How Does IRA Once-a-Year Rollover Apply to Joint Return Filers?

In this episode of Motley Fool Answers, Alison Southwick, Motley Fool personal finance expert Robert Brokamp, and Motley Fool Wealth Management planner Ross Anderson answer listeners' investment and financial questions. They cover topics such as the folly of timing the market, spending money on financial advisors, the financial aid and tax implications of Roth IRAs for young investors, when to hold for growth and sell to reap benefits, and much more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on June 30, 2020.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick, and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool. Yeah, I was going to try to come up with something on-the-fly but then nothing came, so whatever, it's fine. Hey, it's the June Mailbag episode, and we're joined this week by Ross Anderson; he's a planner with Motley Fool Wealth Management. Bro.

Robert Brokamp: A sister company of The Motley Fool.

Southwick: All right. You could've been a little faster there, but that's OK. Yeah, so we're going to answer a bunch of questions, like we do every month; you know the drill. All that and more on this week's episode of Motley Fool Answers.

Hey, Ross, thanks for joining us.

Ross Anderson: Hey, guys, thank you so much for having me.

Southwick: So where are you coming to us from?

Anderson: I am at home in Fairfax, Virginia, where it feels like I have been planted for quite a while, but not too far from Fool HQ.

Southwick: Did I see correctly that you had a party on your, like, a socially distanced, looks like, party on your driveway yesterday?

Anderson: Correct. Yeah, it was Saturday night, but yes, we decided that the community just needed a reason to get out of their houses. So we played some music out in the front and neighbors just kind of walked around in the street, and it was a lot of fun.

Southwick: You had all of these lights going off. It looked pretty amazing, so.

Anderson: ... yeah.

Brokamp: When you say "play music," does that mean you played your drums or were you the DJ?

Anderson: No, it was just recorded music. I was not playing drums for people. That would have scared the neighborhood away.

Brokamp: [laughs] I think it would be quite awesome, quite awesome.

Southwick: [laughs] Ross, just out there with some bongos, just like, "Hey, what's up neighbors? Come have a chat." Like, the widest drum circle ever, like, 10 feet between people banging on drums.

Anderson: I'm into it.

Southwick: [laughs] Yeah. Thank you for joining us. So I guess we can just get into it then.

Brokamp: Let's do it.

Southwick: Let's do it. Our first question comes from Josh. "Let's say. I missed all the events going on. I feel like the market will plummet again soon. Is it feasible to take everything in my Roth IRA and just move it into a money market fund? I wouldn't be taking money out, just rebalancing my portfolio to be all cash, with the idea that stock prices plummet and my money is safe, then rebuy the same stocks at a later time."

Brokamp: Well, Josh, logistically there's no problem with that. You know. Because it's in an IRA, you won't pay any taxes on whatever you sell. Philosophically however, I'm not as big of a fan of the plan, because what you're trying to do is be a market timer. We're not big fans of that because, frankly, just few people are successful at it. Now, maybe you are successful. Maybe in 2008, you knew to get out of the market, and in 2009, you knew to get back in. Maybe this past February, you knew to get out of the market, and on March 23, you knew to get back in. If you have that kind of record, outstanding, keep doing it and maybe send me some tips along the way. But the vast majority of people are not able to predict the ups and downs of the market like that, so I wouldn't try it.

That said, I don't want to dismiss your concerns. Count me among the people who think that maybe the market has gone a little too far too fast, especially with the risk of maybe parts of the economy shutting down again as we fail to, sort of, keep a lid on coronavirus. So if you want to take a little money off the side, I don't think there's any problem with that. But just given my personal situation, as someone who doesn't plan to use his money for the next, at least, 15 years, I feel very confident that the stock market will be higher then. I'm not going to try to time it before then. So we at The Motley Fool generally fall along those lines; buy, hold, then sell when you need the money within three to five years.

Southwick: Next question comes from Frank. "My wife and I were recently going over financial goals and plans. Before getting married, I was always a pretty good saver, had no debt, and built up sizable brokerage accounts. My wife still had some student loans, more retirement savings than me, but a smaller brokerage account. In terms of income, she makes about 30% more than me but has a much higher tendency toward frivolity with her income than I do. She is insisting that we see a financial advisor to build our plan, but I'm not personally convinced that we need to spend the money on it, mainly because I've done pretty well for myself at this point. What can we expect to get out of it, do we need to see a person, or are there inexpensive robo-advisors we can use, like Betterment?"

Anderson: Hey, Frank. So I think the main question here is getting to what you and your wife would want to get out of the process. Sometimes people come to see us, and simply when I say, "Hey, why are we here?" They don't have a particularly good answer for that. I kind of think about it like, you know, if you're going to see a doctor, you can go see a doctor for an annual physical and just, kind of, get a check-in on what are your vital stats, how are things going, you know, is there anything that might be a red flag that you're not noticing yourself but that the advisor might be seeing. The other reason you go to a doctor is because there's an acute problem: You've broken your leg, you need attention right now. And so, people tend to come to advisors for a couple of those reasons, but figuring out what you would want out of the process, I think, is really step one before you would even choose how to engage with somebody or whether it's an online service.

Things like Betterment or some of the other tools that are out there, and even the tools that we use professionally, they're really just fancy calculators, right? The tools that we use as financial planners are there to help us do the math, to help us model out situations, but that's not really the advice component. What we're doing as advisors is doing our best to understand the client, the goals, the path that you're currently on, what you're doing, and if there's any blind spots that you're missing.

And so, I think, if you do choose to engage with an advisor, having that sit-down discussion before you even go in on what you're trying to accomplish or what would be a win from seeing an advisor, whether that's just a pat on the back -- hey, we're on the right track, we're doing everything perfect -- or whether that there's some decisions that you and your wife aren't maybe agreeing on right now in your finances and you're looking for a bit of a tiebreaker. Wherever you are, I think having that discussion at home and figuring out your hopes for the conversation is going to be just as important as engaging with somebody and seeing what you get out of the process.

Brokamp: Yeah, I'll add to that last point. I mean, just based on the way the question was phrased, it seems like there's some disagreement about how to spend the money and whether something actually is frivolous or not. And if you have a financial planner who says, "All right, what are your goals? Okay, this is how much you need to save." And then, once you've done that and you're saving that, then you could be free to spend the money in any other ways, and it's not -- you know, if someone is considered frivolous or not, it doesn't matter, because you're on pace to save enough for your goals.

Anderson: Yeah, I mean, I think the way you even set up your household can impact this. And you know, some people will disagree with me on why we do this. But my wife and I don't even look at each other spending accounts, because quite frankly, I don't want to see what she spends her money on. And that's not because I think she's spending too much of it. Just my values on where I would put discretionary cash is just different. And so, if she wants to spend some money on a yoga class or something else that I might not do personally, like, I'm fine with that, I just don't want to see it.

And so, it's more of a, you know, how you manage your household, I think, really matters here. And there's a lot of different theories, whether it's just one joint account and we just kind of agree on it. Some people have, kind of, a threshold number where we're going to talk about it before we spend X number of dollars. But figuring out some of those how-we-make-spending-choices questions, may be really important here.

Southwick: Yeah. And maybe she might think you already have enough drums and equipment. So you know ...

Brokamp: ... or a tuba ...

Anderson: ... hey, now ...

Brokamp: ... don't you have a tuba?

Anderson: Yeah, we have a tuba.

Southwick: Talk about frivolous.

Anderson: [laughs] Yeah, I know. She has a tuba; I just bought a new electric drum set so that I don't bother the neighbors. Yeah, we've got plenty of noisemaking stuff in the house.

Southwick: [laughs] All right. Next question comes from Levi. "My sister-in-law is 15 and has a job as a waitress. Using a compound interest calculator to show her what a little amount could be worth when she's 70 has convinced her to start investing." Aw! That's wonderful. "Would a Roth be the best way to go? If so, what tax implications would there be? Also, when it comes time for college, would it cause a problem with financial aid?"

Brokamp: So I love this for so many reasons, right? Levi is convincing his teenage sister-in-law to invest and she's smart enough to listen. So that's awesome. I would say, just in terms of the question, in terms of what she should choose, the Roth is the way to go, right? She's probably, and I'm aware she's a waitress, but she's probably in a lower tax bracket. With the Roth, you don't get a tax break today, but tax break doesn't matter much to her, because she's in a low tax bracket. The investments grow tax deferred in the sense that you don't pay taxes on capital gains, interest and dividends year by year, but then when you take the money out, it's tax free. So the Roth is the way to go.

In terms of how retirement accounts affect financial aid, they're not inputted into FAFSA, which is that form you fill out when you're applying for aid for college. So you don't have to worry about retirement assets. She doesn't have to worry about it, and her parents' retirement assets won't go on it either. If she takes any money out during those years, though, that will count as income and count against her for financial aid in the following year, but as long as she leaves the money alone, putting money in a retirement account does not affect her financial aid.

Southwick: Next question comes from Bill. "My wife and I were recently discussing whether to add some buys to our brokerage account, and she raised an interesting point. If the goal is to buy and hold, then it feels like we're just locking money up to grow, but we never get to spend and enjoy the fruits. The growth and increased wealth are nice but doesn't mean much if we never get to use the money. We also have IRAs and 401(k), so this account is not our retirement saving. It's the age-old question about when to sell, but instead of looking it as a pure investment strategy question, it's about figuring out and understanding what the overall goal for these investments and their proceeds should be. Only then can you decide whether to hold on for more growth or sell some to get the benefit of the savings and growth you've achieved. Do you have any insights or wisdom to suggest about tackling this topic?"

Anderson: So I think Bill is asking the right question here, and he's really describing the process of what needs to happen in his question. And you know, if you were trying to ask a map where to go, you need to have the destination first, you can't necessarily just look at the map and, [laughs] you know, look at the streets and find a path because of that. And so, when to sell should be a function of what your plans are. So many Foolish investors that I've talked to in the past, end up in this -- they're almost treating their stocks like a collection, and they don't want to part with any of them because they've fallen deeply in love with the management of these companies and what the business does and just the general story. The portfolio should be there to serve you, not the other way around. And so you should be directing it and not just seeing what happens. But that starts with a discussion of what do you want those funds to do for you?

Now, you kind of mentioned something that I would poke at if I could ask a follow-up [laughs] question here, which is, that it's not your IRA or 401(k) money. The fact that it's a brokerage account means you have access to it before age 59.5. That doesn't have to mean it's not for your financial independence -- which I'll use, really, in lieu of "retirement." Plenty of people, if they want to retire before that age 60, having some taxable brokerage money is a great way to do it, because it's generally difficult to get some of the money out of 401(k) and IRA investments. There are ways to do it, but it's much more complicated. But it sounds like what you guys need to do is really sit down and talk about what you would like to do with the investments that you've accumulated and then start to put together a plan.

And generally, for me, I think about derisking within a three- to five-year time horizon, but this is really specific, because I think this is important here. The more flexible you are on the date of the goal, the more leeway you can have, right? If you said to me, "I need to spend money on June 1 of 2022." Well, then, we need to be pretty aggressive about starting to derisk, because over any two-year period in the market, you could have a lot of uncertainty. If you said, "Hey, listen, the goal is June of 2022, but if the market is not good, we can wait a year, that's no big deal." Well, then, in my mind, you don't necessarily have to be quite as aggressive about when you're derisking the portfolio, because you're giving yourself the flexibility to allow stocks to recover. And your average recovery from a bear market is going to be 12 to 24 months in most cases. And so if you've got some flexibility in what your plans are, you don't need quite as much rigidity in the portfolio itself, but the more solid that date is, the more certain that date is, I think you need to be much more disciplined about starting to take some risk off the table as you're getting within really that that three- to five-year window.

Southwick: I am in my 40s, early 40s, and I just have a hard time even imagining what my point on that map even is. It's like, well, I know we want to pay to put our kids through college. So we have that goal and we're good, we're on track. But then it's like, and I guess I want to retire one day, and I don't know where. I mean, do I want a house on water? I don't know, like, it's so hard to really ask yourself these questions that are 20 years down the road.

Anderson: Certainly. And, you know, as you're getting closer, you'll have more clarity there. But I think the first one you mentioned, putting your kids into school, that's a fairly firm number, right? I mean, assuming you don't have to repeat a grade at some point. You know, by fall of X year you know you're going to be writing some tuition checks. And so, through that logic, I'm generally fairly aggressive about starting to derisk 529 plans, you know, age 13, 14, 15. You know, let's start really backing down how much equity exposure we have, because you are getting close to needing that money.

Southwick: Next question comes from Speedy Joe. "I know if I withdraw from my IRA and redeposit it into another account within 60 days, there will be no penalties, and I can only do it once a year, and I have to report it on my tax return. My question is, how does that once-a-year rule apply to people who file a joint tax return? Can my wife and I withdraw and redeposit in the same year? I am thinking of doing this to combine my accounts into Vanguard, as we are close to retirement, and I'm too cheap to pay the brokerage house's $75 transfer fee. By the way, I just watched the whole Avatar series, it was great, and I'm reading the comic now."

Yay! A recommendation of mine. I love it. I'm glad you loved it Speedy Joe. I love it too. Although, I need to read the comic, because I need to find out what happened to Zuko's mom.

Brokamp: All right. So with that said. So to answer your specific question, the once-per-year rollover rule applies to individuals. So both, you and your wife can do the once-per-year rollover. And by the way, it's a year that's measured by 12 months = 365 days. So it's not a calendar year. I do want to point out that a lot of people think anytime they move money from one retirement account to another, that counts as the "once," and that's not true. So if you do a direct rollover from, like, your 401(k) to an IRA, that doesn't count as one time. If you're doing a trustee-to-trustee transfer from one IRA to another IRA, that doesn't count. It is when you actually get the check and it's made out to you that's the once-per-year rollover. And you can do that once every 12 months.

Now, this year they have this new thing that if you have suffered some sort of a hardship related to the coronavirus, either related to your financial situation or your health, you can take out something called a coronavirus-related distribution, and you can put that back in another retirement account within three years. You don't pay the 10% early-withdrawal penalty. So if you qualify for that, that is one way to get money out of the current IRA to a new IRA.

Another possibility is that sometimes, when you move money to another financial services firm, and you say, listen, to move money, I'm going to have to pay a $75 transfer fee, they will cover that fee for you. I don't know about Vanguard. I did a quick googling, I didn't see that they would, but talk to whoever you're working with, and they might cover that fee for you.

Southwick: All right. Next question comes from Len. "I'm at the age where I must take required minimum distributions from my traditional IRAs." Hey, Bro, this is your favorite topic, why aren't you taking this question?

Anderson: [laughs] Because Ross chose it.

Southwick: All right. "It occurred to me that these distributions are like the "will need" funds that you caution about not risking an equity investment, say, five years' worth." Oh, we just got done talking about that. "And I should cash out from my equities what I estimate to be my RMDs [required minimum distributions] for the next few years. Is this correct?"

Anderson: Yes, it's going to sound like I'm walking back what I just said in terms of creating that safety net, but the RMD is a little bit interesting to think about. And I'm going to give you, kind of, my most aggressive version of this, if this is where you wanted to be, I'm not telling anyone to do it like this. But the required minimum distribution, the value that you have to take out is a multiple. You divide the account based on your age, and there's an IRS table. And so, for most people at age 72, it's about 3.9% of the account value. Well, if you are letting the account float, if it's all in stocks, and let's say all those stocks go down, well, then you're doing 3.9%, roughly, of a smaller account value. So the RMD tends to flex up and down with your account. So if stocks are down, they're going to force you to take less out.

The next thing that happens is what you do with that money. Now, if you take the money out of your IRA and it goes into your checking account and then you spend it, then, I think you're correct. I would protect that money, because that's in that five years' worth of needs. If you're saying to yourself, hey, listen, I don't really need the IRA money. I'm going to take my distribution. I'm going to pay the taxes, but the rest of it, I'm just going to put back into a brokerage account and reinvest it. I don't think you need as much safety there, because the reality is, you're going to be potentially taking money out of stocks when they're low and then buying them back low a couple of days later. So to me, it really depends on what you're doing with that required minimum distribution. It has to come out of the IRA. If you're using that money, then yes, I think you should be protecting it just as if that's money that you will need, as you're stating. If you're not using that money and it's going back into investments, I don't think you have to be as aggressive about derisking that particular piece, because you do have the ability to reinvest those proceeds just in, kind of, another bucket or another account.

Brokamp: Yeah, I agree with that. And just to remind everyone that the CARES Act passed in March suspended RMDs for this year, so you don't have to do them. Some people are like, "Well, I already took mine in January, can I put the money back?" As of last week, the IRS has said, you have until August 31 to put the money back. So if you took your RMD, but you don't need it, you still have a little while to put the money back in the account, and it's like it never happened.

Anderson: Absolutely. And the age changed to 72. The SECURE Act, which was passed, basically right at the beginning of the year, changed the RMD age from 70.5 to 72. So for folks that may have missed that, that law has changed as well.

Southwick: Next question comes from Gayle. "I'm a longtime Stock Advisor and Rule Your Retirement member, and I recently listened to the Answers podcast about real estate and REITs. Matt Argersinger boasted about the impressive past return for REITs, but I was hoping he would talk about the future prospect for REITs in light of the changes brought about by the pandemic. We hear that more people will work at home, thus less office space needed, and that many businesses will close, especially in malls. That makes me wonder if REITs, like VNQ, become riskier, as more buildings are likely to sit empty in the future. Bro, do you still recommend the same percentage of our portfolio in REITs?"

Brokamp: Right. So VNQ is the Vanguard REIT ETF, which is in that Rule Your Retirement model portfolio, and I own it, like everything else, in the Rule Your Retirement model portfolios. So the allocation to REITs in those model portfolios is 4% to 5%, depending on which portfolio you're looking at. So it's not a whole lot, and I'll likely still keep it that way. However, I understand your concerns.

So let's just take a look at the Vanguard REIT as an example of investing in REITs, and you'll see that there's, sort of, good news and there's worrisome news. So for the good news, it's very diversified, it's diversified across 183 companies and invests in all kinds of REITs. So you're talking about office REITs, like you pointed out, office space, but also residential REITs, hotel REITs, healthcare REITs, public storage REITs, all kinds of REITs. So I feel comfortable with that diversification.

That said, a good 20% of it is in retail, office, and then I'll throw in hospitality in there too, so hotels and places like that. So that's a bit worrisome. It's also become more concentrated. So 50% of the assets are in the top 10 companies with the 15% of the assets in two companies. And that is American Tower and Crown Castle, these are REITs that basically invest in cell towers and they have done fantastically well over the last year or two or so, which is great for the Vanguard REIT ETF, but it means, it's become more concentrated in these companies, and they are not cheap whatsoever when you look at, like, price to sales or price to earnings; these are very expensive companies.

So it's really two questions for me, and that is, will real estate, generally speaking, be more valuable 5, 10, 15 years from now? Five years from now, I don't know, it could be tough. But I feel pretty comfortable saying that 10 to 15 years from now, real estate, broadly speaking, will be more valuable and continue to have a good yield. Good thing about REITs is they pay out a lot of their income, the Vanguard REIT right now yields 4%.

The other question is, question No. 2 is, is the dire news about retail and office already priced in? The Vanguard REIT ETF is down 16% this year compared to the S&P 500, which is down just 6%. So they have taken a hit. Maybe the future closures of offices and retail space is already priced in, and I don't have an answer for that. What I do think is that, we live in a country where the population is growing, the economy is growing, so I think real estate, as a group, 10, 15 years from now, will be worth more and continue to pay out a good cash flow. So for that reason, they'll continue to be in the RYR model portfolios and I will continue to own them.

Southwick: The next question comes from Matt. "My wife has a decent amount of student loan debt. When we got married, her monthly payments increased because we were now in a different income bracket. Because of that, we have been looking for ways to reduce this debt or pay less interest. One thing we heard about was possibly using a home equity loan to pay off the student debt. Is that a wise decision? Is there something I'm missing? Is there a better option?"

Anderson: All right, Matt, so I think that there's a couple of things that I'm going to assume based on the questions. And No. 1, if the payments went up when you guys got married, it sounds like your wife was probably doing the income-based repayment program. The way that they calculate how much you pay back as a result of that program is based on your tax return. For some couples -- and I've actually done this in the past -- it makes sense to file separately, married filing separately, versus jointly, because it would keep your income off of your wife's tax return; it would keep that separate. Now, you may lose some tax breaks, it may cost you more in taxes, but if you still wanted to suppress that payment or you wanted to stretch that debt out further, that's certainly a possibility.

But let's go to the other side of that and let's assume that you would like to continue just paying it off as fast as possible. Then what we're talking about is, yes, where can you get the lowest-cost money to pay this off, so you're paying less in interest over time, whether that's to reduce the monthly amount or simply to pay it off faster?

I do think if you've got good equity in your home, there could be a number of ways to utilize that to pay off some of this other stuff and consolidate. Now, what you want to be careful about is that you're not necessarily creating a new problem for yourselves. When you say home equity loan, what I would be looking for is a fixed product or even a cash-out refinance where you take some of the equity out of your house and refinance your whole mortgage into one more flat payment. The reason for doing that is that we're hoping that you're doing a locked rate or a fixed-rate loan and that you're not exposing yourself to potentially higher interest rates in the future.

If you're using a home equity line of credit or a HELOC, most of those are going to be a floating or a variable interest rate. And so, yes, you could pay it off now, and if interest rates spike -- which I don't necessarily think they're going to do in the next few years; the Fed sounds like they're going to keep interest rates suppressed for the next few years -- but you do have more risk there of that payment eventually going back up on you. So yes, if you've got enough equity in your home, that you can use that money and basically get access to very inexpensive lending right now, I think that probably makes some sense.

Southwick: Next question comes from Kenneth. "I read Bro's great article about Coverdells and 529s ... " All right, Bro, you get one right every now and then it sounds like.

Brokamp: Every once in a while.

Southwick: "I have a bit -- OK, a lot -- of student loan debt. Rates are now at 0%, and on an income-based repayment plan my payment is way less than I can afford. Can I now contribute to a college savings plan and use the proceeds to pay off federal student loans? Thanks."

Brokamp: Well, Kenneth, I'm glad you liked the article. The article was published in Stock Advisor. So if you're a Stock Advisor member or Fool One member you can read it there. What I think is the main point of the article, I compared Coverdells and 529s. And I feel like Coverdells are really an underappreciated college savings account, especially for Fools, because with the Coverdell, unlike the 529, you can invest in individual stocks. So that's kind of the point I was making in that article. If you're not a Stock Advisor member, just go to SavingForCollege.com, look up the Coverdell, and you can read about it there.

The 529 does have some advantages though. One is, much higher contribution limits. You can only contribute $2,000/year to a Coverdell, whereas 529, it's practically unlimited; it's not really unlimited, but certainly you can contribute hundreds of thousands depending on which state you're in. But the other benefit of the 529 is that you can use up to $10,000 -- it's a lifetime limit -- to pay off school loans. You can't do it with the Coverdell, but you can do it with 529.

So it sounds like what Kenneth is saying is, since his school loans now are like a 0% interest rate, why don't I instead of paying that down more aggressively, do the basic payments, invest some extra money in a 529, hope it grows, and then take it out of the 529 to pay off the debt?

And so, generally speaking, I would say it's not a bad idea. I mean, whenever you're making the decision between paying off debt versus investing, paying off debt is a guaranteed winner, investing has uncertainty. That said, if the interest rate really is 0%, that's a pretty low hurdle. You don't have to earn a whole lot on your investments to overcome that hurdle. So I generally like the idea of what he's doing, do it in the 529, just be aware that there are some risks and that the lifetime limit is $10,000.

Southwick: Okay. Next question is from Mary. "When I was a young pup 401(k) investor in the spring of the Great Recession, I heard somewhere that target-date funds were to be avoided. I don't remember what the criticisms were, but it stuck with me, and I basically avoided them in my own investments Now, I'm beginning to invest for my husband in IRA and Roth IRA accounts with one of the robo-advisors. My husband has a much more conservative investment profile than I do, but he's also a few years younger than me. (We are bookends to 40.) As I was reviewing the Vanguard mutual funds this morning, I ran across several of their target-date funds, I also noticed that their expense ratios were about a third of the other Vanguard mutual funds. So here are my questions ... " Are you ready, Ross? "One, are target-date retirement funds a good option, especially for an investor with a lower risk tolerance?"

Anderson: All right. So I know there's a number of questions here and we're going to get into a couple of things, but let's start with the first thing, which is that a target-date retirement fund doesn't necessarily mean it's more conservative or more aggressive. What target-date retirement funds are trying to do is create what's called a glide path. They're supposed to be derisking. And we've talked about this a couple of times and I'm going to go even further into it this time. But as you're getting closer to the stated date of retirement, which is when they assume you're going to start drawing from the money, they are getting more and more conservative. So a mix from your risk assets, like, stocks and potentially REITs, to more conservative assets like cash and bonds. And they're making that choice for you. So the percentage that they're going to have between stocks and bonds, it's just kind of based on their model, and by the time you hit that retirement date, you're there.

They are a good option for a set-it-and-forget-it type of investor that doesn't want to make an active choice on starting to derisk the portfolio, but they're not, by their very nature, more aggressive or more conservative than any other investment, it's just that glide path is kind of what you're getting out of them.

Southwick: Next question. "I'm hoping we will have a decades-long retirement after we retire around 65 to 70. So I was also curious whether using the target-date fund series as..." oh, my favorite word "...tranches to invest and draw down throughout retirement makes any sense, such as, 10% in a 2040 fund, 30% in a 2045 fund, 30% in a 2050 fund, and 30% in a 2060 fund or some other distribution. Makes sense?"

Anderson: So I think what you're getting at is probably the first criticism that I personally have of these funds, which is that not everybody has the same drawdown period or even the same intended drawdown period when they get to retirement. So in theory, a 2050 fund should be serving somebody that's retiring at 2050 through those tranches, right? It's supposed to be doing that for you, but your situation may not match what they've kind of built that fund to do. So I don't know that I would be.. if you're going to be that specific about trying to layer out what percentages you're going to spend in those years, I think you've got just as much capability to actually just figure out what you want in your mixture between risk assets and non-risk assets, because it sounds like you're doing a lot more of the heavy lifting versus just letting the fund make that choice for you. So I would be much more specific about what I think I'm going to spend, and continually adjusting my portfolio. If you're already thinking that way of creating those tranches, because that's really what you're going to be doing with your "non-risk or lower risk" assets.

Southwick: Maybe I should just start shouting tranches instead of stocks, I don't know, they're both so good. Okay, next question. "If we use target-date funds for my husband's investments, does it make sense for him to invest in any other stocks or mutual funds?"

Anderson: So we get all sorts of questions that are, kind of, similar to this. "What percentage should I have in ETFs or funds versus individual stocks?" And I don't think that there's a right answer here. I do believe that there is room in many portfolios for some mixture between a passive investment like an index fund and some active stock picking. Most of our platform at Motley Fool Wealth Management is built on the idea that we've got portfolio managers that can look at companies and find great businesses that we want to be invested in. That's similar to the philosophy of The Motley Fool more broadly. So we tend to like stocks here. We also believe [laughs] index funds are a very valid vehicle for getting some stock exposure. That mixture, for any one person, is really going to be up to thier -- that I think is a little bit of a risk tolerance question, and then also, how do you want to engage with your finances? Some people get really excited about this stuff, and we love those people. Some people just don't want to be dealing with this day to day. So that mixture, I don't think that there is a perfect right answer on what should be in an index fund or even a mutual fund and what should be in individual stocks, but I think that's going to be up to the comfort level and how you want to interact with your portfolio.

Southwick: And last question from Mary. "On the platform, I was comparing these funds. The 2045 fund had an expense ratio of 0.15%, but all the other funds had expense ratios of 0.14%. Where is the extra 0.01% coming from? Is this just another life tax paid by the cusp-of-Gen X Millennials?" Hey, shout-out to my fellow Gen X Millennials. Just fall right in the middle there.

Anderson: [laughs] So you know, I took a look at these two funds, Mary is right. So there is a small price difference between the two. And I actually think I looked at the wrong year. I looked at 2050 versus 2035. The main difference that I can see is that the 2035 from Vanguard had about $37 billion under management in that fund. The 2050, and I think the 2045, are much smaller. 2050 had $20 billion, so a little bit more than half. And I think that that's why Vanguard is showing slightly different pricing there. You know, ultimately, when we're talking about a 100^th of a percentage point in dollars, that's probably not going to be a huge, huge difference, but this is the other big criticism that target-date funds get. So let's get into it.

Target-date funds, the expense ratio you're looking at is not the all-inclusive fee. This is a fund built from other funds. So when you buy the Vanguard target-date 2035, you're paying them 14 basis points, so 0.14%, to manage that target-date fund. And then what is inside it is a bunch of other Vanguard funds that also have their own expense ratios. So you end up, kind of, paying in two layers for the target-date fund. One for them to figure out what is that mixture, what should be the ratio of stocks and bonds and how much is going to be in international and those types of things. And then the other fee is still going to Vanguard, because it's more Vanguard product that is building the underlying chassis. And so when you're looking at an expense ratio on a target-date fund, that's not necessarily an all-in thing.

Now, with Vanguard, this isn't as big of a concern. They are, obviously, a huge, huge shop. They manage trillions of dollars; they are enormous. But what used to happen, and people used to see, is maybe some fund families stuffing a few, kind of, gross, maybe not super-great mutual funds inside their target-date funds, right? If they were out in the open market, they couldn't get somebody to buy their commodity fund, because maybe it wasn't best-in-class, but then people in the target-date fund, well, they don't get to choose which commodity fund they're using. So they just stuff that thing in there, and they raise some assets for it. That, to me, is where that these get a little bit questionable, because you're not really saying, "What's my best option for real estate, what's my best option for bonds, what's my best option for international stocks or U.S. stocks or small cap?" It's just, kind of, cobbled together for you and you got to hope that the family you're dealing with, the fund family you're dealing with, has done a good job of putting high-quality and low-cost assets into their target-date funds. Again, of all the ones that are out there, I think Vanguard is probably a safe one. But that's where some of those criticisms come from is that you're buying a fund of funds and it's making a choice that maybe you would prefer to make actively.

When we're working with people -- and I know this is getting into a lengthy answer, but there were a lot of allocation questions. So I'm sorry, Mary, I'm going to keep expanding to answer your particular question. I really like understanding that need from each client on how much do we think we're going to take from the portfolio. And there's a common example where that number might be heavy early on. If you're retiring at 60, for example, and let's say, you're going to file Social Security at 67. Well, your drawdown in those early years might be kind of a lot because we're expecting Social Security to pick up later on and start carrying more of the burden for you. Well, your allocation should actually be more conservative early in retirement, and then as you're getting to where Social Security kicks in, maybe we can accept more equity risk. We're not putting as much strain on your portfolio-supported income.

The target-date funds aren't really going to account for things like that. And quite frankly, a lot of advisors don't as well if they're using more of an age-based system as opposed to a needs-based system. So that's really what I think about as a planner is where's the money going to come from, what are the different resources we have available, and building something that's really going to serve that well.

Southwick: All right, Bro, you ready to bring us home?

Brokamp: I'll do my best.

Southwick: All right. It's from Jeff. "I am a very long-term member of Stock Advisor, Rule Breakers, and Rule Your Retirement, plus a few other Fool services. Love all the guidance and help in becoming a confident investor. Thank you." Oh! You're welcome, Jeff. "I'm retiring in July." Congrats. "I have an IRA diversified according to the in-retirement model portfolio and a five-year cushion with my first year in cash, which have been very helpful, and I can enter retirement with confidence that I'm going to be OK, even entering it during a global pandemic. The question is, what do I do with that cash in my IRA to get the best return? It's a huge amount of money to just sit there, and my E*TRADE account does sweep it into a money market, but that only earns a bit under 1%. A year ago, it was earning 1.9%, and I was good with that, but now that it has shrunk, I'm hoping there's a way to invest that cash safely and earn a bit more."

Brokamp: Well, Jeff, congratulations on your impending retirement, outstanding news, and glad that we played at least a little part in that. To answer your direct question, I don't have any good news, I mean, the bottom-line is, cash is just not paying what it did six months ago, a year ago. I'm glad that you are not accepting just the -- in many brokerages, they put you in a cash account that pays you nothing, and either E*TRADE or you have specifically made the effort to find something that's at least paying you almost 1%, and that's what everyone should be doing. But unfortunately, there's really no other alternative to that that doesn't also involve more risk.

But that comes to a broader question. You mentioned that you're using the in-retirement model portfolio. That's a split of 60% stocks, 40% bonds, you have that five-year income cushion. So any money you expect to spend in the next 5 years is in cash and bonds. So you're playing it pretty safe. What you might want to do with the other part of your portfolio to sort of compensate for the fact that your safer investments are not going to yield as much, is take a little more risk -- not a whole lot more risk, but maybe a little more risk. And do it gradually, you don't have to do it all-at-once, you can, maybe, over the next 12 months basically become a little more aggressive.

I believe, I may have mentioned in a previous episode that Jeremy Siegel now thinks that the classic 60/40 portfolio should be more now 75/25, because the returns from cash and bonds will be so low. Tilt some of that money that wasn't bonds and cash toward dividend-paying stocks. So I think that's what I would consider doing rather than moving your cash to something that's riskier. Keep the cash, but then maybe getting a little more aggressive on the stock portion.

Ross, you have any thoughts on that? I know you folks in Motley Fool Wealth Management make these types of decisions all the time.

Anderson: Yeah, I mean, this is a conversation I'm in constantly, you know. And the idea of even things like negative rates keeps coming up in the news, where potentially would even cost investors money to keep cash. You know, I do think that we're already in an environment where cash and conservative bond portfolios probably have a negative real return. And so, I constantly get the question, well, why would I use those things if I'm going to have a negative real return or close to a 0% return, and the answer is, because it's there for a purpose.

So I think you're doing the right thing. Try not to get discouraged that the cash is yielding so low; that just happens to be the environment we're in. You're also seeing that respond in other ways. Equity valuations are moving, kind of, as a result. And where people put their money in global markets is one function of where they think it's going to do best, but it's also based on a lack of alternatives. Equities are sort of the only game in town for attractive rates of return, and as long as that continues to be true, that should be good for the stock market, which is an interesting way to think about this.

But I think you're doing the right things in terms of the decision you're trying to make; you're looking at what the alternatives are. Unfortunately, there is no good risk-free trade right now, but that's OK. Don't let that convince you to do something else with that safety-net money. And that's going to allow you to, as Bro said, you take the risk, or an appropriate amount of risk, with your longer-term assets and still do as well as you possibly can.

Southwick: All right. Ross, thank you so much for joining us today. So this is airing on The Motley Fool's birthday. So I want to say Happy Birthday to The Motley Fool. We have a pretty big announcement over on Fool.com today, so you might want to go check it out. I also want to thank everyone who sent in video messages for The Motley Fool's birthday. I actually received more than I could use for the huddle today, but the good news is that we have our all-company retreat coming up, so I'll be able to share them with Tom, David, and the rest of the company then. Oh, my gosh! You guys, some of the videos were so good, they made me, like, tear up, they are so good. I can't wait for you to see them.

Okay. Also, Alexander listened to our episode about Robinhood traders, and he was disappointed to hear that you, The Motley Fool Answers show, lumping all Robinhood investors into the same category, as not resourceful, impulsive, and worst of all, lowercase foolish. As someone who uses Robinhood, Alex was worried about us disparaging young investors and turning them off.

I did replied to Alexander via email, but I did want to clarify on the show that we don't believe that all people who use Robinhood are young and dumb investors. We think that Robinhood is a tool, and we hope that it'll help empower more people to learn how to invest, and we also hope that all of those young people don't get turned off from investing entirely if they get burned by day trading.

Bro, do you want to add anything there?

Brokamp: No, I think actually Robinhood has done a lot of good by getting people into investing and making it easier for people. They are pioneers of no-commission trading. So you know, anything that gets people investing is great. Obviously, our concern was the people who were day trading or just holding on to a stock for a week or so. But even if you're doing that, starting out with a little bit of money, you'll learn quickly the things that work or don't, and hopefully, that sets you on the path to being a lifelong investor.

Southwick: Yeah. Marie emailed us in early June and was upset that we were talking about real estate amid the Black Lives Matter protest instead of addressing economic opportunity, generation wealth, and other topics tied to financial inequality.

So I want to thank Marie for writing to us, and we're going to try to do a better job of tackling these issues in the future. Hopefully you've already seen evidence of that on the show.

All right. Well, I think that covers our mailbag. Ross, I want to thank you again for helping us tackle all these questions.

Anderson: Such a pleasure. Thank you, guys. It's always a good time to be able to answer some of these questions. And, yeah, love it.

Southwick: All right. Well, come back again, huh! I think you have to. All right. The show is edited, belatedly, by Rick Engdahl. You know what you did, Rick.

Our email is [email protected]. For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!