Afford Anything - Am I Wrong to Worry About Retirement, with $2 Million Saved?

Episode Date: October 15, 2024

#549: Steven is stuck on the question of financial stability. How do you know if you have it? Is there an objective answer based on net worth? Or is it a calculation relative to your income and age? Jack isn’t sure how to factor his house into his net worth. It’s an asset, but he has a mortgage against it, and there are transaction costs associated with selling it. How should he frame it? Patricia and her husband are debt-free with a $2.2 million net worth, but she’s constantly stressed about their finances. Are her concerns valid? Or is she a financial hypochondriac? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode549 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, when you were a financial advisor, I'm betting you probably had a lot of clients who were in their 50s, their nearing retirement, their kids had recently become young adults, and yet they were stressed about money, but they probably represented a wide range of actual monetary circumstances. Would that be accurate? Yeah, why would you think that? Well, there does not appear to be a strong correlation between a person's actual financial circumstances and their level of worry. But there are, to your point though, Paula, more stressful times in your life. So you're 100% right because this is a time of big change. And because of that, that's a time when a lot of people seek help. And it's also a time when people wonder, am I on the right track, whether they are or not.

Right. New empty nesters, thinking about the next stage. Everything is different and you know it's going to change even more. Right. It's a time of huge transition. We're going to answer a question today from a caller who is in exactly that circumstance. We're also going to answer a question from someone who is wondering how to assess his net worth in the context of his, the value of his primary home. and we're going to start with a question from someone who's wondering about these financial milestones that we're supposed to be hitting by specific ages. How much should you have by the time you're 30, 40, 50, etc.?

Is there any merit to that? Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade-off, and that applies not just to your money, but to any limited resource you need to manage, like your time, your focus, your energy, your attention. So what matters most and how do you make choices accordingly? Those are the two questions. This podcast is here to solve. We cover five pillars. Financial psychology, increasing your income, investing, real estate and entrepreneurship. It's double

eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode, I answer questions that come from you and I do so with my buddy, the former financial advisor, Joe Saul C-high. What's up, Joe? Oh, Paula, I'm so excited about today's episode. I think we're going to really dig in, especially around election time. You hear a lot about misinformation, right? About how there's all kinds of nefarious people spreading misinformation. Well, we're going to talk a little about misinformation and bias confirmation today. In the context of all of these financial milestones that you're allegedly supposed to be hitting. Yes. And happily, not in,

of the election. I don't want to talk about that. All right. Well, let's get to our first question then, which comes from Stephen. Hi, Paula. This is Stephen. I've called in once before. Quick question. In the Money with Katie episode, you were saying that the objective truth of somebody's situation is that they are financially stable and they just don't realize it. So how do you describe what the objective truth of financial stability is. I know the millionaire next door has that formula, which I can't remember right now. If you don't meet that formula, then you haven't made the amount of money that you should have made at this point in your life, given your salary. What is the objective truth? How do you

decide? Someone said, oh, 500,000 and a paid off house. It's like, well, if you don't have 500,000 and then a paid off house, what does that mean? Obviously, that's very general, but still, that's my question. Thanks. Stephen, that is a great question. And it's actually a very philosophical question. What is objective truth? Before we answer, to lay down some context, you mentioned The Millionaire Next Door.

For people who are not familiar with it, The Millionaire Next Door is a book that was published about 30 years ago, originally, back in the 90s. It's one of the most popular personal finance books. It surveyed American households and found that the overwhelming majority of American households are first-generation millionaires. Their parents are not millionaires. Their parents were often middle class or even lower middle class.

And a sizable number of U.S. millionaires did not inherit even one dollar from their parents. At the time, back in the 90s, was a groundbreaking book that really, shattered a lot of people's assumptions about who millionaires are. The book also laid out very data-backed, research-backed information that showed that most U.S. millionaires had what they called boring businesses. They ran pest control companies. They ran HVAC repair companies. Very non-glamorous jobs. You know, they were more likely to drive a Ford truck than a BMW. they were more likely to drink Budweiser or Miller Light than fancy champagne. It's so funny how many of these stereotypes we still have just in modern society,

even though that long ago, the millionaire next door shattered to your point, Paula, a lot of these stereotypes. Like as an example, we think that because somebody comes from a wealthy family, that they will continue that wealth and they'll have good habits. somehow they're going to continue this leg up. We also know now that's not true. A lot of the time, first generation makes it, second generation spends it, third generation completely loses all the money. That is more often the trend than the opposite that we see on social media that we feel when we meet people that are from, quote, rich families.

It is much harder to have sustainable inherited wealth. The wild thing about this study too, because you think about some of these things and you're like, wow, they only broke that in the 90s. You know, really, it's funny, Paul. I was just talking to downtown Josh Brown from Ritzholt's wealth management and he's on CNBC's halftime report. Josh was talking about just how young this idea of retirement planning truly is. Right. Like it's really not that old. Before the 70s, it was either pension or nothing.

And really, 401Ks didn't get any real traction until late 1980s. So this idea of retirement planning might be 50 years old. In fact, the 401K itself was created in 1978. Yeah. And took a while for it really to get moving. And then really by the early 2000s, you saw this seismic shift where companies were like, nope, no more pension for us. Right.

But you think about it, the reason why we're still really digging into the emotions and the feelings around retirement is because it truly is a young thing. It's a young study. Right. It's a young concept. We don't have a legacy of many generations before us who even had the concept of retirement. And even prior to pensions, people typically, you work until you die. Right. Yeah.

The very notion of retirement, even prior to the pension era, just didn't exist. As a construct. Right. We had social security to help people maybe for a couple of years go off with a little bit of dignity and be able to maybe enjoy a year or two or three. It's funny, Paula, you also bring up from the millionaire next door, the fact that a lot of these millionaires have boring jobs. How often do we still hear, usually very wealthy people say, well, follow your passion. When it comes to your career, follow your passion. And Dr. Thomas Stanley back in the 90s said,

a lot of these people who are millionaires, probably not that passionate about making stop signs. Right. But they are, I will argue, passionate about running a business. So you may not be passionate about the stop sign itself, but the operations, the logistics, the project management, the personnel management that goes into all of it. 100% agree, but look at how often that,

that gets misconstrued. Right. They now sell ringlights at Target because the number one thing that high schoolers want to do, I believe, what was the number, Paula? You were in the room when we heard the statistic, like 26% of high schoolers want to be an influencer. Right. That's follow your passion thinking, misconstrued. Yeah. Well, and the irony is not lost on me that we both say this as professional podcasters. I'm an influencer, Paul. You are. You're a retirement influence. Joe. But what was interesting on this topic, just to get to your point, which is running a business, when Nathan Berry was sharing the statistic on a stage in Boise, you and I were both in the room when he was talking about this with a little eye roll, he was talking about the once high schoolers find out the business of being an influencer and how difficult it is and how systematic and how boring a lot of it can be a lot of the time.

Yeah. They didn't want to do it anymore. So running a business is true. truly what you're talking about that you need to get passionate about, yet it's something different. So I love the fact that Thomas Stanley's talking about this in the 90s. Yes. And I want to address, Stephen, the formula that you brought up. So the formula that the millionaire next door proposed within their book is this formula for what they call your expected net worth. And that expected net worth is your age multiplied by your pre-tax annual household income from all sources, except for any inheritances. So if you have an annual household income pre-tax of, let's say, I don't know, $80,000 a year, multiply that by your age,

then divide that number by 10, and that is your expected net worth. Based on that, the millionaire next door stated, if you have an actual net worth that is double that amount, So if your actual net worth is two times or greater, your expected net worth, then you are what they referred to as a prodigious accumulator of wealth. By contrast, if your net worth is lower than your expected net worth, then you are what they referred to as an under-accumulator of wealth. Now, the obvious drawback to this formula is it doesn't work if you're under 35, right? Your age times your income divided by 10 doesn't work when you're 22 and you're working your first job out of college. It doesn't even work really when you're 30.

There's an inherent flaw with the formula right there. In addition to that, the fact that the formula has you multiply your age by your current annual pre-tax income, well, what the heck does my annual pre-tax income in 2024 have to do with my annual pre-tax income in 2023 or 2025. Some people have stability within their income and have relatively predictable 3 to 5% raises each year. Others have wildly fluctuating income. So there's a huge flaw with the system right there.

On top of that, it doesn't account for the segment of society that went to med school and spent a heck of a lot of. time in school and now they're 31 or 32 or 35, that formula is not going to work for them in the same way that it would work for somebody who has been earning an income ever since they were 22. Well, think about this, Paula, you're in medical school. Yeah. You're not making a lot of money now, but in two years, your income's going to change dramatically.

Right. And that blows the equation right out of the water. Yeah, exactly. And it might change dramatically multiple times. So maybe it might spike and it'll spike for a handful of years and you spend those handful of years paying back your student loans. And then you decide that you want to take a year off to do some caregiving for an elderly parent or to raise a child or maybe you want to go take a sabbatical for a year and volunteer in a developing nation at a village clinic. Right? You do that for a year.

Then you come back. I mean, people's incomes fluctuate so dramatically, not just in one. direction, but up and down and sideways over the span of their life. That formula also doesn't account for a huge number of people who don't even come to the United States until they're in their 40s. And up until then, they've been earning money in their local currency, which translates to nothing when you put it into U.S. dollars. And so functionally, their entire financial adult lives, as measured in U.S. dollars, starts in their 40s.

Formula does nothing to account for that. So there are a lot of flaws to the formula in the Millionaire Next Door book. Which also means, Paula, that this idea that Stephen asks about, and rightfully so, he uses a word objective. Objective. What is objective truth? Objective truth is not going to be found in, here's the net worth you need to be at by the time you're 30, you're 40, you're 50, you're 50, you're 50.

You're 60. I hate these. You see these pieces, not just with the millionaire next door. You see these dumb, dumb, dumb pieces all over the internet all the time. If you're not there by the time you're 40, you're, no. So many times we see people, to your point earlier, we see people catch up and not even doctors. You see people that don't do any real saving until they're 50 and they do just fine.

They have to work their butt off from 50, maybe until 65, maybe till 70. they've got to work sometimes very, very hard, but they get there. Yeah. My dad opened his first retirement account when he was 50. These pieces don't make sense to me for two reasons. Number one, either, Paula, they may give you a false sense of security. Oh, look at, I'm 30. I can slow down right, right, right now and everything's going to be fine.

And I remember speaking with a guy I've talked about a lot on this show, Paul Merriman. I remember Paul expressing to me specifically. And me totally agreeing. high-fiving him that he worries about people at age 30 going, I'm going to let off the gas because these pieces online tell me, or the 25x rule tells me that I'm going to be fine. And every point you brought up over the last three minutes says you need to take all of those assumptions and throw them in the trash because everything's going to change. It's all going to change.

The other thing that I don't like about these pieces that you see online, I need to be there by 30. I need to be there by 40. I need to be by 50. Far more often, you're not ahead of the game. There are four more people that are behind, right? And when you're behind, it sets off this set of panic that does nothing for you. The panic does nothing.

You can't do anything about the past. What's that phrase? The best time to plant a tree was 30 years ago. But you can't do that. So do it today. Do it right now. Plant your tree today. And I think that these pieces.

Don't help us at all. Yeah. Set your own plan, go online to one of the many, many calculators out there at any of the big places, Fidelity, Vanguard, every single place where you see money management. They have tools, very simple tools. Look at what you need to do. And whether you're on pace or not for that goal that is yours, not only Paula, is that going to be a better indicator of the milestone that you need to achieve, but it's also going

to be stickier. These rules of thumb are not sticky because you know like Stephen does. He's like, why are we calling this objective? Stephen, I'm with you. We shouldn't. There should be no, this is not objective at all. It's very one size fits all, which means it pretty much fits nobody perfectly. So to get the more perfect fit, which is going to make it sticky, I think work through

the calculator. And it's not as complicated as people make it seem. It's actually more fun to do than you think. And afterwards, whether you're ahead or behind, you have a much better feeling of where you truly stand, which I think gives you power. I would say there is truth to an individual's financial situation, but there is no universally applicable truth to, by the age of 30, you should have X. Yes.

I'd say there could be objective truth to use. You as an individual having enough to be able to do two things, I would measure the truth of your own personal financial situation in two ways. Essentially those two ways are offense and defense. In terms of defense, it's managing the risk of ruin. So risk of ruin is a concept. It comes out of poker where in poker, you know that there's going to be some variance in the cards that you're dealt and in the hands that you play.

And so sometimes you'll be up and sometimes you'll be down and that's natural variance in the game. But you want to make sure that you manage that downside such that you don't get knocked out of the game entirely. That's called risk of ruin. So one component of the objective truth about your personal financial situation is that you have managed the risk of ruin. And there's a guy by the name of Ken Honda, he wrote a book called Happy Money, where he suggests going through the thought exercise of what would you do if you had nothing. Do you have a best friend whose couch you could sleep on? If the proverbial poop hit the fan, what would you do? Of course, this answer is going to change for everyone depending on,

do you have kids? Do you have elderly parents that you need to take care of? Who are the other people who are relying on you? Because if the poop hits the fan, you've got to, find a couch for them too, right? You've got to find that mom's basement that people can crash in for a while. So what would you do if your back was really against the wall and you had nothing? Can you manage that downside risk both for yourself and for all of the people who are relying on you? That's managing risk of ruin. And that is, I think, one of two components of the truth of your situation, the objective truth of your situation. And so that's the defense side.

And then on the offense side, it's what you talk about, Joe, when you talk about timelining your goals. What are your personal goals of what you want to achieve? And are you on track for that? One of the most fun things we would do when I was a financial planner, I would create, based on my client's goal, a year by year set of milestones, where we needed to be. and my client would come in and the very first thing we would do is we would look at, okay, your goal is $2.5 million.

You're 31 years old. So by today, you need to have $46,000 safe. And those two numbers don't seem to be line up, which is always amazing. Really, if I get to $46,000? Yes, this compounding is pretty exciting. And if you continue putting money in the way that you are now, which is the plan, we get together and we look and see if you're, ahead or behind that number. And what's great, Paula, is instead of worrying about an arbitrary number,

what's going on with the election, is the Fed going to raise their lower interest rates, is Bitcoin going to continue to rock? I don't think about any of those. I need to be in the mid-40,000s. And guess what? I'm at $55,000. Now I have some choices to make. I can either stop saving early. I can retire earlier. I can go on a sabbatical now and not worry about saving enough because I can take X amount of time off because I'm ahead of the game. I have all of these choices because I'm ahead of the milestone that reaches my specific goal. Talk about sticky. Now I have some intensely personal decisions to make.

Oh, yeah, I love saving now. I don't want to save later on. So here's what I'm going to do. I'm going to give myself the flexibility to retire a year and a half earlier. Great. Okay. Let's keep going then. Or you know what?

I'm tired of this. I want to spend a little more money today. I want to break the budget to maybe take a trip to Europe that I was wondering if I could have. Yes, you can afford it. Next year, you got to start saving again and we're behind. Speaking of that, let's say you've only got 39,000, Paula. Well, now we can look at the investments and go, is my problem, my investment allocation? And if it's not, because we're using index funds and it's just the market hasn't performed, well, then we know the market's going to revert to the mean. And my, assumptions for my investments are okay, that means I have to decide, do I save more money? Do I tighten the belt? Do I retire later? Do I find a side hustle? Like all of these things get away from all

of this nonsense. And instead, it's actionable things I can do today, which is so powerful. And that's why I think that doing the plan is way stickier, far more sticky than, oh, I'm 40 years old and this piece from a site that I've never heard of before tells me I'm behind. It's natural to want to compare yourself to others. Humans have a tendency to want to compare themselves to the people around them as a barometer. Number one question, Paul, I would always get, how am I doing versus your other clients? Number one question, with a bullet, by the way, far in a way, the number of question. But I just want to ask.

And some people would even say, they go, I know I'm not supposed to, but can you tell me how I'm doing versus your other clients? Wow. And I would say, man, you suck. Bottom 10%. It's the worst. Oh, the second you leave the office, we laugh about you. That would be just absolutely horrible.

But we are social creatures. So we want that social. But, you know, the problem is maybe you have chosen a career that has a fat-tail distribution of outcomes, right? And so maybe in your career you make very little, very little, very little until you're 45, at which point, boom, you make it big, right? Your financial situation up until you're 45 might be scraping by. And at 45, you make it big. And that's cool. You know, that's awesome. But it means that if you look at a, like, how much should I have saved by the age of 40, you're going to feel as though you're behind.

But truly what you've done is you've made the conscious decision that pursuing this particular career, which is ramen noodles until it's steak, is your top priority. And you're going to adjust your lifestyle accordingly in order to make that happen. I don't want to decide. discourage people from making those decisions by virtue of making everyone think that they need to fit some sort of one size fits all formula. So that's the problem with the millionaire next door formula as well as all of those, how much should I have saved by whatever age type of listicles. Yeah, I love this question, Stephen, because this needs to be brought up far more often. We need to call this out more often. This is nothing to do with me.

You could be a stand-up comedian and make it big in your 50s after scraping by in your 20s and 30s and 40s. And that's awesome because we need more stand-up comedians. We do. They make people happy. I think it's a good place to leave it. We need more stand-up comedians. Yes, we do. So our answer, Stephen, is become a stand-up comedian. Well, and Stephen, and I think in terms of the way that this answer can apply to you, because you asked about how do I know the objective truth about whether or not my financial situation is okay. The objective to the quote was The objective truth of somebody's situation is that they're financially stable and they just don't realize it. So that objective truth is not measured relative to anybody else.

It is measured only in terms of your aspirations for your own life. The aspirations that's on the offense side and managing the risk of ruin on the defense side. Well, thank you for that question, Stephen. And for further listening, we interviewed the co-author of, the sequel to the Millionaire Next Door, so the sequel, which was published about 30 years after the original book was published, is called The Next Millionaire Next Door, and it updates a lot of that research that was originally done in the 90s. So that sequel was co-authored by one of the original authors, and his daughter, his daughter is named Dr. Sarah Stanley Fallaw,

and we interviewed her, her father, one of the original authors, unfortunately passed away, right before the publication of the book. And so we interviewed her about all of the updated research. So if you want to hear that episode, it is episode 190. You can access it at afford anything.com slash episode 190. Paul, also a side note about Dr. Stanley. when he wrote that amazing book in the 1990s, he wrote two other books that are not well known. And even though they're dated, I mean, these books are now old, they still really, really hold up. I look at these books still from time to time. Two books. One is called networking with the affluent and the other one is called marketing to the affluent. So anybody in the afford anything community. You pronounce it affluent and not affluent? Yes. Whoa. Tomato tomato. No, it's affluent. Affluent. Affluent. Affluent. It's affluent. So marketing to the affluent. Sounds horrible.

Or networking with the affluent. The cool thing about these books, Paula, with his huge amount of research about who these people really are and how to work with them. If you're anybody in sale, if you're in financial planning, if you're any, but I know a lot of people in related fields listen to this show. Those are two phenomenal books if you're working with affluent or affluent people. And we will link to all of those in our show notes. And I can give you two really cool takeaways. One takeaway is really interesting. People that try to market to high net worth people. So let's say you have variable pricing on whatever your product is. Paula comes to. in, she's a high net worth person. I know she's a high net worth person. So I jack up the price. Dr. Stanley says, all of my research shows these people became wealthy because they're not stupid.

And they will not pay your super high price. The way that you network with and market high net worth people, if you treat high net worth people very well, white glove treatment, roll out the red carpet for them make it so that you really, really help them. High net worth people are much more likely to refer you to their friends because the one thing that they know they don't have much of is time. They don't have a lot of time to mess around. So you know what they do? Instead of looking online at Facebook ads or Google ads or Googling something, who in my town does the thing, they go ask another person in their community. And people with a lot of money. network with other people with a lot of money. So the best way to get referrals is to network with

and high net worth people, treat them very well, and they will take care of you forever. But if you gouge them because you think you can get more money out of the wealthy person, that's a dead end street. Powerful takeaway. Just a huge, huge takeaway. As you can tell, I love these books. Yeah. The research that they have done, on U.S. millionaires is incredible. Yeah, still may be seconded to Don. Yeah, yeah, even now, even 30 years later. So thank you, Stephen, for the question.

And best of luck, calculating the objective truth of your own personal financial situation, which is independent of anyone else's, and which has nothing to do with your age. We're going to take a moment to hear from the sponsors who make this show possible, and when we return, we're going to hear from, a caller who is wondering how to factor for the value of his home when he's thinking about his net worth. So we're going to hear from him. And then after that, we are going to address a question from a listener.

She and her husband are both in their 50s. Their children are now young adults. And they're also worried that they might be worrying too much. So we're going to address both of those questions coming up next. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine.

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really know what to do with our house. So obviously it's an asset, but at the same time, we don't own it outright yet. It seems silly to go to Zillow and look at how much Zillow is valuing the house and then subtract from that number how much we owe still. And hopefully that number is positive, most of the time it is lately, which would imply the outstanding debt is, less than the value of the house in the marketplace, but then there's closing costs and all that other stuff. So we don't plan on ever selling the house, but what should we do with it? Should we just leave it out of our net worth? Should we do that wrote simple calculation I'd just put forth using Zillow? Or is there something else we should do? Curious for your thoughts.

Thanks. Jack, that's a fantastic question. So first, there is a debate. I just want to acknowledge that there is no consensus within the personal finance world. There is a debate, and I have a strong take on where I land on this, about whether or not a person's primary residence should be considered when calculating their net worth. So there are some people who believe that you should leave your primary residence out of your net worth statement entirely. And their argument is essentially you always need a place to live.

and therefore, for some reason, you should just leave that out. I think you can tell where I come down on this argument by just the fact that the way that I'm describing it. I completely disagree. I think that your personal residence belongs on your net worth statement. But there are some people in the personal finance space who disagree with that. So I should state that for the record. If you ever wonder what Uber nerds do on a Friday night? Yeah.

We debate this. Yeah. It is horrible. There's three beers in. Yeah. And all of a sudden the fisticuffs come out. Yes. Yeah.

Okay. So I try to do justice to their argument. Their argument is with the rest of your net worth, you can sell those assets. You can draw down on those assets. If you're calculating the assets that are in your brokerage account or if you're calculating income that's coming in from rental properties. or if you're calculating the value of gold or art or Bitcoin or whatever the heck else you own, those are all assets that you can either produce an income stream from, such as a rental property,

or that you can sell. And by virtue of selling, you also really produce an income stream. So their argument is essentially that you would never do that with your primary residence and therefore you shouldn't count it. that's the position from which they come. And the position that I espouse, Paula, which is closer to yours, is let's look at the ways, even if you think you're not going to sell the house, that you still might need that number. Number one, if in the future you get this great opportunity to buy into a business and the business needs to take out debt and you're a part owner, they're going to want a net worth statement

from every person involved. and this number clearly belongs on the net worth statement. It's going to make you look better in terms of the bank or if for some other reason you decide that you need to borrow funds, they're going to want to know what your net worth is. They're going to want to know what collateral they might have available. This truly belongs on the net worth statement. I do think, though, Paula, in defense of people that are like, okay, you're never going to sell it and it's not something that's going to, you're going to use to reach your goals like Stephen was talking about. we'll never put the house as money, the equity inside the house is money we're going to use to get our thigh number or to put kids through whatever the goal might be. If I'm not going to use it for that,

I think personally, Jack, going to that zillow number and looking at it, it's kind of sloppy, but it doesn't really matter that it's a little sloppy. I mean, don't get me wrong. There's some zillow numbers. You look at them and you laugh. And you go, are you kidding me? there's no way I get that. Okay, then don't use a zilla number. Okay. So, but I think, Joe, if I can cut in here for a moment, I think we're now conflating two different questions. So, A, there's the premise of his question, should this number be counted? And then B, there's the question of if it is counted, tactically, how do I do that? Exactly. And so, yes. I want to address B second. Separately. Okay, fine. Yeah, I want to address that separately.

sticking just with A then, the answer is, of course it counts. Yeah. Put it on the sheet. If I'm three beers in, I'm coming hard at the other nerds telling them, nope, it goes on the sheet. Yeah. And I should add, just to round out why Joe and I both agree on question A, the premise of should it be counted. There are plenty of people who will tap the equity in their primary residence for various things, right? There are people who will take out a loan against their primary residence to start a business.

There are people who will take out a loan against their primary residence to buy a rental property. That is money that you can tap. And yes, when you're borrowing against your primary residence, you borrow against a percentage of it, maybe 70%, so you're not borrowing the entire thing. But it is still value that's on your balance sheet. It's still money that is yours. And how many times have we taken questions on this show from people who have led with my circumstances have changed? Right. It counts.

It's real. It's real value. Exactly. And that's the other thing is I talked in the last question about what would you do if the proverbial poop hit the fan? It's a question I think about a lot. If there was truly some type of an emergency situation, a theoretical person might sell their primary. residents, move into a tiny apartment and use that money for the big emergency thing. Money is a tool, and in some type of a dire situation, that is a tool at your disposal.

It is an option that you have, even if you never exercise that option. So I think all the tools should be counted. So anyway, that is why Joe and I both agree on the premise of, yes, count your primary residents towards your net worth. Moving then to part B of the question, which is, oh yeah. Tactically, how do you do this? So there are a couple of different methods depending on how accurate you want to be. And again, I'll start this with don't conflate precision for accuracy, because all of these, the following tactics that I'm about to describe will give you a number that feels unduly precise and sometimes precision can be conflety.

with accuracy. So tactic number one, it is a variant of what you talked about, Jack, when you talked about Zillow, but it goes a little bit beyond that. So what I do, this is actually what I do personally, when I'm putting together a spreadsheet of my net worth, I will go to Zillow, to Redfin, to Trulia, to Homesnap.com, to Realtor.com. I will go to a wide variety of websites that estimate home value. And I will note all of those home values, all of those estimated home values on a spreadsheet. If there's any one that is like a weird outlier number,

typically if you're pulling five numbers from five different websites, all of which are algorithmically generated, four out of five might be fairly close to one another. Oftentimes there's one out of five that's some weird outlier, sometimes two out of five that's a weird outlier, I throw away the outliers. And then with the ones that are relatively close to one another, I take the average. And so that is a variant of using Zillow, but it isn't reliant on a single source where there is then that single source failure.

Instead, it's taking the average of a bunch of algorithmic predictions minus the outliers. So that's one way in which you can do it. Another way, a second tactic, which is more accurate but more time intensive, is to look at comparable recently sold homes in your area. So what a real estate agent would do if they were trying to assess the value of your property is they would look at comparable homes that have sold within the last 60 days. They're not looking at the listing price. They're looking at the actual closing sales price. Now, when I say comparable homes, homes are, of course, very different from one another. There are going to be certain homes. Maybe there's a home that sold within a mile

of yours, but it has one extra bedroom or one fewer bedroom, or it has a swimming pool and yours doesn't. It has a fireplace and yours doesn't. There are going to be these variations. And so what real estate agents do is they will make adjustments. either plus or minus, that smooth out that variation between the comparable property and your home, which is referred to as the subject property. And by virtue of making those plus minus adjustments, you then can approximate how well that comparable home sale applies to your own subject property home sale. And then if you do that with three or four comparable recent sales, you can arrive at a

pretty good estimate of what your home could probably sell for at this moment. So that practice, which is known as running comps, it's much more labor intensive, which is why if I'm just putting together a spreadsheet for my own edification, I don't bother doing it because I don't need to be that accurate. So the juice isn't worth the squeeze. But that would be a more accurate way to do it if you really want to approach that. Yeah, option one, if there are no pending deals where I'm going to need that equity to show up, option one, doing it the first way that you suggested, I think is clearly that approach has more efficacy. If we're thinking about time versus the squeeze. Yeah. There is a third way, which is great. I have a real estate

professional lives right across the street for me, great friend of mine, and she does that stuff. for fun. So if you can do option two, because your friend likes to do it for fun. Joe's solution is find someone else to do the hard work. Delegate. But actually, you know some real estate pros. They do think it's fun. Yeah. And you can even say to them, I would say to Amy, our neighbor, I go, hey, I don't know if this would be fun for you, but what do you think my house is worth? She's like, oh, I'll pull some columns. Great. And then she'll go, I think I could sell it for X amount of money. There it is. Perfect. And Amy's super good at her job. Now, if Amy sucked at her job, I think I could sell it for a lot.

Yeah. So you can do any one of those tactics. List it, Jack. Put it on the sheet. Listed on your net worth statement, not listed on the market. I was like, Joe, that is a fairly dramatic tactic. Wow. I mean, it would give you market data, but geez.

Jack, just list your house. I was trying to get the cop and I accidentally sold my house. I think I made an error. Might be a bridge too far. Yeah. Great question. How many nerds do you think we enrage with that, Paula? Wait, I want to address one final piece of Jack's question also because he said, if I did sell it, there would be transaction costs.

Technically, even in a hypothetical world where he wanted to access that value, he wouldn't be able to tap that entire value. there are transaction costs associated with that sale. So, Jack, what I would say is, if you want to adjust for that, I would just give yourself a 6% haircut. And again, it depends on how much specificity and how much accuracy you want this spreadsheet to have. If you're compiling the spreadsheet for your own edification, because you want to see that you are directionally creating progress,

You could do it if you're putting together a spreadsheet for business partners and it's going to be audited. It's still not typically commonplace to do that. So even in that situation, if you want to take a 6% haircut just as a rough round number to adjust for those transaction costs, I don't think it matters a lot one way or the other. Not to mention with that lawsuit settlement from the National Association of Realtors, the entire cost structure of what will it cost to sell a home is now totally up in the air. So we're going to have new precedent being set. What I like about your 6% number?

What's that? It's conservative. I like my balance sheet to be very conservative, especially when it comes to the value of a house, which will change in so many ways, so many ways. You put your house up for sale and that number's going to blow in the wind. Yeah. So if you make your cost toward the high end, that's good. If you negotiate a better deal than that later, it's extra money in your pocket.

Well, thank you for the question, Jack. We're going to take one final break to hear from the sponsors who make the show possible. And when we return, we're going to hear from a listener. She and her husband are in their 50s. they have a $2.2 million net worth, no debt, but they're worried. We'll hear from her next. Welcome back. Our final question today comes from Patricia. Hi, Paula and Joe. This is Pat outside of Cincinnati. I was listening to Paula's podcast about being financial hypochondriacs and wondering if I'm one. I'm already stressing about our finances

in retirement. How much is enough? My husband is 56 and the breadwinner. I'm 58 and retired when our first child was born. My husband works from home and makes about $165,000 a year with additional cash bonuses up to $100,000 gross and stock bonuses of restricted stock units and performance units averaging $35,000 per year. For the past three years, we've used the cash bonuses to buy cars for son, 19, and daughter 18, and replace our much-loved travel van. The stocks have been cashed out and are in a money market brokerage account. Some of our financial basics. Our net worth is about 2.2 million with no debt. We have $1.2 million in IRAs and Roth IRAs invested at TROP price with a mix of 70% index and mid-cap funds and 30% bond and U.S. Treasury long-term index funds.

a target date 401k, to which we contribute the max and catch-up amount to each year, and an HSA that we also max out yearly and haven't used. We have about 150,000 in an emergency fund that's a high-yield money market account. The remaining 950,000 is our house, valued at about 625,000, a second home in Michigan near Lake Michigan, and the cars. Right now, we spend about 100,000 a year on living expenses, which will drop to about $65,000 a year in retirement after direct costs associated with our kids are gone. Both have college costs covered between scholarships, tuition reimbursements from my daughter's career path,

and they each have a $529 with about $60,000 each for any additional expenses. My husband is planning on a pre-retirement in 2030 where he'll be working from a travel trailer while we tour the U.S. with an eye out for possible retirement locations. Otherwise, we'll stay here or head back to Michigan. Full retirement will be in 2031. That's when I'm eligible for Medicare and can start taking my Social Security of $1,700 a month and using savings and investments for living expenses until husband takes his Social Security at $70 at $4,300 a month. I keep feeling like it's not going to be enough and we should be doing more.

Please tell me I'm wrong. Pat, thank you so much for the question. This is Paula, one of my favorite questions that we've ever had. So Pat, I really, really like this question because this is, in some ways, a hardcore financial planning question, which I always enjoy. But I also like the fact that this is also a behavioral. question in in the middle of it. So let's tackle it right from the end. The note you ended on is, please tell me I'm wrong. So I'll tell you you're wrong because you are wrong. Now,

you've already done this math, but let me go over this. And this is some back of the envelope stuff, Paula. I'll just do this to look directionally. You, You and I were talking about before we even hit record today that with regard to Stevens' question earlier, I don't like the rules of thumb. Where should I be at 30, 40, 50, those type of thing, those types of things. But what I do like, just to very quickly get where I want to go, some of the shorthand stuff. So if a million dollars equals $40,000 a year in expenses during retirement. and Pat and her husband's net worth is $2.2 million, of which $950,000 of that is houses.

Getting back to Jack's question and assuming that she doesn't want to sell those homes, I then lop off a million dollars, $950,000, you know, is now at $1.5 million, which is available without doing any real estate transactions for her. her goal. That would equal then conservatively about $50,000 a year. She wants to live on 65. So the work, Pat, is not done. It's not done. And my very first question is tell me about these two houses. How much of that equity is in the game for your financial independence years? How much is not? And we'd have a discussion there first. But I think you can make it without it. You're only $15,000. away. And we're talking about 2030. And based on the fact that you're now empty nesters,

and I'm assuming based on the fact that the money for stocks have already, that money's already gone to the kids' cars, and we check that box, you've already checked all these boxes. I'm assuming then some of that money in future years may be able to also supplement making up the difference. Man, I think if you're not there, you are close. You are very, very. very, very close. I could tell you that, though, all day long. And I don't know, Pat, if I were in your shoes, that I would believe it. Because back when I was a financial planner, I knew a lot of people like you, Pat, people that would worry and it would keep them up at night. This is not a little worry. This is a big worry. This is a, are we stepping in it with the rest of our life? And if I

stop working, am I going to mess everything up? And because of that, people have, and you've seen this before, Paula, one more year syndrome. I'm just going to work another year, a little icing on the cake just to make sure. And you know what ends up happening? You end up wasting valuable time because of your fear and uncertainty. I think the only way that I, when I was a financial planner was ever able to help somebody pass that fear is working with you one-on-one on cold, hard numbers, not the back of the envelope stuff that I just did. Cold, hard numbers. Here's where you'll be next year based on your plan. Here's what it would be the year after that. Here's where you're going to be the year after that. And we go through each of those numbers.

And you feel confident then about all the assumptions we're making, not the back of the envelope, that equals 40,000, so I think you're around 50. That was very quick. I wouldn't do that. I would be very comfortable with all the assumptions. I would know what the assumptions are in my plan. And I will tell you that for my, quote, hypochondriac clients, which I don't think is hypocondriac, by the way, I think this is rational. I think if everybody tells you not to worry, you can tell them where to go. Because no matter what I tell you, you're going to worry until you get those numbers. And I think what's really cool is the only thing that is undisputable is math. Those numbers are cold.

They are cold numbers when those numbers tell you good things and you know when they tell you bad things. And I think even if you find holes in your plan, I think you'll be far more comfortable with the holes when you know exactly where that Achilles heel is. When you know where that is, I think you're going to be far more comfortable. So what I would do is I would hire a financial planner specifically to help you dive into those numbers. This is a perfect time to sit down with somebody who's done this before because that will also give you a sense of calm. You may retire once. Your goal is to retire once. When I was a financial planner, Pat, I probably retired 150 times, Paula.

You mean you retired 150 people? Yes. I've been through it so many times and every time I could do it with more certainty. So being next to someone who's done this 125 times, 200 times, that also can give you some confidence because they've seen you before. They go, oh yeah, this is how we handled that. And I think that experience will also give you confidence because you only want to do it once. So I think you're doing great. There are things that I certainly would do differently.

We can get into that later if we choose to. I don't know that we need to. I want to know what should she do differently? Because as I was listening to all of her numbers, they sound spot on. I mean, she's handled her finances very, very well. I think so too. I'm particularly impressed by the 529s. They're funded.

The kids are night. and 18. I mean, wow, they've done an amazing job. I can add two more to that. You know, it's funny during the all these higher interest rate times that we've been in lately, the number of times I still see people that don't have a high yield savings account. The fact that her emergency fund is in a high yield savings account, I think it's fantastic. And you know what? It's not a ton of money, Pat, but it's money and it counts and it gets you there faster. And the number of times I've had conversations, people going, you know, okay, so I go to from half a percent to five percent, $30,000 or $50, whatever the number is, that is free money. It's free FDIC insured money.

Why would I not have my emergency fund in a high yield savings account? If you're walking your dog right now, you don't have money in a high yield savings account. I'm talking to Pat. I'm talking to you, you, not them, you. Because I know there's so many people listening to this right now that are going, oh, yeah, that's me. But that's a great one. The HSA maxing that out yearly?

How great is that, Paula? Yeah, I love the HSA max out. HSA has triple tax advantage. There is no better tax advantage to count than the HSA. It's wonderful. So, Pat, I think you're rocking those things. Obviously, the houses, I think that's fantastic, having some real estate presence. That's great. And you may not even count that real estate, which is also cool. The two things that I think you could do better, and this will go hand in hand with, I think when you meet with a financial planner. That 401k being in a target date fund, the target date fund is going to, quote, land the plane too soon.

Meaning it's too conservative. It is too conservative. Even if, let's say you said 2030, 2031, let's say use a 2035 fund. because these companies don't want to be sued, they will still be more conservative than they need to be to ensure that you have a safe landing and don't lose money. But because of the fact that what I'm telling you to do and what's going to give you certainty, which I think you really need just the confidence to know that you're as well off as Paul and I both think that you are, I think when you're in the middle of getting that confidence, what's going to give you confidence is knowing kind of when you're going to spend those dollars. So let's get rid of the target date fund and instead target specific amounts of money into the bucket of time when you're going to need that money. money. I will bet that will create a little bit more aggressive allocation, but it will also create a much, much bigger amount of money for you in the future because of the fact that you will

safely, quote, land the plane at the appropriate time instead of doing it early so that T. Rowe Price doesn't get sued. I'm assuming this is at T Rowe Price as well. It might not be. Vanguard Fidelity, whoever, I don't think you need the Target Day fund, which brings the second thing, which is the money at Tiro price. I love TRO price. 60% index funds, 40% bonds also just seems too conservative for me again. But again, I don't know that. But I think that when you do the financial plan and you start bucketing out what I'm going to need that money,

I think you're going to find an allocation that is closer to what you really need than this directionally appropriate but not really specific approach that you're using right now. now toward reaching your goals with this money? Directionally appropriate, but not really specific. So essentially what you're saying is her asset allocation could be more dialed in. This is different, but it truly is, Paula, the same discussion that I've... We've been having about Paul Merriman. Yeah, this is like a thematic to the last few weeks.

I seem to have blown up every Facebook group online with this discussion, but it is. This is the same argument I'm using against VTSAX, right? It'll get you there. What Pat's doing will get her there, but she could do so much better if she bases it on her end game. Pat, if you do meet with a financial planner, there are three things that I would recommend. One is to meet with somebody who has a fiduciary duty to you at all times.

So the question you want to ask is, do you have a fiduciary duty to me? at all times. Make sure you use the phrase at all times because it is possible for somebody to have a fiduciary duty to you some of the time, but not all of the time. And that can actually happen in the same conversation. So that's one question that I would ask. The second question is, are you fee only? Because I would recommend going to a fee only financial planner. And the third is, and this is going to be controversial, but personally, I do not like the assets under management model. And I would steer clear of anyone who's going to push you towards assets under management,

which goes by the acronym AUM, an AUM model. On top of those guidelines, Paula, I also think, Pat, you really want to go back to specifically the type of advisor they are, how they work with you. You need somebody who you're not delegating this to because I meet a lot of people who are financial advisors and a lot of clients, they just want somebody to handle it. You want somebody who's going to have the heart of a teacher who's going to show you these numbers and walk you through the plan. So almost somebody who's going to do it hand in hand with you, I believe, versus somebody

who just says, okay, magic, yep, Pat, you're okay. because I don't think a financial plan or even if they have a ton of experience, them just saying, yeah, you're good. It's going to be great. This needs to be your plan. So for me, when it comes to interviewing all the things that Paula said are checkboxes that I want to check. But the biggest checkbox of all for me is how is this person really going to work on my team?

And am I going to have this relationship that I need? because different than just this arbitrary hire a financial planner, you have a specific mission that you are out to fulfill. You and I talked about a gentleman, Big Earn. Yep, Big Earn. And I mentioned to you. Dr. Carsten Yeska is his official name. Yes. And I mentioned to you that if I were in the market right now for a financial planner, Big Earn would be my financial planner.

Yeah. Now, let me tell you some things about Big Earn. Yeah. Big Earn is not a financial planner. He's not. He has a PhD in economics, but he is not a financial planner. He's not a financial planner. He's not a fiduciary. He's not a licensed person. I just took everything Paula said and threw it out. But this is where I think that people online, Paula, get it wrong, is that I totally agree with everything you're saying. But my first criteria, my very first criteria is I need somebody who's matching me. And Big Earn is, a guy who I know very well. He will fight with me, which is what I'm looking for. Everybody's not looking for that. I'm looking for that. That's what I want. I want somebody who's going to go, Joe, you are messing this up. Yes. Please give me that. I want somebody who's not going to be afraid of fighting with me. And as you, Paul, you've known me a long time. I will fight back, right?

I will always fight back. And often I'll be wrong as hell and I'll fight back. I need you to push through Joe's ego and just punch me. And bigger and would do that. I also need that person to have enough credibility that I will believe them. There are some people that fight with me and I just, they're not the right who for me, meaning you can tell me all day long, oh yeah, your approach to XYZ sucks. Well, you know what? I don't value your opinion. Yeah. So I need to value your opinion. When I got help with social media, I went to MIT. And it was specifically because that was my who. When it comes to social media stuff for my company, I didn't want the snake oil salesperson, you and I, Paula, get these emails all the time.

So it resonates with us, but maybe not for the whole audience. But we get these snake oil salespeople, oh, your social media could be so much better. No, don't care. Yeah. But if Sinan Oral, my professor at MIT tells me my social media sucks, I'm listening because I'm a moron if I don't. So that is the number one criteria, Pat, for you. you need to think, does this person have the credibility it takes to make me feel comfortable enough that I'm going to sleep at night?

And then am I a fiduciary? How do I get paid? Like all those things people talk about? I do those after I accomplish that number one goal because they can be all the things, Paula, that you mentioned. And I'm still not going to hire them. Okay, great. You're a fiduciary.

I don't care. I think you're a moron. I said this on a previous show. There's a person can have the right credentials, but if you don't assess that they have both intellect and wisdom, then they're not the right person. Absolutely. I thought when you said that last time, I was like 100%. Yeah, exactly. Because having credentials alone does not mean that you have good judgment.

But getting back to Big Earn. So a lot of people listening will go, oh, wait a minute, Joe just said, it's because I know the market. And most people listening to the show don't know the market. So I would take everything Paula said first. Are they a CFP? Are they fee only? Are they a fiduciary? All these things.

How do they work with me? Take those first. And then are they, quote, big earn. Yeah. Do they have both the wisdom and the intellect that Bigern has? Yeah. Yes. But I can go right to Big Earn because I know Big Earn, I know the space, I know what I'm looking for, I know

specific. Most people aren't privileged to have that. And the big question, it's hard for you and I to answer is, how do I find the right person? Well, that top of the funnel, I think for most people should be what what Paula you're talking about. But beyond that, then, I think, Pat, you've got to have it deep in your gut that this person is going to give me that heart of a teacher. By the way, if for anybody who's wondering. The reason that Dr. Karstenyeska is referred to as big urn, earn is the acronym ERN for early retirement now, which is the name of his blog. And he's big. And he's big. He's so, he's super tall. I just interviewed him in person in at the Bogleheads conference in Minneapolis. And we have like a foot of height differential. Cameras try to put your eyes at roughly the same

level, you know, that's like one of those things that videographers do. They want your eyes to be the same level because otherwise it looks weird on camera. Yeah. We had to make some adjustments in that shoot. Paula had to sit on 18 books. Yeah. But Pat, I love this question. Love, love, love this question. This truly is the time where I think getting very comfortable with these numbers is going to help you behaviorally, which is awesome. It is awesome. It's this dovetailing of all these things that will make these years exciting. And by the way, Paula, one more thing I think is exciting. Having that 2030 to 2031 year where you're playtesting, you and I both love this idea of playtest it. It's so cool that you're going to go try out different areas to see where

you might land. That's neat. Yeah, absolutely. Working out of a travel trailer, like that sounds like an amazing adventure. For a while. Well, when it stops being fun, then you stop doing it. And for some people, that fun is forever. Yeah. For me, as you know, Paula, it was roughly seven months. Yeah. That's what's cool is you get to do it until you decide you don't want to do it anymore. It's fantastic. Yeah. But Pat, if you do move up to Michigan, make sure you bring some cans of skyline with you because the moment you said you're from right outside of Cincinnati, my first thought was Skyline! For those of you who are wondering what we're talking about, I'm just, I'm referring to the best

chilly in the world. So thank you, Pat, for that question. And congratulations on being so darn close. You have done so many things right. And you've still got time. You know, there's still six years. And you've done your very, very on track for this 2030 goal. Yeah, I think it looks really good, pet.

Yeah. Well, Joe, I think we're signing off for today. I think we've done it. No. Okay, that was super fun. That was a lot of fun. Joe, if people want the party to continue, where can they find you? Every Monday, Wednesday, Friday, the greatest money show on Earth.

We call The Circus. It's the Stacking Benjamin show. It is a variety show on Mondays. We have Monday Mentor Day. Wednesday, we dive into a case analysis or into some big headline. And on Friday, we have a roundtable discussion with some amazing people like the Paula Pant and other notable people from the personal finance base. And we take a great topic. One topic I really like that we discussed lately was health and wellness, the chicken of the egg.

What comes first? Being healthy or being wealthy. And I thought it was really, really neat. The scary part, I think to me. me, Paula, in that discussion was this idea that I'd never consider before your healthy life expect, not your life expectancy, but your healthy life expectancy. And the fact that in the United States, that age is 66 years old. That's scary.

It really means that as much as we focus on money, we should focus on our health as well. So stack you Benjamin show every Monday, Wednesday, Friday. That was a fun discussion. And you can listen to that on your favorite podcast playing device. Speaking of which, if you enjoyed today's episode, please follow us on both Apple Podcasts and Spotify, as well as any other favorite podcast players you enjoy. Also, please come find us on YouTube, YouTube.com slash afford anything. I should mention we are trying our best to get YouTube videos out kind of close-ish to when our audio episodes come out. But there is still some variation.

So we're releasing these audio episodes, of course, every Tuesday and Friday, and we're releasing episodes on YouTube. When post-production is ready. Find us on YouTube. Subscribe to our channel, hit the notification bell, and you will get notified whenever we have a new video up. Also, subscribe to our newsletter, afford anything.com slash newsletter. And don't forget to tell your family, your friends, your neighbors, your colleagues, share this show with the people in your life. Thank you so much for tuning in. My name's Paula Pant. I'm Joe Solcii hi.

And we'll meet you in the next episode.