every year, bonds make sense. I think most bond funds are probably up at least eight to 10% this year.
Joshua Winterswyk: Yeah, they’ve been good. And comparing them too, I mean there’s enough research out there now to compare different portfolio strategies and I think traditionally it was, “I’m going to put my money into a CD.”
Matthew Theal: Oh yeah, CDs.
Joshua Winterswyk: You know, that was traditionally with interest rates so low, I mean CDs are barely yielding any more than an online savings account. You’re looking at still a little low that below 2% or at 2%, so why tie your money up into a CD? Let’s try to get some more return if you do have a developed an appropriate emergency savings fund. You’re not going to worry about that short term volatility because you know you have enough saved.
Matthew Theal: Yeah. Absolutely. I feel like I don’t see a ton of CDs anymore. I think that was kind of more of the, a lot of the silent generation did it. But the boomers don’t seem as big on CDs.
Joshua Winterswyk: Yeah. Yeah. And I think a lot of that, some of it has flooded into the annuity market too.
Matthew Theal: Yeah, yeah. They like the safe money.
Joshua Winterswyk: So, I mean, that is another option, but you want to do your research.
Matthew Theal: Yeah. And I would say one thing too where we’ll tie in question number two about the fee-based versus fee-only. This is where you could get sold an annuity.
Joshua Winterswyk: Absolutely.
Matthew Theal: So be careful out there. The downside of putting your savings in an annuity is the way it’s taxed. And you’re essentially locking your money up. But when you put your money in an annuity and it’s from a savings account, you will pay ordinary income taxes. So, that’s like your working income tax rate on your annuity when you use the money.
Joshua Winterswyk: Yeah. And just another variable to consider when making these decisions with cash and investing. But I think it’s, you have to do a lot of due diligence making sure you make the right decision. It’s tailored.
Matthew Theal: Absolutely. Anything left?
Joshua Winterswyk: No, I think the questions were great and can’t wait to continue to do this podcast in 2020.
Matthew Theal: Yeah, absolutely. We’ll probably do another mailbag, maybe in another six months or so?
Joshua Winterswyk: Yeah. I think we should gauge how many questions we get. Right?
Matthew Theal: Yeah. And then that’s pretty much it for today’s show. Like we said, RPA Recommends is being held off until we do the famous Christmas list.
Joshua Winterswyk: Yeah, we’re doing our annual gift guide.
Matthew Theal: Yeah. I’ll have to work with Brittany to get that out, but it’ll probably come out in the next week or so. So be on the lookout for that.
Joshua Winterswyk: That means I have to work on my list.
Matthew Theal: Yeah, you do. Hopefully we get some better ideas this year instead of like AirPods or Apple TVs.
Joshua Winterswyk: Is that what it was on the list last year?
Matthew Theal: I don’t remember. But we’re going to need some creative ideas this year. The people demand creativity.
Joshua Winterswyk: Okay. So I’m going to have to do my research over the weekend.
Matthew Theal: Yeah.
Joshua Winterswyk: Perfect. I’m looking forward to it.
Matthew Theal: All right, well, that’s all we have for today’s show. Thank you for listening. If you have a question, please email us at email@example.com. I mean, we’ll consider your question for our next mailbag episode. Thank you for joining us and we look forward to speaking with you someday.
Joshua Winterswyk: Yeah, absolutely. Thank you, guys.
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