Mailbag: What Rate Of Return Should I Expect?

This is a mailbag edition of the show where we answer some questions that have come in from listeners. Today we will be discussing if it's a good idea to pull money from an IRA for home repairs, some rate of return expectations, and when to hire a financial advisor.

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Transcript Of Today's Show:

Speaker 1: It's time for another edition of Plan With The Tax Man, and it's a mail bag edition where we're going to take some email questions that have come into the podcast and share those a little bit on the show to go through these scenarios that might be similar to something you're going through. Of course, all emails and questions get answered when you reach out to Tony and his team at Tax Doctor inc., but we take some from time to time and put them on to the podcast. So if you'd like to submit your own or have questions, stop by Tony's website, yourplanningpros.com, drop them a line, again at yourplanningpros.com. All the good tools, tips and resources, and information there at the website. Don't forget to subscribe to the podcast as well while you're there, Plan With The Tax Man, again at his website, yourplanningpros.com. That's yourplanningpros.com. Tony, what's going on, buddy? How are you?

 

Tony Mauro: I'm good today. Thank you.

 

Speaker 1: Yeah, we're into late August.

 

Tony Mauro: Yes.

 

Speaker 1: Summer's winding down. We're getting close to Labor Day. I think the time we're going to drop this one, it'll probably be about a week or so before Labor Day. So summer is a-winding down. So hopefully you have-

 

Tony Mauro: State fair time here.

 

Speaker 1: Oh, okay. State fair thing.

 

Tony Mauro: Yeah.

 

Speaker 1: Yeah. Well, hopefully everybody had a good summer. Hot one, that's for sure, all across the country. Man, it's just been blazingly hot all summer. But anyway, let's jump in and take some email questions from folks. I've got a couple of good different types of things here. Interesting situations from folks they've sent in. This question comes in from a listener named Johnny and he starts it with this, Tony.

 

Speaker 1: He says, "I have a weird situation. I've been very aggressive," he says, "about funding my IRAs and my 401ks over the years, so I do have close to 2 million in these accounts."

 

Tony Mauro: That's good.

 

Speaker 1: That's great. He says, "I'm 54 though, and suddenly find myself needing major cash for a major home repair that was not expected. I kind of feel poor because my emergency fund you guys talk about is less than five grand in the bank, because I, again, put all my money tied up into these retirement accounts. I was very aggressive, as I said." So he wants to know, "Should I take money out of the IRA and eat the penalty and the taxes to pay for this home repair?" Because obviously he's well aware of that. Or do you have any other thoughts for Johnny on this situation, Tony?

 

Tony Mauro: Well, couple things. One, it would be congrats again on the $2 million, right, at age 54. I mean, that's really going to be good if you can let that keep going till you decide to retire.

 

Speaker 1: Yeah. I wish he would've shared how much the home repair was, but he didn't.

 

Tony Mauro: Yeah, I know he didn't share that. So, depending on that, I would say, what you need to do, it's easy to say what you should have done, but I think you already know what you should have done is, obviously have a fund for repairs set up in addition to emergency fund. For me, I have a fund for home repairs that just goes into that, because these things pop up from time to time. They never...

 

Speaker 1: I get the feeling that this is maybe something really unexpected and really outside the norm. So let's touch on a couple things. He knows he's got to eat the penalty and pay the taxes. So based on that, let's just say, he's got to pull out $50,000, Tony, for the sake of the argument. He's got to pay tax on that, right, in an IRA, plus he's got to pay the 10% penalty because he's under 59 and a half.

 

Tony Mauro: Right. And we don't know what his tax bracket is, but I'm assuming it's... I'm going to use 20%.

 

Speaker 1: Okay.

 

Tony Mauro: So there's another $10,000, and that doesn't even include the state. And so-

 

Speaker 1: [inaudible 00:03:26].

 

Tony Mauro: ... and cashing out, I guess to a degree in the dip, if the market happens to be down. And what is that 50,000 going to cost you in earning if you left it invested for the next 10 or 15 years? So my advice would be to try to work with him and say, look, do you have any equity at the home? Maybe you could take out a home equity loan. Rates are extremely cheap.

 

Speaker 1: I mean, they're ticking up, but they're still not bad.

 

Tony Mauro: Yeah. They're not bad. It's not going to be a 30% tax yet. That 30% what you're going to get hit here-

 

Speaker 1: With the... Oh, that's a great point. Yeah.

 

Tony Mauro: So you could spread it out, so it's not going to be a big event, and pay it off quicker if you need to. That would be my first suggestion. Second suggestion would be even just a conventional loan possibly, before I would take this money out, because besides the tax hit, I always look at that 50,000, in this example-

 

Speaker 1: Like a personal loan or something.

 

Tony Mauro: Yeah. Is, take that 50,000, use a... What do you call it? Compound interest calculator, and calculate that out. Even at 5%, over 15 years, what that is going to be. And you don't have that anymore. Your two million now is $50,000 lighter. I think that's too big of a hit if at all possible.

 

Speaker 1: That's a good point. I'm really glad you brought that up because... So it really is like, let's run some numbers and see what it costs you more to pull money. Because a lot of times we look and we go, "Well, I've got it." He's like, "I got the two mil." Again, I made up this 50,000 because I don't know, but, "I got the two mil. So if I pull out 50 grand, I mean, yeah, okay, fine. But I still got 1.95, right." But it may be more like an additional 30 on top of that, to your point. So that's a really interesting way of looking at that, versus maybe just getting a home equity line, with a slightly higher interest rate than it was six months ago, but even at that, it may still be a cheaper option, and that's why it's important to run the numbers and really have an advisor, right, so you can say, let's do some math, and then look at the tax too.

 

Tony Mauro: Look at the tax. Yeah. At least bounce it off somebody because they're going to be able to give you the numbers on all three sides of that, and then, obviously you can make the decision, but I think by pulling it out, especially when you factor all that in, you're going to see, wow, that's really going to cost me a lot more than 50,000. A little more pain than I want to take maybe, more of a haircut. Well obviously, Tony has reached out to Johnny in this scenario, or is reaching out, because we're talking about this on the show, but I wanted to share this because people do find themselves in these kinds of situations where it's like not thinking through the easiest way to do something. Because often it's like, "Well I've got the money, technically." It's just a matter of how efficient are you with and where do you get it from? Same problem that people face in retirement. Tony. It's what bucket to use at what time.

 

Tony Mauro: Yeah. And that's why it's important to have the buckets in the first place.

 

Speaker 1: Yeah. That's true. If you don't have the buckets, can't use them. Yeah. Well, Johnny, obviously a great question. Thanks for submitting it into the podcast. Thanks for letting us use it on the show. We certainly appreciate it. And good luck with the situation as you get it worked out with Tony and the team. All right.

 

Speaker 1: So let's check out Rowland and see what he's got to say. He says, "Tony, what rate of return should I be getting on my investments these days?" Ah, one of the old, what should I get? "I haven't been pleased with my accounts for several months this year." Well, many people have not been, Rowland.

 

Tony Mauro: No.

 

Speaker 1: So, Tony, this is the thing. We get these a lot of times. You hear this, I'm sure, often. "Hey, what rate of return should I be getting?" I think the question is, what rate of return do you need?

 

Tony Mauro: Yeah. I mean, that's the question, because I mean, I could spout out some number here and every one of them are going to be wrong, really. And so it's hard to say, right? I would say-

 

Speaker 1: Well, and somebody might say, "Well I need 12." Well, do you really need 12 just because that's what you've been getting the last couple years? I guess, what do you need to make the car go? What do you need to make the retirement plan work? And then anything over that's like gravy, right?

 

Tony Mauro: It is. I think if Rowland is in retirement or near retirement, I mean a general rule of thumb, I'd say, on average again, and you got to look at your timeframe, is this is not going to happen every year. A five, 6%, you get anything higher than that, I think, depending on your risk tolerance, and it's great, but people have gotten to a point where they think that these great returns are going to happen year in, year out. And we're finding ourselves in a market that's not probably going to happen this year. And you got to take that a little bit and factor that into the average, type of thing. And I think if you're not doing that, if you're chasing returns, you're going to be way worse off.

 

Speaker 1: Yeah. And I think that's where... And again, not to pick on you, Rowland, that's been easy to want to chase returns. '19, '20, '21, the market made it fairly... I mean the last 12 years really, right.

 

Tony Mauro: Yeah.

 

Speaker 1: Kind of made it easy to want to chase returns, because it's been fairly favorable, especially, I mean, some of the numbers that the market had ended up on in '19, '20, '21, I mean you could throw a dart at an index and you probably did pretty darn good.

 

Tony Mauro: Pretty darn good. I would say if he's in retirement then he should be talking with his advisor and really not be so concerned about the return. That's an important component, but am I getting the income, like you said, that I need to run my life?

 

Speaker 1: Yeah. Run the life, make the plan go.

 

Tony Mauro: Be satisfied. Yeah. If that's 12, 15% and you're in retirement, I think that's unrealistic.

 

Speaker 1: That's for sure.

 

Tony Mauro: [inaudible 00:08:54]. That's just hard [inaudible 00:08:55]. You can't sustain it.

 

Speaker 1: Yeah.

 

Tony Mauro: And so you'll be... Like we've talked about on previous podcasts, you will probably run out of money if you're going to do something like that, or portfolio's going to go down the tubes.

 

Speaker 1: Don't chase the returns, buddy. Don't do it. Get a plan, get a strategy, find out the number that you need, build a plan to guarantee some of that coming in to get those numbers that you need. And then, gravy's gravy, so.

 

Tony Mauro: Yeah.

 

Speaker 1: All right. Great question though, Rowland. Thanks so much. Thanks for letting us pick on you a little bit here on the podcast as well.

 

Speaker 1: Final one, Rita has one for you. And she says, "Tony I'm 61 years old, never had a financial advisor. I do enjoy the podcast, but I've made it this far on my own, so I feel as though I can make it the rest of the way by reading books and learning things, listening to stuff, so on and so forth." I mean, it's not a bad thought. She's 61, Tony. So she's been a DIYer and she thinks she can make it the rest of the way. And this is the folly, I think, that again, favorable markets of the last 12 years has done to the DIY type of person, right. Because it's been pretty successful. So if we go back 12 years, Rita was 40 what? 48, right? 49? Little different animal, when you're growing money from your late 40s to your early 60s than it is when you now got to live on it for the next 30 years.

 

Tony Mauro: I would agree. And I picked this question because it's kind of vague, because we don't know enough about her. I would say to her, surely, if you can make it the rest of the way, right. I would say, yeah, hey, absolutely. You certainly can. But if you were in my office and we were discussing working with each other, first thing I'd ask her is, "ell, what are your chances of running out of money?" And just be [inaudible 00:10:37] and ask her some questions. And if she couldn't answer those really well... Let's take it the other way. If she could, I'd say, "You really got this. You do have this figured out. You don't need to pay me to help you."

 

Tony Mauro: But many, many never can answer those types of questions. And then I say, "Well, so yeah. Will you be all right? Well maybe, depending on how much you have and what you want, but there are a lot of things that maybe you could be doing better. And you'll have to decide if that's worth hiring an advisor for."

 

Speaker 1: Well, and again, Tony, the accumulation part, the building of the wealth, it's a lot easier.

 

Tony Mauro: It's a lot easier than the distribution.

 

Speaker 1: Than the distribution, the tax conversation, the conversions, the... Again, we have a collection of stuff, right, when we get to retirement. We get to Rita. She's 61, she's got stuff. She's doing pretty good, she says. How do you make them all work? But more importantly, how do they all work together? Because this affects that and that affects this and blah, blah, blah, blah, blah.

 

Tony Mauro: Yeah.

 

Speaker 1: I mean, it's...

 

Tony Mauro: It would be worth Rita having a conversation-

 

Speaker 1: To see what you don't know.

 

Tony Mauro: To see what you don't know. And then maybe you're going to get that, "You know what, you are right on it and you don't need any help." And I would hope any advisor would be willing to say that to somebody that really got it covered because, I mean-

 

Speaker 1: Most advisors, yourself included, Tony, you offer complimentary consultations and reviews for just that reason.

 

Tony Mauro: Right.

 

Speaker 1: Right. It's like, okay, let's take a look. Let's sit down and chat. There's no cost, there's no obligation. After looking this over, Rita, yeah, you're right. Spot on, right. Shake hands, pat on the back, on your way.

 

Tony Mauro: Exactly.

 

Speaker 1: But many people get there and most of them wind up with a... And not a complete overhaul, right, I mean, I'm sure that's a lower number, but you're going through it and you're like, "Hey, you've done a pretty good job. There's a few places where we could make some tweaks." And have you thought about X, Y, or Z? And that's usually when the light bulb comes on and the client goes, "Oh no, I didn't think about that."

 

Tony Mauro: Exactly. Yep.

 

Speaker 1: So, strategy, planning.

 

Tony Mauro: That's what it is. Strategy and planning. There's plenty of advice out there. I think still, I think it's worthwhile, especially you get to the retirement and the distribution stage, to pay an advisor to help you, especially if they're as active as we are in running numbers and making sure not only not do you not run out of money, but other things in your financial life are taken care of as well.

 

Speaker 1: Yeah. I mean, do you want to pay the government the most you can absolutely pay them or would you like to pay them the least that you can pay them, legally, efficiently, right? Those kinds of things. Do you want to leave a legacy? Do you want to have something set up to where you're leaving that legacy tax efficiently or whatever the case might be? I mean, there's just like a ton. Long term care healthcare. Rita, are you by yourself? We don't know. You didn't mention a spouse. I mean, there's about a million variables that go into it. And so when someone says, "Can I do this on my own?" Yeah. Inevitably, technology has made that a lot easier, Tony, but at the same time, it's also, man, it's a lot more convoluted and the tax laws and the retirement thing rules, they're changing all the time.

 

Tony Mauro: Oh, they are. And I think if you try to cope with that on your own, well, you could do it, but in my mind, it's almost like, well, do I really want to spend all my waking hours doing this?

 

Speaker 1: There you go. Do I want a second career as my own financial planner? That's true.

 

Tony Mauro: Or do I just want to pay somebody? I mean, that's what I do, you know?

 

Speaker 1: Yeah. I mean, I like to do stuff, but I don't really want to... I know I decided not to build my own deck because I didn't want to spend all my time doing it, so I paid somebody to do it. That's a great point. Rita at 61 getting close to retirement, do you want to do all the things and learn the things that you may not know, probably don't know, and will need to know, to be as efficient as possible in retirement? Or do you just want to spend time with your grandkids and have fun or whatever the case might be?

 

Tony Mauro: Yeah, exactly.

 

Speaker 1: Yeah. It comes down to, what's your time worth, right?

 

Tony Mauro: At the end of the day, yeah, that's it.

 

Speaker 1: That's true. That's a great point. Well, there you go. Great email questions, guys. Thanks for all of those coming in. We had other ones, obviously. We let Tony pick the ones that he wanted to speak to. So if you'd like to submit your own or just have questions and you just want to talk with a qualified professional, like Tony Mauro, who is an EA and a CFP of almost 25 years, or 25 years getting folks to and through retirement, then reach out to them. Get started with a conversation. As I mentioned earlier, most advisors do, no cost or obligation. So it's worth it to find out where you stand in your retirement journey.

 

Speaker 1: Stop by the website yourplanningpros.com. That's yourplanningpros.com. If you're already working with Tony, obviously you're enjoying the services, and you haven't subscribed to the podcast, or if you're not, and you're enjoying the podcast, please consider subscribing. No cost or obligation to that, obviously. It's just a podcast. So you can click on a little button, the little heart button or whatever it might be on whatever app you use, like Apple podcast or Google podcast or Spotify. So that way you can catch future episodes as well as past episodes. And I think this one was number 70, Tony.

 

Tony Mauro: Wow.

 

Speaker 1: So our podcast can max out its retirement now.

 

Tony Mauro: Yeah, that's right.

 

Speaker 1: For social security.

 

Tony Mauro: Social security. Yeah.

 

Speaker 1: It can get the full... There's no reason for it to work any longer.

 

Tony Mauro: Nope.

 

Speaker 1: It can't add any more to that social security number. So there you go. Well, thanks for hanging out, my friend, and answering some questions. I appreciate you.

 

Tony Mauro: All right. We'll see you next time.

 

Speaker 1: We'll catch you next time here on the show. This has been Plan With The Tax Man with Tony Mauro.

 

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