PODCAST EPISODE 221: Asset Allocation in Early Retirement, Backdoor Roth Back On and Debunking High-Yield Funds

 

WHAT WAS COVERED

  • 00:00 – Paul welcomes listeners.
  • 02:45 – Article Breakdown – “Hit your retirement savings goal? It may be wise to unload some stocks”
  • 09:25 – Article Breakdown – “What’s Not to Like About a Fund With a 7% Yield”
  • 18:40 – Article Breakdown – “The iPhone Feature to Turn On Before You Die”
  • 24:40 – Article Breakdown – “Backdoor Roth 401(k) and IRA rules for the wealthy survive — for now”
  • 30:00 – Episode ends, thank you for listening.

LINKS

Hit your retirement savings goal? It may be wise to unload some stocks – CNBC

What’s Not to Like About a Fund With a 7% Yield – The Wall Street Journal

The iPhone Feature to Turn On Before You Die – The Wall Street Journal

Backdoor Roth 401(k) and IRA rules for the wealthy survive — for now – CNBC

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Full Episode Transcription


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Hello, and welcome to your business your wealth. My name is Paul Adams. I’m joined today by the expert, my friend and business partner Corey shepherd. And Cory Cory, the expert Shepherd. Indeed. And by the way, guys, we’ve got a little update from a prior episode we want to let you know about here, you’re getting a chance to see us for the first time in 2022. And we’re recording this slightly before Christmas, so but we’re hoping all slow news days between now and then that don’t cause us to have to do any further updates right at the beginning of the year. But I got to tell you something, Cory, that was kind of funny happened this weekend before we talk about the articles we have lined up. Ah. So we’re going to church this weekend. And it’s pajama day, I was told my wife dress in her pajamas because she’s leading the kids program. Now one thing I discovered after I got to church is it was pajama day for the kids. So I have to get the adults. So I’ve got full Santa hat, my Christmas pajamas that are you know, these good looking flannel pajamas and quite warm, which I was thankful for. And my wife is we’re getting ready to drive off. She’s taking one car and taking another one. And she says, You know what? You look like a really fit young Santa. You know, I got this red pajamas on. And I was like, yeah, and then I’m driving to church. And I go wait a second, my wife just gave me a compliment about being fit. But in comparison to the most famous fat man in history in the world. And so, yeah, so I felt pretty good about the compliment for about two minutes. And then the rest of the drive home or drive to church. I mean, I was like, I am going to put this in the offering talk today. I’m sure everybody in my church knows my wife gave me that compliment. And now the entire podcast audience knows to so


I like that. That’s almost, you know, that’s almost nagging right there. Right? It’s almost


it’s like one of those, one of those cut Downs is sit with you and don’t affect you until like years later. So fortunately, I think she had the best of intentions.


You know, we just watched Arthur Christmas. For the first time. It’s, I think it’s from the last few years. And there’s Santa has kids and they’re like taking over from and one of them is like super red kind of military. So there is at least one really fit Santa out there. Check that out. For all the grown ups out there that like need a Christmas movie for the kids and want to be entertained. I highly recommend. So


nice. Nice. Speaking of which, speaking of Here we go. Let’s take a look at our first fun article we’re looking at today we’re going to talk about your retirement savings goals. And why you should unload stocks. That’s what this article says. Now, for those of you that are clients of ours, you already know from this headline, we’re probably going to have some issues. But the gist of this article Greg, he he wrote Cory


Curtis, is he I think probably Mukherjee Okay, so


his last name starts with an eye. And his he talks about the main bullets are investors who hit their retirement savings goal ahead of schedule may be wise to reduce their exposure to stocks in favor of safer assets. Now, let’s pause there first, we don’t even need to get to the article to find our first issue with this one. Now, this is an article that the way I described it to Corey was, it’s like an article that gives you advice gives you little to no grounding. And yet doesn’t actually tell you what you ought to do, in fact, tells you two different things to do that are opposite of one another with no decision matrix between the two.


Now on the one hand, no article can tell any of us exactly what to do. So we got it. We gotta not be looking for that, like magic game plan right right there. But I think some kind of Yeah, list of questions to ask or some kind of direction like if this then that kind of framework would be helpful.


And I’ll politely disagree with Cory here is that I think that articles all the time, tell us what to do. We shouldn’t probably listen. And this one tells us two different opposite things to do.


Know what you’re not disagreeing with me. I’m saying the same thing. No article, they can try to tell us what to do. But no article can because they just don’t know our situation.


I accept. I accept the correct No,


I accept.


But here’s what I do. Enjoy. Like, let me just give a couple props for a few tidbits in here. The fact that he references the fact that if you’re going towards too low of a risk allocation, you might not be beating inflation, like you’re trading one problem for another. That’s fair. And I like that that shirt goes in there. And I also like, where he says, you know, if you’re, it’s probably a bad idea to invest your way out of a saving shortfall. Like, you don’t have enough money doubled down. Yeah, probably bad. So there’s a there’s a few tidbits in here that are great. But I just think it’s curious that the article, the body article, again contradicts the headline in a couple different places.


And that’s the one that first gets me the first bullet is investors who hit their retirement savings goal ahead of schedule may be wise to reduce their exposure to stocks in favor of safer assets. Now, if you hit your retirement savings goals early, let’s just all participate in the thought experiment, you hit your retirement savings goal, at save 52 like our last podcast guest, Chris fabro. And that when you hit that retirement savings goal, what you then did, because you are quote unquote, ahead, which with money surplus is always safer. But if you’re ahead, then you should cut back well, that 52 year old is of far more risk than the person that had to retire at 70. In fact, I think it was Wade foul that was quoted as saying that famous economist for those of you not know, that he talked about that longevity risk is as big or bigger risk to most retirees than volatility.


It’s bigger, because it multiplies all the different risks, like the more long jagged Jeopardy risk we have, the more volatility we’re facing. So, risk multiplier


was gonna say, longevity, evens out the volatility, you still experience it, but it becomes less of a problem,


it comes less. Here’s the other part of the thought experiment. If you hit your goal early, then are Do they just retire? Or do they stop working, in which case, they’re turning their portfolio into a cash and income creating machine, which might cause the allocation to change. But if they hit their goal, but then kept working? Sounds like they got some new goals that they haven’t hit yet.


Indeed, indeed, and one thing in this article, without taking too long on it here is that they discuss the idea simultaneously with you should take less risk to if you have a surplus of retirement funds, you can go ahead and take more risk, because your core retirement funds are not at risk. And, frankly, what I would have loved to have seen. And so if Greg gets a chance to get a hold of this episode, I would love to see an article with the same information that talks about volatility, but then really talks about that lower rate of return when somebody gets into, say, an income fund or a bond investment that only pays them interest, what happens the erosion of their capital over time in real purchasing dollars. I would offer that the less money you have, the more that impacts you and the less wiggle room you have. So let


me just read this last this this quote from the right and perhaps counterintuitive, those who are overfunded, meaning they’ve saved more than they need have an ability to take more risk with their extra savings if they’d like. That’s because it doesn’t matter if they lose that money. But so is it wise to scale back? Or can you do it if you’d like, that’s the, that’s what bugs me when an article just doesn’t match up with its with itself.


And reality. For those of you listening? When you read an article like this, what it’s going to do is you’re going to probably be one of those two minds when you read the article. And you’re gonna just read the article that agrees with your way of thinking. That’s what this sort of article does, is it’s going to naturally if you don’t bring the critical view to reading some of this financial stuff, this is a perfect article that if you’re one of those people that wants to be more conservative, you’re going to see that this is an article giving you evidence of that if you’re somebody who wants to be more aggressive, you’re gonna see the stuff in the article that gives you evidence of that and you may be cognitively blind to the rest. All right, now speaking of situations where what people would like to do, Cory is put themselves in a position where they have enough income and perhaps choose an Income Fund of some sort. And there’s a particular income fund that’s being written about in The Wall Street Journal. And this is what’s not to like about a fund with a 7% yield. Now what I do like about this article, is they actually do list out what are the things not to like,


you know, this asin ag Jason sweet. Alright, Jason, correct us. I’ve read a few of his different articles over time, I think we’ve actually featured a couple of his articles, he tends to be really clear thinking and spot on about what’s going on out there.


So I agree with that. Indeed, yeah, I’ve been reading him for well over a decade. So he talks a little bit about this, this ETF that’s an exchange traded fund, which is like an index in its structure. But it’s actually this one is actively managed inside of this ETF structure. So think of it for those of you less familiar, like a mutual fund with some additional tax benefits. And right now, they acknowledge that you can get one to 2% bonds, but there’s this ETF that gets you this 7% return now, it’s called the NASDAQ seven handle index, H A N D L. Index. It’s


like mullet, such a millennial name like made for tick tock. I don’t know why.


Yeah. And speaking of which, it’s also created in 2018. So it’s, it’s also not been around very long that we’re in any millennial. That’s right. And so what one of the points of the article is like, well, there’s all this volatility in the market. But this fund will give you a 7% return. Now, many of you have probably been exposed to I’ve been asked by clients, and oh, Cory, and our other advisors have wealth for retirement income, can I just buy dividend paying stocks. And if you look at just the high dividend paying stocks, as a general course, they tend to significantly underperform over time. They’re otherwise equity partners. And I think one of the things that these funds take advantage of, and I don’t mean in a terrible way, but they take advantage of the fact that people do like interest payments. You know, it’s a very easy thing to understand. If I wanted to spend, you know, 7% of my portfolio each year, here’s an ETF that promises me a 7% return. But what’s good, they like


it, because they, they don’t have to sell anything. To get that income. They buy the fun, and it just sends them, quote, unquote, paycheck. But what they don’t realize is the fund itself may be selling a lot of things to be able to send them the money. That’s what susceptive Yep, they have their shell, but their shells getting thinner.


as well. And this is a I’m just reading for those of you that are looking at this article, this is the part that’s right below this s&p graph. And there’s a quote, it’s a little recycling cash received, says Jonathan Ross chat Rothchild, individual investor in the New York area, who own shares of the seven handle fund, he isn’t the only one that likes it, the ETF has attracted 1.2 billion in 2021. So hold on to that for a second, you don’t have to hold on too long. 1.2 billion, according to FactSet, growing to 1.4 billion in total assets.


So the head 200 million, went from 200 million to 1.2 billion in a


in a year. So they grew by 600% in a year in assets. Now for those of you not as familiar what that does, over time to a mutual fund, it makes it more difficult or an ETF or any asset management strategy, that much influx on a cool strategy that’s doing something unique and different. It automatically starts to compete away some of its own ability to do it.


And just if that doesn’t make sense to anyone, think about it. Like if you want a kitchen, and people were sending you more and more ingredients, you could make more and more pies, but eventually you’ve got your kitchens just not big enough to turn all those ingredients into pies. The stock market is finite, you know, there’s only so many investment opportunities, whatever strategy they’re doing, whatever pool they’re swimming in. So it just doesn’t work as well over a certain size and every strategy like this faces that


indeed, and this is the next paragraph but the seven handle fund which owns both stocks and bonds has made trade offs to achieve that high yield. The ETFs distributions are amplified with leverage, leverage a form of borrowing, like well,


Jason Ponzi scheme, I don’t think it’s a Ponzi scheme, but I’m reading this like, if it turned out to be I wouldn’t be surprised. These are the kinds of things you say about a Ponzi scheme. We’re gonna bring in all this money and pay it out to the other. That’s not I don’t think that’s what they’re actually doing.


But I got ahead. I do love Jason’s riding he does break Daddy’s has leveraged a form of borrowing. Like, yes. But I understand that, you know, even the Wall Street Journal has to, you know, what do they say newspapers need to write to middle some


kind of goals or something like that. Sixth grade level? Yeah, yep. And those,


so this is an X ends, and those 7% annual payouts are generated only partly from safe bonds. Oh, is that right? Comma. But largely from gains on systematically trading riskier stocks, like this is still a stock trading fund with mostly stocks, the only thing they’re doing is in a year where they make more, they keep it in the fund and reinvest it in a year that they make less, they are taking either portions of the leverage, or they’re taking capital sales, they’re taking actual parts of your invested capital. And they’re paying that out, because they continue to pay out their 7%, even through the COVID decline. Now, when


he says, go go, Well, the thing is, there’s no magic, there’s no magic. So it’s bonds are only getting one to 2%. And you go to this fun, well, they don’t have special bonds that are getting more. And the real problem is by selling off those assets, like this is the the back and forth, people say I want this income, it feels really good. But keeping the money in the fun. And the appreciation that you might get from compounding over time, might actually give you more income, yes, over time.


Indeed. And then one more sentence from this that I think to me, kind of puts the death nail into funds like this. And you always want to be a little bit curious, inquisitive. Whenever a fund has launched, recently seen enormous influxes of capital and major publications are touting their results. And I like that Jason has a little it has at least some critical eye on it. And this is the last part of the article I want to read everybody in a protracted bear market seven handle would probably have to eat into its assets to sustain its monthly payouts at that 7% annual rate, you’d still get a high yield, and most likely negative return. Of course, most stock funds would decline even more. But they would bounce back. That’s the difference because we don’t if we have an academically allocated globally diversified fund that holds strategy, you don’t have somebody that’s selling things over time to put them in a potentially poor position for the rebound. Earlier versions, last sentence of so called Managed distribution funds have tended to shrivel in value over time. Now you guys can get all these articles and links on our website, just follow the link in the description, we have all this listed out, you guys can go in and read these articles. But the point being it’s this thing that we have known for many years, that there is a marketing machine in the financial services world. And if they can say, hey, we’ve got these these dividend payer funds, or we’ve got in something like this manage distribution funds, and they sound really good. And they’re really easy to understand, they’re very easy to purchase, they may not be so easy to own over decades. Okay. So let’s just say not a substitute for your money market account. And so watch those funds that promise you a yield. Now we got two more short little articles we’re going to speak to to kick you guys off into 2022. And the next one is a super easy one, most of you can do. And this is an iPhone feature. And I think there’s some versions of this for Android, but iPhone was what was featured in The Wall Street Journal. And it’s this ability to turn on a feature in iCloud that would give someone access to your phone. Now, I want to say that again, you can actually add what they refer to, as you can see here, as a legacy contact, you can add somebody, they then verify that they’re you know, a person and they they click on the link when they get the email, and then it waits and then if they can prove that your deceased then they will release your iPhone data. And so what what it gives them they get the whole enchilada messages and fires etc. And


it sounds like Android users can kind of pick and choose what they want, which and I get it but you probably should just if you want someone to have everything you should just be okay with that person like you’re your guy. So you don’t care what either. It’s like, it’s like they’re soldiers when they’re overseas, and they have a burn box in their locker. Like, maybe that’s what your phone is, and you just want that thing to disappear when you die. But like, I know, my wife does not, she knows she doesn’t want to see the text that you and I send back and forth. Also, she’s just gonna look, I’m not worried about it. I just, I just updated, I didn’t have this latest update on iOS, I just did it this morning, I see legacy contacts show up. But I don’t actually have an option to add anybody yet. So something’s still like, if you don’t see it, it’s all kind of it’s so new, that a lot of us don’t even have this on our phones yet. So just watch out for it. Don’t be frustrated, it’ll get there.


I think that’s well said. And this is the bigger conversations that we now have more then paper assets, even our paper assets largely feel digital. You know, when somebody dies, people have to look through sometimes, if they don’t have a relationship with a firm like ours, where they have a dashboard, they have a vault that has all the important documents that anybody would need that a spouse would need, or child would need if their parent died, they don’t have any of that. For most people, what would happen when somebody dies, and we often will get that call from the widow or widower that’s like I don’t know where everything is. And it’s looking through months of bank statements, see where the bank drafts we’re going to and then calling those companies like, do we have an investment with you. All of that is is difficult enough in the old way of doing things. But now we have digital assets, you know, you might have a spouse that has a business where they sell an online course, or there may be important business documents that are in there, etc. And I think that’s where some simple tools like LastPass, one password, etc, making sure that somebody else knows how to access that information, so that your family can actually get to what it is that you have. And as always that simple inventory of where is the money can be super helpful. So if you’re not working with an advisor, let’s say your your do it yourself, or really consider just putting together a spreadsheet and putting it in a locked in password folder, or just emailing it to your spouse at some point in the past so that once a year, they have an updated version somewhere in their archived email, of here’s where all of our stuff is. Because none of us have I mean, if anything’s taught us in the last two years, is that no one has a guarantee that we’re going to, like I’m gonna get 10 more years to make sure my wife understands where everything’s at. Right? So all the more reason there’s a verse of the Bible in Proverbs, if I remember right is a wise man thinks constantly about death. Now, I don’t think what that means what it means to me isn’t that he thinks about getting hit by a chariot. What he’s thinking about is what will life be like for those that I leave behind? What’s the legacy I’m leaving, and part of that legacy we can leave is we can leave something organized for them to work their way through and mourn us. Or we can make the first six months after we depart this earth, enormously difficult for the people we most loved, to sort through everything that we left behind. And I think it’d be much better to be in that, in that camp of, we did our best to communicate what was going on ahead of us leaving so that we left the best legacy possible.


You know it and that thinking constantly about death can actually be oriented towards making the most of your, of your life, you know, Danielle’s grandfather passed away right after Thanksgiving, were talking to her or her grandmother and and part of the conversation that comes out is she’s kind of she’s processing what her life’s looks like after losing her partner of 65 years or so, like, some amazingly wonderful, long time. And, and I said, Well, you know, I think about it. I don’t know if I have any more or less time than you. So I’m not in any, I don’t think any of us should feel like we’re in a different position. It’s always like, what do we do with the rest of our lives starting with making the most of tomorrow? Because we just don’t know like, it’s a really, it can be really positive thought that a wise man always thinking about death.


Even there was a great little clip I saw, as as if I’m not eclectic enough in where I gather my information. So we’re just referenced the Bible now, Neil deGrasse Tyson. And one of the things he said he was being asked by somebody, Hey, if they get this longevity thing hacked, would you want to be able to live forever? And he says, I don’t think I would. Because it’s knowing that death is coming is what makes me work so hard to live my life. The day right and I don’t know that I would do that if I felt like I had an unlimited timeline.


Just like how much do you really enjoy the food and all you can eat buffet? versus, versus, you know this limited quantity of a thing that comes? Like everything get everything? Yeah,


what you’re right once I’ve have 782 already peeled cocktail shrimp at the Rio buffet in Las Vegas. I find I can barely finish the cheesecake. Okay, one off ball. One last one that, I think is great news. On this front, I’m not gonna make any political judgment on the rest of build back better. That’s everybody’s individual way of looking at it. But part of the build back better plan that got delayed, Joe Manchin said, Hey, I’m not gonna vote for it. Kristen cinema was hard to convince some may or may not have voted for it, but it’s not going to pass this year. And for those of you who appreciate being able to do something called the backdoor Roth, or the super backdoor Roth’s, which many of our clients participate in Mega? Well, there’s the super. And then there’s the Mega. And then there’s the Omega variant of the Roth conversion.


And the leaner Cola, macro rock. Yeah.


So all of those things that we’re going to stop us from being able to do backdoor Roth’s in 2022 have been delayed, and it appears that it is going to get delayed on through 2023, mainly because it’s very difficult to make tax laws intra year, because we make the tax law entry here. You, you could have voters who support your legislation, but get blown up on a tax rule that you passed, that affects them and you lose their vote. So as a result, they tend not to do ensure your tax changes. So in this case, the build back better plan didn’t pass, which means we can still do backdoor Roth, we can still do the mega backdoor Roth, we can use the SEP IRAs for backdoor Roth’s we can do all of that fun stuff, we can still convert IRAs to Roth, those were all on the table with this, you were not, if you made over a certain amount of income, you were not going to be able to convert your IRA to Roth, if you made over a certain amount of income, you couldn’t do a backdoor Roth, if you made over a certain amount of income, you couldn’t do a lot of things that are available to you today. And I’m just super happy that this didn’t pass mainly because I just didn’t believe the CBO score on it. Meaning it was said it would raise a certain amount of money. But every time a client contributes to a backdoor Roth, it is tax neutral in the current year for the IRS and tax neutral for many years because the IRS got their money up front versus that money growing in a taxable account. And I personally think that they scored it as like the money not being invested, versus it being in the Roth. And they didn’t compare the money being invested in an after tax account where it only have capital gains, exposure, etc. So great news. And the big point is that we want to put on the end of this episode is if you’re somebody who explores wants to explore would like to have a backdoor Roth, get a hold of either your advisor or reach out to us. Maybe this would be a good time at the beginning of 2020. To to build a relationship with a new firm, bring some new ideas, your finances, and make sure that the strategy you have in place has the best chance of arriving you where you want to be in the future with your family. So Corey with that in our new 2022 commitment to plan on 20 minute episodes, but get them done in less than 30 minutes.


Yeah, it’s it’s been my commitment all the time. But Paul’s finally coming around to it. So I’m excited.


Well, would you like to say anything in closing that would take us over 30 minutes? Nope. All right, guys, we are so excited to spend the year with you. I didn’t tell Cory this yet, but I’m going to be pushing for us to go back to live stream. Because I want some chats, I want to be able to interact with everybody who’s in our stream and get a chance to put Cory in a spot to get all these in one take. We rarely have to do a midstream edit when it’s just Cory and I


may on this. Let’s put you on the spot. You’re gonna have to watch your language I


almost never occurs on the podcast and it never makes it all the way out. I’m gonna add a beep button for me on my soundboard here. And it’s not a one word. It’s like it’s the it’s the sentences. Yeah. It’s the implications of what to say with that. We hope in an attempt to be done in less than 30 minutes that this has been a contribution to you being able to design and build a good life here in 2022. We look forward to seeing you next week.


 


 


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Podcast production and show notes by Greater North Productions LLC