Target date funds are one of the most popular investment options inside a 401(k), but are they actually the right choice for your retirement plan? In this episode of the Wise Money Show, we break down how target date funds work, when they make sense, and when building your own diversified portfolio may be the smarter move. We also answer a fan question about choosing a later retirement date to take on more risk, and whether that strategy really works.
Season 11, Episode 25
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Transcript: Are Target Date Funds a Wise Choice? What To Do When They Aren’t
It’s time for Wise Money with Korhorn Financial Group with certified financial planners Kevin Korhorn, Mike Bernard, and Josh Gregory.
Segment 1: Welcome to another episode of the Wise Money Show with Korhorn Financial Group, where every week we’re helping you take your next wise step in your financial life. Thanks for being here, friends. My name is Mike Bernard. I am your host. I’m also one of the certified financial planners on the program. And with me in the KFG studio is my business partners and fellow CFPs, Kevin Korhorn and Josh Gregory. Target date funds are a common investment option in most 401ks, but how do you know whether they’re appropriate for you? And if you decide they’re not for you, what strategies do you use instead? We’re answering questions like these that came from fans of the show on this episode of Wise Money. Yeah, you pretty much, you know, I remember when they became a thing. You know, that boy, that dates you. you know that I remember a time when you could look at a 401k and the investment options and there wasn’t a dozen or so target date funds and now I I would argue and Kevin you might be able to uh fact check me on this. I feel like every plan has target date funds. Yeah, it’s it’s a staple it feels like. So the question is when are they the right fit? When are they not? And if they’re not, what do you do instead? Uh, we’re answering just questions from fans of fans of the show. Starting with that one. If you have a question for the program, we’d love to hear from you. You can call or text us 574222000. That’s 574222000 online. Wisemoneyshow.com is where you can find us. Leave questions there. That’s where actually the majority of the questions we’re going to hit today have come from. But then all over social media, wherever you’re at, we are there as well. Just search the WiseMoney Show on YouTube. We get a lot of questions there and then other venues on social media. Just just look us up. Uh, okay. So Kevin, you’ve said before that your investment allocation or how you invest your money. If if we were to arm wrestle over, well, what’s the biggest, most important, most impactful financial decision that you’re going to make in your lifetime, it’s your asset allocation. So how you invest your dollars, your 401k, your wealth is critically important. whether you believe it’s the number one, you know, and and top answer or two or three, it’s critically important. And so therefore, how, you know, whether you should use target date funds in your 401k or if they’re not the right fit, knowing what to do instead, uh, you know, that’s that’s, you know, absolutely absolutely a fundamental question that each of us that are contributing to the 401k have to answer. So, we’re starting with that backdrop. Here’s the question from Erica. She shared you’ve shared that target date funds are not the best investment strategy. I wouldn’t I wouldn’t say that but but you could you could take that. Um but who says we have to choose our actual retirement date? Interesting question. What if I chose a target date fund that’s 10 years or so beyond my retirement a age? Does that provide the risk that I me might need over the long term while still giving me diversification that I’m looking for? if not help those of us who don’t really understand investments to know what the other options are. That’s a fabulous question and again multiaceted. So let’s start with what what’s target date fund? How does it how does it how do they work? Well, a target date fund is a pre-mixed formula with different and it’s one fund and it’s basically a fund of funds. So within that one fund, I’ve got an asset allocation and it’s going to be based on the year that it this uh in theory it matures. And it’s kind of it’s kind of confusing a little bit because you some target date funds are to that specific date. So think the plane lands on that date. So if it’s way out in the future, then today it’s going to be more aggressive and have more exposure to equities. But when I get closer to retirement or on that date, I should see something very conservative. And it can be confusing because when we’ve seen some pretty amazing down markets, we’ve seen target date funds, people that have retirement, you know, if you had a 20, there are people today in 2026 that have 2025 target date funds and they could actually see losses in those accounts if the market went dramatically in the wrong direction. So, it’s a little confusing because you think, well, once I hit my target retirement date, I should be in safe mode. But the truth is, most people from the time they retire until the time they leave this earth, there’s a pretty decent amount of time. And so, for that time period, you need to have some exposure to equities. So, okay. So, what are pros and cons? Because Erica starts with, and I’m not taking exception to it because I I I mean, I’m not a fan of target date funds, but there there are pros and cons. So, she starts by saying, “You’ve said they’re not the best investment strategy.” Well, it it’s going to depend. It’s a great place to start. It really is. And and I would say one of the main advantages is Kevin, just like you said, it’s it’s it’s already pre-fabricated. You do need diversification. Don’t put all your eggs in one basket. And and for many people, I I don’t know how to start or what that mix should be. And so, a target date fund helps get you there. I I mean I’ve got so doctor said I need more protein and so I I do a protein shake where I’m mixing my own stuff but then I did get in this habit of buy I don’t know if you ever had that uh oats overnight. Oh delicious. Are those similar to overnight oats? Yeah, maybe. Is that is that what they call it? I don’t know. Josh renames stuff all the time. Now now I’m renaming things. Okay, my bad. No offense to that great brand. However, you just rip the pouch open. It’s already got the the right concoction of sugar and then sugar and then more sugar and then sugar and sugar and then some protein and then a little bit of oats. I’m just kidding. But but here’s the thing. So, it’s a great I can just tear it open and I throw it in the milk and I’m good. I don’t need to overthink it. However, I actually don’t know the ingredients. And so, that’s both the pro of target date funds. I I get it. It’s I just rip the pouch open and target date fund has what I need. However, you don’t fully know the ingredients. So if you are trying to be lighter on the sugar or more on the protein, you actually don’t control it, right? That in that pouch there’s 20 grams of protein. I have no idea how many added sugars. But if you want to have more control over those ingredients, then that’s where target date funds fall down. So when you think of a target date fund, think of an automatic transmission. It’s just going to shift as you push on the gas versus a manual transmission. And you say, “Well, why would I have a manual transmission?” And if you’re below 40, 40 and below, you probably don’t even know what a manual transmission is because they they stopped making them. You know, I grew up with three on a tree. And so you you had to know how to shift. Well, with a target date fund, you don’t know how you don’t have to know how to shift. When is it when’s when’s it a good idea or when should I consider it? If I’m just getting started, if I’m 25 and just getting into the 401k and I don’t have any money in there, I’m The journey of a thousand miles begins with the first step. My first step might be into a 2065 target date fund. Yeah. And so I say, “Hey, I’m going to start accumulating some money there.” There’s another pro. Depending on the investment choices you have in your retirement plan, you might have a decent target date fund and some of the other uh choices if you were going to build your own might kind of be stinkers. Okay, I’m smiling right now cuz you guys don’t throw anything at me. But yeah, I I’ve got a I’ve got a friend who’s got uh more than a million dollars in her 401k. It’s all in target date fun and and I I’m telling her to keep it all in target date fund because when I look at the other ingredients, they’re stinkers. Yeah. Too much sugar and too much fat. And like I like you can’t build a diversified mix and I’ve looked under the hood of that target date fund. I’m like, “Okay, this one is actually pretty decent.” That’s an important distinction to make because a lot of times people just assume that the target date fund is made up of all the same investments that you would be choosing yourself and that’s not necessarily the case. This is it’s prepackaged as we’ve been saying, but it’s prepackaged with the mutual funds that that company selected. You don’t always know what’s under the hood other than maybe a list of some of the key names or whatever. And so I yeah to me this idea of you use the analogy Kevin of an automatic transmission versus stick shift essentially. And the only difference though is these target date funds they only shift down in the level of risk. they don’t really shift back up over time when it’s strategic or or whatever it is on a prescheduled as as time goes on. You get closer to retirement and therefore whatever the conventional wisdom was that was baked into that target date fund. It is on a pre-planned schedule to reduce the risk down to a certain level by the time you get to retirement. And what Erica’s cleverly saying is, well, if it gets too low in risk, lower than what I would really want to be at retirement, what if I just pick a a target date fund that pretends that my retirement is out 10 days 10 years later, maybe? Yeah. So, in other words, when you get to age 65, um, you know, you might still want to be investing more like a 55year-old. That’s effectively what she would be pulling off with her strategy. I I’ve I’ve done it. I’ve helped clients do it. Sometimes that target date that you would use if it makes sense that using a target date fund is appropriate. Then then the next question is well what target year? It doesn’t always have to be the year that you think you’re going to retire. There could be strategic reasons based on the risk and the asset allocation where you might want to pick a different year. So I I I agree Erica. Not only is this a fantastic question, but even that strategy that can make sense. Now, I want to get a little bit more focused though and get to her question. Well, if you’re not great at investment selection, do do you still just go with the target day fund or what should you do instead? So, we’ve got that and questions from more fans of the show. All that and more coming up on the Wise Money Show with Korhorn Financial Group.
Break 1: Hello YouTube. Thanks for being here. This is the Wise Money Show. What you’re watching right now is our weekly 1 hour talk show that airs right here on this channel 10 a.m. Eastern time every Saturday morning. Also on the uh on on podcast as well. and but also on a couple local radio stations at the same time, which is why the content’s broken up the way that it is. We’ve got we’ve got segments and commercial breaks. That’s what we’re on right now. And if you say, “Ah, this doesn’t really fit. I want something shorter or it doesn’t feel like it’s it’s tailor made for YouTube.” Well, we’ve got a lot of other content that is next step videos and and shorts that are built specifically more concentrated 8 10 12 minutes long or shorts that are obviously much shorter than that built just for you, for our YouTube audience. So, make sure you hit that subscribe button, turn on notifications so you’re ready every time we drop new content and leave questions and comments below as well. We appreciate it. I I really on this topic of target date funds, where have you used them? Where have you found success? Where have you said, “Yeah, I feel like something’s lacking.” Would love to hear from you. I love the the comment section. Um especially when listeners say, “Hey, this is this is really good. This has worked for me or that’s that’s this has been share your experience. This has been not a great idea for me. Yeah. So, right. Right. Okay. We’ll pick it back up. Um, we’re going to have to pivot over to start the second question as well. So, let’s not get too drive the bus here. But let’s let’s answer let’s let’s answer the question. What would you do? Because it’s it’s it’s a hard one. All right.
Segment 2: Target date funds within your 401k, your 403b can be a great idea when you’re just getting started. They can be a great idea if you don’t have a lot of other diversified options. But if you do, and you can hand select the ingredients for your diversified portfolio, that’s where uh target date fund may not be ideal, but how do you know the right mix to select? We’re helping with that right now. This is the Wise Money Show with Korhorn Financial Group. Thanks for being here. My name’s Mike Bernard. with me in the KFG studios, Kevin Korhorn and Josh Gregory. Stay up to date on all Wise Money content. Find us online, wisemoneyshow.com, and then all over social media. Wherever you’re at, we are there as well. Search the Wise Money Show. Fantastic question from Erica here. She said, “You shared that target date funds aren’t necessarily the best investment strategy, but who’s to say you have to choose the actual retirement date? What if you chose one that was a different age, you know, or 10 years later?” But here’s the question we’re trying to to get to right now. If a target date fund isn’t the right fit for every situation or for my situation, what should those folks that are not those of us that are that that don’t understand investments or aren’t savvy investors, what should we do instead? So guys, what do you think? I I I would say that uh never target date funds. No, that’s definitely not the message. They do fit and they can fit and I tried to mention it but they can fit when you’re just starting. They can fit when you look at the other diversified ingredients and you say, “Yeah, this I I can’t build a a good portfolio around this.” That’s one of five questions you need to answer when you’re dealing with your 401k or employee employer sponsored retirement plan. So a lot of times people think well my investments that’s the big deal. It is a big deal and over your lifetime it’s going to be a huge deal. We meet with folks in their 50s and I can the difference between the folks with 500 in their retirement plan and 1.5 million is for a lot in a lot of situations it’s just the asset allocation. It’s just I uh I let it run a little hotter even during the bad times and I left it alone and here it is. It’s it’s grown to a pretty amazing amount. So for sure invest the investment piece is a is an important component of the decision-making process in your financial life. It’s not the only one. I would almost uh argue with myself and say h whether you do pre-tax or Roth is almost as big of a decision as how should I invest it. M you know I you’re kind of hinting at here. I think the importance of maybe seeking out some advice because the target date fund is really meant to be a tool that anyone can just use sort of do-it-yourself. um it’s the easy button. But as soon as uh you start accumulating a significant amount of assets and you want to be more in control of the mix or the recipe that’s going into your portfolio, you could be doing some education, research, you know, figuring out which of the lineup of investment options are worth using and which ones should you steer clear of or you can, you know, tap into the knowledge and the expertise of a professional. Your 401k might have an advisor assigned to it that is available to you to get some advice. Maybe that’s an option. I I tend to say, hey, go with someone who’s more independent and who can look at the much bigger picture asking those other questions that you’re referring to, Kevin. It’s not that um dissimilar to when you consider which home improvement projects are you going to do yourself versus hire professional. you know, if it’s like, ah, I’m going to paint the room or maybe get some new curtains, you know, pretty low stakes decision. You don’t have to live with it real long. If you get the paint up on the walls and realize that you hate it, you can paint it again. You know, it’s not not the end of the world. But as soon as you’re like getting new cabinets, moving walls, doing permanent more, you know, elaborate flooring, that kind of thing. Often that’s where people say, you know what, I I want to work with a professional. I want to have a great designer in place and maybe even more of a craftsman to do the the actual work instead of me myself. And so to me it boils down to well how long are you going to live with the consequences of not getting this right? Kevin um has said many times and Mike you alluded to it this might be one of the most important financial decisions that you make. Getting the right recipe, the right mix of investments is crucial. And here’s why I would maybe double down on that. this might be if if you’re hearing all this and saying, “Yeah, I actually don’t think the target date fund is ideal for my situation and I don’t feel confident picking my own selection or, you know, picking my own uh mix, it it might be time to reach out to a professional and and at least get a a perspective, an independent perspective looking at all six areas of your financial life to see, well, what is the right mix? But then also is you know what’s the right mix in light of this retirement account and the other investments that you already have. That can be another um downfall of the of target date funds is it’s not taking into account where you have or how you have your other investments invested where you’re going to begin drawing from in retirement. What dollars will you draw from first? the tax uh the tax nature of each, whether it’s pre-tax, Roth, that sort of thing. And so, it might just be time to work with the CFP and get some of those questions answered and uh and and certainly get the right mix for your specific situation. So, great question, Erica. Hopefully that helps you and those in a similar situation. Next question here comes from Scott, also sent via email through the website. Here’s what he said. Hello, I work for a large publicly traded company and have the opportunity to participate in an employee stock purchase plan, ESP, with offerings every six months. So guys, I’m putting you on notice. Let’s define how those work. Unfortunately, the company stock price has remained flat over the last many years. Does it make sense to still participate in the ESP to take advantage of the 15% discount? I would sell immediately based upon past experience of holding a stock that really hasn’t appreciated and I realize there are associated tax implications. I’m already fully funding my other accounts like 401k, HSA, Roth IRA. Should I use the ESP as a short-term investment tool over other options? Thanks for your insights. H, that’s interesting. So these employee stock purchase plans, you know, it these uh exist at a lot of large publicly traded companies and it’s another form of essentially an employee benefit. It’s not that different um if you work for a restaurant and they let you um eat at a cheaper rate than what the public does or you get one meal uh free per shift or something like that. Yeah, something like that. This is just instead of uh getting a discount on the services or the product of the company, you are getting a discount on owning a piece of the company. So you get to buy the stock in this case at a 15% discount. The mechanics of it I think kind of matter and uh we got some clues uh from the the question here saying that it’s every six months that you get the opportunity to buy in. So essentially what the employer is doing is withholding money out of a paycheck, stockpiling a bunch of cash, and then at six-month intervals, whatever the going price of the stock is, they will go buy it on your behalf, but get it at a 15% discount. Now, do you know what the stock price is going to be 6 months from now? No. Is today really the ideal time to be buying that stock instead of 6 months from now? I I don’t know. Sure sounds like this particular company’s had a pretty level or steady stock price, which is not what you want when you own a whole bunch of stock. You want to see it climbing. When you’re in buying mode, though, I I like the idea of buying as many shares as possible in a worldclass company um at a lowest possible price and then let it appreciate. Um but the the question really boils down to is this a short-term investment tool? That’s kind of the essence of uh how this is being considered for use. You know, I I don’t personally think of this as a short-term tool. This is a buy a small portion of the company and let it ride for the duration of your career. It’s what aligns um you know, when you can own a piece of the company that you work for, you benefit from the good stuff happening within that business. Yeah, this is a show about financial planning and I was thinking about this like what are the considerations if I’m trying to figure out the ESP? Well, certainly my my present financial position, do I have the money? Does it fit in my budget? If I’ve got 24% credit cards out there, a 15% discount on the company stock doesn’t win. So, I need to make sure my present financial position is there. Tax planning. Do I do I uh use it shortterm and sell it short term and uh accept more ordinary income or not? Investment planning. Diversification. How diversified do I want to be? If I’m counting on this company for my income, my benefits, a number of other things. Do I want to get even more dependent on this company? And then my retirement plan. Does this fit? Does this help me get to financial independence or whatever whatever you’re striving for? Does this take me closer to this? So you I personally um I used to get frustrated. I’m like no, make it simple. Make it make sense and make it simple. And it’s just not simple. And if you’re if you’re willing and able to pull these pieces apart and then reassemble them, it can be pretty spectacular. Yeah. And that that’s that that’s all helpful perspective for because we don’t know all of Scott’s specific situation. And if you have a similar opportunity available to you, you’ve got to look at it from a comprehensive financial planning perspective. So we’re going to get to the root of that. We’ve got more coming up here on the Wise Morning Show with Korhorn Financial Group.
Break 2: We’re going into the third third segment. Yeah. I’m gonna We didn’t answer the question. I think we’re going to disagree. So, okay. Well, let’s Hey, do you know, and I don’t know if this is um bonus content or real content that a lot of these plans have what’s called a look back period. What does that mean? That means that’s the I love that question because I I didn’t know this until I started snooping around. It means I buy it at the lowest price the stock price at the start of the offering period or the stock price at the purchase date the lower of. Mhm. So I could and then a discount off of that. Right. So I could be winning but I do have to be careful about when I sell it which is why I want to think about a donor buy one possibly. So which is why Yeah. So that’s where I want to get to some of that because I actually based on what we know about you. It’s a no-brainer. Um, but we don’t know everything. So, all right, here we go. We’ll we’ll get into we’ll get into it. I know I I’m getting ready to throw my cooler on you. We’ll get into that and then we’ll get into the next question as well as third segment. Here we go. Um yeah.
Segment 3: If you’re looking to build a house, obviously you know construction costs are still very high, mortgage rates are still very high. How do you do it? Where does the down payment come from? And then what’s your approach if you are if you are really wanting to, you know, make progress in your financial life? Does do you let that high interest mortgage stick around or do you have an aggressive game plan? We’re answering that question from a fan of the show. This is the Wise Money Show with Korhorn Financial Group. Thanks for being here. My name is Mike Bernard with me in the KFG studios, Kevin Korhorn and Josh Gregory. Every episode of the Wise Money Show is on podcast wherever you listen. Just search the Wise Money Show. Subscribe to it there and follow us there and then rate the program there as well. That’s helpful feedback for us and helps others that are on their financial journey looking for a a comprehensive approach to take their next wise step in their finances helps them to find us. So, thank you very much. hitting nothing but questions from fans of the show today and have oh a doozy here from Scott and I say a doozy it’s a great one but we also disagree and the fangs are coming out. So here’s what Scott said. Uh just to recap, he’s got the opportunity to to take advantage of an employee stock purchase plan where every six months he’s buying into his company’s stock but at a discounted rate. He said 15% discount. The company the stock has not performed well. It’s been pretty flat. So he doesn’t really love the idea of continuing to do this. But the question is, he’s asking, “Should I still take advantage of this?” And by the way, and I think this is critical. He says, “I’m already fully funding my 401k, my HSA, my Roth IRA. Should I do this?” Okay, guys, feel free to throw your coffee at me. I mean, based on what we know about Scott’s profile right there, I think it’s a no-brainer. I think you absolutely should continue to take advantage of it. You’ve got to be mindful of how much of your overall financial life is connected to the health and well-being of the company. Right? So if and sometimes it’s helpful to put up rules or guardrails. I don’t want more than 5% of my entire investment portfolio in my company stock. I don’t want more than 2%. I don’t want more than 10%. Whatever it is. And based on you, Scott, what you’re saying about the company being the stock price being relatively flat and and not an area that’s helped you build wealth, you might have an even lower threshold. I don’t want more than 2% of my portfolio. That’s where I do like the idea of capturing the discount and then either selling it immediately and just saying, “Hey, I’m going to pay short-term or, you know, ordinary income tax rates.” Or waiting the 12 months and just rolling the dice. Well, it might not grow a lot. I might lose a little bit. But capturing the discount, I I would I wouldn’t say that that’s better than optimizing your tax shelters. But assuming that you’re already doing so and you’re on track for your other financial goals, I personally I I would I would do it. I’d take advantage of it. And I would do it from a comprehensive planning perspective. making sure that saying yes to this isn’t doesn’t mean you’re saying no to some other good things or great things, but it just based on what I what we know about your situation. I would I think it’s a no-brainer even even in a short-term situation because that’s how we framed it as a short-term investment option. I I would be careful also to just make sure that you understand the rules of your right is it restricted. That’s right. Sometimes you have to hold the company’s stock for a period of time. Might be a year, could be two years. I I don’t know. Um but I would look into that. You wouldn’t want to buy in um thinking that this is going to fund, you know, a car purchase in 3 months or 6 months and you’re just trying to take advantage of the the discount and then find out, oh wait, this money’s stuck for some period of time, right? You’d want to make sure that you’ve got, you know, your emergency fund that you’re I mean, Kevin, you’re spot on. Like look through all six areas of your financial life where where what areas will influence this decision. But if you’ve got a solid financial foundation, I actually would not worry about this being a short-term investment option. Knowing the risk, it certainly is not risk- free. No, nowhere near. But if you can buy it at a discount and repurpose the dollars, maybe even to a donor advice fund, Kevin, teeing you up for that. Y but uh Yeah. Yeah. Well, I was thinking what So, it sounds like Scott has mastered his cash flow. Some people’s cash flow masters them and some people master their cash flow. So whichever one you are, it’s not too late. Take your next wise step in your financial life and get that a handle on that. Sounds like Scott has a handle on that. So he if you if all things being equal, the only thing the stock did was stay and just static for the the the whole year and he bought it. And so in essence, he had a 15% gain. One of the things that he could do if he really really really really really wanted to hold the stock, he could put that take that stock, put it into his donor adise fund, sell it in there. So the donor advised fund isn’t going to pay any capital gains or ordinary income on that 15%. The other thing that he could do is if there was gain in that, say there’s a 15% gain in that, the other thing that he could do is gift it to uh family members who are in that that are he wants to give money to. [clears throat] And uh for I’m thinking of children, maybe not even minor children, just adult children who are in the 12% tax bracket. They can sell it immediately and pay no tax and zero capital gain. Yeah. Yeah. And you you hit uh on this. You said if you want to give and so that’s obviously the prerequisite for using a donor adise fund or gifting to family members or whatever. That has to be part of the plan. That’s part of the goal that you’re trying to achieve. And so don’t make this decision outside of the context of your financial plan. That’s kind of what it it boils down to 100%. Even though Yeah, completely agree. All right. Next question here comes from Chris also on the website. went to wismoneyshow.com, filled out a question in the comment section there, came right to us. Hello, I’m 39. My wife is 37. We have no debt outside of the home. Way to go. Way to go. And we’ve decided to build a new house, which is going to cost approximately 600,000. We’ve got 180,000 of equity, give or take 5%. And we have 250,000 set aside in a taxable account, and we’re wondering how to best handle the down payment with the new house. That’s one. And then second, is it better to get this new house paid off as fast as possible since the mortgage interest rate is going to be around 6%. So, so two-part question. First, uh, yeah, Chris, we’ve all been there. All of us here on the show are older than than you. And, uh, know just how great the sacrifice is and the financial discipline is that’s needed to be able to be those ages. no debt other than the house, have that much equity built up and to be in a financial position where you’ve got resources available to help with the down payment, be able to. So, obviously, you’re doing a lot of great things in your finances. Way to go. Keep it up. Um, down payment, I personally would ask, do you have a home equity line of credit on the existing house? That’s I you know that’s not going to get you super super far, but it could get you 20% if that’s what the down payment is needed on the construction loan. I don’t know the details of the construction loan, but I would consider my my guess is that the $250,000 in the taxable account is going to have some taxation to it to get your hands on it. Um too low of a balance to really get a um a securities back line of credit. So that option I’m going to say is probably not there because of the run the stock market’s had. That 250 has some gain. Likely a decent amount of that short-term gain. Don’t really love touching that. And so to me, my first option for down payment is I look at home equity line of credit on your existing home that equity. And if you do not have a home equity line in place, it’s not necessarily too late to put one in place. You just can’t do it when the house is on the market. when when you’ve signaled to the world that this house is going to be sold, no lender is going to come and put a new loan in place on that or or offer a new line of credit. But since you’re in the construction phase, you’ve got some time here where you could borrow the down payment, any cash that you have to have. But, you know, usually most construction loans, they are built so that you’re not putting too much cash into the deal until there’s some sort of an end loan. And at that time, maybe you take the equity out of your house and um your your former house and get it into the new constructed uh building here. Yeah. Yeah. Go ahead, Josh. Well, I was just going to say, I mean, there was another part of this question, though, and fast forwarding to when now you’re living in the house. You you’ve got a beautiful uh well-built $600,000 house. Maybe you’ve got 30% equity in that house coming out of your former one. And the question was, well, do we get aggressive on paying off that mortgage? And that is just such a fundamental financial planning question. And it all boils down to, well, what are your primary goals? And is getting the mortgage paid off early uh in alignment with you achieving that that big goal? I think about retirement, for example, at age 39. If let’s just pretend that your goal was to be retired at 65. So, you’ve got 26 years, maybe 25 by the time the house is is done. Do you put yourself on an accelerated path to have the mortgage wiped out at that time? But in the meantime, by putting extra on the mortgage, you have to ask yourself, well, what could I have done with that uh extra mortgage payment? Would I have been better off maybe maxing out my retirement plan at work or saving some additional dollars into a Roth IRA, something along those lines? That is what a financial advisor in the context of financial planning is helping you to evaluate. You have options here. If you can afford to pay extra on a mortgage, then you might be able to afford to do something even better. We want to identify what even better could be. Oh, so much here to hit. So, we’re going to pick it right back up here coming up on the Wise Money Show with Korhorn Financial Group.
Break 3: Such a great question. So, okay, but here’s the problem. We’re This is the problem with answering questions. It is They’re not complete, right? Because he has $180,000 of equity in his house. Okay? What he didn’t tell you is his house is valued at 900,000. So, how much of a home equity line could he get? If you can get 80, you know, if if they’re looking at up to 80% of the equity, he has he he he only has 20% down on a $900,000 house. So, this is where it’s now, if he’s got a $200,000 house, he can get most of that out using a home equity line. So, this is where it’s it’s tricky to do math on the radio, right? And I I mean, I have no idea what what value this guy has as far as a house and and other things. But yeah, I still go back to, well, how much do you really have to put down on the construction loan anyway? And that’s the purpose of the construction loan. I go back to you better understand the construction loan because how many uh construction loan mishaps have we seen where someone gets to the end it’s all built and they’re saying hey give me that 6% interest rate and they’re like well actually it’s a 7 and 12enter and you’re like yeah because whatever the prevailing rate is at the time that you finish the project and you roll it into a new loan that is what you’re locking in at essentially Well, on most yes, but I mean it is possible to structure it. This is this is my rate, but this is where you really have to know and most of us are not equipped to ask the right questions. So, this is where you want to have your team in place. Yeah. Yeah. All right, let’s pick that back up and then at some point I’ll transition us to the next question. If there’s still a decent amount of time, we’ll hit Rodney’s question. If we’re a little light on time, I think uh I think Corporal Daniel’s question that’s been here for so long, Corporal Daniel, if you’re listening on YouTube, uh we’ll we’ll see where we are at. So, all right, four segment, land on the plane.
Segment 4: Thanks for being here. This is the Wise Money Show with Korhorn Financial Group. My name is Mike Bernard. With me in the KFG studios, Kevin Korhorn and Josh Gregory. Make sure that you are a subscriber on the Wise Money YouTube channel. Not only is every talk show that you’re listening to right now on the Wise Money YouTube channel, but so are uh Next Wise videos that air all throughout the work week, as well as shorts and a lot of other content, different uh different financial series and playlists and so on are all right there. Well over 2,000 videos. So, make sure you go to YouTube, search the Wise Money Show, subscribe to it there, turn on notifications so you’re made aware every time we drop new content. You can leave comments there. You can leave questions there as well. Engage with us. We appreciate that. We’re hitting questions from fans of the show. A great question here from Chris, uh, that they are in the process of building a house for 600,000. They’ve got $180,000 of equity in their existing home and have another 250 grand in a taxable account. How do they approach the down payment is first question. How do they tackle the new mortgage once the house is built? Because that mortgage is going to be at 6% if not higher. Guys, I know in in uh in bonus content we were talking a few other issues. What else would you want to make sure is is is are they aware of when it comes to the construction loan and then we can weigh in on Yeah, for sure. I would want to be asking the right questions about the construction loan because I’ve seen it where at the beginning when I start taking out the construction loan and we start doing draws, etc., etc., what at the end the rate is going to be what it was promised at the beginning and I’ve also seen it where at the end they say well you thought it was a 6% rate but it’s not that anymore it’s 7 12% so here you go and now my budget and cash flow and other things uh you have a little kurfluffle here yeah so I would really understand the details of the construction loan because it’s also very possible you don’t need an enormous down payment that the construction loan can be structured as some sort of a bridge loan and that it can all sort of re, you know, resolve itself. Work with the right lender. I we recommend I’ve had this question recently. Well, uh, if I don’t have a primary lender that is sort of a a a partner with me in this, how many do I discuss? We would say work with and talk to at least three. Get good faith estimates. Get quotes from each of them. Compare them side by side. Make sure you’re asking the right questions. Work them with your CFP. A and then going to the next question of well then what should your approach be with the new mortgage when it’s at a higher interest rate 6%. You’ve got to know your present financial position. You’ve got to know your tax picture. You’ve got to know your investment and your retirement picture. even your estate plan as well in order to answer that uh you know wisely. Okay? Because based on the fact that you’ve got $250,000 of of of resources in a taxable account makes us presume that you are maximizing and optimizing your tax shelters, but we don’t know for sure. I’d want to make sure that you’re doing that. that could influence the the decision on well do you go gang busters on attacking this new higher interest mortgage or do something else first start with your tax shelter strategy start with your goals are you on track and if you’ve got the right tax shelter if you are then on track and there’s resources still available in your present financial position I wouldn’t mind paying extra onto the mortgage but it would be after you’re on track for those other big goals that’s right the other thing we don’t know about this story problem here is how is that $250,000 positioned. You know, it’s framed as a a taxable investment account, but it could be sitting in a money market fund for all we know. That’s true. You know, there are plenty of people out there who locked in, you know, during the COVID years and and the aftermath there at obscenely low mortgage rates. you know, maybe you’re paying 2 and 12% or 3% on your mortgage and um you’ve had no incentive to pay extra on that mortgage because it’s such a low rate. In fact, you’ve been piling money up in a bank account potentially earning 4% or or even higher at times. And so if this money is not actually invested in long-term assets that are growing and appreciating in in value, maybe have some taxable gains embedded there, then if this is money that we might consider lazy assets, you know, they’re earning uh 4% that’s better than what your cost of borrowing is today. But in the new world with a new mortgage, now all of a sudden you’re borrowing at 6% and you’re uh depositing money at the bank at 4% or something even less. Now that money is truly costing you by sitting there and you may be better off. Maybe this was even part of the original strategy. I’m building up additional resources that will eventually go into my next house at at some point. I think a lot of people the the calculus has changed with as as interest rates have dropped as the Fed has lowered interest rates that means the interest that you’re saving that your savings account is earning or money market’s earning is much lower and a lot of people have gotten frustrated that we haven’t seen the same sort of decline in mortgage rates and so the calculus is changing make sure you’re you’re making a planning decision looking at all six areas of your financial life all right here we go next question from Rodney on the YouTube channel uh I am a teacher with the pension until security. I retired this year at age 62. I’m not getting to Social Security yet, but I’m going to turn it on later this year in the summer. I have about $127,000 left in two 403b accounts. I’m single and I’ve thought about converting it to a Roth, but I’m not sure it would make much of a difference for me. I have CDs well over 175,000 now and savings of another 70 grand. Would you suggest doing taking the 127 403b 127,000 403bs and moving it into an IRA or to the Roth? By the way, I live in Florida, so only federal taxes. Oh gosh. I I think it’s got to start with, and it sounds super geeky, but we we share this all the time. You you need a multi-year tax projection. You need to build out right now at the ear in beginning of 2026. All right. What do you think this tax year is going to look like in 2026? And then what does it look like in 27? What’s it look like in 28? And you need to start looking. Well, does it make sense to do a Roth conversion of all of these dollars right now? What tax bracket will that push you into? The one thing we know is it’s not going to. We don’t believe. I don’t know when your birthday is. It won’t count towards Irma because you’re only 62. The prior prior year rule, you should be safe if you want to convert all of it right now. But what tax bracket does that push you into? What other tax consequences does it create? Versus doing a Roth conversion, spreading this out over three years or five years or some extended period of time or just waiting and taking dollars out over time and not shifting it to the Roth. I mean, I I think the only way to know that is to build out mock tax returns for this year and the next several. We call that a multi-year tax projection. Guys, you seeing it any differently? No. I mean, the the one of the things I I love the idea of thinking in a multi-year strategy because one of the questions is uh should I just convert it all? Just rip the band-aid off, convert it all, and be done. And that can be a problem. I mean, if you if you look and you say, “Hey, if I convert it all in this year, I have a big tax year, but if I’m 62, I’m not concerned about Irma or anything. So, it might make sense to have a big tax year or not. But I’ve seen that happen where all of the traditional taxable IRA money got converted and then there was nothing there. There there was no lever to move when I said, “Hey, I want more income for this year. You can’t you can’t get more income on your tax return unless you go to work.” Right? Right. And so that’s where it does make sense in my humble opinion to hold back some traditional money that I’ve never paid taxes on in a reserve so that I as I mix my my taxable income cocktail, I can get it mixed just right because I’m going to have likely with my pension and social security there’s some tax there. And the question is how do I optimize my tax situation? Mhm. Boy, I I feel like you guys nailed the question at hand, but there may be another question in here that ought to be asked, and it has to do with social security. I I would ask the question, well, how um set in stone is the decision to start Social Security right now at age 62? Because if you haven’t already filed and you’re that’s just the plan, but you’re open to maybe considering some alternatives, you just have an interesting opportunity here because you’re so liquid. You have so much cash in the form of CDs and savings and everything. It’s possible that maybe your pension and drawing a little bit of those assets down could allow you to postpone Social Security by some period of time. Here’s what we know. every year that you wait to draw social security, you’re essentially getting an 8% pay raise. And I I’m confident that your savings and your CDs are not earning 8%. And so if you redeployed that money to live off of and postpone the social security, I I wonder what does the math how does the math play out in your favor? Does it put you in an even stronger position for your retirement by just simply delaying? Yeah, I mean that’s the proactive work we’ve shared all along that you know what is your what’s the benefit of your financial planner? What do they bring to you? Is it is it you know strategy and is it in investment savviness? Yeah. Yeah. Yeah. All those things but then clarity, confidence and creativity and sometimes just taking a beat pausing and taking a creative look at what your options are can really go a long way. All right, that’s all the time we have for today on behalf of Josh Gregory, Kevin Korhorn, all of us at KFG. Have a great weekend. We’ll see you next Saturday for the wise money show with Korhorn Financial Group. Securities offered through Silver Oak Securities member FINRA/SIPC. [music] Advisory services offered through KFG Wealth Management LLC. Join business as Korhorn Financial Group. KFG Wealth Management LLC [music] and Silver Oak Securities Incorporated companies are unaffiliated.
