The Top 11 Questions a Financial Advisor Gets

Every week, clients ask us: Should I pay off my mortgage or invest? How much do I really need to retire? Is now the right time to start?

If you’ve been wondering the same things, you’re not alone.

Financial advisors Alec Sunners and Jackson Courtney answer the 11 questions they hear most often.

What’s Covered:

• Debt vs. investing: When to pay off loans first (and when to keep them)
• Roth IRA vs. traditional IRA: Which one makes sense for your tax bracket
• Market timing: Why time in the market beats timing the market
• How much you need to retire: The 25x rule explained
• Investment adjustments: When to shift your portfolio as retirement approaches
• Tax reduction strategies: How Roth conversions can lower your lifetime tax bill
• Part-time work in retirement: Financial and emotional benefits
• Inflation protection: Keeping your savings from eroding
• Market volatility: How to handle downturns without losing sleep
• 401(k) rollovers: Pros and cons of moving to an IRA

If you have questions about your situation, schedule a free 30-minute call to discuss your retirement goals.

Transcript

As a financial advisor, we get a lot of questions. Today, we’re going to walk through all your most-asked questions. 

Here’s how a true comprehensive wealth advisor should think about them.

Thank you for joining. My name is Alec Sunners. I’m joined by my colleague, Jackson Courtney, and today we’re going to go through the top questions a financial advisor gets.

Should I Pay Off Debt or Invest First?

So let’s get started. Should I pay off debt or invest first? That’s a great question, and it’s going to depend on the kind of debt you’re talking about. High-interest-rate debt (like credit cards or personal loans), typically you’re better off paying those first, and then after those are paid off, start investing. But it’s also going to depend on what the interest rate is, right? 

So lower-interest-rate debt can have some benefits to keeping that outstanding, then investing money first and paying off debt second if the interest rate is low enough. 

Also, some kinds of debts like mortgage or home opening line of credit will have certain tax advantages for keeping those outstanding. 

Those are great points. We see people who come to us and they have mortgages that are 2.75% or 3%, and that might be a piece of debt you want to keep because your investments, even your money market rates are higher than that debt in terms of interest right now.

Roth IRA vs. Traditional IRA: Which Should You Choose?

Another question we get a lot: Should I have a Roth IRA or a traditional IRA? Well, really we want that flexibility, so we’d like our clients to have both, but the underlying part of the question is, what should I be contributing to? 

It’s really a toss-up. It depends on a couple of things. First is availability, right? And for some people, they might not be able to contribute to a Roth IRA because of what their income is, so they have to do non-deductibles and things like that. 

Let’s just start with the difference between the two. A Roth is after tax, meaning you pay tax on the contribution now, or in other words, you don’t get to deduct the contribution now, so you pay tax on that money. But later down the road, if you meet a bunch of different requirements, then you can withdraw that money completely tax-free. 

The flip of that is traditional, which is what we call pre-tax, so you can deduct the contributions now. I make a $7,000 contribution to my traditional IRA, then I get to take $7,000 off of my income on my taxes. Well, that’s a good thing, but you want to think about where tax rates are going to go in the future, right? 

So if I pay a lot of tax now, and I know in the future that my tax rate is going to be much lower as I stop working, it can be a huge benefit to do traditional because later in your life, you’re not going to be paying as much tax. So you can get the tax deduction now and not pay as much tax in the future. 

With Roth, it’s the flip. If I know I’m going to be having a pension, a Social Security in the future where my income is the same or even higher than what it is now, then I might want to take that tax deduction later and pay the tax now on the Roth contributions. 

So it really depends on what kind of tax bracket you’re in, and traditional and Roth can help in different situations, so we like to have the flexibility between the two.

And I think a good answer to this is combining doing both IRA contributions and a 401(k), so then you can do both Roth and pre-tax, and you sort of get the best of both worlds, and it’s going to depend on what tax bracket you’re in, what you expect tax rates to be at when you’re in retirement. But having a combination gives you more flexibility.

Is Now a Good Time to Invest? Understanding Market Timing

So, next question (this is a good one): Is now a good time to invest? If I had a dollar for every time I got this question, even as a young advisor, I would already be rich. And I think the best answer to this is no one has a crystal ball, right? If someone says to you, “Yes, you have to invest now, you’re going to get this rate of return,” or “No, you can’t invest now, the market’s going to tank,” they don’t know just as much as you don’t know. 

So there isn’t ever a best time to invest, but what I will say is that typically your time in the markets is going to beat trying to time the markets. What that really means is the longer you’re invested (the longer you have money in the markets going both up and down) is going to beat you trying to buy in at the lows and sell at the highs; because when you try and time the markets, you have to be right twice. 

It’s already hard enough to be right once, but now you have to sell at the high and buy at the low. And that’s really hard to do. So my suggestion is always just time in the markets will beat out timing the markets. 

That’s right. Markets have a lot to do with retirement at the end of the day, right? You have to have your portfolio set aside to be able to handle your withdrawal needs in the future. So that leads us into our next question.

How Much Do I Need to Retire Comfortably?

How much do I need to retire comfortably? Well, the simple answer is we don’t know. We can drill down on numbers and we can use complex scenario tests. But a good rule of thumb we like to think about is 25 times your annual spending. 

When you’re retiring, you’re probably 60, 65. That’s typically when clients start to come to us. And we know for a fact that clients often live into their 90s or even upper 90s these days. Healthcare is better, people’s general life expectancy is longer, so we have to plan for that. 

We use more complex tools to analyze this, but you have to think about a few things. You have to think about your lifestyle and the longevity that you want, you have, and you want to live. If you’re going to be spending a lot, you’re going to need more. If you’re going to live longer, you’re going to need more. So you have to think about these things in that scenario. 

And you have to think about what kind of retirement income you’re going to have. If you have pension and Social Security and a part-time job, you’re not going to need as much because you have more income coming in every year. So, we can kind of take a scale almost and say, what are my needs, longevity, and lifestyle? And then on the other hand, what kind of incomes do we have coming in? Pension, Social Security, a part-time job, investments; you kind of have to balance the two. 

And you also have to think about when one person asks, “How much do I need to retire comfortably?” that might be $5,000 a month. Someone else, their comfort might be $10,000 a month. So that’s also going to dictate how your lifestyle will have a big impact on how much you need to retire comfortably.

Should I Adjust My Investments As I Get Closer to Retirement?

Next question: Should I adjust my investments as I get closer to retirement? And the answer is going to depend on what your investments look like now versus what your goals and objectives are in retirement. 

If you are close to retirement and you’ve got a hundred percent of your portfolio all in high, large-growth stocks, yeah, you’re likely going to want to make a switch to get some more, less volatile investments in the portfolio. It’s going to just depend on what your goals and objectives are, as well as what income do you have coming in.

We have clients where all their spending is covered by Social Security and pensions. And their goal in life is to generate as much return as possible to leave that money to their children or other heirs. In that scenario, they can be more aggressive with their investments because they don’t need the money. 

Whereas if someone’s coming to us and saying, “Hey, I don’t have a pension. I have a little bit of Social Security, but I’ve got a really big 401(k) that I’m going to live off of.” In that scenario, you likely will want to be more conservative because that portfolio is your life. The income for the rest of your life is going to be drawn from that portfolio. And if you’re too aggressive in that portfolio, that can lead to a dangerous situation in the future where that portfolio is down 20% and now you’re taking withdrawals and you’re locking in that loss. 

Whereas if you’re a little bit more conservative and let’s say stocks are down 20%, but you have some money on the side in cash or money market or very safe, low-yielding funds, you can sell those off first for your income and let the stocks recover. 

So it’s always going to depend on what your retirement goals and objectives look like. 

That’s right. And we just did a webinar where we talked about the sequence of return risk, where if you have too aggressive of a portfolio going into retirement, how that could potentially be detrimental; not in every case, but in some cases. So go check that out if you haven’t already.

Should I Delay Retirement to Boost My Savings?

The next question: Should I delay retirement to boost my savings? Well, sure. If you like working, but there’s a bunch of different aspects to retirement. Only one of those is financial. You have to think about what you’re going to do in retirement because if you retire to something you don’t enjoy or you don’t like doing, we see people who don’t like the mental aspect of retirement or the emotional aspect of retirement. 

So the same is true for if you’re going to continue working. If you’re going to continue working, enjoy what you do. If you’re just doing it for financial reasons, then check out the projections. If your projection is telling you you could retire comfortably, don’t force yourself to do something you don’t like doing. 

But really it comes down to the projections and exploring what a downside scenario looks like with very conservative returns. It takes analyzing what kind of incomes you’re going to have between pension, Social Security. But continuing to work does a lot of things for you. 

A, it delays the drawdown that you’ll have to take from your portfolio. It increases the amount you have in your portfolio if you’re able to save over and above your expenses. And it increases potentially what you’re going to get in Social Security because it’s your top 35 years of earnings. So if your first year of earning was when you were 20 years old, 35 years ago, then you can almost guarantee that the income now is going to be higher than that. So you bump out that lower amount of income, you put in the higher amount of income, and now your Social Security benefit is higher too. 

So it depends on a bunch of different things, but don’t delay just to delay. If you enjoy working, we encourage it. If you don’t and your retirement projection looks good, it looks like you could have a comfortable retirement, then in most cases, we’re telling people to consider retiring. 

And I think in this scenario, there is the correct financial decision on one end and the correct emotional decision on the other end. And the correct answer is likely somewhere in the middle.

Is Inflation Going to Erode My Savings?

So our next question: Is inflation going to erode my savings? And I think, again, I’ve gotten this a lot, especially in the last couple of years, because we have seen inflation tick up. 

And the answer to this question is going to depend on how your investments are laid out. If you are someone that has just been sitting on the sidelines (you’re all in cash because it’s a safe investment, you’re actually getting a return on your cash now), well, if you continue to stay in cash, the inflation is going to erode your savings, right? 

There are two types of return. You have your real rate of return and your nominal rate of return. So your nominal rate of return is just the strictly gross number you’re getting. So let’s say you’re all in a high-yield savings account earning 4%. That is your nominal rate of return; you’re getting 4%. Well, if inflation is 3%, your real rate of return is only 1%. So if those rates for your cash start dropping and inflation stays elevated, your savings will be eroded. 

So the best tool to protect yourself against that is to put that money into other investments in a diversified portfolio where you can get return from different areas of the market so you can keep that real rate of return higher than what you need to take out for withdrawals. 

Right. And over the time that we’ve analyzed the markets, the last 100 years or so, we’ve seen that stocks have been the best way to hedge against inflation. And what’s the reason for that? A lot of it is because inflation is higher than earnings might be higher. So we think that at the minimum, we at least want clients to have a little bit of stock exposure in our portfolio because like you said, fixed-income investments oftentimes can be eaten up by inflation or if inflation runs high.

How Can I Reduce Taxes in Retirement?

The next question we have is a big one: How can I reduce taxes in retirement? Well, there’s a bunch of different ways, but what we want to focus on here are Roth conversions. And this is really kind of an oxymoron almost because Roth conversions cost tax up front. But in the long run, they really can reduce your tax exposure. 

So what’s important about a Roth conversion to analyze? Well, first of all, what bracket are you in now? Second of all, what brackets do we want to fill up? If you’re in the 10%, do we want to fill up the 10%, maybe even the 12%? And then also, how long do you have to do these Roth conversions? If we can convert money over the next five years, and then after that five years, then maybe you’re withdrawing Social Security or you’re taking out required minimum distributions, then that could be a period where we take those five years, we make Roth conversions. And then in the long run, that significantly decreases the amount we’ll have to take from RMDs in the future. 

So it’s all scenario by scenario, but taxes up front now can really help in the long run. And another thing I heard recently in another webinar that I thought is important is that we’re at some of the lowest rates in taxes that we’ve ever seen. So you have to think about that. If the tax rates are historically low now, then what are they going to look like in the future? Or could they potentially be higher? Maybe. 

So you want to think about Roth conversions. You can kind of model them out sometimes. That’s what we do. But Roth conversions can be a great tool to reduce taxes in the future. 

Yeah, I think they do a great job of reducing long-term taxes. I think we’ll discuss this opportunity with some people and they say, “I don’t want to pay all that money up front. That’s a lot of taxes. What do you mean I’m saving taxes?” They really have to be strategic about it and look at the long-term picture. What does that money look like after a long period of time? 

Right. And in some cases too, as we’re getting closer to clients’ life expectancies, we start to look at what are the tax rates of your children? If you’re going to pass money on to your children, then Roth IRAs can be one of the best tools because Roth IRAs go to your children, they’re inherited, and they still don’t have to pay tax on the withdrawals. So it can be a great tool for your heirs as well.

Should I Work Part-Time After Retiring?

Moving on: Should I work part-time after retiring? And this ties into, should I delay retiring? So working part-time, I think, can really dramatically improve a client’s situation if they’re willing to work, if their initial projection looks a little iffy. 

So I think a lot of times people will say, “I need to retire. I can’t do it anymore. I need to not be working.” Well, when they look at their projection, we might say, “Well, there’s a good chance you’ll run out of money if you retire now.” And I think that that comes as a shock to a lot of people where they don’t have enough retirement savings, but they’re just completely burnt out from working. 

And a lot of times part-time employment is the answer. And you don’t need to be doing part-time in what your career was, but part-time somewhere can dramatically improve a retirement picture because you’re now getting income in through a paycheck or through contract work that you can now not touch that piece in your investments. So if you’re just getting paid $30,000 a year, well, after tax, now you’re looking at, you can keep at least $20,000 in investments you would have had to draw if you weren’t doing that part-time work. 

So I think that on the financial side it can really impact someone’s plan. On the emotional side, if someone says, “I have a 99% probability of success in retiring and never running out of money. Should I do part-time work?” And I think emotionally getting someone out of the house in a routine is very important in retirement. 

And part-time work doesn’t have to be that answer. But if you’re someone that’s a “go, go, go” type of person, a part-time job at Home Depot or doing a garden, something you love, volunteer work. Getting out of the house and having a routine, emotionally and mentally, can have a huge impact on retirement. 

Right. So not only working after part-time and retirement, but just being active in retirement is a great benefit. That’s non-financial, but it has a huge impact.

How Do I Handle Market Volatility?

So let’s talk about another thing that’s very mental, very emotional: market volatility. How do I handle market volatility? Well, we’ve talked about it in other webinars, but a lot of times we can limit market volatility just by adjusting our investment allocation. 

So oftentimes we’ll have clients come to us and they talk about things they can’t stomach. Can you stomach what happened in 2000, 2001, 2002? Can you stomach what happened in 2008? And if the answer is no, you probably shouldn’t be allocated 100% to stocks. So you want to keep your allocation in line with your emotional and mental feelings about drawdowns and volatility. So we want to design the portfolio to the point where clients aren’t up at night thinking, “Is my portfolio safe?”

But a lot of times we hear people talk to us about things they hear in the media. A lot of the media is shock and awe, really grabs your attention, and wants you to make a decision. But a lot of times in investments, that can be more detrimental, like you said, than just having more time in the market. 

So don’t just sit by yourself and think about things you hear in the media. Come talk to a professional and get their input on it. If the professional is calm and collected and they give you good information about the portfolio and how it would limit potential downturns and volatility, then that might help you sleep better at night. Knowing that a professional is extremely educated and experienced throughout different markets, that could help you also deal with market volatility.

Should I Roll My 401(k) Into an IRA?

So coming to our last question: Should I roll my 401(k) into an IRA? And I think this is a question we get very often because a lot of times people come to us when they’re about to retire. They’ve contributed to their 401(k) all their life and they say, “Okay, what do I do? I have an IRA. I have a 401(k). Where should I go?” And the answer is going to depend. There’s pros and cons to both the 401(k) and the IRA. 

A 401(k) generally has stronger creditor protection. If you’re on the younger side, if you’re over 55, under 59½, you can take penalty-free withdrawals from the 401(k), which you can’t do on the IRA. 

And on the IRA side, there is a much wider range of investment options. There’s more flexibility with an IRA. And the big downside to an IRA is in some states there isn’t as strong creditor protection as the 401(k). 

But we’re actually doing a full video on this next month about all the different things you should be thinking about when you consider rolling a 401(k) into an IRA. So stay tuned for that. And we’ll go more in depth on the best option for your 401(k). 

I really appreciate everyone tuning in for this. This is one of our most requested videos, just answering the top questions we get. So we might be doing this again in the future. 

If the questions change in the future, let us know. We want to hear all the questions you have and answer them in upcoming videos.

Thanks, everyone, for watching. If you have any more questions for us, you can always reach out to Jackson or myself. Or if you’re already a client, you can reach out to your primary advisor. 

If you’re not already a client and you’re interested in becoming one, we’re going to throw a QR code up on the screen so you can scan and schedule a free 30-minute intro call with us, where you can discuss questions about this specific video. Or if you’re interested in working with us, we can tell you about who we are, what we do, and how we can best serve you. 

Thanks, everyone, for watching. We’ll see you next time. 

Thanks, everybody.