ESG Stocks, Replenishing Cash, and Managing Taxes on IRA Withdrawals
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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and today I'm tackling three listener questions with my good friend, Roger Whitney. Number one, why you don't have to invest in ESG companies in order to make a positive impact.

Number two, how to replenish your emergency fund, plus how much cash is too much. And then finally, number three, how to process withdrawals from your retirement accounts while trying to stay below the 12% tax bracket.

This Q&A session originally aired on Roger's podcast, The Retirement Answer Man. If you haven't already, be sure to check his show out and subscribe by going to rogerwhitney.com or by searching for The Retirement Answer Man in your favorite podcast app. With that out of the way, here is my listener Q&A with Roger Whitney. Good friends of the show. And we have Taylor Schulte from Define Financial.

Taylor, how you doing, man? Roger. I'm doing well. It's 85 degrees out here in sunny San Diego. As it always is. So if you want to help me feel more at home, just make fun of me a little bit and then I'll feel like Nicole is here.

Okay. We'll do our best. And you are the host of the podcast, Stay Wealthy. And you work with only people over 50 that are on that journey to retirement. Why did you decide to do that? Well, you know, I spent a lot of time as a financial advisor trying to serve everyone. And I quickly learned that I'm...

probably doing a disservice. The needs and goals of a 30 or 40-year-old are much different than that of a 50 or 60-year-old. And I just really enjoy retirement planning and tax planning and the really nerdy stuff that comes along with higher net worth people in that age bracket. And so we decided just to zone in on people over the age of 50 planning for retirement. And it's really my bread and butter and my expertise and I really enjoy it.

And it seems like, I don't want to oversimplify it, but the accumulation phase of life, once you figure it out, it's pretty, work, make more money,

keep more money, put it into the markets or the appropriate accounts, and then just go repeat. It's not simple, but it's a lot more streamlined than trying to harvest. Yeah. I mean, there's a lot of fancy things you can do in the accumulation phase to increase the odds of your success or boost your after-tax returns. But I always say that in that phase of your life, making money and saving money is going to matter more than just about everything else. Right.

So focusing on making money, saving money, piling it away. And then once you get to that age 50, age 55, you can start to think about more advanced tax planning. Yeah, it gets much more multidimensional, I think. So this month, Taylor, is the theme of estate planning. And that's one of those super important things that never feels urgent, that just sort of sucks to do.

It really does. It's painful. It's painful. So how do you... What's your ninja trick to get it accomplished either for yourself or to help clients visit that? Yeah. So most of our clients don't have really complicated estate planning issues. And fortunately, we found this firm here in San Diego that works just about completely virtually. And they're a higher volume estate planning firm, but they do everything over email and over phone. And they're very fairly...

priced. And it just seems to do the trick for, I'd say, 90%, 95% of our clients. So they don't have to walk into some fancy mahogany desk office. Just get it done. So I did my own estate planning through them. I had a good experience. There's other firms in town that use them. And that's the

It's kind of what we do. But I think the biggest hurdle for a lot of people is finding an estate planner and then getting over the potential cost of doing the estate plan because some of these things cost $5,000, $10,000. So that's how we've solved it. But I know there's some cool companies out there, technology-based companies that are helping to solve this, which will be interesting. I think that's a good point in the sense that almost everybody doesn't have a complicated estate plan nowadays.

And I think one of the barriers, too, is just the thinking through the questionnaire. Who gets my money if my wife and I or my husband and I die in a plane crash? Or who gets, in your case, because you have little ones, who is going to raise my kids? That's a hard- That was probably the hardest part of the conversation. Yeah, the kids. Yeah. And I declined your request of that. I'm an empty nester, dude. I'm not going back. Yeah.

Yeah, it's tough. I mean, the biggest thing is making sure these estate plans are updated because these laws, these tax laws, estate planning laws are changing rapidly. And so if anything, just getting your existing estate plan reviewed, that doesn't need to cost a lot of money or take a lot of time. Most people have an existing trust or will in place. Just get it reviewed by somebody. Yeah, great point. We have some questions from listeners. And the first one's from Carrie.

And I had previously talked briefly about the pandemic and how it's very personal. And they wondered, as society gradually adjusts to the quote-unquote new normal, we may be making different career or investing choices. Do you think working for or investing in ESG field companies will become more common?

as we adjust to this new normal. So I guess first we should define what ESG is. Do you want to define that or I can? Yeah, I mean, we don't dive too deep into this area and I'll kind of explain why in a minute. But yeah, I mean, investing in ESG

environmentally friendly companies. And there's a few different metrics to do that. It's a big trend. ESG. So it's a environmental, social or governance focus. So if you think of environmental, right, you know, whether it's climate change or being a good steward of the earth, social, that's literally, are they good social citizens or are they not? And then governance of how they govern and how they manage internally from a compensation employee standpoint is,

It was interesting, Taylor, when I was reading about this, I read an article, I think it was in The Motley Fool, that used Nike as an example that was environmentally sound. They're good on the climate change and environmentally sound, but they didn't bring up the fact as they went on, if you look at the social and the government's aspect of it, do they pay good wages and benefits and treat their employees well? They didn't bring up any of the issues related to...

the sweatshops and factories in China and so forth. So I imagine that this is going to be a really difficult field to navigate. It really is. And I don't know if you know Colin Roch out here in San Diego, but he's written a lot about ESG. And he makes this really interesting point that nobody really knows what a SYN stock is or a non-ESG stock is. And he uses this example of Exxon. He's like, maybe you hate ExxonMobil and you don't want to own ExxonMobil. But

What a lot of people don't know is that right now, kind of to your point about Nike on the other side of that, right now, ExxonMobil is one of the leading firms in exploring alternative energy. So maybe right now, today, they're not an ESG stock, and maybe you hate them. But what if in 100 years, they're the market leader in renewables? And

you have not been supporting and investing in this company that could be in the future, a company that's producing amazing and positive changes. So it's just, it's so hard to really know what exactly is a sin stock today, you know, yesterday in the future, it's a really challenging place to navigate. So specifically to your question, Carrie, when I think about this, I generally don't from an investing standpoint and I,

I'm not going to argue that that's right or wrong. I just don't because I invest in a very broad base. And I think there's studies on both sides. And we actually need to explore this more on the podcast. Maybe, I don't know if it could be a monthly theme, but explore it with experts on both sides. My view is, in terms of my personal choices in this quote-unquote new normal, and I'm not sure if I like the phrase new normal. We use that after 08 as well. But I think it does accelerate growth.

trends, this new normal, in this case, the pandemic, accelerate trends that were already in place. And a few months ago, or a few weeks ago, I think I referenced, I think it was an IBM study that looked at workplace preferences post-pandemic, and 50% wanted remote work only at home.

And 75% wanted it as a second choice. And so I think of that as far as, okay, remote work means driving less. I don't know about you, Taylor, but it took me three months to fill up my car, which is environmentally sound. And ultimately, I have an office in Fort Worth that I hardly ever go to, even before all this, because I'm fairly virtual to begin with, but that means less office space. And all of those choices come down to rational self-interest issues.

that have all these wonderful side effects potentially. Now, where do you fall in the ESG investing standpoint? Taylor? Yeah, so like you, we believe in buying broad-based index funds. We want to own the entire market. I want to own 10,000, 12,000 securities. I want to own everything. It's not a very active decision to own everything.

everything, right? We call that passive investing. I think that when you take part in ESG investing, you're making an active decision. And when you make an active decision in investing, the odds are that you're going to accept lower returns. It's really hard to act

Yeah.

the best predictor of future returns is the underlying cost of the investment. In other words, lower cost investments have a higher expected return than higher cost investments. So by investing in ESG, you're making an active decision, which I don't like in the first place. And then second, it costs more to do it. So I'm going to expect a lower rate of return. And I kind of like your point about

things that you can do in real life to make an impact on the world. I almost think using broad-based index fund investing to get a higher rate of return and then use that higher rate of return to do something with that money that's meaningful to you. You're going to have more of an impact there than buying a stock in the secondary market.

So that's how we approach it. Very few people I talk to are willing to accept higher fees and lower returns just to invest in ESG. They just feel like they can do that in other places. Yeah, it's interesting because as you're talking and I think about it, and I don't have any research on what performed, whether they lagged, but the higher fee end of it, that may be okay if it's a conscious choice. We vote our conscience in a lot of ways.

where it creates more friction for us, but we're willing to accept that to express our views. And I can think of a couple examples of after '08, I only worked with credit unions. I moved everything to a credit union from a major bank. I just was disgusted with the financial system, the big financial system.

Many people may be disgusted with other areas of the economy. I owned a position in Amazon personally. I sold it mainly because I get disgusted with Amazon. But I'm not congruent there because I still use Amazon because it's so convenient. But I didn't want to be an owner of it. So I get lost here. But I think the key is, if it's really important to you, invest in ESG. There'll be a little bit more expense. It may lag a little bit.

it's important to you. Yeah. Just remember that companies like Amazon, when you and I invest in the public markets, we're buying stocks. We're buying Amazon stock in the secondary market. And companies like Amazon are not going to the secondary market to raise capital. They don't need...

our money to fund their operations. So when you go buy Amazon stock, it's just this kind of transaction from your hands to somebody else's hands. Again, we're not really funding Amazon's operations by doing that. So I think to your point, like you could make a bigger impact by just not purchasing things from Amazon. But they deliver it the same day, Taylor. Yeah.

Yeah, Amazon's a tough one. I don't know how you'd ever get rid of Amazon. You know, not filling up gas at ExxonMobil, a little bit different. You can make choices there, but yeah, Amazon's a tricky one. I don't know if that helps, Kerry, but this is at least some of my views and Taylor's views on it. Now, Joel Taylor gets to a more practical question. This is an important question, and this is on replenishing a rainy day fund. So we live in turbulent times, which is, to me, is sort of like the new normal. It always feels like we live in turbulent times.

But these do feel a little bit more turbulent, which is what everybody says when they say that throughout the ages. But he's very disciplined. He has a three-year rainy day fund, a liquid bucket of assets to invade in retirement. And then he's wondering, well, in the worst case scenario, if the economic recovery takes three years and he ends up debunking

completing his cash reserves in retirement. Well, how the heck do you replenish the rainy day fund before another calamity hits during retirement? And this is a 30-year issue. So he's built up three years of cash for rainy day fund. I'm going to assume that's for three years of consumption. Well, when you need that rainy day fund, how do you replenish that if you don't have an income? Do you have any thoughts on that?

Yeah, I have a lot of thoughts. There's a few things in here I think that are really important for us to highlight. The first is stock market downturns are much shorter than most people think. There's never been in a single point in history, just going back to 1926, which is as far back as we can have accurate data.

We've never experienced a catastrophic loss in the market that's lasted three years. The single worst time in history was the Great Depression, and that lasted 34 months from the time the market turned negative to the time it got back to even again, 34 months.

So not even the Great Depression did we see a 36-month or three-year time period where you would have exhausted all your cash. I mean, the Great Recession, the second worst economic crisis, only 16 months. The crazy thing is, or the hard part is, is that when we're in the thick of these things, even in Q1 of this year, it just feels like eternity. It feels like the world's ending. It's never going to end. It's never going to end. But when you go back in history...

And Dimensional Funds has a great chart on this. When you go back in history and really look at it, these things don't last as long as you think. So that's the first point that I wanted to highlight. Yeah, I think another important point here is, and this is where I fall apart with even withdrawal rates or whether it's systematic or dynamic withdrawal rates, is people don't operate that way.

If you are in a car and you're heading in a safe direction, and as the road unfolds, you realize there's a cliff on the horizon, you don't just keep driving up to the edge of the cliff. You iterate. You slow down. You make a move.

You make a right turn. You alter your course. And I think a lot here, Joel, is that, right? You have three years of cash reserves. The premise in your question is that you deplete those waiting. Well, you're not going to likely deplete those fully while waiting. You're going to make alterations to your course. In my practice, the way I think of it, Taylor, is I want to know, I think of them like tripwires. You have the most important, safe, essential needs to have a good life. And then you have

your wants, your more discretionary spending, and then you have your even more discretionary spending. And if life unfolds with calamity after calamity, you have three years reserves for all of those. Well, if calamity strikes trip prior one, you start to make decisions and stop some of the...

slow down some of the discretionary. And then if the calamity continues, you continue to slow down your discretionary because your base needs should represent a good life without discretionary. And then that three years actually becomes, say, five or six years, depending on how many...

big the layers are. Plus, you can do other things. But I think the key is this is iterative. I think that's a really good point. And I think we can all think about this year, Q1 of this year, going through COVID, I didn't spend nearly as much money as I normally would have. We're not going out. You mentioned filling up gas. Now, I know this is totally different than anything else, but it's always different. I don't think in the Great Depression, people were going out to eat and going to the

movies and traveling as much. So they were probably spending less. Yeah. I call it the COVID dividend. Right. Yeah. It's what all that non-spending assuming we stay away from Amazon, which I was, I've been good at, I haven't really bought much at all.

The other thing I wanted to mention is, assuming Joel's a retirement investor, my guess is that, Joel, you also own bonds in your investment accounts in addition to stocks. I've not met a retirement investor that just owns 100% stock. So you've got three years in cash, and then you have your investment portfolios that have a percentage in bonds. I'm an advocate for only owning US government bonds. I don't know, Joel, how you invest in bonds, but when stocks go down...

big and have catastrophic losses, government bonds historically have gone up. And we saw that in Q1 of this year where government bonds were up 7% or 8%. But regardless, the hope is at least hopefully you own high quality, safe bonds. And I would count on that part of your investment portfolio as part of what I would call your war chest to lean on during difficult times. So you've got three years of cash, and then you have, let's say, 30% to 50% in bonds. Like

That's way beyond any textbook planning recommendation. And to me, it seems pretty sufficient, especially when we look back at these major, major events. Yeah, I think ultimately it feels more at risk because we don't have the income, but you have a lot more control by just staying awake at the wheel. So I think just the fact that you're thinking about it, you're going to navigate it. I remember when the pandemic hit, because like you as a retiree, me and Taylor as a business person, and

human and dealing with our own finances. It was about cashflow. And what we did when the pandemic hit right at the end of March, right when we were at the bottom, we had 15 minute conversations with every single client and all we wanted to focus on, okay, let's look at where our cashflow is and how this is segmented out so we know what our runway is.

And that's probably what you would do, Joel, if the next calamity hits. You're going to constantly, okay, what's my runway and what power do I have to control that? So hopefully that helps. I wonder if we should just quickly answer his actual question of how to replenish it. Oh, yeah. I guess we should maybe answer your question, Joel. Yeah.

rather than pontificate on all this other stuff. Yeah. I think it's simple, right? Like if you start exhausting your rainy day fund, yes, it's a priority to start to replenish that. And I personally think it's as simple as when the time is right and it's necessary, you systematically rebalance your investment accounts. And rebalancing simply means you're selling the things that have gone up and buying the things that have gone down. And maybe instead of buying the things that have gone down, you've

You just take those sale proceeds and you replenish your rainy day fund. So it doesn't need to happen all at once, but I would systematically rebalance, replenish that rainy day fund and continue on your investing course. Yeah, and a couple of other things you can do, Joel, is one, I like that idea and that's what we do. Two is things generally don't go straight down

I mean, just think of March was a horrible print on your statement. And then June, we pretty much made it all back up in extreme quick time. And at the time of this recording, we don't know if there'll be another leg down or not. But when you get that...

breath after the big fall and things rebound to some extent, then you can take action to do the kind of rebalancing Taylor's talking about. Another thing you can do is in your investment allocation, this is focus, maybe lean a little bit more towards things that are throwing off naturally income and not reinvesting them. When we're accumulating, we just naturally reinvest everything. And I generally am a fan of that.

But if you are investing and you have more dividend-leading items, you can create this current to help you replenish. Even if you're rebalancing back into it, you're not just naturally rebalancing. And lastly, depending on age and preference, I'm going to say it bluntly, but it's a good one. Get a job. Get a part-time job. Life is happening and you really feel at risk. Working just a little bit

doesn't just give you the extra money. It could be literally making a couple hundred bucks a week doing something. That will, one, take up your time, two, bring in a little bit of money, and three, have you moving forward and help you retain agency when we feel like the world's just acting upon us. Because I think a lot of that navigation is,

having power to do something. So hopefully that helps a little bit. Thanks for inviting me, actually. Having some responsibility and obligation to society, I think feels good for most people. So I like that. Now we're getting even more technical. We went from ESG to replenishing. Now we're getting into tax brackets. So our next question, Taylor, comes in the form of story problem. Remember that? You liked story problems in college? Yeah, I did, actually. I still do. You still do? Well, good, because I got one for you.

So this is from Larry, and he likes the show. I always like to say that. We're glad you found it too. He says, here's his question. He's married, and he would like to start taking out money from pre-tax accounts, say IRA, of $80,000. And he's trying to stay in the 12% bracket. And we had talked about how capital gains and qualified dividends are taxed differently than income at a previous show. And he wanted to know, does that mean we could have adjustable tax

income of $120,000 if $40,000 is comprised of dividends. So I think the premise, and Taylor, you pointed this out when we were discussing it, is that could you take out more from an IRA if a lot of that was actually from dividends? Yeah, so I don't think it matters how

How you got that $80,000, how you accumulated that money in the IRA doesn't matter. It could have been dividends and capital gains and growth and all that stuff. That's irrelevant when it's coming from an IRA. Everything inside of that IRA, it grows tax-deferred. You don't pay taxes on capital gains or dividends anymore.

as that IRA grows. So it doesn't matter how you accumulated that wealth inside that account. When you take $80,000 out of that account, it's just taxes, ordinary income, just as if you earned it in the workforce. So if dividends were a part of that, it's kind of irrelevant. It doesn't really matter. It's not that $40,000 of dividends you might've earned

in that IRA are not stacked on top. Yeah, so that's an important point. It doesn't really matter the source of the money in the IRA from returns, contributions, or capital gains. It's going to be income when it comes out. Now, to pile on this question a little bit, if we think through this, what if you have after-tax assets where you're generating qualified dividends and you still want to fill up the 12% bracket? So let's assume that $40,000 in dividends

dividends is in an after-tax account, you could take out $80,000 in this scenario as a married couple and

and have it be taxed in the 12% tax bracket because your ordinary income, which the distribution from the IRA would be, is taxed first, and then they look at capital gains and qualified dividends and such. So even though the whole comprised more than the top of the 12% bracket, you should be okay there. Now, we'll qualify this in that Taylor and Roger are not CPAs, and we don't give tax advice, but from doing some research and practice, this is our understanding.

I think one of the things for listeners to think about in addition to this question is, and I'm sure you've talked about this on the show, what type of investments you're putting in what type of accounts, right? What type of investments are you putting in your taxable accounts and what type of investments are you putting in your IRA accounts? We call this asset location. And asset location is really important.

when you get to this withdrawal stage of your life and how all these different things are taxed. So we don't need to go into the details today, but think about asset location. Think about what account you have your stocks in and what account you have your bonds in because it comes into this equation for someone like Larry when he's at this stage. The other thing...

Larry, I think that will help you is, yeah, it's going to end up being a year by year decision. But once like for us anyway, once we know how much we need from financial assets for, I say, a client for Larry. So if Larry, if you're 60 today, it

And we know you need $100,000 to live on and you're going to have, say, $20,000 of that covered by a pension. And then the other $80,000 has to come from your financial assets of your investments of whatever. What we'll do is we'll map out how much has to come from your financial assets over a five-year period. So each year, how much you're going to need, that's not covered by other income sources.

And then we'll look at, basically do a five-year tax projection of what your estimated ordinary income is going to be for each of those five years. Because when we go to figure out where are we going to draw the money to cover that deficit, then you can start to play with these numbers, not just on a year-by-year basis, but sort of map out a plan of, okay, over the next five years, these are the accounts that I'm going to draw from to try to

optimize the tax end of it. That's a really good point, Roger. I don't know if you experienced this in your practice, but do you see clients wanting to take money out of their IRA accounts first versus their taxable accounts? It just feels like those are their retirement dollars and they want to spend those first and they want to protect those taxable dollars. Do you experience that? No, generally the default is I built up all this after-tax money

To preserve it. Because I think the mantra is always, especially in the accumulation phase, defer, defer, defer, defer taxes. Right. So generally, no. If they have after-tax assets, they drain those first and then go to other sources. Right. That's the textbook answer, right? And it kind of gets what you're talking about and having a plan to drive where your withdrawals are taken from. But I just find that

clients have a hard time spending down those taxable accounts first. They've always viewed that as kind of their liquid savings bucket. And it just feels weird to start draining that bucket. And I'm not saying that they don't do it. It's just a little bit of a hurdle to get over in the beginning because they're like, well, I have this 401k or this IRA. That's where I should be taking money from in retirement without thinking about some of the tax consequences and the most efficient way to create income in retirement. That's interesting because I have the exact opposite.

This is why I love working with people over the age of 50. I love all these different pieces. You start thinking about higher RMDs. You start thinking about opportunities like Roth conversions and QCDs and charitable giving strategies. There's just so many things you can do between the age 50 and 70 to save a ton of money on taxes. I'll tell you as an advisor, you told me this. This is how I feel. As an advisor, there are very few things

where I can say, we did this and this is what it made you, right? You know, a CPA, when they find something that you're not deducting, I just saved you X amount in taxes and it's hard dollars. We don't have that when we're dealing with markets and life and everything else. So I like this part of it because I feel like it's like mowing the lawn. You can see the result when it's done very quickly. Yeah, really something tangible to grab onto. Yeah. Well, thanks for hanging out with me today. You didn't make fun of me and I appreciate that.

You can find Taylor at Stay Wealthy on the podcast and Define Financial in San Diego. He's a great guy, very smart. Where else can people find you, Taylor? Yeah, youstaywealthy.com. You can learn more about the podcast, find everything there, shoot me an email. I read and respond to everything. I've learned a lot from you, Roger. I appreciate you having me on. This is a lot of fun and I'd love to have you on my show one of these days.

Awesome, man. Be well.