Fed Rate Cuts, Roth Rules, and Retirement Risks
On this week’s Best of Simply Money podcast, Bob and Brian get Allworth Chief Investment Officer Andy Stout’s take on the Fed’s latest rate cut and what it really means for investors. They also cover new IRS rules pushing high earners’ 401(k) catch-ups into Roths, why HSAs are the most overlooked tax break, and how to protect your retirement from sequence of return risk. Plus, real listener questions on private REITs, pensions, and illiquid wealth—and a quick December tax trick that could save you thousands.
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Bob: Tonight, interest rates are falling, retirement rules are shifting, and are you missing out on one of the biggest tax breaks available to you? You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller, along with Brian James. Well, this week starts in a lower interest rate environment. Allworth's Chief Investment Officer, Andy Stout, is here. Andy manages more than $30 billion worth of investments across the country for all of our clients, and we want to get his take on the Fed interest rate cut. Andy, any surprises at all with what happened with the Federal Reserve last week?
Andy: No, not from the actual movement of the Fed where they lowered rates by a quarter of a point, but there was some surprise that even though they brought rates down from...it was a range, by the way, of 4.25%, 4.5%. Now, it's at 4% to 4.25%, still pretty high, still doesn't really help your mortgage rates that much, by the way, but it is a move in a direction that could help over time. But what the surprise was, Bob, was in the economic projections that Fed provided.
Normally, when you look out the interest rate environment and what the Fed does out there, it's going to be based on a few things. It's going to be based on where they think GDP is going, where they think the unemployment rate is going, where they think inflation is going. Right now they changed their forecast, so they think GDP is going to be higher this year and next year than what they thought in June. They think the unemployment rate is going to be lower, and they think inflation is going to be higher. All of those actually argue for higher interest rates, not lower interest rates. So even though we had those three projections move, it certainly started the meeting off with a little bit of a head scratching while those all things are very important things the Fed looks at. I mean, these are the main economic indicators, and they're saying, "We're cutting rates," despite our projections indicating that normally we would think you should be keeping rates high.
Bob: So, Andy, how worried do you think the Fed really is about the slowdown in jobs? What are they trying to stay ahead of since we had that pullback in that reporting?
Andy: Well, so when the Fed's looking at the unemployment rate, inflation, and GDP, and all those are arguing for lower rates, you're probably thinking, "Well, why did they cut rates?" And jobs is the reason. We've seen some massive revisions over the past really two annual reports. When I say annual reports, what the BLS does, the Bureau of Labor Statistics, some fun government agency that apparently gets their job reporting very wrong very frequently, they revised the lower from basically March 24, 2024 through March 2025 by 911,000 jobs. In other words, they said employers added 911,000 fewer jobs than what we originally said. That's a huge mess across the board once they got better data. And they had a similar problem the year prior, where they revised lower the number of new jobs by 818,000 for that basically March to March 2023 to 2024 period.
So in other words, what we're seeing is that the labor market, while it looks pretty solid on the surface, I mean, with 4.3% unemployment rate, but it's definitely more fragile underneath the surface. When you look at these revisions that are going, it just indicates that the Fed is not looking at the economy from a point of view of the labor market having a position of strength of a starting period, but more of a position of some weakness.
Bob: Andy, I want to go back to this Fed's 2% inflation mandate. I've heard more than a few pretty respected economists over the last week say that perhaps the Fed is outdated on this whole thing, and they're shooting at the wrong target. Do you have any thoughts on that? Are we going to see some Federal Reserve reform going into 2026 that might change around the edges some of these dual mandate targets that they're going after? And do you have an opinion on that based on what you actually see going on in the economy? Because I know you look at a ton of different factors, other than unemployment and inflation, when you look at this...or when you build this recession scorecard that you and your team build and maintain on a regular basis?
Andy: Yeah, that's a really good question. And there's a lot of nuance in there, Bob. So when you think about the...and I know I don't often give you that sort of high-level compliment. So, you know, take that one to the bank there.
Brian: Don't let it go to your head, Bob. Doesn't happen very often.
Bob: I'm going to record it and play it back often.
Andy: Well...
Bob: Now, let's keep it serious here. No, I appreciate it. I'm interested in your answer.
Andy: Yeah. So they're not going to probably change anything in the near term. So what the Fed looks at, they look at core PCE, which is different than CPI. CPI is the big inflation number that most people talk about. PCE is a little broader, and it includes a few other things, and core excludes food and energy. And that's where they want it to be at 2%. And what we're seeing with these changes in the projections, it appears that they're getting...I'll call it more tolerant with inflation. I don't expect them to change their target. That's a 2% target. Because they actually just came back a few months ago from some larger study they did, and they basically solidified their inflation objective.
Now, with that being said, the chair Powell's term ends in the middle of next year. So we'll have a new Fed chair, probably have someone handpicked by President Donald Trump, and that person may be more open to letting inflation run a bit hotter than what the current regime has in place. And, therefore, they can be more open to lower interest rates because they're not as worried about inflation. So I could see a shift maybe in the middle of the next year. But as far as any sort of...I'll call it institutional revision, that seems unlikely. And is it the right number they're looking at? Yeah, I think core PCE is the right number if you're going to be looking at inflation. I mean, obviously, it's really hard to say 2% is the target. I mean, putting a hard number on it is a little bit of a...you know, it's risky because you're keeping one number constant, but there's so many things changing in the economy.
I mean, the Fed does not have an unemployment rate forecast. I mean, they just say, you know, low unemployment, they say full employment more specifically, and they say stable prices. That's their dual mandate, but they put an actual number on that core PCE. Now, I don't think that will go away. I just think maybe tolerance becomes, you know, the word of the day for the Fed.
Brian: This sounds an awful lot like lower for longer from, you know, not that long ago. And I believe that...if I remember correctly, that became a political flashpoint there when it was handy for somebody to kind of throw that in faces. So am I thinking correctly there? Is this kind of a rerun of what we've been through before?
Andy: Well, I think it's a rerun from the perspective that everybody wants the Fed to do something different than what they're doing. The Fed becomes a scapegoat. So when you think about where the Fed sees pressure, I mean, this isn't the first time they've had outside pressure, and this isn't the first time the Fed has been blamed for messing up because it's a very difficult job. And, quite frankly, they do mess up a fair amount, but it's easy to say that in hindsight, I mean, just to be honest about it. But when you're in the throes of it, you know, that's where it is to become a little bit more challenging as far as lower for longer. I mean, that was really more we were at a 0% Fed funds rate, and we were at inflation going nowhere. I mean, we...sub-2% inflation for quite a long period of time, and the economy was doing okay. And there was really, you know, no need to really raise rates because the Fed actually wanted inflation to get a little too...a little bit higher than where it was. But, obviously, we're in a situation where, you know, it's a, you know, careful what you wish for sort of thing.
Bob: You're listening to Simply Money presented by Allworth Financial. I'm Bob Sponseller, along with Brian James, joined tonight by Allworth's Chief Investment Officer, Andy Stout. Andy, let's boil this down to just practical moves that we should or shouldn't make given the announcement last week. Should we be making any changes to our overall asset allocation as a result of this Fed announcement last week? I know you said the 10-year bond didn't really move, mortgage rates didn't really come down. Is there anything to be doing right now of a drastic nature, or, you know, is this just a regular news event?
Andy: I mean, as important as I like to, you know, want my job to be, this is more of just a regular event for, you know, most investors out there. I mean, if you're going to be changing your allocations every time...you know, and, I mean, it's an important event, but if you're going to be changing your allocations and changing your investment mix whenever one of these things come up, you're going to be chasing returns. You're going to have the fear of missing out. You know, all that you probably end up doing or, you know, most likely is you end up buying high and selling low, which is the exact opposite of what you want to do. It's better to certainly have a financial plan that drives that investment mix and then make sure you stay grounded in reality. I mean, the real important thing is understanding cycles and understanding, you know, markets go up, markets go down. You know, here's what you can expect over a long period of time. And here's the volatility. Importantly, here's the volatility you can expect, because if you know volatility is coming, you're not going to freak out and make an emotional decision, because when you make those emotional decisions, that is when you hurt your own retirement.
Brian: Andy, I think this would be a great time to maybe do a little bit of fixed income 101, meaning, yeah, we know we always talk about not trying to time the stock market, that kind of thing. And none of these headlines really drive that. However, there are bonds. On the fixed income side of your portfolio, there are things you want to own in a declining rate environment and things you don't. Could you kind of take us through just so everybody can hear that from your mouth, you know, what are the things to avoid and just at a high level, rising rate environment versus, you know, declining rate?
Andy: Well, so that's also quite nuanced because when you say a rising rate environment and a declining rate environment, that really depends on which part of the yield curve is actually increasing and decreasing because what the Fed can do...and the Fed is lowering short-term rates right now, and they'll probably lower them again. That's what the market's pricing. However, long-term rates went up last week. So in that situation, you know, what you have is you have lower short-term rates, but longer-term rates have actually increased a bit. So let's assume, and this is a big assumption, that when we say lower rates, we're talking about longer-term and shorter-term bonds all moving in the same direction. So when interest rates go down in general, you would expect bond prices to go up, and in that scenario, if short-term rates and long-term rates are moving together, you know, by the same amount, if rates are going down, long-term bonds should outperform short-term bonds. Now, if rates are going up, then you would expect short-term bonds to outperform long-term bonds.
Now, the other thing to keep in mind is, you know, what does that economy look like behind the scenes? I mean, are we in a situation where, you know, the economy is, you know, in a freefall, or are we in a stable environment? If the economy is stable, typically corporate bonds, you know, could do better than treasury or government bonds. Conversely, you know, if we're in some economic trouble, and you see a lot of risks out there, and then you start to see the Fed cut rates because they're worried about the economy, what has outperformed every other asset class during those time periods has really been long-term government bonds. That's your ultimate flight to safety security. So when stuff hits the fan, long-term treasury bonds are usually a pretty good option for investors to be in.
Bob: All right. Good stuff, Andy.
Andy: But we're not there right now, to be clear.
Bob: Yup. Yup. All right. Good stuff, Andy. As always, thanks for joining us tonight. All right. Coming up next, the IRS is forcing some high earners into Roth catch-ups, and are you sleeping on the best tax break you've got available to you? We'll talk about all of that next. You're listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller, along with Brian James. If you can't listen to Simply Money every night, subscribe and get our daily podcasts. And if you think your friends or family could use some financial advice, let them know about us as well. Just search Simply Money on the iHeart app or wherever you find your podcast. Straight ahead of 643, we've got advice on Roth versus pre-tax savings, private REITs, pensions, and even caring for aging parents. All right. If you're 50 years old or older and trying to ramp up retirement savings, listen up. A new IRS rule just finalized under the Secure Act 2.0 will change how you make those extra so-called catch-up contributions to your 401(k), especially if you're a high earner. This is important, Brian. Break it down for us.
Brian: Yeah, this one's going to sneak up on a lot of people. So catch-up contributions are...you know, a lot of people...probably sounds familiar now. They've been around for a while, but if you're 50 or older, the IRS made it possible a couple decades ago to go ahead and start saving a little more money, meaning you could go up to $30,000 this year. Changes a little bit every year. However, this year says that starting in 2026, so next year actually, if you earn more than $145,000, and that's in terms of wages that are subject to Social Security tax, there's some nuances there, that's still going to be most people, if you earn more than $145,000, any catch-up contributions you make to your 401(k) are going to have to be going on the Roth side. So in other words, what that means is if you are over 50, you can throw extra money in.
Like we said, for 2025, that's $7,500 on top of the regular limit of $2,250. But, basically, these dollars will now have to go in after taxes. These are the catch-up dollars. The good news is it's going to grow tax-free as per the Roth rules, so that's not the worst thing in the world, but you're still going to have to pay taxes on those dollars going in as the catch-up. There's no immediate tax deduction. You are paying taxes now on those dollars.
Bob: Yeah, here's the thing to watch out for. If your 401(k) plan currently doesn't offer Roth contributions, and I think, Brian, it's safe to say most companies now do, but there's still some out there that don't, heading into the fourth quarter of 2025, please check with your HR department and make sure that your 401(k) plan does add Roth contributions if it doesn't allow those right now, especially if you're over 50 years old, because you could literally be leaving money on the table here if your plan doesn't get updated with the times.
Brian: Yeah, and I would say one quick thought on that. I would say set this aside. If your plan doesn't yet offer Roth contributions, then chirp. Let your employer know that, "Hey, I would like a little more flexibility," because we're really 15, 20 years past when that was possible.
Bob: Yeah, for sure. You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller, along with Brian James. Speaking of taxes, some new details are unfolding about health savings accounts, specifically the lack of knowledge about them. Brian, we talk about these accounts all the time on this show. The message doesn't seem to be getting through to a lot of folks.
Brian: Triple tax free.
Bob: You've got some new data here from Voya.
Brian: Yeah, the reason we talk about these all the time on these airwaves is because it's triple tax free, deducted on the way in. Don't pay taxes on the investment choice as long as you're not ignoring something that looks like a bank account. That's the big pitfall. And when you pull it out for health care reasons, you never pay taxes on the entire dollar amount. But, anyway, so this new research from Voya says that only about 6% of Americans ages 18 through 34 were able to correctly identify the full range of benefits offered by HSAs. And, of course, there's tax advantages involved, investment options, using them both for medical costs and long-term savings. There's a lot of moving parts to these, Bob. But, yeah, the message definitely does not seem to be getting out there. That said, younger folks, of course, are stretched pretty thin. There may just not be extra dollars available to be put into health care savings accounts, but it would be nice if companies did a better job communicating, especially here...
Bob: Brian, when you were 18 to 34 years old, how much time were you spending thinking about a health savings account?
Brian: None, Bob. Didn't really think about my health care plans at all. But I would throw this out that it's still only 6%. I would say there's a higher percentage of people in this age cohort who are really interested in understanding how to maintain their...or how to take advantage of every tax opportunity that's available to them. So if this is ringing a bell a little bit, don't think of it only as a health savings account. That's what people get hung up on. You can use this as a tax advantage retirement account. You can plow money into it, hang onto your receipts for 10, 20, 25, 30 years, really. And you pay your bills out of your pocket, right? Just pay your bills normal if you have the ability to do this. Those dollars that you've put into your HSA can come out 30 years from now based off of expenses that you incurred now in 2025. And they'll come out tax-free because you're simply saying, "Hey, this expense I had 25 years ago, yup, that's the one I'm paying with this distribution I'm making here now in 2050."
It's kind of a subtle way to use that tool, but it's not as well known as it should be. They can really be a powerful tax planning tool. And remember, you have got to get those dollars into something that can grow. If you're simply using the bank or whatever the financial institution is that your company sets you up with, your employer, then it's probably just a bank. You can move it around and put it in mutual funds, but you're going to have to jump through some hoops to do it, but they are worthy hoops.
Bob: Yeah, what it comes down to is a little bit of delayed gratification, right, Brian? Paying these bills out of pocket now and socking that money away for 10, 20, 30, 40 years on a tax-free basis, wonderful planning strategy, but you've got to have some discipline up front and be willing to do it. And let's not forget, for those post-65, age 65, unused HSA funds can be used for non-medical expenses. They're taxed just like an IRA, but you're not penalized. So think about this as just an extra IRA account. So there's a lot of good things and really little to no downside around taking full advantage of that HSA account.
Brian: Yeah, and, again, if you are someone who likes that scavenger hunt of, "What else can I do? How do I do? I've maxed out my 401(k), and I know about mega backdoor Roth rollovers and backdoor Roth rollovers. What else is there?" well, HSA, that's for you. That's the next thing to look at and take the H out of it. If you're thinking tax planning, it is a powerful, powerful tool. You do have to have a high deductible health care plan to go alongside with it. So, again, there's moving parts here, but great tax planning opportunity. And we are heading into benefit season. Maybe this year tell yourself you're going to read a little more about that high-deductible plan option.
Bob: Here's the Allworth advice. An HSA isn't just for a safety net for health costs. It can also serve as a stealth long-term wealth builder. Next, a deep dive into sequence of return risk. You're listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station. You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller, along with Brian James. Most seasoned investors understand that markets fluctuate up and down. What often goes unnoticed, however, is the timing and the magnitude of those potential fluctuations and how profoundly it can impact a retirement strategy. For those drawing income from their portfolios, the order in which returns occur can quietly erode wealth, even when the average annual return appears very healthy. What we're talking about here is a very important topic for retirement income planning called sequence of return risk. Brian, walk through some of the data here.
Brian: When does the bad stuff happen? That is sequence of return risk. Let's go through an example here using two investors. Let's assume everybody earns the same average annual return. There's no difference there over a 20-year retirement period. However, one experiences strong market performance in those early years while the other one takes a punch to the face right out of the gate. This is what we're describing here as anybody who retired in, let's say, 2007 or 2021 and then right after we had the '08 and '22, which were some of the worst years the market has ever had. But we just said their same average annual rate of return, so their average return is identical, but the outcomes are not. So why does this happen? Well, once withdrawals begin, as they typically do in retirement, that's the point. We retire, we're going to draw on our nest egg and spend our own dollars.
Well, the order in which these returns really starts to matter. When losses happen early, you're both drawing income, you're spending money down, and your portfolio is shrinking at the same time. So, for example, let's say we always talk about that 4% rule. Let's use that. If the market pulls 10% out of your assets, and it's down, and you're withdrawing 4% based on that rule we talk about all the time, well, your portfolio took a 14% hit in year one. That doesn't necessarily sink the ship, but it does change the metrics a little bit. So every withdrawal compounds that damage, locks in losses, and reduces that base that the future growth depends on.
Bob: Yeah, and this is why it's critical. And we talk about stress testing a portfolio all the time, not only for concentrated stock exposure or things like that, but the main reason to stress test a retirement income plan is the sequence of return risk. And that's where some of this sophisticated software really is worth its weight in gold because it can go through all these different iterations of historical market volatility based on all kinds of different asset allocation strategies and really test how a portfolio and a retirement nest egg will perform given the best and worst-case scenarios of this sequence of return risk. It's critical that when you sit down and get ready to retire and develop an income strategy that you have factored this in. What are some other things that we can do about or should do about sequence of return risk when we start to get ready to retire and actually turn this pot of money into an income stream, Brian?
Brian: Well, you might think about looking at what we call a multi-bucket strategy, which is break down all your spending goals into short term, which might be 0 to 24 months. In that bucket, you would want to keep that in cash or really, really short-term bond funds, money market funds, high-yield savings accounts, anything you can identify your normal spending that you would spend down. Also, any one-time things, are you going to buy a car or maybe you got to replace the HVAC or something else out there that's going to be a one-time significant expense. That stuff should be very, very, very short term in nature and very little risk.
Then the next is the midterm, so something like three to seven years. Maybe it's these similar things. You know, you got to make some expenses for this. It could be like maybe it's a wedding or just other things you know is out there. That might be something you put into a little more high-quality fixed income. Even throw some stocks in the mix for modest growth, lower volatility. And then, of course, we have our long-term investments. That's really where we spend most of our time thinking because this is where we have growth type orient investments, and this is really your eight-year-plus bucket here. Some people, Bob, do this with individual accounts. I have this account that's for the next two years and then this account for the midterm and then this account over here. Other people just kind of arrange the entire portfolio inside one account to make sure that it covers all these different needs. There's a few ways to do it, but, again, the whole point is breaking down your spending goals in terms of when those dollars are needed.
Bob: Well, Brian, for those that listen to this show on a somewhat regular basis, I think they hear me talk about this all the time because this happens in my office when people come in for meetings. I urge them, please, if you're going to take that big cruise or replace a vehicle or do large home repair projects, please just let me know about it ahead of time so that we can get out in front of this. And even if we've got an account where all the money is in kind of one asset allocation strategy, we can segregate these short-term needs, these big lump sum needs out of a portfolio and really avoid and bypass some of this sequence of return risk that we're talking about, but you got to communicate with your advisor if you have one so we can help you with this kind of stuff. Do you have similar conversations with your clients?
Brian: Absolutely, and it's just a matter of understanding exactly what somebody needs. And a lot of times, this is where it helps to have an advisor simply because you've got somebody an arm's length away that can really help you understand based on stuff you've told them before, based on their own experience of things that maybe you haven't mentioned but they might be aware of to help you look under every stone for when those things might come up.
Bob: Here's the Allworth advice. Even the wealthiest investors aren't immune to bad timing. Let's face it, none of us are immune to that. Protecting your retirement from sequence of return risk means structuring income, taxes, and withdrawals so market downturns don't derail your long-term strategy. Coming up next, real listener questions that could save you from some very costly mistakes. It's our Ask the Advisor segment. You're listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller, along with Brian James. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question, and it will come straight to us. All right, Brian, leading us off tonight is Jeff in Anderson Township. Jeff says, "I got $1.2 million in retirement accounts. Do I pull from taxable accounts first or my IRA to make that money last longer?"
Brian: Okay, Jeff, congratulations on obviously a pretty successful career if you put this large sum amount into your retirement accounts. Yeah, so we don't know much about Jeff's taxable accounts. He doesn't tell us how much there is. Sometimes the urge is to...well, these IRAs are pre-tax. I don't want to pay taxes ever. So I'm going to wait, wait, wait, wait, wait until as long as I possibly can before I have to pay taxes on these dollars. Well, remember, we've got that thing hovering out there around age 73 or 75, depending on when you were born, called a required minimum distribution. That's when the IRS shows up on your doorstep and says, "Hey, the gravy train has come to an end. It's time to start paying taxes on these dollars via the required minimum distribution." So draining your taxable accounts first and ignoring your IRAs may put you...could result in you being in a higher bracket.
So Jeff's $1.2 million is probably going to generate $50,000, $60,000 in annual...that's based on now. It depends on how far... We don't know how old Jeff is either, but that money will grow from here on out, and that's going to put him in a minimal bracket at least for a long time. So I would say look at those different factors and see what you need first of all. And then you might consider going ahead and taking some out of the IRA because you can figure out which bracket you want to stay under. You can control it, but over time, you could take those dollars out and pay taxes at lower brackets over time versus letting it all go and then being stuck while holding the bag when retired minimum distribution time comes around. So let's move on to Bill and Linda and Mason. They're hearing about private REITs and private credit funds, and they're wondering if they're worth considering at their wealth level or are those too risky. Bob?
Bob: Well, when I read how their actual question was worded, they said, "We've been pitched private REITs and private credit funds."
Brian: [crosstalk 00:29:03].
Bob: So, yeah, I have no idea what your current wealth level is. I don't know what your financial plan looks like or if you even have one, but my spidey senses go up right away when I hear the word pitched because pitched often means someone is trying to sell you some of these things that come with front-end commissions. And so my first question is, do you have a financial plan, and have you factored in these potential investments from a risk tolerance standpoint and an asset allocation standpoint as part of a coordinated financial plan? If the person that is pitching these things to you have never done that kind of work for you or all of this sounds foreign to you, don't walk, run away from this pitch and go work with a fiduciary financial advisor.
Now, all that being said, private REITs and private credit funds can...they can positively improve your yield, and they do work in certain situations, but you got to look at the liquidity, the fees, the risk. These things can get awfully complex in a hurry. So I think before you jump into any of this kind of stuff, I strongly urge you to sit down with a good fiduciary financial advisor if you don't already have one or have a good one who can truly match this stuff or discard it based on your personal planning needs. I hope that helps. All right. Next up is Dan in Pleasant Ridge. Brian, this is a great question. Dan says, "I've heard people talk about treating their pensions like the bond portion of a portfolio. Can you explain that for me?"
Brian: Yeah, this is a concept where, you know, a lot of people think of Social Security as the only source of income in retirement of true income versus just spending down a pile of money, but there are still pensions out there. And for people in this situation, and I always like to point out, you know, if you worked in a situation where you were feeding money into a pension that probably came somewhat at the expense of a larger 401(k) or, you know, some other type of a pile of money type of retirement asset. But remember that pension a lot of times can be your ace in the hole because if you're a married person, for example, now there's three paychecks coming in, two Social Security and one pension.
So what Dan's question is, is so since I have that income coming in, right, I have these couple different sources of income, well, what does that mean I should do with my investments? And the answer is, well, you've got a predictable stream of income, probably, I assume you've got Social Security in the mix as well. We don't know what type of pension this is, could be state pension too. But if those pension checks and Social Security are going to be enough to pay your bills, then that means you could lean your portfolio much more toward the aggressive side. I'm not a believer at all, Paul, that...or I'm sorry, Dan, that you should have your assets be super conservative just because you're retired or just because you're a certain age. It has everything to do with when you're going to need these dollars. If you've got multiple streams of income coming in to support your retirement, and therefore you won't need to touch these dollars for 10, 12 years, let them be aggressive. Your pension can in that point serve as your bond portion. So it's really kind of, really, a frame of thought there.
All right, Paul in West Chester. Paul says their net worth is about $2 million, but a lot of it is not liquid. It's tied up in their house and the rental property they have. And they're wondering how they deal with making sure there's enough liquidity for retirement.
Bob: Well, Paul, the simple answer here is you need a financial plan. You need to take a look at what your income needs and wants are in retirement and what the sources of that income are going to be when you factor in Social Security, a pension, if you have one. And if you don't have a pension, then more of that monthly income nut is going to have to be met through either rental property income or investment assets or a combination of the two. So the potential danger here is your net worth looks great on paper, but as you just stated, you're pretty illiquid. So it's really of no use to you because you can't turn it into a monthly income stream at retirement. So I think, again, sit down with a good advisor, run some scenarios based on what you and your wife really need and want in terms of income and retirement. And if it makes sense to maybe move some of that real estate into more liquid assets that can generate the income that you need, might need to talk about doing that. And you need to factor in tax ramifications and all that in the mix. But, again, sit down and develop a good financial plan that factors in retirement income. And, hopefully, a good advisor will help you get you where you need to be.
All right, coming up next, a quick mental check you can do every December that could save you thousands and thousands of dollars in taxes. And it really only takes about five seconds. You're listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station. You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller along with Brian James. All right, time for a quick December money trick. This one could save you money on taxes, and it takes about five seconds. Brian, lay it on us. This is good stuff right here.
Brian: The five second tax filter. Here's how it works. Every time you make a financial move in December, whether that's donating to a charity, so this is close the books time of year, maybe you're going to look at it and sell an underperforming stock or buy a big ticket item, a little holiday present for somebody, stop and ask yourself one simple question. Is this going to improve my tax situation this year, or is it going to cost me? Because if this is the end of the year, then it's only going to be three, four months before you have to figure out, do the math for the final outcome that year. So that's really it, though. That's the filter because this December is that month where little decisions have big tax consequences. So you're either going to lock in those losses or realize some gains or giving it away that's deductible or not, meaning you may or may not be able to deduct something in April. And so you need to understand what the impact of that is.
I would start by figuring out where are you tax wise? It's November, December. We're 11 months through the year. So most of your tax situation, not all, definitely not all, but most of your tax situation is already in stone. You can figure out what dividends you've received in taxable accounts, what capital gains have been generated. All that kind of stuff is available from your investment custodians. You, of course, can look at your pay stubs and your bank accounts and things and look for what interest has been paid so far. And you can figure out what dollar amounts of those various items have come your way already. And then you can reposition those decisions. Is this a good year to make a sizable charitable contribution, for example? If it's been a big year for perhaps you sold a business or something like that, then you might want to look at a donor-advised fund to support charities that you've always supported. But as we've talked about before, you can make one lump sum contribution and dole it out from the donor-advised fund in a slow manner as opposed to giving it directly to a given charity. That's one idea.
Bob: All right, Brian, let's face it. We're moving into the season now where we're going to start...we're going to get inundated with advertisements for charitable giving. Most charitable giving in the country gets done in the fourth quarter of the year. I don't think that comes as any surprise to most people. We're getting invited to fundraising events and things like that. So charitable giving is on everyone's mind. And I continue to run into too many people who just write those checks. And, look, it's out of a huge heart and a desire to help the charity. And I love that. But what we're saying here is just pump the brakes a little bit and think about if there's a better way, tax-wise, to do this charitable giving because we all want to see, if possible, more and more money go to these charities that you care about rather than to the IRS.
So just as a reminder, for a married couple, you got to have roughly $30,000 in itemized deductions to even be able to itemize. So a lot of charitable giving is not getting deducted from your taxes right now. And that's why we're calling this thing out. You can bunch charitable gifts, not give one year and then double up the next year to get you over that threshold. You can give away appreciated stocks, ETFs, and mutual funds and avoid the capital gains taxes and get the deduction. If you itemize or, as Brian just mentioned, use a donor-advised fund to pile in some of this money and get the deduction and give it away later. So there's a lot of things you can be doing out there, but you got to think a little bit and coordinate with your CPA and your advisor to take the full advantage.
Brian: Yeah, Bob, you touched on one thing. I want to kind of flesh it out a little bit. Donation of appreciated stock. If you bought something for 10 bucks a share and it's now worth 20 bucks a share, well, you now have a $10 gain. If you sell that, some people might just sell it and say, "Stick that money in my checking account so I can turn around and write a check to my church or whatever charity I'm interested in." That's the wrong move, because what you've done in that case is you've incurred taxes for the privilege of giving the proceeds away from that sale. So what you can do is contact that charity. They're going to have a financial account, a brokerage account, an investment account somewhere, and they'll have a little brochure with their logo on it that explains the seven steps you got to follow, including an account number and something called a DTC number that identifies the custodian, all this stuff. They will know how to do it, and you can then transfer those shares in kind. You're not selling, you're simply saying, "Hey, custodian, please send X amount of these shares to this account, and then my charity will sell it, and nobody pays taxes."
Bob: Yeah, and remember, smart investors too have more tools, direct indexing, tax loss harvesting. There's a lot of things you can and should be thinking about out there. So this December, before you hit send on that donation or sell on that stock, take five seconds and ask yourself that one question. Thanks for listening. You've been listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station.
Andy: No, not from the actual movement of the Fed where they lowered rates by a quarter of a point, but there was some surprise that even though they brought rates down from...it was a range, by the way, of 4.25%, 4.5%. Now, it's at 4% to 4.25%, still pretty high, still doesn't really help your mortgage rates that much, by the way, but it is a move in a direction that could help over time. But what the surprise was, Bob, was in the economic projections that Fed provided.
Normally, when you look out the interest rate environment and what the Fed does out there, it's going to be based on a few things. It's going to be based on where they think GDP is going, where they think the unemployment rate is going, where they think inflation is going. Right now they changed their forecast, so they think GDP is going to be higher this year and next year than what they thought in June. They think the unemployment rate is going to be lower, and they think inflation is going to be higher. All of those actually argue for higher interest rates, not lower interest rates. So even though we had those three projections move, it certainly started the meeting off with a little bit of a head scratching while those all things are very important things the Fed looks at. I mean, these are the main economic indicators, and they're saying, "We're cutting rates," despite our projections indicating that normally we would think you should be keeping rates high.
Bob: So, Andy, how worried do you think the Fed really is about the slowdown in jobs? What are they trying to stay ahead of since we had that pullback in that reporting?
Andy: Well, so when the Fed's looking at the unemployment rate, inflation, and GDP, and all those are arguing for lower rates, you're probably thinking, "Well, why did they cut rates?" And jobs is the reason. We've seen some massive revisions over the past really two annual reports. When I say annual reports, what the BLS does, the Bureau of Labor Statistics, some fun government agency that apparently gets their job reporting very wrong very frequently, they revised the lower from basically March 24, 2024 through March 2025 by 911,000 jobs. In other words, they said employers added 911,000 fewer jobs than what we originally said. That's a huge mess across the board once they got better data. And they had a similar problem the year prior, where they revised lower the number of new jobs by 818,000 for that basically March to March 2023 to 2024 period.
So in other words, what we're seeing is that the labor market, while it looks pretty solid on the surface, I mean, with 4.3% unemployment rate, but it's definitely more fragile underneath the surface. When you look at these revisions that are going, it just indicates that the Fed is not looking at the economy from a point of view of the labor market having a position of strength of a starting period, but more of a position of some weakness.
Bob: Andy, I want to go back to this Fed's 2% inflation mandate. I've heard more than a few pretty respected economists over the last week say that perhaps the Fed is outdated on this whole thing, and they're shooting at the wrong target. Do you have any thoughts on that? Are we going to see some Federal Reserve reform going into 2026 that might change around the edges some of these dual mandate targets that they're going after? And do you have an opinion on that based on what you actually see going on in the economy? Because I know you look at a ton of different factors, other than unemployment and inflation, when you look at this...or when you build this recession scorecard that you and your team build and maintain on a regular basis?
Andy: Yeah, that's a really good question. And there's a lot of nuance in there, Bob. So when you think about the...and I know I don't often give you that sort of high-level compliment. So, you know, take that one to the bank there.
Brian: Don't let it go to your head, Bob. Doesn't happen very often.
Bob: I'm going to record it and play it back often.
Andy: Well...
Bob: Now, let's keep it serious here. No, I appreciate it. I'm interested in your answer.
Andy: Yeah. So they're not going to probably change anything in the near term. So what the Fed looks at, they look at core PCE, which is different than CPI. CPI is the big inflation number that most people talk about. PCE is a little broader, and it includes a few other things, and core excludes food and energy. And that's where they want it to be at 2%. And what we're seeing with these changes in the projections, it appears that they're getting...I'll call it more tolerant with inflation. I don't expect them to change their target. That's a 2% target. Because they actually just came back a few months ago from some larger study they did, and they basically solidified their inflation objective.
Now, with that being said, the chair Powell's term ends in the middle of next year. So we'll have a new Fed chair, probably have someone handpicked by President Donald Trump, and that person may be more open to letting inflation run a bit hotter than what the current regime has in place. And, therefore, they can be more open to lower interest rates because they're not as worried about inflation. So I could see a shift maybe in the middle of the next year. But as far as any sort of...I'll call it institutional revision, that seems unlikely. And is it the right number they're looking at? Yeah, I think core PCE is the right number if you're going to be looking at inflation. I mean, obviously, it's really hard to say 2% is the target. I mean, putting a hard number on it is a little bit of a...you know, it's risky because you're keeping one number constant, but there's so many things changing in the economy.
I mean, the Fed does not have an unemployment rate forecast. I mean, they just say, you know, low unemployment, they say full employment more specifically, and they say stable prices. That's their dual mandate, but they put an actual number on that core PCE. Now, I don't think that will go away. I just think maybe tolerance becomes, you know, the word of the day for the Fed.
Brian: This sounds an awful lot like lower for longer from, you know, not that long ago. And I believe that...if I remember correctly, that became a political flashpoint there when it was handy for somebody to kind of throw that in faces. So am I thinking correctly there? Is this kind of a rerun of what we've been through before?
Andy: Well, I think it's a rerun from the perspective that everybody wants the Fed to do something different than what they're doing. The Fed becomes a scapegoat. So when you think about where the Fed sees pressure, I mean, this isn't the first time they've had outside pressure, and this isn't the first time the Fed has been blamed for messing up because it's a very difficult job. And, quite frankly, they do mess up a fair amount, but it's easy to say that in hindsight, I mean, just to be honest about it. But when you're in the throes of it, you know, that's where it is to become a little bit more challenging as far as lower for longer. I mean, that was really more we were at a 0% Fed funds rate, and we were at inflation going nowhere. I mean, we...sub-2% inflation for quite a long period of time, and the economy was doing okay. And there was really, you know, no need to really raise rates because the Fed actually wanted inflation to get a little too...a little bit higher than where it was. But, obviously, we're in a situation where, you know, it's a, you know, careful what you wish for sort of thing.
Bob: You're listening to Simply Money presented by Allworth Financial. I'm Bob Sponseller, along with Brian James, joined tonight by Allworth's Chief Investment Officer, Andy Stout. Andy, let's boil this down to just practical moves that we should or shouldn't make given the announcement last week. Should we be making any changes to our overall asset allocation as a result of this Fed announcement last week? I know you said the 10-year bond didn't really move, mortgage rates didn't really come down. Is there anything to be doing right now of a drastic nature, or, you know, is this just a regular news event?
Andy: I mean, as important as I like to, you know, want my job to be, this is more of just a regular event for, you know, most investors out there. I mean, if you're going to be changing your allocations every time...you know, and, I mean, it's an important event, but if you're going to be changing your allocations and changing your investment mix whenever one of these things come up, you're going to be chasing returns. You're going to have the fear of missing out. You know, all that you probably end up doing or, you know, most likely is you end up buying high and selling low, which is the exact opposite of what you want to do. It's better to certainly have a financial plan that drives that investment mix and then make sure you stay grounded in reality. I mean, the real important thing is understanding cycles and understanding, you know, markets go up, markets go down. You know, here's what you can expect over a long period of time. And here's the volatility. Importantly, here's the volatility you can expect, because if you know volatility is coming, you're not going to freak out and make an emotional decision, because when you make those emotional decisions, that is when you hurt your own retirement.
Brian: Andy, I think this would be a great time to maybe do a little bit of fixed income 101, meaning, yeah, we know we always talk about not trying to time the stock market, that kind of thing. And none of these headlines really drive that. However, there are bonds. On the fixed income side of your portfolio, there are things you want to own in a declining rate environment and things you don't. Could you kind of take us through just so everybody can hear that from your mouth, you know, what are the things to avoid and just at a high level, rising rate environment versus, you know, declining rate?
Andy: Well, so that's also quite nuanced because when you say a rising rate environment and a declining rate environment, that really depends on which part of the yield curve is actually increasing and decreasing because what the Fed can do...and the Fed is lowering short-term rates right now, and they'll probably lower them again. That's what the market's pricing. However, long-term rates went up last week. So in that situation, you know, what you have is you have lower short-term rates, but longer-term rates have actually increased a bit. So let's assume, and this is a big assumption, that when we say lower rates, we're talking about longer-term and shorter-term bonds all moving in the same direction. So when interest rates go down in general, you would expect bond prices to go up, and in that scenario, if short-term rates and long-term rates are moving together, you know, by the same amount, if rates are going down, long-term bonds should outperform short-term bonds. Now, if rates are going up, then you would expect short-term bonds to outperform long-term bonds.
Now, the other thing to keep in mind is, you know, what does that economy look like behind the scenes? I mean, are we in a situation where, you know, the economy is, you know, in a freefall, or are we in a stable environment? If the economy is stable, typically corporate bonds, you know, could do better than treasury or government bonds. Conversely, you know, if we're in some economic trouble, and you see a lot of risks out there, and then you start to see the Fed cut rates because they're worried about the economy, what has outperformed every other asset class during those time periods has really been long-term government bonds. That's your ultimate flight to safety security. So when stuff hits the fan, long-term treasury bonds are usually a pretty good option for investors to be in.
Bob: All right. Good stuff, Andy.
Andy: But we're not there right now, to be clear.
Bob: Yup. Yup. All right. Good stuff, Andy. As always, thanks for joining us tonight. All right. Coming up next, the IRS is forcing some high earners into Roth catch-ups, and are you sleeping on the best tax break you've got available to you? We'll talk about all of that next. You're listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller, along with Brian James. If you can't listen to Simply Money every night, subscribe and get our daily podcasts. And if you think your friends or family could use some financial advice, let them know about us as well. Just search Simply Money on the iHeart app or wherever you find your podcast. Straight ahead of 643, we've got advice on Roth versus pre-tax savings, private REITs, pensions, and even caring for aging parents. All right. If you're 50 years old or older and trying to ramp up retirement savings, listen up. A new IRS rule just finalized under the Secure Act 2.0 will change how you make those extra so-called catch-up contributions to your 401(k), especially if you're a high earner. This is important, Brian. Break it down for us.
Brian: Yeah, this one's going to sneak up on a lot of people. So catch-up contributions are...you know, a lot of people...probably sounds familiar now. They've been around for a while, but if you're 50 or older, the IRS made it possible a couple decades ago to go ahead and start saving a little more money, meaning you could go up to $30,000 this year. Changes a little bit every year. However, this year says that starting in 2026, so next year actually, if you earn more than $145,000, and that's in terms of wages that are subject to Social Security tax, there's some nuances there, that's still going to be most people, if you earn more than $145,000, any catch-up contributions you make to your 401(k) are going to have to be going on the Roth side. So in other words, what that means is if you are over 50, you can throw extra money in.
Like we said, for 2025, that's $7,500 on top of the regular limit of $2,250. But, basically, these dollars will now have to go in after taxes. These are the catch-up dollars. The good news is it's going to grow tax-free as per the Roth rules, so that's not the worst thing in the world, but you're still going to have to pay taxes on those dollars going in as the catch-up. There's no immediate tax deduction. You are paying taxes now on those dollars.
Bob: Yeah, here's the thing to watch out for. If your 401(k) plan currently doesn't offer Roth contributions, and I think, Brian, it's safe to say most companies now do, but there's still some out there that don't, heading into the fourth quarter of 2025, please check with your HR department and make sure that your 401(k) plan does add Roth contributions if it doesn't allow those right now, especially if you're over 50 years old, because you could literally be leaving money on the table here if your plan doesn't get updated with the times.
Brian: Yeah, and I would say one quick thought on that. I would say set this aside. If your plan doesn't yet offer Roth contributions, then chirp. Let your employer know that, "Hey, I would like a little more flexibility," because we're really 15, 20 years past when that was possible.
Bob: Yeah, for sure. You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller, along with Brian James. Speaking of taxes, some new details are unfolding about health savings accounts, specifically the lack of knowledge about them. Brian, we talk about these accounts all the time on this show. The message doesn't seem to be getting through to a lot of folks.
Brian: Triple tax free.
Bob: You've got some new data here from Voya.
Brian: Yeah, the reason we talk about these all the time on these airwaves is because it's triple tax free, deducted on the way in. Don't pay taxes on the investment choice as long as you're not ignoring something that looks like a bank account. That's the big pitfall. And when you pull it out for health care reasons, you never pay taxes on the entire dollar amount. But, anyway, so this new research from Voya says that only about 6% of Americans ages 18 through 34 were able to correctly identify the full range of benefits offered by HSAs. And, of course, there's tax advantages involved, investment options, using them both for medical costs and long-term savings. There's a lot of moving parts to these, Bob. But, yeah, the message definitely does not seem to be getting out there. That said, younger folks, of course, are stretched pretty thin. There may just not be extra dollars available to be put into health care savings accounts, but it would be nice if companies did a better job communicating, especially here...
Bob: Brian, when you were 18 to 34 years old, how much time were you spending thinking about a health savings account?
Brian: None, Bob. Didn't really think about my health care plans at all. But I would throw this out that it's still only 6%. I would say there's a higher percentage of people in this age cohort who are really interested in understanding how to maintain their...or how to take advantage of every tax opportunity that's available to them. So if this is ringing a bell a little bit, don't think of it only as a health savings account. That's what people get hung up on. You can use this as a tax advantage retirement account. You can plow money into it, hang onto your receipts for 10, 20, 25, 30 years, really. And you pay your bills out of your pocket, right? Just pay your bills normal if you have the ability to do this. Those dollars that you've put into your HSA can come out 30 years from now based off of expenses that you incurred now in 2025. And they'll come out tax-free because you're simply saying, "Hey, this expense I had 25 years ago, yup, that's the one I'm paying with this distribution I'm making here now in 2050."
It's kind of a subtle way to use that tool, but it's not as well known as it should be. They can really be a powerful tax planning tool. And remember, you have got to get those dollars into something that can grow. If you're simply using the bank or whatever the financial institution is that your company sets you up with, your employer, then it's probably just a bank. You can move it around and put it in mutual funds, but you're going to have to jump through some hoops to do it, but they are worthy hoops.
Bob: Yeah, what it comes down to is a little bit of delayed gratification, right, Brian? Paying these bills out of pocket now and socking that money away for 10, 20, 30, 40 years on a tax-free basis, wonderful planning strategy, but you've got to have some discipline up front and be willing to do it. And let's not forget, for those post-65, age 65, unused HSA funds can be used for non-medical expenses. They're taxed just like an IRA, but you're not penalized. So think about this as just an extra IRA account. So there's a lot of good things and really little to no downside around taking full advantage of that HSA account.
Brian: Yeah, and, again, if you are someone who likes that scavenger hunt of, "What else can I do? How do I do? I've maxed out my 401(k), and I know about mega backdoor Roth rollovers and backdoor Roth rollovers. What else is there?" well, HSA, that's for you. That's the next thing to look at and take the H out of it. If you're thinking tax planning, it is a powerful, powerful tool. You do have to have a high deductible health care plan to go alongside with it. So, again, there's moving parts here, but great tax planning opportunity. And we are heading into benefit season. Maybe this year tell yourself you're going to read a little more about that high-deductible plan option.
Bob: Here's the Allworth advice. An HSA isn't just for a safety net for health costs. It can also serve as a stealth long-term wealth builder. Next, a deep dive into sequence of return risk. You're listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station. You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller, along with Brian James. Most seasoned investors understand that markets fluctuate up and down. What often goes unnoticed, however, is the timing and the magnitude of those potential fluctuations and how profoundly it can impact a retirement strategy. For those drawing income from their portfolios, the order in which returns occur can quietly erode wealth, even when the average annual return appears very healthy. What we're talking about here is a very important topic for retirement income planning called sequence of return risk. Brian, walk through some of the data here.
Brian: When does the bad stuff happen? That is sequence of return risk. Let's go through an example here using two investors. Let's assume everybody earns the same average annual return. There's no difference there over a 20-year retirement period. However, one experiences strong market performance in those early years while the other one takes a punch to the face right out of the gate. This is what we're describing here as anybody who retired in, let's say, 2007 or 2021 and then right after we had the '08 and '22, which were some of the worst years the market has ever had. But we just said their same average annual rate of return, so their average return is identical, but the outcomes are not. So why does this happen? Well, once withdrawals begin, as they typically do in retirement, that's the point. We retire, we're going to draw on our nest egg and spend our own dollars.
Well, the order in which these returns really starts to matter. When losses happen early, you're both drawing income, you're spending money down, and your portfolio is shrinking at the same time. So, for example, let's say we always talk about that 4% rule. Let's use that. If the market pulls 10% out of your assets, and it's down, and you're withdrawing 4% based on that rule we talk about all the time, well, your portfolio took a 14% hit in year one. That doesn't necessarily sink the ship, but it does change the metrics a little bit. So every withdrawal compounds that damage, locks in losses, and reduces that base that the future growth depends on.
Bob: Yeah, and this is why it's critical. And we talk about stress testing a portfolio all the time, not only for concentrated stock exposure or things like that, but the main reason to stress test a retirement income plan is the sequence of return risk. And that's where some of this sophisticated software really is worth its weight in gold because it can go through all these different iterations of historical market volatility based on all kinds of different asset allocation strategies and really test how a portfolio and a retirement nest egg will perform given the best and worst-case scenarios of this sequence of return risk. It's critical that when you sit down and get ready to retire and develop an income strategy that you have factored this in. What are some other things that we can do about or should do about sequence of return risk when we start to get ready to retire and actually turn this pot of money into an income stream, Brian?
Brian: Well, you might think about looking at what we call a multi-bucket strategy, which is break down all your spending goals into short term, which might be 0 to 24 months. In that bucket, you would want to keep that in cash or really, really short-term bond funds, money market funds, high-yield savings accounts, anything you can identify your normal spending that you would spend down. Also, any one-time things, are you going to buy a car or maybe you got to replace the HVAC or something else out there that's going to be a one-time significant expense. That stuff should be very, very, very short term in nature and very little risk.
Then the next is the midterm, so something like three to seven years. Maybe it's these similar things. You know, you got to make some expenses for this. It could be like maybe it's a wedding or just other things you know is out there. That might be something you put into a little more high-quality fixed income. Even throw some stocks in the mix for modest growth, lower volatility. And then, of course, we have our long-term investments. That's really where we spend most of our time thinking because this is where we have growth type orient investments, and this is really your eight-year-plus bucket here. Some people, Bob, do this with individual accounts. I have this account that's for the next two years and then this account for the midterm and then this account over here. Other people just kind of arrange the entire portfolio inside one account to make sure that it covers all these different needs. There's a few ways to do it, but, again, the whole point is breaking down your spending goals in terms of when those dollars are needed.
Bob: Well, Brian, for those that listen to this show on a somewhat regular basis, I think they hear me talk about this all the time because this happens in my office when people come in for meetings. I urge them, please, if you're going to take that big cruise or replace a vehicle or do large home repair projects, please just let me know about it ahead of time so that we can get out in front of this. And even if we've got an account where all the money is in kind of one asset allocation strategy, we can segregate these short-term needs, these big lump sum needs out of a portfolio and really avoid and bypass some of this sequence of return risk that we're talking about, but you got to communicate with your advisor if you have one so we can help you with this kind of stuff. Do you have similar conversations with your clients?
Brian: Absolutely, and it's just a matter of understanding exactly what somebody needs. And a lot of times, this is where it helps to have an advisor simply because you've got somebody an arm's length away that can really help you understand based on stuff you've told them before, based on their own experience of things that maybe you haven't mentioned but they might be aware of to help you look under every stone for when those things might come up.
Bob: Here's the Allworth advice. Even the wealthiest investors aren't immune to bad timing. Let's face it, none of us are immune to that. Protecting your retirement from sequence of return risk means structuring income, taxes, and withdrawals so market downturns don't derail your long-term strategy. Coming up next, real listener questions that could save you from some very costly mistakes. It's our Ask the Advisor segment. You're listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station.
You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller, along with Brian James. Do you have a financial question you'd like for us to answer? There's a red button you can click while you're listening to the show right on the iHeart app. Simply record your question, and it will come straight to us. All right, Brian, leading us off tonight is Jeff in Anderson Township. Jeff says, "I got $1.2 million in retirement accounts. Do I pull from taxable accounts first or my IRA to make that money last longer?"
Brian: Okay, Jeff, congratulations on obviously a pretty successful career if you put this large sum amount into your retirement accounts. Yeah, so we don't know much about Jeff's taxable accounts. He doesn't tell us how much there is. Sometimes the urge is to...well, these IRAs are pre-tax. I don't want to pay taxes ever. So I'm going to wait, wait, wait, wait, wait until as long as I possibly can before I have to pay taxes on these dollars. Well, remember, we've got that thing hovering out there around age 73 or 75, depending on when you were born, called a required minimum distribution. That's when the IRS shows up on your doorstep and says, "Hey, the gravy train has come to an end. It's time to start paying taxes on these dollars via the required minimum distribution." So draining your taxable accounts first and ignoring your IRAs may put you...could result in you being in a higher bracket.
So Jeff's $1.2 million is probably going to generate $50,000, $60,000 in annual...that's based on now. It depends on how far... We don't know how old Jeff is either, but that money will grow from here on out, and that's going to put him in a minimal bracket at least for a long time. So I would say look at those different factors and see what you need first of all. And then you might consider going ahead and taking some out of the IRA because you can figure out which bracket you want to stay under. You can control it, but over time, you could take those dollars out and pay taxes at lower brackets over time versus letting it all go and then being stuck while holding the bag when retired minimum distribution time comes around. So let's move on to Bill and Linda and Mason. They're hearing about private REITs and private credit funds, and they're wondering if they're worth considering at their wealth level or are those too risky. Bob?
Bob: Well, when I read how their actual question was worded, they said, "We've been pitched private REITs and private credit funds."
Brian: [crosstalk 00:29:03].
Bob: So, yeah, I have no idea what your current wealth level is. I don't know what your financial plan looks like or if you even have one, but my spidey senses go up right away when I hear the word pitched because pitched often means someone is trying to sell you some of these things that come with front-end commissions. And so my first question is, do you have a financial plan, and have you factored in these potential investments from a risk tolerance standpoint and an asset allocation standpoint as part of a coordinated financial plan? If the person that is pitching these things to you have never done that kind of work for you or all of this sounds foreign to you, don't walk, run away from this pitch and go work with a fiduciary financial advisor.
Now, all that being said, private REITs and private credit funds can...they can positively improve your yield, and they do work in certain situations, but you got to look at the liquidity, the fees, the risk. These things can get awfully complex in a hurry. So I think before you jump into any of this kind of stuff, I strongly urge you to sit down with a good fiduciary financial advisor if you don't already have one or have a good one who can truly match this stuff or discard it based on your personal planning needs. I hope that helps. All right. Next up is Dan in Pleasant Ridge. Brian, this is a great question. Dan says, "I've heard people talk about treating their pensions like the bond portion of a portfolio. Can you explain that for me?"
Brian: Yeah, this is a concept where, you know, a lot of people think of Social Security as the only source of income in retirement of true income versus just spending down a pile of money, but there are still pensions out there. And for people in this situation, and I always like to point out, you know, if you worked in a situation where you were feeding money into a pension that probably came somewhat at the expense of a larger 401(k) or, you know, some other type of a pile of money type of retirement asset. But remember that pension a lot of times can be your ace in the hole because if you're a married person, for example, now there's three paychecks coming in, two Social Security and one pension.
So what Dan's question is, is so since I have that income coming in, right, I have these couple different sources of income, well, what does that mean I should do with my investments? And the answer is, well, you've got a predictable stream of income, probably, I assume you've got Social Security in the mix as well. We don't know what type of pension this is, could be state pension too. But if those pension checks and Social Security are going to be enough to pay your bills, then that means you could lean your portfolio much more toward the aggressive side. I'm not a believer at all, Paul, that...or I'm sorry, Dan, that you should have your assets be super conservative just because you're retired or just because you're a certain age. It has everything to do with when you're going to need these dollars. If you've got multiple streams of income coming in to support your retirement, and therefore you won't need to touch these dollars for 10, 12 years, let them be aggressive. Your pension can in that point serve as your bond portion. So it's really kind of, really, a frame of thought there.
All right, Paul in West Chester. Paul says their net worth is about $2 million, but a lot of it is not liquid. It's tied up in their house and the rental property they have. And they're wondering how they deal with making sure there's enough liquidity for retirement.
Bob: Well, Paul, the simple answer here is you need a financial plan. You need to take a look at what your income needs and wants are in retirement and what the sources of that income are going to be when you factor in Social Security, a pension, if you have one. And if you don't have a pension, then more of that monthly income nut is going to have to be met through either rental property income or investment assets or a combination of the two. So the potential danger here is your net worth looks great on paper, but as you just stated, you're pretty illiquid. So it's really of no use to you because you can't turn it into a monthly income stream at retirement. So I think, again, sit down with a good advisor, run some scenarios based on what you and your wife really need and want in terms of income and retirement. And if it makes sense to maybe move some of that real estate into more liquid assets that can generate the income that you need, might need to talk about doing that. And you need to factor in tax ramifications and all that in the mix. But, again, sit down and develop a good financial plan that factors in retirement income. And, hopefully, a good advisor will help you get you where you need to be.
All right, coming up next, a quick mental check you can do every December that could save you thousands and thousands of dollars in taxes. And it really only takes about five seconds. You're listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station. You're listening to "Simply Money presented by Allworth Financial." I'm Bob Sponseller along with Brian James. All right, time for a quick December money trick. This one could save you money on taxes, and it takes about five seconds. Brian, lay it on us. This is good stuff right here.
Brian: The five second tax filter. Here's how it works. Every time you make a financial move in December, whether that's donating to a charity, so this is close the books time of year, maybe you're going to look at it and sell an underperforming stock or buy a big ticket item, a little holiday present for somebody, stop and ask yourself one simple question. Is this going to improve my tax situation this year, or is it going to cost me? Because if this is the end of the year, then it's only going to be three, four months before you have to figure out, do the math for the final outcome that year. So that's really it, though. That's the filter because this December is that month where little decisions have big tax consequences. So you're either going to lock in those losses or realize some gains or giving it away that's deductible or not, meaning you may or may not be able to deduct something in April. And so you need to understand what the impact of that is.
I would start by figuring out where are you tax wise? It's November, December. We're 11 months through the year. So most of your tax situation, not all, definitely not all, but most of your tax situation is already in stone. You can figure out what dividends you've received in taxable accounts, what capital gains have been generated. All that kind of stuff is available from your investment custodians. You, of course, can look at your pay stubs and your bank accounts and things and look for what interest has been paid so far. And you can figure out what dollar amounts of those various items have come your way already. And then you can reposition those decisions. Is this a good year to make a sizable charitable contribution, for example? If it's been a big year for perhaps you sold a business or something like that, then you might want to look at a donor-advised fund to support charities that you've always supported. But as we've talked about before, you can make one lump sum contribution and dole it out from the donor-advised fund in a slow manner as opposed to giving it directly to a given charity. That's one idea.
Bob: All right, Brian, let's face it. We're moving into the season now where we're going to start...we're going to get inundated with advertisements for charitable giving. Most charitable giving in the country gets done in the fourth quarter of the year. I don't think that comes as any surprise to most people. We're getting invited to fundraising events and things like that. So charitable giving is on everyone's mind. And I continue to run into too many people who just write those checks. And, look, it's out of a huge heart and a desire to help the charity. And I love that. But what we're saying here is just pump the brakes a little bit and think about if there's a better way, tax-wise, to do this charitable giving because we all want to see, if possible, more and more money go to these charities that you care about rather than to the IRS.
So just as a reminder, for a married couple, you got to have roughly $30,000 in itemized deductions to even be able to itemize. So a lot of charitable giving is not getting deducted from your taxes right now. And that's why we're calling this thing out. You can bunch charitable gifts, not give one year and then double up the next year to get you over that threshold. You can give away appreciated stocks, ETFs, and mutual funds and avoid the capital gains taxes and get the deduction. If you itemize or, as Brian just mentioned, use a donor-advised fund to pile in some of this money and get the deduction and give it away later. So there's a lot of things you can be doing out there, but you got to think a little bit and coordinate with your CPA and your advisor to take the full advantage.
Brian: Yeah, Bob, you touched on one thing. I want to kind of flesh it out a little bit. Donation of appreciated stock. If you bought something for 10 bucks a share and it's now worth 20 bucks a share, well, you now have a $10 gain. If you sell that, some people might just sell it and say, "Stick that money in my checking account so I can turn around and write a check to my church or whatever charity I'm interested in." That's the wrong move, because what you've done in that case is you've incurred taxes for the privilege of giving the proceeds away from that sale. So what you can do is contact that charity. They're going to have a financial account, a brokerage account, an investment account somewhere, and they'll have a little brochure with their logo on it that explains the seven steps you got to follow, including an account number and something called a DTC number that identifies the custodian, all this stuff. They will know how to do it, and you can then transfer those shares in kind. You're not selling, you're simply saying, "Hey, custodian, please send X amount of these shares to this account, and then my charity will sell it, and nobody pays taxes."
Bob: Yeah, and remember, smart investors too have more tools, direct indexing, tax loss harvesting. There's a lot of things you can and should be thinking about out there. So this December, before you hit send on that donation or sell on that stock, take five seconds and ask yourself that one question. Thanks for listening. You've been listening to "Simply Money presented by Allworth Financial" on 55KRC THE Talk Station.