#176 – Wes Answers Listener Questions

Wes Moss [00:00:51]:

Leave us a question and we’ll send you a free book. We’d love to hear from you. I’m Wes Moss. The prevailing thought in America is that you’ll never have enough money and it’s almost impossible to retire early. Actually, I think the opposite is true. For more than 20 years, I’ve been researching, studying, and advising American families, including those who started late, on how to retire sooner and happier. So my mission with the Retire Sooner podcast is to help a million people retire earlier while enjoying the adventure along the way. I’d love for you to be one of them.

Wes Moss [00:01:25]:

Let’s get started. For more than 15 years, I’ve been doing some sort of financial radio, whether it’s on one station or another, station and or podcasting. So that’s a lot of years on the air. And the one thing about radio that I think is so great is that it is very live and interactive, and taking live calls on the air while people are in their car thinking about their financial questions can be a lot of fun. I remember one Christmas season as we were heading into the new year. The tax changes were coming on January 1, and we did Up, Down. We called it up, down, flat. Are my taxes going to be higher, lower, or flat with these new tax rates that were starting at the beginning of the year.

Wes Moss [00:02:15]:

And I’d found this great online future tax calculator for the new rules. And we did Up, down or Flat, and we probably got 50 phone calls in an hour and went through the calculations. It was great to do it live on air. Obviously, podcasting doesn’t do that because that’s just not the way the medium works. But our listeners still really do become a family. We end up hearing from you, typically via email. We’re able to answer your questions right here on the show. But I thought to myself, why not just have listeners call in and ask their financial questions and leave a voicemail? You can play it right here on the show and then I’ll answer it, which is just like a live call on the air.

Wes Moss [00:02:59]:

So we’ll bring the best of radio and podcasts and we’re bringing them together right here on Retire Sooner. So no question is too big or too small or far reaching. We cover a lot of different topics here on the show. There’s almost an endless list of financial questions that you could ask from particular investments, mutual funds, sectors, styles, stocks, bonds, alternative asset classes, real estate, mortgage rental income. Maybe it’s during the accumulation phase as you’re trying to figure out how to retire sooner, or you’ve already crossed that line and now you’re in retirement and you have a question around distribution and how to most effectively choose which accounts to draw from in your particular situation. Then of course, we have all the other lifestyle retiree habits that we want to learn from happy retirees, and we love to answer those questions right here as well. And maybe there’s something new that you haven’t heard on the show that you’d like us to research or cover. Those would be great questions to leave us here as well.

Wes Moss [00:04:10]:

So I invite you to do so, and you get a free book if you do so. A free copy. Of what? The Happiest retirees. Note ten habits for a healthy, secure and joyful life. And your questions are very likely helping a lot of other people that have thought the same thing but just never figured out a way to ask. Well, we’re going to try to change that right here on the Retire Sooner podcast. The retire sooner hotline. 808 56301.

Wes Moss [00:04:40]:

Now on radio, you end up saying this five or six times because there’s no rewinding, but I know here on a podcast you can hit pause and go back, but so you don’t have to. 808 56301. And let’s go to the phones.

Chris [00:04:56]:

Hey, Wes. As a longtime listener who has applied your principles and thoughts and have now been successfully retired for a couple of years, it dawned on me that perhaps occasionally you could aim your shows at that audience. Because the people that have been with you a while have already gone across one line. And now we’re working towards the next line in our life. And any advice you could give how to successfully handle your funding in that stage of life, that kind of thing, I think would be really helpful. So thanks a lot, man. Appreciate all you do.

Wes Moss [00:05:27]:

This question was from Chris, and I love how he used this terminology, you go from one line to the next line. His question gives me this visual of working towards some sort of period or time, in his case, working and saving and accumulating. And then we cross over into another zone and we’re switching from having everything centered around accumulation. As one of our producers, Ryan Doolittle, also the host of the Happiest Retirees Podcast, calls the Souffle model, let’s just watch it grow and grow over time and then we can start taking chunks or bites out of the souffle makes total sense. But that can start to get a little scary when you cross that proverbial line. Like Chris is asking about what happens if you’re taking chunks out of the souffle and there’s no reflating for a while. Now you’re digging a hole, and you’re digging a hole further in that hole. That’s why I think one of the first lines of defense for someone in their post work years now they’re in what we call distribution phase.

Wes Moss [00:06:43]:

You’re distributing money out of your accounts back to you and your family. And yes, the souffle effect will come into play over time, as we of course believe, if we’re investing in a highly diversified set of companies in the United States that over time their earnings will grow and we can use part of that appreciation to fund retirement. But that certainly doesn’t happen in a straight line. In fact, we can go long periods of time where markets are flat or down and take a while to recover. So whether markets are up, down, sideways, or flat, something really helpful can be the consistent income that we get from dividends and interest and distributions. Well, when you’re 30 and you’re just accumulating and you’ve got your eyes closed and your head down and you’re just hoping just feeding the souffle to grow, you don’t really think about all those dividends that come into play, because they should be and typically are just reinvested. Reinvested. You don’t think of it as income.

Wes Moss [00:07:50]:

But even if you just own the S and P 500, you’re getting a call at one and a half percent dividend. That’s actual cash that’s getting paid out from the companies. Within the S and P 500, that adds up to around one and a half percent. Now, that’s more of a retirement income trickle as opposed to an income stream. But as we get into that distribution phase, we can modify how we’re investing in our retiree accounts and our brokerage accounts so that instead of a trickle per se, we get more of a couple trickles that add up to a retirement stream of income. So instead of just owning the general market we may be focusing in on utility companies or energy companies or consumer staple companies or investments or ETFs that focus in on dividend paying companies that could be in the two and a half, three and a half or four and a half percent range. Really? Without stretching all that much. Now, of course we know the higher the dividend payout for a company, the less capital appreciation we should expect.

Wes Moss [00:08:57]:

So if you find a company that’s paying out 9% a year, that’s probably a dividend that’s too high, maybe it’s unsustainable, and you’re probably not going to get a whole lot of appreciation in addition to that income. So we always want to find some sort of happy medium. But if we can get to 3% or so on two to 4% on dividends. And now, in this new, higher interest rate world we live in, four to five and a half percent from the government and treasury and municipal bonds that we own in our retirement accounts. All of that income together can go a very long way in any given year of getting us to our spending goals. And if you think about some of those numbers, to answer Chris’s question, imagine you’ve got a portfolio, even if it’s only yielding in aggregate, three or three and a half percent. What else does that do? What gets us two thirds or three quarters of the way to satisfying our 4% plus rule? Hopefully you’ve heard us talk about the 4% rule here on the podcast. But we know that all the machinations of that rule allow us to pull between four and four and a half percent per year on our initial retirement funding levels, plus inflation, with very high probabilities still probabilities, not guarantees, but very high probabilities of not running out of money for 30 or 40 or 50 plus years.

Wes Moss [00:10:28]:

Let me add one more thing to Chris’s question about as we cross that line. And this goes back to the conversation around core pursuits. Hobbies on steroids, things you love to do. You don’t have to go as far as Mitch album did and build an entire school or orphanage for children in another country. You don’t have to become a best selling author in retirement or be the chairman of a giant nonprofit board. You could just do three or four things you think about, take up your mind, share, and just love doing. They help you with socialization help, with structure of your week and your time. Remember, you’ve got about 2500 extra hours to start filling once you stop working or crossing Chris’s line.

Wes Moss [00:11:25]:

But another guest we’ve recently had on Retire Sooner, named Chris Farrell, no relation to our caller, is the author of a book called Purpose and a Paycheck. It’s about finding meaning, money and happiness in the second half of life, or the line we’re talking about here. He argues that one of those core pursuits could be some sort of hobby that pays you something, even if it’s in a very part time way. Your core pursuit that happens to be a job or part time work could give you the community you may have missed at work, at least in your early years of retirement, and now the commute that you used to have at work. So put that all together. And I do think of retirement planning in real phases and crossing certain lines. I do think of it as accumulation. Then we cross the line.

Wes Moss [00:12:21]:

Then we’re in typically a retirement gray zone where we’re maybe still wanting to work a little bit for a couple of years. We’re finding our core pursuits, and then we go into the point where there really is no more wage income and we’re no longer running a business or starting a business at that point as those three phases, it’s a great way to look at it. So, Chris, thank you for your call. Right here on the Retire Sooner Hotline, the S and P 500 fell nearly 20% in 2022. Inflation jumped to double digits, and the Fed has continued to relentlessly raise interest rates. It feels like chaos, but at Capital Investment Advisors, we take a disciplined approach to investing to help our clients find happiest in retirement. Regardless of the scary headlines, we can’t control the chaos, but we can control what we do about it. If you’d, like, help with your disciplined retirement strategy, reach out to our team@yourwealth.com.

Wes Moss [00:13:27]:

That’s your wealth next.

Trip [00:13:33]:

I got a rental income property that is paid for and just I’m in the process of building another house. I heard you tell Jared Yamamoto that if he was to buy another house, he should always keep his condo into prepared because it keeps up with inflation. But my question is, if I don’t have a mortgage and interest rates are 7% right now, doesn’t that mean that I’m saving 7% each year that I would have had a mortgage? I don’t know. Something to think about.

Wes Moss [00:14:08]:

All right, that was Tripp with really comment and a question and the reason he used Jared Yamamoto’s name. He’s a producer on one of the radio shows I’m on, and we were talking about this on air, and he called into our hotline to ask this question and I think it makes sense what he’s contemplating right now. Hey, if I’m buying a new place, should I sell the old place, take the cash, and either pay for completely or have less of a mortgage because rates are really high and I’m saving seven and a half percent depending on where rates are. And he’s absolutely right about that. So selling that other property you may have held for five or eight or ten years gives you the cash to plunk down and maybe not have to pay a mortgage on a new place. So, yes, and you’re absolutely saving having to pay these new high interest rates that we live with. But if you were to sell that existing property to take the appreciation, guess what? You’re also losing out on your old low rate because you can’t take that new mortgage rate with you. Now, there are some startups out there that are trying to be able to help home buyers do that, where if you’re buying a home and the seller has a 3% interest rate or a mortgage, there are some possible ways to keep that mortgage in place if the original mortgage allowed for it.

Wes Moss [00:15:37]:

These are usually government based or government backed loans, like most loans are in the US. But it’s a little more complicated than that and very few transactions we’ve seen that happen. So for the most part, we can’t take our low older mortgage rate with us. So, sure, it’d be great to pay cash for. Median home prices in the United States today are a little over 400,000. So it’d be great to be able to pay cash or a 700 or a million dollar house. And yes, you save call it 7% in interest every single year, particularly in the early years of paying down your mortgage because that’s where you pay a higher percentage that’s interest. But at the same time, if you keep your old property, then you could potentially be renting it out and have a new stream of income while the property hopefully over time, continues to appreciate.

Wes Moss [00:16:36]:

So if you think about this holistically trying to solve this question of, hey, I want to buy a new place, do I sold my old place in order to do it? If we’re holding on to our existing property and we’re going ahead and having to do new financing to buy a new property, now we’ve got two properties. Well, it’s a little riskier of an overall financial move, but what are you doing? You’re now owning more assets that are able to inflate along with inflation over time. Now, of course, there’s some pitfalls here. You could lose your renters, the rental market could get soft, the housing market could get soft, and you don’t want to find yourself stuck having too many bills that just can’t get paid. So you don’t want to stretch too far here when it comes to your income relative to the debt you need to service. But rather than the conventional, buy a house, live there for a while, sell it, move to another house, live there, sell it, if we want to hang on to the gift that is a low mortgage rate many people in America have to this day. And you can pull it off by being able to hold the old property and get financing on a new one over time. Ten years, 1520 years.

Wes Moss [00:17:51]:

When everything starts to get paid off, you could be looking around and say, wow, I’ve got three separate properties and two of the three are paying me income. That could be a big boost when it comes to retirement. Now, we also do know the retirees that are within five years of paying off the mortgage are four times more likely to end up in the happy group. So I do advocate not having a mortgage on your primary house once you get to your retirement years. But if you have some debt on what is now a cash flowing, income producing property that you’ve held for many years, it’s just a matter of time before that gets paid off too, then by all means we’re leveraging more financial assets that can help us keep up with inflation and protect our purchasing power over time. Thank you for the call. If you have a question just like Tripp and would like a free copy of what the Happiest Retirees know, we’ll send you one. Just let us know how to contact you so we can know where to ship the book.

Wes Moss [00:18:57]:

The number 808 056301. Now we’re going to switch gears and go to the Retire Sooner Facebook group and answer some of the questions that are there that have been posed to our team. Producer Mallory joins us. Hey, Mallory.

Mallory Boggs [00:19:18]:

Hi. I’m so excited to be here.

Wes Moss [00:19:20]:

The welcome, as usual, and to the air, at least, and not just producing, waving your Harry Potter wand around.

Mallory Boggs [00:19:29]:

Normally, I like to sit in the background and just try and sign language.

Wes Moss [00:19:32]:

To you wrinkle dust. I mean, if it works, walk through walls. I have watched a little bit of.

Mallory Boggs [00:19:38]:

Harry Potter, but not your world. You’re a marvel guy. You’re not a Harry Potter guy, you’re.

Wes Moss [00:19:41]:

A yeah, I just I think anybody that runs around with a broom is just we’re not going to be friends. I’m just kidding. I think it is fun. It’s maybe too magical of a leap for me, is what it is. It’s just so fantastical, as opposed to marvel, where that makes so much more real world sense. Right. The scientist, he turns into a big green guy and he’s so strong that he can jump over buildings. Like I can relate to that.

Mallory Boggs [00:20:10]:

Yeah, that seems very realistic. I know I’m going to blame your boys. I think your boys didn’t do a great job with educating you on the magic that is Harry Potter.

Wes Moss [00:20:19]:

Yeah.

Mallory Boggs [00:20:19]:

Let’s talk about another magical place, which happens to be our Facebook group. Another place where you would be friends with anybody in would be I would be.

Wes Moss [00:20:28]:

So let’s go through a couple of these and let’s just start with this first one from Jeff.

Mallory Boggs [00:20:34]:

Yes. So Jeff wrote into the Facebook group and he said, wes, I’m close to an early retirement at 58 and I’m quite frustrated with the safety of my bond index funds. Is there value or a right decision path to move from bond funds to actual bonds? They appear to be more predictable. You know what you will get.

Wes Moss [00:20:51]:

Yeah. This is such a real I would think this applies to so many people listening. If you own any bond fund, any ETF or individual bonds, or just a balanced fund, which is a 60% stock 40% bond fund in some way, you’re wondering what happened to the great stability that was supposed to be the bond portion of my portfolio. Well, guess what? I think we’re at month 38. This is the worst three year time period we’ve seen for bonds, really, in the history of the bond market. And it’s because the inverseness of bond prices and interest rates. So we had 30, almost 40 years of rates trickling lower. That was good for bond prices moving higher, but we got to a point where rates went down so long that they eventually got to zero.

Wes Moss [00:21:45]:

Then they almost bungee core back to reality, where we’ve seen much more long term historical bond interest rates or yields on bonds. And that rise in interest rates correlated with lower prices. So that round trip back to reality has made for a really difficult bond environment. If you look at the aggregate bond index, the line just keeps going down and down and down and has been and really won’t start going back up or stabilizing until interest rates stop going up. And that’s why if you’ve had bond funds, bond index funds, bond ETFs or Predators, anything bond related, it’s felt like the values come down. Now, you’ve also gotten some interest and you’ve gotten some income, but values have been weak in the last couple of years. Now, again, even a bad couple of years of bonds is still pretty mild relative to stocks that can move dramatically lower. But even, and this is to answer Jeff’s question here, even if you owned individual bonds and they had five or seven or ten year horizons for maturities, until you get to maturity, you can see some price fluctuation lower.

Wes Moss [00:23:04]:

Now, Jeff is correct, and this is the one thing I do like about individual bonds, is that you know their destination. As long as the company or the government, wherever or the municipality that we’re investing in, remember bonds are just IOUs back to a company, government or municipality. You’re buying an IOU, you get some interest for it along the way, and then you get your money back. They owe you. So I do like individual bonds because we do know where they’re going to mature and what year and what month, what day they’re going to mature. And that does give you more predictability, but it doesn’t mean that bonds on your statement don’t fluctuate lower. So the reality here is that there’s just been a real headwind for any vehicle when it’s come to bonds over the last really now call it three years and that’s been the bad news. That’s what’s made it hard.

Wes Moss [00:23:58]:

The good news is that future bond returns over the, let’s call it next three to five years and longer are highly correlated and highly predicated on where interest rates are starting or where they are today. The day you buy your bonds is likely the destiny of how your bonds are going to perform over the next several years as an annual rate of return. So if you’re buying a bond fund or a bond ETF, or a group of bond ETFs, and you’re doing that when prevailing interest rates are 5% and you’re locking that in, you’re highly likely, but not guaranteed to make around 5% over the next several years, year after year after year. In the bond world, they call it yield is destiny, meaning that starting yields are a pretty darn good indicator of how your bonds will do over time. There’s also another way to do this that kind of combines what I think may be a couple of things that Jeff is looking for. You can buy bond ETFs that have a specific maturity date. So instead of buying just a bond that matures in October of 2028, you can buy an ETF that is call it dozens or hundreds of bonds. So lots of diversification that all mature by an end date.

Wes Moss [00:25:32]:

So I think you get a little bit of the best of both worlds in that scenario. So that’s another thing for Jeff to consider. And I think if you’ve been a heavy bond investor, it’s been tough sledding. I think this sledding gets easier over the next couple of years from here. That leads us to our next question. Mallory it does.

Mallory Boggs [00:25:55]:

So Lori wrote in and she said, wes, I’m curious about your opinion on laddered CDs for generating income on cash savings. Good idea or no? And I love this one. Apparently a lot of other people were really curious. So it got a fair number of likes and some other people commenting, saying they had the same question.

Wes Moss [00:26:11]:

In the world we live in today, with rates much higher than the Federal Reserve pegging their federal funds rate at between five and a quarter and five and a half percent, owning CDs, it’s not a terrible idea. I think it’s a good idea. So the short answer is yes. Laddered CDs, I don’t see anything wrong with it. Now, a couple of caveats. We don’t want to be purely CD investors just because we can now get 5%, because that’s fleeting. We don’t know where rates are going to be in the future. And if you look at the history of cash or short term Treasuries or CD rates, they do a pretty poor job of outpacing inflation over time.

Wes Moss [00:27:00]:

If inflation is average three and you’re getting five, that sounds pretty good. But you’re really only getting a real return of 2%. Whereas stocks have averaged ten, inflation is three. Now, your real return over inflation is seven. So it’s not 5% versus 10%, it’s a net of two versus a net of seven. So your stock versus cash return isn’t just 100% higher or double five versus ten, it’s three and a half times higher. If you’re looking at your real rate of return, seven versus two. Now, with that CD laddering could be great.

Wes Moss [00:27:47]:

I’ve shopped around and looked all over the Web, and if you’re willing to have different accounts at different banks, then you can find 5% all day long. Now, you’ve got to stick with FDIC limits, and it can be somewhat cumbersome, but having a six month, a one year, an 18 month, a 24 month, a 36 month CD at different rates gives you a nice interest rate and then gives you liquidity because you have something maturing relatively often. It also brings up an interesting conflict for investors because, yes, you can get a one year at these pretty high rates, but it’s real tough to go out and get a five year at 5% because the Fed sets short term rates. Call it a six month or one year CD that’s closest to that. But out into the future, it’s the bond market setting those rates. So it’s really hard to get a high rate for a longer term CD. And I tend to see people wanting to do most of their money in the really short term CDs because it’s five and a half versus a let’s call it a longer dated CD that’s lower than that. And again, hey, well, I’m locking in this good rate.

Wes Moss [00:28:56]:

But what happens if in a year from now your CD matures, you get your cash back? And now the economy slowed down enough because of these higher interest rates that the Fed has to lower rates, and now you can only find three and a half percent, but you could have locked in even higher if you went out further. So we’ve got to think about what the financial world calls our reinvestment risk. What happens when my CD ladder or bond ladder matures? Then I have to reinvest at prevailing rates, and if they’re lower, that’s reinvestment risk. But as far as locking in pretty high interest rates relative to what we’ve seen for the last nearly 20 years and having part of our overall financial mosaic or pie stable and productive. Although not that much above where inflation is, but still higher then my opinion for Lori is that as long as you’re following FDIC, I think a CD ladder can be great. If you’re wanting to do this for even bigger amounts, lori may want to think about brokered CDs, which you can find at the big brokerage firms. Think Fidelity, think Schwab, where you can all, in one account find CDs issued from lots of different banks. Now, they trade a little bit more like bonds because they have maturity dates as well.

Wes Moss [00:30:29]:

But that’s another way if you’re wanting to go way beyond the FDIC limits. That’s a lot of Q A. Mallory, thank you for being here.

Mallory Boggs [00:30:39]:

Thank you for having me again.

Wes Moss [00:30:41]:

We love when you reach out. We always get back to you with an answer, regardless if we do it here on the podcast. And if you have a question and want a free book, just give us a call, 808 56301. Thanks for tuning in.

Mallory Boggs [00:30:57]:

Hey, y’all, this is Mallory with the Retire Sooner team. Please be sure to rate and subscribe to this podcast and share it with a friend. If you have any questions, you can find us@westmoss.com that’s wesmoss.com. You can also follow us on Instagram and YouTube. You’ll find us under the handle Retire Sooner podcast. And now for our show’s.

Mallory Boggs [00:31:16]:

Disclosure this information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guaranteed offer that investment return, yield or performance will be achieved. Stock prices fluctuate, sometimes rapidly and dramatically due. To factors affecting individual companies, particular industries or sectors, or general market conditions for stocks paying dividends. Dividends are not guaranteed and can increase, decrease or be eliminated without notice. Fixed income securities involve interest rate, credit inflation and reinvestment risks and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

Mallory Boggs [00:31:55]:

Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Investment decisions should not be based solely on information contained here. This information is not intended to and should not form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment tax, estate or financial planning considerations or decisions. The information contained here is strictly an opinion and it is not known whether strategies will be successful. The views and opinions expressed are for educational purposes only as of the date of production and may change without notice at any time based on numerous factors such as market and other conditions.