#257 – Keys to Early Retirement: Rule 72(t), New Research, Investing Insights, and Lasting Happiness

Wes Moss [00:01:08]:
Right? Flows right off the tongue. 72T? Yeah.

Christa DiBiase [00:01:12]:
I’ve never. I’ve never heard of this rule. I’ve never heard of it. So I’m excited to hear about that. And then you’re gonna talk about, if you do retire early, what brings you joy. Is that right?

Wes Moss [00:01:22]:
Yes. Which is one of my favorite topics. We’ll start first with the technical one, because when you’re in the world of try to help people retire a little bit sooner. And I wrote a book called you Can Retire Sooner Than youn Think, because I think people can. And subsequently, I’ve done more research that just shows that there’s really this magic moment that does happen, and maybe not for everyone, but just overall in America, we. Our happiness levels rise the minute we retire. So there’s something about that period of time which is awesome. So I think that any rule that can help us get there a little bit sooner really helps.

Wes Moss [00:01:58]:
And we’ve talked about the Rule of 55 here. Rule of 55, of course, is if you’re at an employer and you leave 55 or later, you could access your 401k without the 10% penalty. But there’s other rules. But what if you were going to retire even sooner than that and you’re 54, maybe you’ve already have a bunch of money in IRAs, and you don’t have a lot in a 401k, there’s still hope to be able to pull money out of an IRA and still be able to not have to deal with that 10% penalty. We do not like tickets penalties, fines in America.

Christa DiBiase [00:02:32]:
Sure.

Wes Moss [00:02:33]:
Particularly when it comes to our retirement account. So here comes the rule 72T. And 72 is the section within the IRS code that talks about IRAs, and T is the section that talks about the 10% penalty. And this 72T is an exception to that. And here’s how it works. If you are, let’s say, age 54 and you’ve got an IRA and you are no longer going to be working, maybe you’ve saved plenty of money to retire, and you’re super 54, super young to be a retiree, which is awesome. And I’ve seen this happen many times. Not a ton, but it happens.

Wes Moss [00:03:10]:
Well, the problem is that, wait a minute. Aren’t I supposed to be 59 and a half before I can access these funds? That’s a long way off. That’s another almost six years. So if you apply this Rule 72T allows us to take something called substantial equal periodic payments. Sepp. So these substantially equal periodic payments, it’s a formula you enroll in, if you will. And this is all per the IRS guideline. And this is pretty complicated.

Wes Moss [00:03:40]:
So you really have to. This is not like a DIY thing. I think you need a. Usually you should have somebody at your financial institution helping with this, because once you start it, you also don’t want to mess it up.

Christa DiBiase [00:03:51]:
Okay.

Wes Moss [00:03:52]:
So the rule goes that you calculate a formula, and there’s two different or a couple different ways that you can arrive at the amount. Usually I see people use what’s called the amortization method, which allows you to. To access about five. Call it five and a half percent of the. Whatever the account value is a year, per year.

Christa DiBiase [00:04:12]:
Okay.

Wes Moss [00:04:13]:
So think $1 million, call it $53,000 a year, somewhere in that 5% range. And then the rule goes that you have to take those payments for at least five years or when you reach age 59 and a half, whichever is longer. So if you start rule 72T at 58, that’s going to carry you through 59 and a half, and you’re going to have to do it for at least five years.

Christa DiBiase [00:04:40]:
Is it the same amount? Like, if I start with five and a half, do I have to keep doing that?

Wes Moss [00:04:43]:
Yeah. Then that’ of the substantially equal periodic payments.

Christa DiBiase [00:04:47]:
Okay.

Wes Moss [00:04:48]:
Okay. And they’re the same payments. I don’t know if they recalculate a little bit per year. But it’s. The point is you’re taking the same amount of Money and, and you have to do it for five years or 59 and a half, whichever is longer. So that’s the. So if someone starts at 54, and let’s just use Sarah as an example, she’s going to have to take that all the way through 59 and a half. Even if she goes and comes into a situation where she might not need it, maybe a pension were to have kicked in and she doesn’t need it, you still have to take it or else then you get a penalty.

Wes Moss [00:05:18]:
Okay, so you kind of lock yourself into doing this for a pretty long period of time, but it allows you to access the money in your IRA without the 10% penalty, but only a certain amount, which again is per a table and a schedule that you’re going to get from the irs. And you have to choose the amortization schedule, if you will, on how much you can take. So think of it this way. Sarah, let’s say she has two IRAs. And this is where it gets even a little more complicated. You don’t have to do it on all your IRAs, so you can choose an IRA to do it. Let’s say she has 600,000 in one IRA and 400,000 in another IRA. Well, she can use the rule 72T.

Wes Moss [00:05:58]:
Let’s say she needs two grand a month. So she could take the $400,000 IRA and apply this rule to that which would give her around, call it 20, about $2,000 a month, which kind of carries Sarah through. Now what if she needed more and that’s going to cut it? Maybe she says, I need four grand a month from my retirement accounts. Well, then you could either, you could either take the bigger IRA or remember, within IRAs you’re allowed to roll money into each other as long as they are qualified rollovers. So you can almost. Right. Size your IRA to the size you need. That five, five and a half percent is enough.

Wes Moss [00:06:38]:
Coming substantially equal periodic payments so that Sarah can kind of back into how much she would need in any given IRA in order to fund her retirement. And then once she’s done, you go back to the normal rules that apply. So it’s, it’s a way to access IRA money early. It’s, it can be earlier than the rule of 55. This is again applies to your retirement individual retirement accounts, not your 401k accounts.

Christa DiBiase [00:07:08]:
Right. Okay.

Wes Moss [00:07:09]:
So just in the bag of tricks to get money out a little early or maybe a lot early and avoid that 10% penalty.

Christa DiBiase [00:07:16]:
Okay, well, I’ve got questions for you of course, Wes. Mark in Florida sent this one in for you. I’ve really enjoyed listening to you. Two questions, Mark. First, I have an IRA and a 401k combined, they are close to $300,000. Did I hear correctly that you can move your IRA into your 401k and if so, is that a good thing? Secondly, I’m 60 and will work for five and a half more years. I do not have a Roth IRA. Since my company does not have a match because we have a pension, should I start a Roth IRA to have an additional pool of money for retirement?

Wes Moss [00:07:47]:
Okay, Mark, I try to jot down the important pieces of these questions. IRA and a 401K. No, Roth has a marquee of a pension. I think the critical point here is age 60. And Mark also asked about a reverse rollover here where, yes, you can take money that’s already in an IRA account and I call it a reverse rollover into your 401k. Your company plan that you’re currently at, at work, if that makes sense for you and you want to do it A. Maybe you like the 401k plan. Maybe it’s super low cost.

Wes Moss [00:08:21]:
Maybe you like the investment options. Maybe it’s flexible, easy to see, great technology interface. So these are all the things that we, we would be looking for in order to make that decision of rolling money to 1,1 retirement account to another. But the other thing is that because Mark, you’re 60, you don’t, you already are past the age of 59 and a half. So you don’t, you would never have to utilize that Rule of 55. The Rule of 55 is way to access your money a little bit early without the penalty in a 401k. So since you’re already past that line of demarcation, the 59 and a half, and you don’t have to worry about a 10% penalty if you were to stop working now, you can pull money out of an IRA or 401k without the 10% penalty. So I think the Roth is the right option here because you’ve got a pension coming.

Wes Moss [00:09:10]:
IRA money you already have, 401 money you already have. I think that when it comes to that bucket strategy of how you control your tax rate as best as you can when it gets to retirement, it is nice to have a brokerage account, a Roth account, an IRA account, and it sounds like that’s the one piece that you could be adding to here. So I think the Roth, starting the Roth between now and when you retire, whether It’s Mark. You probably have a Roth 401k option as well. If not, you can always do the $8,000 a year in the regular Roth contribution.

Christa DiBiase [00:09:47]:
Okay. Chris in Virginia says Wes, I’m 50 years old, planning to retire at 57. I’m targeting three and a half total in retirement savings. I made a mistake in late 2019 when COVID 19 was first in the.

Wes Moss [00:10:00]:
Didn’t a lot of people 2019? So he was. Yeah, that’s right. It did start in 2019.

Christa DiBiase [00:10:04]:
I let fear take hold and I moved around 15% of my 401k from an index fund to a short term reserve fund somewhere between a money market and short term bond fund. Its Yield ranges between 2 and 2 and a half percent. I have 2 million in my 401 case, the 300,000 in dry powder. Age 50 seems overly conservative. I know I missed growth due to the fear I had five years ago. And I can’t change the past. I’m thinking I should slowly move some of that balance back to the index fund each month and wonder if I should lower my 401k contribution and instead take the difference and put it in a money market or bond fund outside of my 401k that has a higher yield. My choices in the 401k are very limited for stable value and dry powder.

Christa DiBiase [00:10:46]:
This would give me access to those safe funds without the restrictions of the 401k such as penalties and RMDs. I know I lose the tax shelter of the 401k and would pay ordinary income tax on the portion I don’t contribute to the 401k. Putting it in a Roth seems to make it a wash. Should I let it ride as $300,000 is around three years worth of dry powder when I retire in around seven years and am I overthinking this, Chris?

Wes Moss [00:11:11]:
I don’t know. You’re not overthinking this. I think that you are like any investor that has regret because in retrospect, everything makes perfect sense. Well, remember 2019, scary pandemics come in. Wait a minute, it’s over overseas. Is it coming here? Yes, it’s coming here. Then you get into February and you start to see the markets drop. And then all of a sudden I remember being on a call, it was a media call with the cdc and the lady that was running the CDC at the time was freaked out and you could just tell.

Wes Moss [00:11:44]:
And they started talking about lockdowns and shutdowns and in isolation. And I remember thinking, holy cow. And then that same day, I think a bunch of journalists were listening to that call. The market was down, like, 2,000 points. And the next thing you know, we get into March. March Madness is canceled. Wait a minute. And the world literally shuts down.

Wes Moss [00:12:07]:
So, hey, everybody, just stay home for two weeks. Which obviously turned it a lot longer than that. So we were all thinking, like, wait a minute. There is no time in modern history where the largest economy in the world just shuts down. Like, how can this. This is totally unprecedented because it was. And it was really scary. Well, what is that gonna do to company earnings? Stock market is down.

Wes Moss [00:12:30]:
So I get it. I just wanted to revisit that. The reality of how scary that period was, because it very much was. Then all of a sudden, the Federal Reserve came in and said, wait a minute. It’s okay. We’re gonna buy everything. We’re gonna inject money into the system. We’re gonna buy bonds.

Wes Moss [00:12:43]:
We’re gonna even buy stocks if we need to again, what? So all of a sudden, this big cascade bear market that we got in 30 days corrected itself super quickly. And then the world slowly, slowly healed after that, and the markets got much better. And the markets got better really quickly. The rest of the world slowly healed from that. And we still have effects today. I think we’ll have effects for many more years from now when it comes to the economy, the housing market. These are. There’s still big effects from COVID But when you look in retrospect, you think, wait, why did I sell anything? I should have stayed 100% invested.

Wes Moss [00:13:22]:
But guess what? Over the last five years, there’s been another couple bear markets. And, Mark, you have stayed invested. So what I’m getting from this, and maybe you don’t see it, but what I’m seeing is that it’s good for you to have some dry powder. That $300,000 a. It’s nominally a good number because, you know, if the world goes terribly again, I still have my safe money that would help me spend, if I really needed it for several more years. And that helps you be a better equity investor, because that’s the volatile part. So I would contend that, first of all, 300,000, 15% of your 401k and really less than 10% of your overall assets in safety. That means you’re 85 to 90% invested in stocks.

Wes Moss [00:14:13]:
That doesn’t seem too conservative for me, as you’re now in your 50s. So I actually maybe give that balance that you forced yourself into. In retrospect, maybe you would have a Little bit more money if that 100% invested, but you’re well invested and I think that balance really helps you. So don’t discount that. The other piece of that that I notice in this question is that your short term bond funds or stable market funds, they usually are going to pay prevailing money market rates. So right now that’s around 4%. Just call it 3.8 to 4.1%. If you’re looking at that option and it’s only been giving you 2%, I think you may be looking at the total return.

Wes Moss [00:14:59]:
And that makes sense too, that it’s 2% is a lot lower than 4 because there were a couple of years after Covid when interest rates were at zero and those probably didn’t make much. So just go back and check is your stable value. Maybe it’s paying more like four now, but it wasn’t a couple years ago. So it may not be as low as you think it is. So there’s a lot to that question. You’re not overthinking it. You’re just being a normal human wishing that you had perfectly done everything, which is easy to think about and do in retrospect. But that balance, my friend, I think it makes you a better investor moving forward.

Christa DiBiase [00:15:36]:
And how about the idea of lowering the 401k contributions and contributing to a Roth to have that dry powder more accessible?

Wes Moss [00:15:44]:
I don’t see that as a bad idea either. I mean, there’s so much flexibility around a Roth. It’s the ultimate account. Now granted, you do have to wait till your retirement age still, you still want to be 59 and a half before you access it. And you’re getting there.

Christa DiBiase [00:15:59]:
You can withdraw your contributions in an.

Wes Moss [00:16:01]:
Emergency and you can do contributions. So I like the idea of funding a Roth. Very few situations where a Roth isn’t a good idea, so that could be something to do as well.

Christa DiBiase [00:16:13]:
Okay. Ed in North Carolina says, I was surprised that Wes recently approved of a young investor using an S&P 500 fund. It’s not diversified and has a lot of exposure to just a few stocks. I’m sure that none of Wes’s clients are invested in only the S&P 500. If Wes wants to keep it simple for young investor, there are globally diversified funds he could recommend. Or if people are reluctant to invest globally, there are many total market index funds. Wes did recommend at the end of the discussion that people should invest in other sectors outside of the S&P 500, but didn’t give much detail. Why not recommend a total market index fund.

Wes Moss [00:16:47]:
You know, you could almost put this on a West Stinks.

Christa DiBiase [00:16:50]:
I know we don’t have a West Stinks, but maybe we’ll. Well, we, we read another one, but I don’t know.

Wes Moss [00:16:56]:
It was somebody that didn’t like my Apple choices.

Christa DiBiase [00:16:58]:
Yes.

Wes Moss [00:16:58]:
Wasn’t it the. So Ed, I’m surprised that you’re surprised that I talked about having a young person in an s and P500 index fund. Of course that can make a lot of sense. So yes, we, and we’ve done some segments here that the S and P has gotten really top heavy. It’s called 30, I think it’s 32% today of the total S&P 500 is moved by the top 10 stocks because it’s cap weighted. But if you look back over the last 20, 30 years, it’s usually 20, 22, 25% in those top names. It’s just the way the index works. So it’s almost a success biased index.

Wes Moss [00:17:40]:
The really good companies that are performing, they get bigger and bigger and then they carry the day. Yes, it’s more top heavy today than it’s ever been. So I share that same concern. The thought though, around saying, well, let’s just look at a total market index in the United States. I’ve done that. And if you look at a total market index, so S&P 500 is 500 companies, total market index might have 3000 companies, but guess what, those are cap weighted too. And if you look at a total market index fund in the United States, and I’m generalizing here, and AN S&P 500 fund, the top 10 holdings are pretty much the same anyway because they’re again, they’re mostly cap weighted. So any sort of total index, unless it’s specifically designed to be equally weighted and there’s a lot fewer of those out there or equal sector weighted and those are even more rare, easy to find, but they’re not trillions of dollars in these investments, then you’re still, you end up with a lot of concentration at the top just because of company size, market cap size.

Wes Moss [00:18:46]:
So I think if you’re in your 20s, there’s so much power in picking something and setting it and forgetting it and just adding and just adding and just adding. And then you look up and you’re 30 and you’ve given this great amount of time. And I think there’s a lot of power just in doing that, making it simple. And an index fund can do that. Now I agree that I like having other sectors. So there’s Very, very limited exposure in The S&P 500 to utilities. Very, very small percentage. S&P 500 is energy.

Wes Moss [00:19:21]:
Yeah. Very small percentage is real estate. So to counter that, you can either look to add those specific indices or Index Fund ETFs with those sectors that are underrepresented. So you start to counterweight very tech heavy S&P 500 or total market index. And you can go back and look at the equal weighted indexes which will have the same amount in each stock. Still you are weighted towards text because there’s more technology stocks than anything else. And you can go back and look at equal sector funds. You’ve got to usually do a little more digging and oftentimes they’re not available in a 401k.

Wes Moss [00:20:03]:
If you go to your average 401 in America, it’s going to have 15, 20 funds. It’s going to be more rare to have all these equally weighted options. Now almost any 401k you look at is going to have some international. So you absolutely can counterweight just having us with an international fund typically. So I’m a big believer in balance. I don’t want everything in just an S&P 500 fund, but for somebody younger, it’s a good place to start.

Christa DiBiase [00:20:33]:
Okay, next you’re going to talk about something that we need to think about no matter what age we are. And I’ve really been thinking about this lately. What is actually going to make us happy? What actually does bring joy in retirement activities, Core pursuits.

Wes Moss [00:20:46]:
This is kind of the opposite of the technical conversation we just had around 72 ta. This one’s maybe more fun.

Christa DiBiase [00:20:53]:
Yeah. If you have a lot of money and you can’t enjoy it, what’s the point, right?

Wes Moss [00:20:57]:
Yeah, exactly. We’re going to talk about that right after the break.

Christa DiBiase [00:21:00]:
Okay.

Wes Moss [00:21:03]:
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Christa DiBiase [00:21:35]:
We’Re back. And Wes, you’re back with brand new hot off the press research.

Wes Moss [00:21:40]:
It is. This all got started about 15 years ago and I started researching the habits of happy versus unhappy retirees. It came from the thought of happiest baby on the block.

Christa DiBiase [00:21:50]:
Yes.

Wes Moss [00:21:51]:
And I thought, well, why don’t we, if we know what makes babies happy, which by the way, I don’t think that book worked, I don’t know. But I do think that the research we found about what makes retirees happy versus unhappy, I think that does work. And it’s all in the context of retiring just a little bit sooner. I’m fine with and, or just having that in mind. But when we get there, regardless, as you said earlier, all the money in the world, it doesn’t necessarily make for a happy retirement. It definitely helps. And that’s a whole other part of the research on different asset levels. But once we’re there, there’s some really clear behavior that works and leads to a happy retirement.

Wes Moss [00:22:35]:
When I’m comparing these two groups, I’m always looking at the top two quintiles of happy respondents versus the bottom two. And then comparing those habits, I actually take out the neutral. So we’re looking at the habits of happy versus unhappy. And one of the things I’m very interested in, and this should be the fun part about retirement, is something I call core pursuits. I also call them hobbies on steroids. Our friend Joe Salsihai from Stacking Benjamins, he calls them super activities, which I actually probably like more than any of the things I’ve come up with. But a super activity or a core pursuit is something, it’s not just a hobby that you do once in a while. It’s something that really fills your time, your schedule, your week, your month, your year that you have a, I would say passion for.

Wes Moss [00:23:20]:
But I’m sometimes I like to limit that word because not everything we do has to be this massive passion. But I think collectively our core pursuits can add up to what essentially becomes your new life purpose over time. And you don’t have to start a charity in another country to help the homeless and you don’t have to do something world changing to be a purpose. Your purpose can be doing in regular patterns all the things you love to do. And they bring you purpose and they bring you socialization. They bring you joy in retirement. So in my most recent study, I studied 1200Americans mapped to the U.S. census.

Wes Moss [00:24:07]:
And there was one open ended question which is what brings you the most joy, purpose, happiness and retirement? And the answers were somewhat surprising, but not so surprising. But it’s really interesting to look at what people said. So first of all, and I’ll back up the number of these things you have, core pursuits does matter. So happy retirees tend to have five or more. This is again my old research actually showed a little bit less than this. But the brand new research from 2025 shows we want to have a higher propensity to be in the happy retiree camp. We want to have five or more of these core pursuits and unhappy retirees tend to have four or less on average. So that’s you want more is better when it comes to core pursuits.

Wes Moss [00:24:55]:
Even more importantly, the amount of time we spend on them per week matters a lot. And this is statistically significant data that shows, and I’m rounding here, the average happy retiree spends about 18 hours a week. That’s a big chunk of time on their core pursuits, the things they love to do. Unhappy group spends about 13. So it’s about a six hour per week difference. It’s 280 hours a year. It’s a big chunk of time. So it’s not just the number of core pursuits, it’s the amount of time we spend doing them.

Wes Moss [00:25:25]:
Are we structuring our week around these? But here’s what showed up in and I look at it in these open ended responses which is really fun to read through and to boil down to what are the top categories? Well, the top categories, what people said here, this is the corporate that makes me the happiest. This is what I like to do the most. So at the very bottom, the least out of nine, nine out of nine, the least amount came back to work. So there was some gig work in there, but I didn’t see a lot of that was the least important thing to folks. And again, happy retirees can be doing part time work. That’s part of why that’s in that spiritual is on the list. Learning on the list, family. So some people just said literally I just want to be with my family, spend time with my family, kids, grandkids, that’s it.

Wes Moss [00:26:13]:
Social. Some people just said what brings me the most joy is I just like being with my friends and being in my social groups. That’s it. Physical activity is getting near the top. Some people just say exercising makes me feel great and it is the number one thing when it comes to my retirement. Volunteering is on the list, is number three. Number two with the most second most mentions out of this entire research study was the adventure category. What’s in that category? Travel.

Wes Moss [00:26:45]:
Travel is in a category. RVing shows up a lot. People traveling around the country. And the number one category, a little surprising to me was creative. Now part of it is that I took the liberty of categorizing actual activities. So some people said music, some people said gardening, some people said walking, running, bike. Those got categorized. Those are actual activities that got categorized into these bigger categories.

Wes Moss [00:27:11]:
And I had to put gardening somewhere, and I couldn’t figure out if gardening was physical activity. Is it learning? The learning category was actually in here as well.

Christa DiBiase [00:27:23]:
Form of being in nature.

Wes Moss [00:27:25]:
So I put it in creative. To me, that’s the best category for it because it is a very creative thing that you control. You could have three beds, five beds, 100 beds. You could have. You get to choose what you’re cultivating and what you’re growing. And it’s almost like you’re working on a painting in real life as you do it every single day or every couple days you’re in the garden, you’re creating. So I think of it as creative process, pursuit. But those are the main categories.

Wes Moss [00:27:50]:
Creative shows up as number one as the main category of what brings us joy. And there’s a bunch within creative. Gardening is one. Music is another as an example. Painting showed up a bunch. So art showed up a bunch. Adventure as we can imagine. Travel, and then volunteering.

Wes Moss [00:28:08]:
And what I would say is that seven out of those nine categories, the real theme in all of them, Socialization.

Christa DiBiase [00:28:16]:
Community. Yeah.

Wes Moss [00:28:17]:
And our community. And that is. That is the overarching theme of all of these. Most people that said travel, they also stated travel with my. Fill in the blank. Travel with my. So physical activity was very often golfing with my. Walking with my friends, neighbors.

Wes Moss [00:28:34]:
And so the theme in seven out of the nine main categories, the underlying theme was socialization. And that is what brings us joy in retirement. So the money part of this, of course, gives us the flexible freedom and time to be able to do these things. You don’t need all the money in the world, though, to be social at all. And that is a key takeaway when it comes to doing what we want to do. This is what Americans report back, is the things that bring them the most joy, it brings them purposes, and I hope we can do the same. And you’re thinking about all those things right now.

Christa DiBiase [00:29:09]:
I sure am.

Wes Moss [00:29:09]:
Not that you’re retiring anytime soon.

Christa DiBiase [00:29:11]:
No, but I think it’s important to plan. And you don’t want to just start when you’re retired. You want to learn what you like and what brings you joy before. Very true. All right, I have lots of questions for you. I’m going to start with Jay in Missouri. To Wes. I obtained a quote for an immediate annuity that will pay out approximately 6.6, 5% of the amount deposited for the joint lives of my wife and me.

Christa DiBiase [00:29:33]:
This is significantly more than the safe 4% withdrawal rate from my IRA. That seems like a pretty good deal. It is fixed for our lives, so it will not increase with inflation or earnings in the stock market. And it goes away at our deaths. So it would eliminate any residual for our kids, but it would be a large boost to income in the early years. Any other things to look at, Jay?

Wes Moss [00:29:55]:
Really? That’s again, first time I’ve gotten an immediate annuity question here. And you’re right. That, and that sounds about right. And I don’t know your exact age, but I would suspect you’re probably retirement age now. And you’re thinking, okay, well, if I can use the 4% rule, or this annuity over here is essentially. And again, this all goes back to the claims paying ability. And we say there is, there really are no guarantees ever, anywhere, ever. And when we do an immediate annuity, we are counting, of course on that hopefully very highly rated company that you’re getting the annuity from.

Wes Moss [00:30:31]:
And yes, there’s even backups to the annuity companies if something happens. So there’s a very high probability that the promise would be fulfilled. But it is a guarantee quote just from a company. It’s not from the US Government. It’s not from. It’s from a company. So just remember that, number one. Number two, I want to make a distinction.

Wes Moss [00:30:54]:
This is important. You said 4% withdrawal rule. There’s a big difference between a 4% rate of return and a withdrawal rate. And you’re conflating the two here. You’re saying, well, I can only take 4%, but I can make 6.65%. Those are two different things. So just remember that that’s apples and oranges here, the withdrawal rate. So let’s compare these two.

Wes Moss [00:31:19]:
I would be thinking it boils down to this 6.0.65% or 6,000, 6,650 bucks per 100k you’re getting from an immediate annuity and no liquidity or no money. So that 100 in my example is gone, but you get 6650 a year. Now also, you made the great point that in 20 years, $6,650 is going to feel more like 4 grand today. So it’s going to be eroded. The purchasing power of that is, is eroded. And that’s part of why this calculates right on the surface. Wow, 6.65. That’s 2%.

Wes Moss [00:31:56]:
Now here’s what also makes the 4% withdrawal rate. Confusing is that right now the quote risk free rate is around 4%. Meaning that’s about what you can get in US treasuries with very, very little risk. It’s backed by the US government, not insurance company. You’re also conflating that I can withdraw 4% and not run out. So here’s the other option. Option A is no cash and a payment. Option b is taking 4% approximately.

Wes Moss [00:32:28]:
And that can vary from 4, 4.5% depending. And you still have all your money. That’s the consideration here. So I’m not totally against an immediate annuity because I believe more income streams are better with happy retiree research. We want differentiation and diversification in our income streams. So the way I would look at this is, Jay, I would look at taking a portion of your IRA money. Maybe it’s 20%, maybe it’s 30% and you’re getting rid of that liquidity and there’s no money inherited. That money for your heirs goes away too.

Wes Moss [00:33:02]:
It’s just you and your spouse. If when both of you are gone, the money is with the insurance company. So I would consider using that for a portion if it boosts your overall income or how much you can really take each year. Four is a little too little for you. Six and a half does the job. I wouldn’t go all to the 6.5. I would be looking at maybe taking a portion in an immediate annuity and then utilizing the 4% plus rule, which is a rule of thumb, and at least keeping a healthy portion of your overall investments still under your control, not the annuity company.

Christa DiBiase [00:33:40]:
Okay. Sean in Nebraska says, my wife and I are both 38 and plan to retire between ages 55 and 57. Our retirement income will consist of our pensions and my VA disability compensation, which together should cover approximately 70% of our projected gross income at retirement. We are currently maximizing our HSA and Roth IRA contributions. I have the option to contribute to a 457B, but there’s no employer match. We are considering whether to invest the 457B or a brokerage account to further supplement our retirement income from pensions and VA disability until we reach age 59 and a half and Social Security benefits begin. My concern is potentially increasing our tax bracket by contributing too much to the 457B. Will it be better to focus on the brokerage account? And is this general rule of thumb we could use between these two accounts? Is there a general rule of thumb? And I just want to say really Quickly.

Christa DiBiase [00:34:34]:
First of all, thank you for your service, Sean, and how impressive that they have this plan in place when they’re 38 years old.

Wes Moss [00:34:41]:
It’s pretty awesome.

Christa DiBiase [00:34:42]:
I bet they know their core pursuits and what those are going to be, too.

Wes Moss [00:34:45]:
Hopefully I give you some good examples today.

Christa DiBiase [00:34:47]:
Yeah.

Wes Moss [00:34:47]:
About the. So you guys are young. Sean, in Nebraska, remember, if you get. It was a va, was it va, yeah. Disability. Va, disability pension, Social Security, which would be. It could start at 62, not 59 and a half. Okay.

Wes Moss [00:35:06]:
So Sean, this is what I would think here. The 457. We haven’t gotten a ton of questions around that, but just as a reminder, that’s essentially like a 401 for public service folks. 401, 403. Typically more teachers, doctors, nurses. 403. But. But public service is going to be 457.

Wes Moss [00:35:28]:
The cool thing about a 457 plan is that the rules around when you can start withdrawing the money and not have the 10% penalty, they essentially go away. And I don’t know if this is that a lot of public service folks are getting pensions a little earlier. 50, 55. So the retirement age is, can be a little bit earlier. And maybe that’s why the 457 was designed that way. But you could stop working at 55, get a pension, and then you could still tap your 457. So you have a lot of flexibility with that account. You’re doing your hsa, you’re doing a Roth account, even though you’re not getting a match.

Wes Moss [00:36:08]:
I still like the 457 because it’s a retirement type account. You can do it habitually over and over and over again, contribute every month, and it should grow in the next 20 some years by the time you’re ready to retire. So I, I still like the 457. I think also remember about taxes today versus tax tomorrow. Today you’re in a high tax bracket. You’re. I don’t know exactly your income, but I’m sure you’re paying Nebraska state tax, which is, I think is similar to Georgia once you make over. I don’t know the exact numbers, but over 50,000 a year.

Wes Moss [00:36:41]:
You’re paying almost 6% in state tax. Your earnings will keep going up, but you have high. Let’s say your earnings are higher today than when they will be in retirement. In retirement, your VA disability won’t be taxed on your earnings. Today. We’re paying fica. We’re paying. I’m not sure if he.

Wes Moss [00:36:58]:
Yeah. He would be paying into FICA. I believe that’s another 6.2%. So when we get into retirement, your tax bracket should drop because your working earnings will go down even though you’ll have a pension. The VA benefits should be taxed. Disabilities should not be taxed. And then your Social Security should, at least from a state perspective, shouldn’t be taxed in the state of Nebraska. So I wouldn’t be too worried that your tax bracket is going to be the same or higher in retirement.

Wes Moss [00:37:32]:
I think it’ll be a little bit lower, maybe a lot lower. And that wouldn’t dissuade me from doing the 457. I still like that as an account. It’s hard to say that having some brokerage money is a bad thing. So if you have the capacity to do it, I would also be funding the brokerage. Maybe it’s a couple hundred dollars a month and that is a pot of money you can get to that’s got its own tax treatment that by the time you’re in your 50s you’re going to want that liquidity too. So kind of all the above approach here, but the crux of your question, I wouldn’t discount the 457 just because you don’t get a match.

Christa DiBiase [00:38:11]:
Okay. And then James and Georgia says is there any scenario in which it’s a good idea to purchase whole or variable life insurance? Car is generally a big never, not ever on this topic. Yet there’s still an entire industry around these products and it can’t be 100% a scam. The one situation that seems to make sense are the ultra wealthy who exceed the estate tax threshold and thus can invest money tax free. And outside of the estate. Are there any others? Thank you, Wes. You and Clark are both financial studs.

Wes Moss [00:38:39]:
Oh, that is.

Christa DiBiase [00:38:40]:
So I’m going to have to pass that on to the Clarkster.

Wes Moss [00:38:43]:
Pass that on to Clark. What would Clark say about. That’s fine.

Christa DiBiase [00:38:45]:
You would giggle.

Wes Moss [00:38:47]:
I’m giggling too. Thank you, James. Financial. So you’re right. The ultra imagine and this is a great problem to have.

Christa DiBiase [00:38:56]:
Sure.

Wes Moss [00:38:57]:
Is you have a $50 million farm or state. Big, big property. Well, the state exemption right now is it’s almost 14 million a person. So 14. 14. Husband, wife. That’s 28. Imagine you have a property worth 58 million and the family has this giant property.

Wes Moss [00:39:18]:
After the estate settles, they say wait a minute, that’s 30, that’s 20. That’s $30 million over the exemption. And what are the taxes on that? It’s something that’s call it approximately 40%. I think it’s 45. But let’s say 40% of 30 million is what, Christa? 12.

Christa DiBiase [00:39:38]:
12 million. Look at that fast math. Thank you, Wes.

Wes Moss [00:39:41]:
So wait a minute. Does the, does the family have 12 million bucks in cash to pay the taxes?

Christa DiBiase [00:39:48]:
No, they’ve got it in a farm, right?

Wes Moss [00:39:49]:
Get in a farm. Can they go and carve out 40% of the farm and say, hey, here’s some land, here’s some land. Can you do that? So you have a net worth, great net worth, but not enough liquidity to pay the taxes. So then you’re in a real problem. This is why a whole life policy that is designed to fund really the taxes to be able to keep the farm. So that is a great example, and you brought this up, James, of why whole life still really holds a place.

Christa DiBiase [00:40:25]:
But for that sounds like a super small percentage. It’s pretty small, beyond tiny.

Wes Moss [00:40:29]:
But here’s what starts to get a little more mainstream. Buy sell of a if you own a business with a couple people and the business has a bunch of value, grows, you start, it’s worth not a lot in the beginning. Thirty years later, it’s worth tens or 20, 30, 40, $50 million. And what happens if one of the partners dies? How do you pay out? Now, you can still do that with term insurance, but you’ll see some businesses that will fund buyouts through this. So that’s another potential reason. And then having a guaranteed amount of money coming in, if you have a child, let’s say, that has a disability. So you really want some certainty around that. Again, you can say, well, Wes, you could still fund that in term insurance.

Wes Moss [00:41:16]:
And that’s precisely probably why Clark is at never, because most of these things can still be funded with term. So I’m a big believer in term insurance. It’s so much less expensive. You should be able to take what you would be paying in insurance, whole life premiums and invest it. So buy term, invest. The rest still stands. But the industry really does have its place and at least I want to give it credit for that. All right, Christa, thank you for joining us today.

Wes Moss [00:41:43]:
I’m looking forward to more of our listener questions. So if you have any questions you’d like us to answer in future episodes, I’d love to hear from you. You can send them into us through YourWealth.com contact.

Mallory Boggs (Disclaimer) [00:41:58]:
Hey, y’ all, this is Mallory with the Retire Sooner Team. Please be sure to rate and subscribe to the this podcast. And share it with a friend. If you have any questions, you can find us@wesmoss.com that’s W-E-S-M-O-S-S.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 Disclosure this is provided as a resource for informational purposes and is not to be viewed as investment advice or recommendations. 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. The mention of any company is provided to you for informational purposes and as an example only, and is not to be considered investment advice or recommendation or an endorsement of any particular company.

Mallory Boggs (Disclaimer) [00:42:45]:
Past performance is not indicative of future results. Investing involves risk, including possible loss of principal. There is no guarantee offered that investment, return, yield or performance will be achieved. The information provided is strictly an opinion and for informational purposes only, and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing. 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. Investment decisions should not be made solely based on information contained herein.