If it's the last week of the month, odds are that Alison Southwick and Robert Brokamp are going to amble over to the Motley Fool Answers mailbag to find out what their listeners really want to know. And for added gravitas and expertise, they've brought in reinforcements: Naima Barnes, a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool. Among the topics on deck are retirement accounts, HSAs, long-term care insurance, market timing, and car buying.
A full transcript follows the video.
This video was recorded on May 29, 2018.
Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool.
Robert Brokamp: Hi, Alison!
Southwick: It's the May mailbag, and this month we're joined by Naima Barnes. She's a financial planner with Motley Fool Wealth Management, a sister company of The Motley Fool. Hi, Naima!
Naima Barnes: Hello!
Southwick: Today we're going to tackle questions about HSAs, long-term care healthcare insurance, and car buying. All that and so much more on this week's episode of Motley Fool Answers.
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Southwick: Let's get into it. Our first question comes from the Twitters. The question is, "If the conversion of funds from a traditional IRA to a Roth IRA is counted as income and taxed, then what is the benefit of doing this?"
Brokamp: So, whenever you convert money that's in a traditional account to a Roth, that amount gets added to your taxable income. If you convert $10,000 you have to add that $10,000 to your income, so you're going to pay more taxes this year. The benefit is that ideally you are in a lower tax bracket this year and you'll be in a higher tax bracket in retirement. Basically, you're paying taxes today, or prepaying them, really, at a low rate so that you can get a better benefit when you retire.
There are all kinds of calculators on the internet that will help you analyze the situation. I found one at calcxml.com. Just very quickly a little hypothetical, here. Let's say you're 35 and you're in the 12% tax bracket today. You convert that $10,000 to a Roth. Let's say you're in the 22% tax bracket in retirement. What's the difference? Well, if you do the conversion, that account will provide $8,700 a year in retirement. If you don't do the conversion on an after-tax basis, the traditional IRA will just provide $7,500 a year. You're getting more than $1,200 a year in after-tax income by doing the conversion.
Obviously, this takes some assumptions. You don't really know what the future's going to look like, so there are other reasons to do a conversion. One is a traditional IRA or 401(k), you have to take out required minimum distributions at age 70 and a half. The Roth IRA, you do not, so that's another benefit. You can let that money grow a little longer.
Also, it gives you what's called tax diversification. When you're in retirement, if you have a year in which you have high taxes for any reason [maybe you got a lump sum investment of some kind, a big capital gain], you can tap the Roth, then, to counteract being driven up even higher into a higher tax bracket.
One word of caution, though, is let's say you're in a low tax bracket today and you decide that the conversion makes sense. When you do the conversion, that money gets added to your taxable income which could drive you up into a higher tax bracket, so you only want to convert so much so that you stay in the current tax bracket and not get driven up into the next one.
Southwick: Our next question comes to us from Leisha. "I'm in need of a car, soon. I am self-employed, though the vehicle will be used for personal use, not business. I'll need to take out a loan, and I see three options. One, apply by myself. Self-employed with a low net income [$22,000] but with a good FICO score of 760. Two, husband applies by himself with higher income [$79,000] but some late payments and a much lower FICO score of 690. Three, we apply jointly to show his income, too, and both of our FICOs. What kind of documentation would be needed to document my income? Is there any chance that a bank would be impressed with my FICO store and not want to see 1040s? Do we have a better shot applying for financing with a car dealership's financing or my local bank? Thanks so much."
Barnes: First of all, taking a look at credit scores will play a factor when choosing a car. There are a bunch of calculators out there on like Bankrate and NerdWallet that you can use to see what you would qualify for.
And in terms of whether you should apply as a single or a joint owner, usually when you apply for a joint car loan it's when you don't think that you're going to qualify for a loan on your own. You want to steer away from that, because his score is lower. In that case, I would say apply by yourself, but go in pre-qualified.
You can go onto one of those calculators. They'll give you different rates of loans in your area and then you can pre-qualify for it and take that to the dealer and say, "I pre-qualified for this amount. Will this work?" They'll also ask for a proof of income, whether that be with your tax return or 1099. If you are filing jointly, then it will show that you guys have enough income to support the needs for the car.
Brokamp: And generally speaking, the dealership is not going to give you the best rate. Obviously, that varies from dealer to dealer, but generally speaking you're going to get a better deal from a bank. And to answer one of her questions [is it possible to even get the loan based on the FICO], I was able to do that through a service called LightStream, which comes through SunTrust Banks. All they wanted to see was our credit score. We did not have to provide any other information. It was very easy to get the loan, and it was easy to pay it off, because we paid it off sooner, so that option does exist.
Barnes: When I applied for my car loan, I went online and looked at Capital One and Ally. They didn't ask for anything but my credit score, either.
Southwick: The next question comes from Stormy. "My mother is 73 and retired. Her house is paid for and she has money coming from Social Security, an annuity, and an IRA. She has enough money for regular, day-to-day stuff plus a little extra. She also has about $100,000 sitting in a bank account earning 0.4% interest, which is nothing. This money is a buffer if an unexpected expense comes up. I want her to get this money into an account that would keep up with inflation; otherwise, she's losing money every year. She's onboard with that.
This is money that should be liquid and not volatile. I don't want to invest in stocks. Bonds are an option, but I'm not finding a bond fund that would keep up with inflation. The bank wants to put her into an annuity. I'm not excited about that either. She's OK with a 12-month CD, but I'm not seeing good rates either. Do you have any suggestions?"
Brokamp: First of all, interest rates have risen significantly over the last year, so there is absolutely no reason to be just earning 0.4% at a bank. If you go to the Motley Fool Banking Center, you'll see that there are savings accounts that are yielding 1.7%. One-year CDs 2.4-2.5%. There's just no reason to be sitting there in that type of a situation.
I do agree with you that stocks are not a good place for this money. I also agree with you that bond funds are not the best place, either, because bond funds can go down in value. In fact, the total bond market index from Vanguard is down about 2.5% this year because interest rates have gone up, so cash is definitely the place to be.
You will find better rates through online banks, which does make some people uncomfortable, but if that makes your mother uncomfortable, maybe with that $100,000 keep $25,000 at the local bank but do the rest with an online bank.
In a previous mailbag we also talked about iBonds, since you brought up something that keeps up with inflation. It's a mix. iBonds are offered through the U.S. government, so they're very safe. They have a fixed rate plus a rate that varies according to inflation. The current rate on iBonds is 2.5%, so it's pretty good. They're not as liquid, though. You can't touch them within 12 months, and if you take them within five years, you lose three months' worth of interest, but for a portion of your money that's probably a good place, too.
Southwick: The next question comes from Brian. "I have a high deductible insurance plan with a health savings account. If I move to a new company that has another plan type, what should I do with the money remaining in the HSA?" This might apply to me, as well. I might have some money sitting somewhere now that I think about it. So, Brian and Alison want to know what you do with it.
Barnes: HSAs are amazing. They're one of the best investment vehicles, especially because you can use them for health expenses. But when you leave a company and you still have money in your HSA, you can take that with you, and because HSAs are an investment vehicle, you can invest them once they reach the threshold.
But in order to continue to contribute to it, you do need to make sure that the current employer that you're at, or if you're applying for health insurance on your own, is a high deductible health plan or HDHP. If it's not one of those plans, then you're unable to continue to contribute to your HSA.
Brokamp: And like any other investment account, you do want to pay attention to fees and investment choices. If your current provider of the HSA isn't very good, you can transfer it.
Barnes: A cool thing with them is that you can use them for long-term care. If you keep it in there and then you need it when you're retired, you can use that for long-term care expenses.
Brokamp: Right. One of the big benefits is as you get to a certain age in retirement -- once you reach that age and if you still have money in the account -- you can use it for anything you want. While you're working, you have to use it for medical expenses. Once you retire, you can use it for anything.
Southwick: That's fun.
Brokamp: Yeah.
Southwick: I've got to go figure out if I really do have an HSA hanging out somewhere. The next question comes from Mark. "I am 39, married, and have two kids. I will be getting a pension, but because I was only at that employer for seven years, it will be small; just $400 a month at age 65. Recently they offered to buy my pension out for a lump sum of $15,000. I can't recall if it would be taxed as ordinary income or if the $15,000 was an after-tax amount.
I was debating taking the money and investing it myself. With the assumptions of the market returning 8-10% annually, retiring at 65 and living another 20 years beyond that, the amount would end up being more than the $400 pension. On the other hand, it is reassuring to think that I would have a steady source of monthly income even if it is only $400. What would you do?
Also, as a side question, if I were to die prior to retiring and getting the pension, would my wife get the $400 a month?"
Brokamp: Well, Mark, you took the right step to begin with, in that you ran some numbers. And I did some back-of-the-envelope math and saw that you're probably right. If you do earn at least 8%, you're probably better off taking the money. Of course, that's not a guarantee, but that's the first step, and you're right. You probably will have more money if you take the lump sum of that for yourself.
If you take the lump sum you should move it to an IRA or your current employer's 401(k), otherwise it will be taxed. You don't just want to take that money as a check and put it in your checking account. You want to move it to another tax-advantaged account.
The other thing, too, is if you like the idea of some sort of guaranteed income when you retire, you can take the lump sum, invest it, and then when you turn 65, use the money to buy an annuity if that's what you want. I recently read a study from Towers Watson that found that as retirees have some sort of annuitized income [it could be a pension, it could be an annuity, it could be higher Social Security benefits], the happier they are. They feel more at peace. They feel more satisfied, so there actually is a psychological benefit to having that check coming in each and every month.
As for what will happen to the benefit for your spouse if you die before you take it, you need to check with the pension provider, but that's a very smart thing to do, and when it comes to any retirement planning decision, you should always think about how it's going to affect you, but also your survivors. What happens if you die? Will the benefits still continue?
Southwick: Our next question comes from Rob from Crozet, Virginia. "I have two questions about 529 accounts. Say, theoretically, a family lives in the great Commonwealth of Virginia, where we can deduct from state income up to $4,000 per account. This theoretical family is considering moving out-of-state -- commonwealth --" [people get real nitpicky about that], "and was wondering what they should do if anything with those accounts.
To complicate it slightly, let's say they have Virginia accounts for their adult daughter who lives far away, really for her future children; their high school senior son, who will withdraw some money next year; and their grade school niece and nephew who currently live in Virginia."
Brokamp: These people are very generous in terms of looking after the college well-being of many relatives.
Southwick: Yes, that's awesome!
Barnes: So, when you move out-of-state, theoretically...
Southwick: Theoretically...
Barnes: ... you can keep your 529 at your current state plan, so you can keep it in your Virginia plan if you enjoy the investment options that you have with that plan. There's two benefits to moving it out of the Virginia plan. If you move to a state that also has a deduction; yes, that's one of the biggest benefits. You can move it to that plan and that plan will provide you with the tax deductions that you're looking for.
And then the other benefit would be to move it to a plan that has better investment options. On some of the list of the best 529 plans, Utah is a really good one. New York. Maryland. Those are all really great plans. If you move to a state and they might not offer the tax deduction, or the investment options are terrible, then you can move it to any other state that has a great investment option or is one of the more reputable 529s.
Brokamp: Right. And Morningstar rates plans. SavingForCollege.com rates plans. You can go there to see what the ratings are on your various options. But you can have multiple 529s in multiple states, so that's perfectly fine. You don't have to use your state's plan.
A couple of things I would highlight, here. I found this out from Tim McFillin, who is with TheCollegeFundingCoach.org and was on the show last month. For Virginia, for example, the limit for the deduction is $4,000. If you contribute more than that you have two options. The money you contributed over that amount you can deduct in a future year or just open a separate account, because it is per account. So, if you're going to contribute $8,000 just contribute to two separate accounts. Even for the same kid you can take the deduction in the same year.
And the other thing I'd point out about the 529 for the nieces is when it comes to accounts that are owned by relatives other than parents, the distributions from those plans can affect financial aid, so generally you want to save those for the last year of college.
Southwick: With Virginia, if you are going instate or if you are using a 529 within Virginia, doesn't it go farther if your kids choose a Virginia school?
Barnes: No.
Brokamp: Well, that's a good point. There are really two 529 plans. There's the savings plan, which is basically like a 401(k). You choose from among the mutual funds. In that case, no. If you are choosing the prepaid tuition plan, you can only get that guarantee if you choose a Virginia state school. You can go out-of-state, and you get most of that money back, but it's not guaranteed to cover tuition at that school.
Southwick: You've really got to look closely at the fine print of these plans.
Brokamp: Right. I will point out, by the way, that this show is airing on May 29th -- 529.
Barnes: Ooh!
Brokamp: Hey.
Barnes: And you can use your 529, now, for K-12.
Brokamp: That's right. After $10,000 you can use it for private elementary and secondary school costs.
Southwick: And Ron has a follow-up question. "Is there a time limit for the funds to be invested? If we find that we need non-529 money to pay tuition, could we fund a money market type of 529 account up to the maximum deduction, then take the money out a couple of months later to pay tuition? When I fill out my state taxes, it doesn't say anything other than how much we contributed. I guess really one could put in well more than the limit and carry over the extra to deduct on future tax returns. Getting back 5.75% of that money in Virginia seems like cheating. Yours, theoretically, Rob."
Barnes: You can. Definitely if the investment options offer a money market vehicle for investing you can put it in there. There isn't a time limit that you have to keep the money in a 529, so you can do that theoretically, and you still get the deduction because it will show as you put in money for the 529 for that year. But the contributions for a 529 are immediately invested, so you do want to make sure that those contributions are going toward a money market or bond-type fund when you invest them.
Brokamp: Right, because you're really spending the money within the next year or so, so you're playing pretty safe with it. There is something called "tax recapture" with 529s, by the way. If you put money in and get the state deduction, and then you end up using the money for something other than qualified higher education expenses, you might have to pay back some of that money that you got through the deduction. That varies by state, but just understand that if you end up using the money for something other than college, you may have to give some money back.
Southwick: The next question comes from Pete in Phoenix. "I've got a question about alternatives to long-term care insurance. I know there's a range of options out there, but the premiums can be relatively high, especially if you factor in an inflation adjustment and do away with the five-year limitation on benefits. I know you need insurance for the unexpected, but I hate the idea of paying hundreds of dollars a month well into retirement.
Would it be better just to sock that premium money away in an IRA after maxing out my employer's 401(k)? Assuming I have my home paid off in retirement and a decent payout from my other investments, would it make sense to use this 'long-term care' IRA as an old-age emergency fund and as an alternative to long-term care insurance?"
Brokamp: Long-term care insurance is a tough one. Let's start with whether you're going to need long-term care. If you go to [LongTermCare.acl.gov], they have some good stats. The stats are that you'll need some type of long-term care, probably. It also shows that the majority of that long-term care is in-home care, so you'll need help with some kind of shopping, cleaning, bathing, and stuff like that.
Roughly speaking, anywhere from one-quarter to one-third of people will need some sort of facility care, so you're talking about a nursing home, and that's where people get very concerned, because on average [it varies where you live], a nursing home costs $8,000 a month. A large amount of money. So, it's in those situations where people get scared. On average, people stay in a nursing home about a year, but a good percentage of them [around 20%] stay for more than three years and the chances that you'll go into a nursing home and stay there longer increase if you're a woman because you'll be living longer. That's a factor to consider.
Given those odds, a lot of people think, "Well, of course, long-term care insurance would make sense." The problem is, first of all they are expenses, so if you're in your fifties or maybe early sixties, it's going to cost you $3,000 to $3,500 a year. Now, what you'll be told is that that's all you have to pay.
Unfortunately, the history of long-term care insurance over the last 10 to 15 years is that many companies underpriced their policies and had to come back to policy owners and say, "Actually, you have to pay more. Either you have to pay more, or we have to reduce your benefit," and this happened just recently. One of the last holdouts was MassMutual in terms of raising premiums on people, but now they need to raise premiums about 77% on 54,000 policies.
Because of these problems, people are getting out of this industry. At its peak in the early 2000s, there were more than 100 insurance companies offering long-term care insurance. Now, there are about 12, because they underestimated how much it was going to cost to pay these out. They underestimated how long people would keep these policies. Insurance companies always factor in the odds that people just won't pay their premiums anymore. And low interest rates, which can be devastating to insurance companies because they invest most of their savings, or the premium money, in bonds and things like that.
So, should you get long-term care insurance? Generally speaking, I like your idea, actually, of being able to self-insure. Save enough money. I love the idea of you calling it -- what did you call it? -- your long-term care IRA. There is no such thing, of course, but just mentally you're thinking this is the money I may need for long-term care. Also, with the house paid off, you can use home equity to pay for a lot of long-term care, especially in-home long-term care. You can get a reverse mortgage, pay for someone to come in and do some of the services you need.
Now, if you get a reverse mortgage and then have to go to a nursing home, then you have to pay back the reverse mortgage, but it's still, I think, one way to think about home equity in retirement as that big, fat emergency fund that could cover long-term care and expenses if you need it.
Southwick: There's no easy answer for long-term care insurance.
Brokamp: There really isn't, and when you think of life insurance, when you get a life insurance policy, it's pretty efficiently priced. If they tell you it's going to cost you $500 a year, you can be pretty sure that's what it's going to cost you. You don't have to worry about any sort of future increases. But long-term care -- the history is that's just not been the case.
Southwick: The next question comes from Ravine. "Over the past year, I have slowly begun investing through the app Robinhood using some advice from Stock Advisor. I recently came across IRAs and have a question. As a 21-year-old, is it smarter to max out a Roth IRA and then invest? My primary concern is when pulling money out close to retirement, the tax rates are relatively the same and I'll lose 40% in taxes, whereas with the Roth IRA, I get to keep all the money. I know it's a far way out and a lot could change. Any advice would be greatly appreciated." Well, good for you! A 21-year old? Oh, you are on it.
Brokamp: Very impressive.
Barnes: That's great. I would say that as a 21-year-old, it is great to max out your Roth IRA because you'll be able to enjoy the benefits of that potentially tax-free in retirement. And you can use Stock Advisor to pick the stocks that you're holding inside of your Roth IRA.
Robinhood is great. I use it for just playing around with a few dollars here and there, but it's not where I keep my retirement fund. So, thinking about retirement, I have a Roth IRA that I use for 70 and a half, since that will be when necessarily I'll probably be pulling that money out, but that's not where I keep my retirement fund. So, using Robinhood for just maybe short-term expenses that you might have [meaning like three to five years] and nothing that you'll need today. Or if you're saving up for a house or a trip, that's good for that, but in terms of retirement expenses, I say go Roth IRA and max it out if you can for as long as you can.
Southwick: So, for our listeners who aren't familiar with Robinhood, it's like an online brokerage, but they don't charge you any trading fees. Robinhood is doing very well as a company, right now and it's very attractive. Maybe for our listeners who aren't familiar with it, can you talk a little bit about why someone might use Robinhood?
Barnes: Sure! How Robinhood started was they wanted to be able to allow people to trade stocks without charging any commission fees. Some brokerage companies have fees that are $4, $7. It varies depending on which company you're going with. Robinhood wanted to get away from that, and they started only on mobile phones. They have an app that you can download in the App Store, and you set up your account that way. They have since branched out to providing different types of things you can invest in. You can now invest in ETFs, which might not have been there when they first got on there, as well as bitcoin.
Brokamp: How do you feel about bitcoin, Naima?
Barnes: No, thanks. So, they've gotten to a place where they can offer different types of ways that people can invest and it's pretty cool. You can set it up that it links to your bank. It can do recurring withdrawals to your Robinhood account so that you have a certain amount that's getting put into your account on a regular basis. And the regular Robinhood account is free.
They do have a Robinhood Gold account. I don't know much about that. I think you have to pay for it, but regular Robinhood is free, so it's pretty cool if you want to just look on your phone and do some trading.
Brokamp: And the trick, here, is that Robinhood does not offer IRAs.
Southwick: Right.
Brokamp: That's the thing, so it cannot be a retirement account. And I'll just say for Ravine again, awesome for you thinking about saving for retirement at your age. Just know that the amount you can contribute to an IRA of any kind -- you have to have earned income first. If you have a part-time job and you only make $2,000, that's the most you can put in the IRA and you can't max out to the $5,500.
Barnes: You do want to make sure that first you have earned income, second you have enough for emergencies...
Brokamp: Right.
Barnes: ... third, max out that IRA with the limit. So, if you work full-time and you make $5,500, go ahead and do it.
Brokamp: Yes.
Southwick: The next question comes from David. "Following a suggestion I heard on this show, every last day of the month I put together a financial summary for my family that includes things like income, assets, expenditures, savings, and investments. I also give us a grade. What things did we do well this month? Which things not so well? I print it out and we talk it through as a family." So cool!
Brokamp: Yes, that's pretty impressive.
Barnes: I love it.
Southwick: "One of the more challenging elements of the numbers is our savings rate. I wanted to track this on a monthly basis because I was of the opinion that we started late to savings. We're an average of 40 years old and have saved around 3x our income in my 401(k). We also have a one-year-old son and wanted to make sure we were saving enough for his education. Our aim has been to maintain at least a 40% savings rate every month.
How should this be calculated? My working formula currently takes the amount we save or invest, adds what my employer contributes to my 401(k) plan, then divides by our after-tax income. Is it right to include the employer contribution? Am I right to use the after-tax income number? I also split the mortgage payment into the interest and principal. The interest is classified as expenditure and the principal is classified as savings because it pays down a debt and increases our net worth. Similarly, our auto loan principal repayment is classified as savings as are our HSA contributions.
In a nutshell, my question is how we ensure that the 40% we think we're saving is the same 40% you think we should be saving in our situation?"
Brokamp: First of all, I would say you're actually not behind on your savings. There are various analyses that look at how much you should have saved at various ages. We've talked about them in previous episodes as a multiple on your income.
Recently MarketWatch tweeted out that the average 35-year-old should have twice their income, and there was a lot of jokes and scorn made about that. But to the extent that you believe in this study, Fidelity thinks you should have 3x your income by age 40, so you're actually on that target. T. Rowe Price's analysis is you should only have twice your income at age 40, so you're actually doing fine.
That said, how to calculate your savings rate. I would say you include any asset that you are willing to spend for that specific goal. I wouldn't necessarily calculate an overall savings rate, although I think that's still interesting, but I would do it based on each goal.
For example, for retirement include what you've contributed to the 401(k) as well as your employer match and do it as a percentage of gross income. That's how most of these are calculated, so doing an after-tax income is actually making your savings rate look a little higher. I would do it as gross income.
I would not include the car payment in your savings rate, because that's basically a loan to buy a depreciating asset. Unless you are investing in some sort of antique car that you plan to sell in retirement or as a retirement asset, I wouldn't include it.
The mortgage and HSA are a little different. They're a little trickier. We talked about HSAs. Chances are you're not going to spend most of that money, and it will be a retirement asset. How much will be in that, though? How much you'll need I don't know, so I think it's safer to not include it.
Mortgage is also a little trickier because generally speaking, when you look at your retirement, you look at just what's in your portfolio [your IRAs, 401(k)s and other things like that]. Although as we talked about on a previous episode, more and more financial planners are saying you should be incorporating your home equity.
I think this is an evolving view. I still tend to side with the folks who say that really you should look at your home equity as a big, fat emergency fund and not plan on spending it. In that case, then, I would not include the mortgage in my savings rate. I think it's quite possible, as I think about this more as the years go on and appreciate the fact that really people have more in their home equity than they have in their 401(k)s. Then I might change my opinion on that a little bit.
Southwick: But for now...
Brokamp: But for now, I would just factor in that. And for the savings rate for your son's college education I would just calculate how much you're putting into the 529.
Southwick: And our final question comes from Josh. "I'm a 29-year-old teacher from Florida and would like to start investing. I pay into a pension fund for work but have saved another $10,000 and I'm unsure where best to allocate it. I'm most interested in putting the money in the stock market and I've had success so far; however, I recognize that I'm pretty late to the party." Oh, Josh! You are not late to the party!
"And I am worried about the dreaded correction that is coming. I'm not really interested in starting an IRA. Should I just pull my money out and wait for the correction, or put my money somewhere else?" All right, Naima.
Barnes: Well, Josh...
Brokamp: First of all, we love Josh for two reasons. He's a teacher...
Barnes: He's a teacher.
Southwick: From Florida!
Brokamp: From Florida! I am also.
Southwick: You're a teacher from Florida.
Brokamp: This is the truth, yes. All right, go ahead, Naima.
Barnes: That's awesome. So, first things first. I would make sure that you have an emergency savings, because I'm all for it. You need to make sure that you can cover an unexpected car expense. An unexpected flight to go see family. If you've already got that covered, great. It's also great that you're paying into your employer's pension plan because that will be a stream of income when you're in retirement.
In terms of the $10,000, seeing that you've hypothetically already covered your emergency expenses, just go ahead and invest it. There's no time like the present. If right now you're not making anything really [you might be making that 0.04% on your bank account], why not try and make a few extra dollars on it? Put it inside of a taxable account, since you don't want to use an IRA, and get into the market.
Southwick: He could also dollar-cost average into it, right? Like if he's worried that there's a correction around the corner... And by the way, people have been saying that there's a correction around the corner for the last 10 years.
Brokamp: Including us.
Southwick: Including us.
Brokamp: Including me, I should say.
Southwick: Yes, you're a little, dark rain cloud over that. So, he could also dollar-cost average in. Just go in a few thousand every few months.
Barnes: Yes, he can definitely do that. Dollar-cost averaging can also be tricky because say, for example, one of your stocks starts at 10 bucks, and then it goes to 15 bucks, you've already made five bucks and you're waiting for it to go down a bit, then you're still doing a little bit of market timing. That's the only concern with dollar-cost averaging, but if you're just purely moving it from cash and then just investing it however you invest it, then that's fine, too.
Brokamp: I recently did a little bit of research on how stock market valuation affects the safe withdrawal rate in retirement. There have been many studies about this going back four, five, six years. And every single one of those articles said, "Well, people should be nervous, now, because the stock market is so expensive and who knows what's right around the corner."
But, of course, the market has done pretty much nothing but go up since then. This year has been a little dicier. And these articles are written by some of the smartest people in financial planning.
The bottom line is no one really knows when the correction is coming. Josh, you're young. Assuming that this money is for retirement, you've got decades for this to recover from any correction that happens. Chances are you're just better off investing it now.
Southwick: Right. We want you to hold these investments for three, five, 10 and even more years. There will be plenty of time for you to go through a horrible, painful period but then come out on the other end happy.
Barnes: Time is on your side.
Southwick: Absolutely, and we know what bumper music Rick is going to use.
Rick Engdahl: Can you just sing it for me, Alison?
Southwick: Oh, I could. I could.
Brokamp: Theoretically.
Southwick: Theoretically.
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Southwick: That's all for the questions -- sort of. We have some listener feedback to get to. Matt heard our episode with Scott Kennedy [from the Center for Strategic and International Studies] about the trade war. In the episode, Scott mentioned that we, here, in the U.S. are using cheap solar and not the best solar technology, so Matt wants to know what the best solar is.
I emailed Scott, and he wrote back and said, "A big expert on solar with whom I've consulted is Varun Sivaram, a scholar at the Council on Foreign Relations. These ideas are in his new book, Taming the Sun: Innovations to Harness Solar Energy and Power the Planet." There you go, Matt. Go read that book.
Matt also had a bone to pick with Bro.
Brokamp: Uh-oh. What did I do?
Southwick: Bro suggested for a backdoor Roth to wait six months plus or minus before the conversion to avoid taxes. Matt doesn't like this strategy because you don't want any earnings in your traditional IRA before the conversion, so "I convert right away, usually within three days due to transaction time. It is called a loophole, but it is perfectly legal. If the government doesn't want me to do it, they are welcome to change the law and I will abide by the tax laws."
Brokamp: There's a little bit of controversy about this, so the idea of putting money into the non-deductible, traditional IRA and pretty soon, thereafter, converting looks like a loophole, so you will see very heated arguments online by people saying no, you need to wait a little bit.
On the other hand, there are people who say no, that's fine and one of them is Ed Slott, who's considered one of the premier IRA experts here in the country and has a very thorough article about why it's actually OK to convert pretty soon. So, it's debatable. Chances are he's probably right, but it just depends on how much chance you want to take with messing with the IRS. You're probably fine.
Southwick: I guess if you have a podcast that's listened to by a dozen listeners, or so, you want to maybe play it safe, huh, Bro?
Brokamp: Yes, that's true. If there's anything about me, it's about playing it safe.
Southwick: Mark heard last week's episode about how to evaluate your 401(k), and he had a follow-up question about BrightScope Ratings. "I work for a company that utilizes ADP for payroll benefits and retirement planning. In turn, ADP uses Voya for their 401(k) plan. Should I be evaluating Voya funds, then?" I think you need to clarify what you get out of BrightScope.
Brokamp: BrightScope just takes the data that's filed with the Department of Labor -- it's called the Form 5500 for each plan -- and pulls the data straight from that. Whatever is in your plan, that's what's being evaluated by BrightScope.
Southwick: But he should go to BrightScope and look for his employer, right? He searches for his employer and not for Voya funds.
Brokamp: Yes, he needs to look at his employer. And it can be tricky because some employers [especially really big multinational corporations] have different units that will have different 401(k) plans. You've got to make sure that you are choosing the right unit for which you work.
Southwick: Josh on Twitter heard your advice about going to BrightScope and he looked up his employer, which is Microsoft's 401(k), and it was awesome. So, hooray, Microsoft! They got an 88.
Brokamp: Wow! That's pretty impressive.
Southwick: So, people are actually following your advice. Also, over on Twitter is [OldSchoolMike] who listened to the episode about evaluating your 401(k). He took a gander at his 401(k) allocations and then swapped out an actively managed international equity fund with a 0.08309% fee for a passive one. In his defense, the passive option was added last year without him looking or caring. So, they snuck that one in. Also, you guys keep posting reviews on iTunes and they're so kind!
Brokamp: They really are. I showed them to my wife last night. It's just so nice.
Southwick: It's so... Oh! Like I don't even have words to explain how heartwarming it is to hear you guys. I want to thank Brendan, and MrCornyGuy, Luke, Linda. The problem with these names is they're not really names, sometimes. [Revealo], KRBMeister.
I love all of the posts equally, but I have to call out Linda, who wrote, "Since listening a few years ago, among using other tools, I've paid off all credit card debt, stashed away a six-month emergency fund, have contributed significantly to my 401(k), HSA, started investing in stocks, and have a goal of saving 30% of our annual income."
Brokamp: That's really impressive!
Southwick: Gee! That's why we do this. That's why we get into the studio every week and say, "Ugh, what haven't we talked about yet? Time to make the doughnuts." No. Sometimes. Sometimes I do feel that way, but not all the time. Not most of the time.
We also got a postcard from Tivana and Joshua who went to Santorini and honestly, Tivana, my Malta tattoo story is so boring it's practically embarrassing so I'm not going to share it on the show. That's what she asked for. No! Sorry!
Brokamp: But you did get one. What is it again?
Southwick: It's a bee.
Brokamp: It's a bee. That's right.
Southwick: It's a bee, but the story is boring. All right. I believe that's the show. You guys have given us a lot of feedback, lately, and so I'm sorry if I missed some of it, but please keep emailing us. Our email is [email protected]. I want to thank Naima for joining us...
Brokamp: Yes. Thank you very much!
Southwick: ... from our sister company, Motley Fool Wealth Management. The show is edited theoretically, of course, by Rick Engdahl. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!
