Introduction & Hosts

Madison: Hello everyone, and welcome to Not Just Numbers, Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora and I’m here with Mike Garry. Mike is a financial advisor and a CFP practitioner and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer and his law firm is Yardley Estate Planning. Hey Mike.

Mike: Hey Madison. How are you today?

Madison: I’m great. How are you?

Mike: Good, good. We’re getting some much-needed rain. Hopefully it clears out so I could golf tonight.

Traditional vs. Roth: Why 50/50 Became the Standard Advice

Madison: Yeah, that’s true. Alright, so today we’re diving into a really interesting Wall Street Journal article that asks a question a lot of investors wrestle with. Should you be saving in a traditional retirement account or a Roth, and is the classic 50/50 split actually the best strategy?

Mike: Yeah, Maddie, this is one of those topics where the “standard advice” sounds simple, but when you actually dig into the math, it gets a lot more nuanced.

Madison: Alright, so let’s start there. The article mentions most financial advisors recommend splitting contributions evenly between traditional and Roth accounts. Why has that been the go-to advice?

Mike: So it mostly comes down to uncertainty, right? Especially around taxes. With the traditional account, you get the tax break today. With a Roth, you pay taxes now but get tax-free growth later. Since we don’t know what tax rates will be in the future, advisors hedge their bets with a 50/50 approach.

Madison: So it’s basically a diversification strategy, but for taxes.

Mike: Exactly. It’s a tax diversification strategy more than anything. That said, I’ll be honest, I’ve never actually recommended a strict 50/50 split and I didn’t know that that was the so-called standard advice until I read the article. Now most advisors I know prefer clients to have a mix of pre-tax and Roth, but the exact breakdown should be driven by the individual’s tax situation. For example, early in your career, it can make sense to go all Roth when you’re in a relatively low tax bracket, right? Because you’re not getting much out of the deduction if you were to go pre-tax. On the flip side, someone in peak earning years in a high bracket will often favor pre-tax to take advantage of the deduction today, aside from any required Roth catch-up contributions. Now, there are two ends of the spectrum, that we embody, but that’s exactly the point, this decision is highly individualized. It ultimately comes down to comparing someone’s current tax rate to what we expected to be in retirement.

What the Study Tested (and a Big Caveat)

Madison: Now this article actually puts that idea to the test using simulations. Can you walk us through what they looked at?

Mike: Sure. They ran tens of thousands of simulations comparing three strategies. A 50/50 split, a 60/40 tilt towards traditional, and a 60/40 tilt towards Roth. They assumed a pretty standard scenario, someone starting at age 20, saving 10% of income, and earning about 6% annually on their investments and following today’s tax rules.

Madison: So pretty realistic assumptions for a long-term investor.

Mike: Yeah, with one big caveat. In their example, they assume someone is earning $30,000 at age 20 and only getting raises consistent with inflation.

Madison: That seems kind of low.

Mike: Very. In some states, that’s actually below minimum wage, and if someone’s income only keeps up with inflation their entire career, they’re never actually getting ahead financially, which is not a realistic or optimistic scenario. It’s actually quite sad. More importantly, it means the study is effectively modeling a lifelong low-income earner. That tends to overstate the benefits of Roth, because that person is never in a high tax bracket, so the upfront tax deduction from pre-tax contributions isn’t nearly as valuable, and they aren’t going to have a big drop off in income in retirement or expected taxes on it.

The Study’s Key Findings

Madison: Right, so let’s get into the results. What stood out to you most?

Mike: Well, if you retire earlier, say 65, but delay withdrawals until later, like 75, then the Roth-heavy strategies tend to win. If you retire later and withdraw later, then the 50/50 split actually performs best.

Madison: And interestingly, the study found that overweighing traditional accounts was never the best outcome.

Mike: That’s right. And that’s probably the most surprising part for a lot of people.

Is 50/50 Really Best for Most People?

Madison: So here’s the big question, do you agree with the idea that a 50/50 split is “best for most people”?

Mike: Honestly, no.

Madison: All right, let’s hear it.

Mike: The issue is that the 50/50 rule assumes everyone has the same goals, tax outlook and retirement timing, and that’s just not reality. For example, if I have a client who’s earlier in their career, in a lower tax bracket, and expects higher income later, I’m leaning towards the Roth.

Madison: So you’re not starting from 50/50, you’re starting from the individual situation.

Mike: Exactly. The article kind of treats 50/50 as the default, but I think of it more as a fallback if we truly don’t know anything else. And generally speaking, if someone is likely to be in a lower tax bracket in retirement, as most people are, then pre-tax contributions tend to make more sense once they reach their higher-earning years, especially in middle age. And since he studied low-income taxpayer, of course overweighting pre-tax accounts was never the best. Like here’s the example, a lot of our clients are in the marginal brackets in like the 32% or 37% rate. And they wind up with effective tax rates while they’re working, close to 30%. But then when people are retired, you know, even if they have high Social Security and high required minimum distributions, at most people’s effective tax rate is the 22 or 20.. I mean marginal tax rate is 22% or 24%. And their effective rate is generally in the teens. Right. So there’s a big difference. And you know, when you’re comparing our business or practice that has, you know, people who are relatively higher income and higher wealth than the market as a whole, right, you know, we work with people who tended to have good incomes, often two good incomes, and who have done a good job of saving, so they get themselves into having more investments than the saver in this hypothetical and they’re in higher tax brackets, pre-tax. Right. So if someone is a 55-year-old and they’re earning enough money to be in the 37% tax bracket, I’m not going to start with like, okay, well we’ll assume 50/50 Roth versus pre-tax, it’s going to cost them thousands of dollars this year in income tax. That’s never going to be recouped. Right. And if they go then and have a normal retirement 15 years or 10 years in the future and they start taking money out, and that money is taxed at 12% and we’ve given up the 37% deduction for that, that’s just silly, right? That is dumb financial advice. So I’ll get off my soapbox for a second, let you ask the next question.

The Timing Gap: Retiring vs. Withdrawing

Madison: No, thank you, Mike. One thing the article highlights is the timing gap, retiring at 65 but not withdrawing until 75. Why does that matter so much?

Mike: Well, that gap is huge. If your money sits longer in a Roth, it compounds tax-free for an extra decade. That’s incredibly powerful.

Madison: So it’s not just what account you use, it’s when you use it.

Mike: Exactly. And retirement planning isn’t just about saving, it’s about sequencing withdrawals strategically too. Also, it’s kind of hard to imagine a low income, you know, someone who’s been a low-income person their whole life being able to retire and be able to wait 10 years to use his retirement account. That would be a pretty unusual situation. I’m not saying it couldn’t happen, but we wouldn’t see it that often.

What Should You Actually Do?

Madison: So if someone is listening and thinking, okay, what should I actually do? How would you guide them?

Mike: I’d focus on three things. The current versus future tax rates. Are you likely to be in a higher bracket later? Time horizon. The longer the runway, the more attractive Roth becomes. And flexibility. Having both account types gives you more control in retirement.

Madison: So even though you don’t love the strict 50/50 rule, you still value having both?

Mike: Absolutely. You know, I just don’t think it should always be evenly split. It really depends so much on the circumstances of the individual client.

Real-World Factors: Access to Roth Accounts

Madison: Yeah, that’s right. Before we wrap up, I think there are a couple of real-world factors we should layer onto this, because not everyone has had the same access to these choices.

Mike: Yeah, and that’s a great point. For a lot of retirees, or people close to retirement today, Roth accounts really weren’t widely available for most of their careers.

Madison: Right. Roth IRAs have been around, but Roth options inside 401(k)s didn’t really become common until much more recently.

Mike: Right. The Roth IRA came into existence in 1998. Right. So, when that happened baby boomers are already like far into careers. And you know, higher earners, you know, often run into income limits that prevent them from making direct Roth contributions. So a lot of people in their peak earning years, the decision wasn’t Roth versus traditional, it was really just traditional.

Madison: So in some ways, this whole debate is more relevant for younger workers today than it was for previous generations.

Mike: Yeah, that’s right. Younger investors have more flexibility, but, you know, they have to get the decision right. You know, if you didn’t have a choice, it was either save in pre-tax or not save. Well, then it was pretty easy. Now, you know, with that choice comes great responsibility.

The Future of 401(k)s: Private Investments

Madison: And speaking of 401(k)s evolving, there’s another big shift happening right now that could change what people are actually investing in inside their retirement accounts.

Mike: Yeah, this is where things get interesting. There’s a New York Times article talking about how 401(k) plans may soon include private investments, things like private equity and private credit.

Madison: Which is very different from the traditional advice most people are used to, like low-cost index funds.

Mike: Completely different. Index funds are transparent, like, you know what you’re investing in. They’re low cost and they’re easy to trade. And these private investments are basically the opposite. They’re expensive, they’re less transparent, and much harder to get out of.

Madison: So why are they being introduced now?

Mike: Part of the argument is that there are fewer publicly traded companies than there used to be, so investors are missing out on opportunities in private markets. Right. There are thousands less companies trading on the stock exchange than there were 20 or 25 years ago. And they’re owned by private companies. And, so, you know, it’s understandable that, you know, if you want to invest in more companies, you know, this would be a way to do it. You know, and there’s also a push to democratize access to investments that were historically only available to institutions and wealthy investors. The people who own and manage private equity and private credit funds see a huge untapped market and want to be able to access it. It’s all driven by money, Maddie, like most things. I guess.

Madison: So that sounds good in theory, but I’m guessing there’s a catch.

The Catch: Cost, Complexity & Illiquidity

Mike: Yeah, there are a few. One big issue is the range of outcomes. The gap between top-performing and worst-performing private funds can be huge, much wider than what you typically see with traditional investments. And on top of that, these investments can be illiquid, meaning your money can be tied up for long periods, which makes them harder to use in typical retirement strategy. I don’t honestly see how they’re going to work in a 401(k). I think they’re going to have to do like, a part of a fund or a sub fund of a fund. Like, I don’t see how a regular private credit or private equity fund could trade in a 401(k), where people are adding money to it every couple weeks in their working careers and then taking money out every month in retirement.

Madison: So this isn’t just a small tweak, it’s a pretty fundamental shift in what a 401(k) could look like.

Mike: Exactly. It adds potential diversification, but that comes along with complexity, higher fees, and new risks.

Bringing It All Together

Madison: Alright. So it feels like we’re moving into a world where 401(k)s aren’t just about stocks and bonds anymore, they’re becoming a lot more complex.

Mike: That’s right. You know, between the Roth versus traditional decision and now the potential addition of private markets, there’s a lot more strategy involved than there used to be.

Madison: And it really reinforces the same theme we’ve been talking about this whole episode, there’s no one-size-fits-all answer.

Mike: I feel like we talk about that in 90% of our episodes. Right? So it’s whether it’s deciding between Roth and traditional, or evaluating new investment options inside a 401(k), the details matter. Your tax situation, your timeline, and your flexibility all play a role.

Madison: So it’s not just about what you invest in, it’s about how all the pieces fit together.

Mike: That’s right. And as these plans evolve, it becomes even more important to be thoughtful about those decisions, rather than just defaulting to whatever the standard advice used to be.

Final Takeaways

Madison: Alright, let’s start wrapping up. What’s your main takeaway from this whole conversation?

Mike: You know, for me it reinforces that Roth accounts are often underutilized, and that blindly favoring traditional accounts can be a mistake. For older people they probably aren’t even thinking Roth because it wasn’t available to them most of their careers.

Madison: And for me, it shows that even widely accepted advice, like the 50/50 split, deserve to be questioned.

Mike: Exactly. The best strategy isn’t a rule of thumb, it’s a personalized plan.

One Last Tip: Keep a Paper Copy of Your Statements

Mike: And one last thing before we go, Maddie. I saw that article I shared with you, earlier this week, where a woman, a 35-year-old physician assistant, goes to log into Fidelity and all accounts are gone. And customer service initially says she has no accounts at all, treated as if she was like mistaken or confused. Finally reached someone helpful and the issue was identified as a system glitch. This is crazy to me. We log into Schwab and Fidelity every day, and it’s hard to imagine something like that would happen. But what I would say is with your accounts being online, it’s great most of the time, but keep at least one statement on hand. And don’t rely entirely on the apps and the platform visibility. So go in, you know, log in, save and / or print a statement and it would be great thing for your spouse or your end or your kids in case something happens to you to be able to find everything, you know, because it’s not like 20 years ago where you get all the statements in the mail and after like a quarter goes by you’d have statements from all of your different accounts, that doesn’t happen anymore. If they can’t access your accounts or can’t get into your email, they might not be able to find everything that you have. So take, a few minutes sometime soon, log into all of your accounts, print out a statement, you know, with the account numbers on it, and keep them in a binder. And set yourself a reminder task every year to go and do that or every quarter, every six months if you can’t help yourself. But yeah, have some sort of physical documentation to go along with, your logins.

Madison: Awesome. Thank you so much, Mike. That’s really helpful advice.

Mike: Oh, good.

Closing & Contact Information

Madison: So that’s all for today’s episode. If you find this helpful, be sure to share it with someone who’s thinking about their retirement strategy.

Mike: And you want help figuring out what mix makes sense for you, reach out, we’re always happy to help.

Madison: For more information on Yardley Wealth Management or Yardley Estate Planning, you can visit our websites at yardleywealth.net and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. Don’t forget to subscribe to our YouTube channel and smash the like button. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.