Afford Anything - Ask Paula: A Year Off Work, a Career Change, and a Divorce: How to Make It Work

Episode Date: September 13, 2023

#461: A special LIVE recording in front of an audience at Podcast Movement, an industry conference in Denver. Former financial planner Joe Saul-Sehy and I tackle two questions in today’s episode. Our first question comes from a soon-to-be-single-mother on the precipice of divorce. How should she navigate this financially? Our second question comes from the spouse of a Purple Heart veteran of the war in Afghanistan. She and her husband would like to take a one-year sabbatical from work when they turn 40, which is in five years. They’d also like to pivot into lower-paying but more enjoyable careers. How should they map out their money for this transition? Joe and I dedicate this episode, recorded live on stage, to answering these two questions. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode461 Learn more about your ad choices. Visit podcastchoices.com/adchoices

And now, for your listening pleasure, an audio only exclusive from Afford Anything. Joe, we're recording in person. It's unbelievable. Unbelievable. We're here. We're in person. I'm actually looking at you, like, live and in the flesh. We are violating the restraining order.

I know, right. They said it shouldn't happen. They said it couldn't, but here we are. Yes. So do you want to announce where we are? We are live at the FinCon booth on. some awesome equipment in the huge expo hall at one of our biggest industry conferences called Podcast Movement.

Yes. And it's at the Gaylord Rockies Hotel, which is in Denver. Yeah. Wow. Very comprehensive. Why, thank you. Incredibly comprehensive. Joe, you flew here on a private plane.

Yes, you do. Because you're fancy like that. Yes. I flew commercial. Oh. Because I'm a commoner. Little people. But we are here.

live answering questions that come from you, the audience. So welcome to the Afford Anything Podcast. This is a show that understands you can afford anything but not everything. Every choice you make is a trade-off against something else. And that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention. It applies to any limited resource that you need to manage. My name is Paula Pant. I am the host of the Afford Anything podcast. My buddy, former financial planner, Joe Saul C-high, looking dapper in a pair of glasses. Why, thank you. I can actually see you now. So we are here answering your questions.

And this first caller, I'm going to read her question out loud. She's anonymous. And for the sake of added anonymity, she requested that we read a transcript of her question rather than she didn't want her voice to be played on the air. Joe, given that she's anonymous, we do need to name her. We just recorded. Paula was awesome enough to sit in on yet another Stacky Benjamin's. I almost said a Fort-Native. Stacky Benjamin's show, and we did a great recording. And we had my friend, Shawna Game, who is awesome from a show called Everyone's Talking Money.

And so let's call her Shauna. All right. Well, then this anonymous caller is named Shauna. And here's her question. My marriage may end in divorce. I don't know how to navigate this from a financial perspective. We have children and we own a house with $250,000 of equity. We live in a no-fault state and we'd split the assets 50-50.

I have modest non-retirement savings, including a health savings account, Roth IRA annuity, and an illiquid pension with $20,000 to $30,000. I've gone through a rent-to-own analysis. from an emotional and financial perspective. And I want to buy a house that would cost $350,000. What should I prioritize as I look at the possibility of needing to purchase a house and live on a very tight budget as a single parent?

Shawna, what a difficult time. I just feel for you having to go through an emotional time and make financial decisions at the same time. because Paula, the one thing we always counsel people to try to do is don't do that. But in this case, you have to. You have to. The thing about divorce, and I've been divorced myself, at the lowest, worst, most trying time in your life, you have to make irreversible, irrevocable decisions about your entire lifetime's worth of assets and income.

And potentially also future. money that you will receive, right? At the lowest point in your life, you have to make irreversible decisions about everything you've ever built and everything you will ever build. And I think in this case, that's why, at least for my answer, Paula,

I'm not going to focus on the assets that she has now and much more on the rubric of how she needs to think about this situation. Yeah. The first thing that I want to say is I would not necessarily be so confident that the assets will be split 50-50. It doesn't sound from your question as though you have been through the process. I know you live in a no-fault state. That means jack.

I've lived in a no-fault state. It means absolute jack. The bigger question, do you live in a community property state versus do you live in an equitable distribution state? That's going to determine some of how the assets are split. Beyond that, the other major question is, what kind of paperwork do you have related to who came into the marriage with what? Because if your soon-to-be ex-spouse is going to try to make a claim on a bigger share of the assets than he may claim, however much was separate property from prior to the marriage, he's going to make claims on that. if there was property that he acquired during the marriage that was funded by cash that he made from before the marriage, then he may try to claim that these assets acquired during the marriage

were funded by what was originally separate property and therefore ought to be his. There are a lot of arguments that he can make that can try to tilt the balance to something that is very not 50-50. I think it could be even greater than that, as if that wasn't bad enough, right? which is this, if she feels this right now, he may also feel it, Paula, and there becomes a time when people start hiding stuff from each other. Yeah, yes. And so discovering where your husband's assets are is a big thing, or at least keeping track

of what money you have now is going to be super important for the rest of your marriage. It is not uncommon to see accounts get drained. Well, I can talk about it from mine. I'm not divorced, but I had many clients that went through divorce over my 16 years and the draining. As a financial planner. Yes. You saw it a lot. Yeah.

Yes. A council get drained. Even if you have high airline miles, right, even that can get drained. I mean, stuff that you don't even think about. Ridiculous. Yeah. Also, if you have assets that will generate future income. So, you know, and, Sean, I'm not just saying this for you.

I'm saying this for all listeners who might be going through this or who might know somebody who's going through this. If you have any assets that could generate future income, such as a business, for example, that might generate future income, your divorcing spouse might claim a share of that, particularly if that business was started during the marriage or if the assets were acquired during the marriage. So it isn't, oh, well, we live in a no-fault state that that really doesn't matter. There's a huge industry around divorce. The divorce industry exists because it is so high stakes and so complex. And attorneys in that business will tell you that the fees are high and the fees get much, much higher when people haven't figured out what they want. They have no idea what it is that the other person has.

And then, obviously, the conflict on top of that that people have, when they just, they're in the mood to burn it to the ground, makes those fees go even higher. Yeah. And you know the thing, honestly, when I was getting divorced, some of the worst advice that I ever got was from people who were like, oh, don't fight it because you don't want to pay these fees. Wow.

Really? Oh, my goodness. So many people. And their justification was twofold. One was like, you don't want to pay the attorney's fees. And the other was, don't you have better things to do? You have a business to run, just like, move on. And that was such stupid advice for two reasons.

Number one, paying an attorney, let's say $50,000 or $100,000. I mean, Sean, I'm not saying that's that how much you're going to pay, but like $250 increments, the number of hours that you pay is often proportionate to how complex your situation is, and that is proportionate to how much you stand to lose, right? If I pay an attorney $50,000, but from that, I am able to save an asset that's worth $300,000, or at least if I have a higher likelihood of saving an asset that's worth 300,000 or 500,000 or 800,000, right? Then that is a plus EV decision. It's a decision that has a positive expected value because it's essentially an investment that you're making in defending the robbery that is being perpetrated on you.

I have a resource to recommend here, Paula. I have a friend. She's appeared three times on the Stacking Benjamin Show because this is such a big area. She is a forensic accountant. And her job is to help people find out when a partner is stealing from you. Partner, by the way, in every sense of the word.

She's even talked about cases where somebody thinks their partner at work is stealing from them. And so she goes through the numbers, but she has put together a guide. It is not free. So I'll say that right away. But if anybody wants to look into this, her name's Tracy Conan. Her website is Fraudcoach.com, and it's called the Divorce Money Guide.

It's so good at helping people get that piece together so that at the very least we're not paying the attorney that cost. Right. Attorneys are not business people. They're not accountants. They're not financial planners. My attorneys had zero understanding of how to value my houses or my business or my assets. sets in any way whatsoever. Attorneys are good for predicting how a judge will respond to a given set of stimuli. That's their expertise. If we go in with X, the judge will likely do Y. And particularly,

they know the family court judge in their particular county. They know the personalities of the five or six family court judges in that county. You know, they know this judge is better than that judge for the situation that you're in. We'll see if we can get it reassigned to this other judge. You put our best foot forward. Yeah, I mean, attorneys are good at that. They're not good at understanding the mechanics of bought a house and then we refied it against it. And then we took the refide and we used half of it to buy these other assets. Or on the other side, we have a 401K with a loan against it.

I mean, right, yeah. Or the value, the present value of a pension you're not going to get for 20 years. Right, exactly. What is the present value of future dollars, right? And so when they start making arguments that, hey, you know, I deserve a show. share of this future revenue. I want to backdate that and collect a bigger share of the assets now. Man, in my experience, divorce attorneys are absolute garbage at that.

No offense to any divorce attorneys who are listening. Maybe you're one of the few who's good, but there are a lot of them who just do not know how to do that. Every divorce attorney I've run into or that we've interviewed on stacking Benjamins has been very open about that and said that they outsource that to people, Paula. So they will sometimes charge you a fee to bring in this expert person. Or you can do it on the side yourself. Or you can do both. I mean, it's worth the money up front.

Like insurance. Yeah, exactly. Because what you stand to lose is so much bigger than the fees that you're going to pay. There's this particular class of financial planners. And Joe, you're probably actually more acquainted with this than I am called, what is it, CDF certified divorce. Yeah. Yes. Correct.

There's a particular certification. If I knew we were going here, I would have had it pulled up. Let's see if I can do that while you keep going. Yeah. And so it's a particular certification that financial planners or financial advisors can get that indicates that they are specialized in financial planning in a divorce context. The best advice that I ever got came from one of those. The acronym, Joe is looking up the acronym right now.

CDFA. CDFA. Certified divorce financial advisor. Is that what it stands for? Certified divorce financial analyst. Ooh, certified divorce financial analyst. Okay. Yes, look for a CDFA because the thing about getting divorced is that not only is at high stakes,

not only is it irreversible or irrevocable, not only does it happen at the worst time in your life, but also you have no experience with it. You're a novice. You have zero practice. So you're doing this thing that you've never done before. No practice, no preparation, right? No training for how to go through this. And it's happening at the worst time in your life, the emotionally worst time in your life.

And the stakes are the highest, from a financial perspective, it's the highest stakes set of decisions you will probably ever make because it deals with all your past assets and all your future assets. everything you've ever built and everything you ever will build. And so it's this horrible, horrible, horrible combination. Wow. We have our poor anonymous caller. This was not the question I asked, but.

Well, let's get to that, though. Yeah. Because there is good stuff there too. Yeah. Because I think all of that is great. And I don't think that Shauna's the only person going through this. Right. Yeah.

And, Sean, I don't mean to like salt on the wound here. I normally like to be positive, but I think you can tell that I also, I don't want to sugarcoat it. Generally, I maintain an optimistic and positive vibe. If you're a long time, listener to this podcast, you know that. But unless you're very lucky, it's not going to be simple and it's not going to be straightforward. If you are one of the lucky ones and it's simple and straightforward for you, that's great. I'm happy for you. but be prepared for this to become much more complex than you might be anticipating.

That was common also. It was always common for a couple at the beginning of a divorce process to tell me, hey, I wanted to let you know we're getting a divorce. But it's going to be really simple. We've already worked things out. And then six months later, they're fighting over something. Yeah. There's some complication.

Or many complications. Or many. You know, they're fighting over a dozen different things. You hope it's just a couple. Right. Yeah. Yeah. Yeah, it's incredibly common.

And for everyone else who's listening, by the way, this is why it drives me crazy when people are like, we're not getting a pre-up because we're so in love. The worst decision I have ever made in my entire life is not getting a pre-up. Hands down. Absolute worst decision of my life, of my financial life. Did you talk about it? I mean, well, I guess. We sort of did, but we didn't talk about it seriously.

And we just basically said, look, we're committed and we're going to be together for life. So this is just not going to be an issue. And if it is, we're going to be really fair to each other. And we're going to be adults and we're going to handle everything responsibly. And that was basically the extent of our conversation. And it's so naive, you know, it's so... Did you have assets? Had you brought assets to the marriage?

Both of us came in with basically... nothing, but it's easy to make the argument that such and such was separate property from prior to the marriage. If, for example, something was deposited in one person's account rather than the others, and it happened four months before the actual marriage became official, you know, when things like that happen, then you can go in and say, oh, well, this is separate property from before the marriage, right? See? And likewise, it's also easy to say, well, technically, you know, because oftentimes when people get married, they don't, they might still retain their accounts that are in their own name, and then you also open some joint accounts. But just inertia,

you don't necessarily close the accounts that were in your name. If you had an account that you opened when you were in high school or in college that you've just had forever, you might keep it open. And like various things get, you know, and so it can be easy. It's messy. Yeah. And it can be then easy for someone to say, well, see, granted, we acquired this asset during the marriage, but look, forensic accountant, look at how much of it came from my account. So, you know, the thing about a pre-up is people like to believe, it's basically the equivalent of not getting health insurance because you're like, I'm healthy, or not wearing a seatbelt because you're like, I'm a safe driver.

it's arrogance. That's what it is. It's arrogance mixed with naivete. And I'm guilty of it. I'm not sure. I did it. I made that mistake. I think 99% of people are guilty. That one. Yeah. The good news is... I know. Yeah, let's get to some good news. Well, the good news is, is once you're past that point, and now we deal with the $350,000 house and your own things, the first thing you have to do is think of about your stream of income. That is job number one. And this may be even a bigger job than people think it is. Like, well, my income is my income.

Well, it doesn't really have to be. You know, how much money can you bring in now that you're going to be sole provider for your family? And you're responsible for bringing in all the income. So where is that going to come from? How reliable is it? And is there a way that we can beef it up? And once we do that, and that maybe is a whole separate.

discussion, then I like separating things into four separate buckets. And I kind of look at it. If people make like a plus sign in their head, the top half of the plus sign are the two things we're going to live by. And those, when you're first starting out are by far the two most important areas. Then we have below the bottom half of the plus sign are the two areas that we're going to grow by. What do you really worry about growing yet? Let's worry about living. getting that together. So in the upper left quadrant, we have our cash flow, which means if she knows she's buying a $350,000 house, what is that going to do to the budget? And then what expenses am I going to have around that? And I would begin then plotting out those expenses against that

income. So once I've made the income as high as it can be, what are the super important expenses? So I get a feel of what it's going to take to turn on the lights every single day. And then the non-negotiable is you have to be able to have enough money to build an emergency fund. Because the emergency fund, especially initially, when that boat is pretty rocky, you need that emergency fund in place. So you have to have enough cash flow. I don't care if you can put money in for retirement or not or if you can put money in for long-term. Forget that. Forget that.

This is not the time. You have to be able to put as much money into an emergency fund to build that thing as much as possible. because you can't rely on two incomes anymore. You're relying on you. And if something happens there where you get disabled, have to take time off work, whatever it might be, you need to have that in place. So for me, that is job one.

Income in and then how much money we have going out. The risk, though, is that if she increases her income, then he might try to claim a portion of it, particularly, they've got kids. I'm not saying to increase it now, to know what my strategy is around increasing my income. income. Right, right. Because, you know, if they have kids, now I don't know which one is the higher income spouse, but if she's the higher income spouse, she may need to be paying child support.

And that changes the equation at the last minute. Right. Exactly. And so if she increases her income right now, that just increases the amount of child support that she would owe him and the amount of alimony that she would owe him. It's a great distinction, planning for what your income stream is going to be versus rolling it into action. I want to know, though, when that divorce is final, that I can roll into action. I don't have to think about where I go first. I'm going to my boss first and I'm getting this. I'm starting this side hustle.

I'm doing this second job, whatever it might be, so that I can lock down my income stream to create that emergency fund. Right. Have the plan in place. Yeah. By the way, once we know that we're cash flow positive, because I look at Shauna's if she's a business, a business is only healthy if it's cash flow positive.

and you're bringing in some money. The second area to live by is that upper right quadrant of the plus sign, and these are what if something goes wrong? So that actually is, the cash reserve itself as you're building it, is in that upper right quadrant, but so is your need for life insurance is going to change. Your need for health insurance is going to change. What are these protections you have?

Because you're going to need those things to make sure that the wheels don't come off the bus. Right. But it's funny because a lot of people, Paula, don't think of an emergency fund as insurance. And you know me, I think that is your number one insurance policy. The ability to self-insure gets rid of the need for short-term disability coverage. You can raise your deductible on your homeowner's policy. You can raise the deductible on your car insurance.

You can buy a lot less outside insurance once you have that emergency fund and great cash flow in place. Right. And, you know, the kids are going to need health insurance, and so which parent pays for that? Well, this can also, doing this planning, you can see doing this ahead of time, can inform your divorce strategy. And you can dictate to your attorneys what negotiations are the most important to you. Right. Which, to your point earlier, they don't know that. They don't know that ahead of time.

Exactly, yeah. Now, with a $350,000 house, she's going to need a down payment. Yeah, so she says she's got modest non-retirement savings, right? But part of its HSA, obviously, you don't want to touch that. An illiquid pension, obviously you don't want to touch that. Probably can't. Right. You know, a Roth.

I mean, the non-retirement savings that she has are things that she wouldn't want to touch. No. So the first thing I would do would be to look for what program she's eligible for, as an example, if she spent any time in the military. there are special housing loans for people in the military. Some communities have programs that are available. There are USDA loans. If she lives in a rural area, Sean, if you live in a rural area, USDA loans are an option.

You know, if you put aside the divorce itself, beyond that, then it becomes the same calculation as anyone who says, hey, I want to buy a home. I need to start saving up for a down payment. Really, it appears the only thing she has available then would be the equity from the current home. Yeah, yeah. They've got $250,000 in equity,

but I just wouldn't be so confident that that's going to be a 50-50 thing. There are so many ways that that can go. He might claim all of it. He might claim that plus also claim a share of her pension and then also ask for child support and alimony. And even if it is 50-50, where are the attorney fees going to come from?

Yeah. How much of that will there be? Right. Which are worth it, I will say, don't listen to the people who tell you to roll over and give up for the sake of saving on attorney's fees. I think I've heard that recently. Yeah. But divorces are expensive in multiple ways, not just the fees, but the assets that you lose. Shana, when I look at your question, it seems to me that the non-retirement savings that you have, those are not buckets of money that you can tap to make a down payment on a home.

and the at most $125,000 that you would get from the equity in your home. I'm not going to count on it. So I'm going to run this scenario in my head as though you're starting from zero and you need to save up a down payment on a $350,000 home. And so then I'm going to say, well, what is 3.5% of $350,000? And that is the down payment that you would need if you got an FHA loan. So let's do that math right now. So $350,000 times 3.5% times 0.035 equals $12,250.

Okay. Then the question is, how do you save $12,000? There it is. Right? And then it's, depending on your income, maybe that means you're saving $1,000 a maybe it means you're saving 500 a month and you'll be able to do it in between 12 to 24 months. But I mean, certainly if you are able to get any equity from the sale of your home, that's better. What I like about that strategy too is that I often saw too many, I see, don't you want to use past tense,

but I see too many strategies that are too optimistic. and I think if you have optimism in your soul, but your strategy is pessimistic, it's a way better plan. It is a way better plan because now anything good happens, Paula, anything good happens. A, you have so much gratitude, which is incredible. But then B, it just makes the plan so much better. Right. Versus what's going to happen if you go the other way. Hope for the best, prepare for the worst.

Absolutely. Absolutely. But Shauna, the main points that we've brought up throughout this answer have not necessarily been specifically your question. We've talked about forensic accounting. We've talked about hiring a CDFA. We've talked about good advice versus bad advice. Strengths and weaknesses of attorneys. Right, exactly.

And the reason that I bring all of this up is because, Joe, as to what you said, oftentimes when people are at the beginning of the divorce, they think it's going to be simple. And it turns out to be much more complex and much more contentious than they had anticipated. And as a result, Shana, my biggest concern for you is that you are not asking the right questions right now or that you may not be. Because I think it's great that you want to buy a home. fundamentally your question on its face is, I want to buy a home for $350,000, how do I do it? And then the context around that is

I am just beginning the process of a divorce. And I think it's wonderful that the goal is I want to buy a home for $350,000. But the context around it is potentially a bigger, deeper, and more treacherous minefield than you may realize. And I hope it's not.

Some people get lucky, you know? And Joe, I'm sure you probably saw that as well. You know, I'm sure you saw the full range in your clients. Yeah, but not as often. It was never, ever that simple. So with regard to what questions should you be focusing on, I love the goal of buying a home and a 3.5% down payment on a $350,000 home. you're going to need $12,000.

Add a little buffer to it, let's say, 13, 14, 14, 15,000. Right? And then it just becomes a question of what's the gap between your income and you're spending? How do you save 12, 13, 14,000, right? And what does that come to? How does that divide out into a monthly amount? So the process of saving up the down payment for the home is relatively straightforward. but the other issues that potentially you might have to face, you know, if he decides that

that illiquid pension worth between 20 to 30 grand, what if he decides that he thinks that a portion of it should be his? The retirement assets that are in your name, he can try to make a claim for a part of it. If you get a raise, he can try to claim a portion of that. So that's the situation that you should be bracing for right now. And when you're on the other side, after the divorce is finalized, then turn your attention to, hey, now I have these new goals. And one of these new goals is to buy a home. But the time for new goals is after you come out the other side of this.

And on my end, in that planning, I think of it as four quadrants, the top two that you live by. the first one being your cash flow and creating a great cash flow situation and the other being making sure that all of your protection is in place in case something goes wrong from then on out. Right. Well, Shauna, thank you for the question.

I hope this was helpful. I know this is probably not where you were expecting the answer to go. It's like, wow, Bala. I know, right? Wow. Yeah. Who would have known we get that serious

on the floor of such a casual conference? Right. Yeah, I know. Well, what a question to answer live. Yes, absolutely. Yeah. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need servware and cookware. And, of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale.

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fan of NPR to us. Do with it what you will. That was not in the transcript that you read. Right, right. But when she gave us her question, she said, I'm a big fan of NPR. And I totally ignored that, so I apologize Shana. But being associated with Shana game is pretty cool as well. But let's do that with a second. We'll be a little late. But, you know, you can't think of NPR and not think of Terry Gross. Somebody with fresh air who's had such an amazing career in radio. So I think we named this anonymous caller Terry.

Hi, Paula and Joe. I'm anonymous from Colorado. I'm a longtime listener and appreciate everything you do. Thank you. My question is about VA disability payments and how to think about the in relation to our goals. For some background, my husband and I are both 35 and don't plan to have children. We have approximately 500,000 in investments split pretty evenly between retirement and post-tax investments.

We max our 401 s and HSA, but are over-the-income limit for Roth IRAs and choose to contribute this money to a regular taxable account at Vanguard. My husband spent five years in the Army, earning a Purple Heart while deployed in Afghanistan, Afghanistan and received an 80% disability rating. Because of this year, receives $2,100 a month from the VA tax-free. We both work in fast-paced jobs in the tech sector, earning a combined $280,000 per year, not including the disability. We want to take a year-long sabbatical to travel and decompress when we turn 40. After the sabbatical, we'd like to pivot into lower-paying careers we are more passionate about,

essentially becoming Coast-Fi. We're trying to determine how much money we need for our sabbatical and to reach coast-fi. How should we think about the $2,100 in relation to our savings goals? This amount typically goes up yearly based on inflation, but that's at the discretion of Congress. Should we ignore the disability and have it be icing on top of our savings, or take it into account when calculating our cost-by number? Longer term, how should we think about this money for regular retirement planning purposes? Thank you again for everything, and I look forward to hearing your response.

Paula, I have a definite opinion. Oh, boy. All right. I like the discussion that we just had about hope for the best, but plan for the worst. So here's what I would do. What I would do is see if all of your plans work without counting this money at all. It doesn't mean it's not going to be around. It doesn't mean that you can't rely on it. It also doesn't mean that you can't have a secondary plan that talks about how to invest it.

But let's look at it this way. If anything changes with this income stream due to future legislation, future changes, and you didn't plan on the money at all, I love that. Wow. That was not going to be my answer at all. Wow. Oh, this is good. Bring it. All right.

Well, first of all, thank you and thank your husband for his service, for your service. Absolutely. Right? Yes. Both of you sacrificed. So big thanks to both of you for your service to this country. Joe, what I was going to say is, given that this money comes from the VA,

which is backed by the federal government, there is perhaps no more secure source of this fund than that. Man, I disagree. What? And I could tell you exactly why I disagree. What? Okay. My dad, who fought in fact,

Vietnam, gets services from the VA. The cheapening of services he's had over the last 15 years is astounding and horrible. It's absolutely horrible. So I just wouldn't count on it. Wow. Okay. So what I was, all right, here's how I'm thinking of this. If this $2,100 came from a private company, XYZ Incorporated, then there's a level of risk there because that private, company might go bankrupt and might dissolve. Sure. And so if you're relying on a pension or if you're relying on a payout that comes from any type of a private entity, there's risk. Likewise, if you are relying on a pension or a payout that comes from a less stable government, like if you were Nepalese and you

were relying on the Nepalese government, I would say don't, right? I'll pick on that one because that's where I was born. But the federal government, the U.S. federal government, there's nothing more secure. I'm not saying it won't be there. Don't misconstrue my statement that it won't be there. It's almost like if you can do a financial plan and it works and you don't have to count on Social Security, Social Security is the biggest social program in the United States. Certainly, especially for people already receiving Social Security, Social Security will be there.

do I think that Terry's husband will continue to get benefits? Yes, I absolutely do. But if I'm doing a plan and I can make it work without the plan, phenomenal. Then it's phenomenal. If they can take that sabbatical and not have to worry about it, that's the first thing I do. And then I would begin feeding it into the plan on a as needed basis. So if we can do, and this is what I did when I was a plan. planner was if we could rely on Social Security at a 50% clip to what the Social Security projection

looked like, that was far more secure than relying on 100% continuation of things going the way that they are, right? With problems projected and predicted in the future with Social Security, we know that things may change. So if we only have to rely on it at 50%, that's great. If we only have to rely on it at zero percent, it's even better. So start off with zero and then work your way up in your plan. How much of this money do we actually need to rely on to make the plan work? I see what you're saying. I get the value in that. I would suggest an alternate track, though. And yours is probably wrong. Ah. So my suggestion would be, currently this money is $2,100 per month. But the increases are at the discretion of Congress. And we hope that there will be increases that will

keep up with the cost of living like there are in Social Security. But we don't know that. I would be very, very conservative about any type of inflation. Inflation, yeah, inflation projections or increased projections. And Joe, this goes to what you said about the cheapening of those services over time. If it's $2,100 today, I certainly would not assume that it's going to go up at the rate of inflation, which historically has been around 3%. I would not assume it's going to rise 3% every year. I might say 1%, just to be very conservative about my estimates. And then I would project out into the long term based on that.

So, Terry, you asked, how do we account for this payment when calculating the cost pie number and longer term, do we count it for retirement planning purposes? I mean, Joe, I know you disagree. my answer to both of those questions would be, yes, you do account for it when calculating KOSPI and when calculating long, long-term retirement planning, but just assume a much, much lower inflation adjustment than ever. Assume 1%. I don't think that that would go astray. I don't think that bad things would happen in your plan.

planning strategy. Obviously, I think mine is safer. Mine is just a safer way to plan, which, you know, begs the question how much they need to rely on it. I mean, because that would seriously be my first question to them, because Terry didn't mention what other assets they've accumulated. They certainly have phenomenal income. I don't know how much that speaks to their lifestyle, but if she's hoping to clip things

back and go coast-fi after the sabbatical, you've got to. think they're fairly frugal people based on, you know, or at least have a big difference between the amount of money coming in and the flow going out. So I would love to know how big that asset base is ahead of time, which just leads me right back to answering a question with a question. How much should we rely on it? Terry asks, Joe asks back, how much do you need to? It's my fundamental question. All right. So then what if we did this. What if we ran two scenarios, a best case and a worse case, right? Always better. No, I seriously, I'm not even kidding. I love this planning. Because using what if scenarios with a more

robust calculator can give you so much insight into what could be. Right. Right. And, you know, with COSFI, with retirement planning generally, there's always a range of potential outcomes. We don't know how much the overall market is going to rise in the next 20, 30, 40 years. Yeah. So necessarily, anytime that you're doing any type of long-term planning, you already want to be running a range of outcomes. You know, what if the markets only go up 6%? Well, and also here is, you know, you start to think about, as we were talking about with Shauna, things that could go wrong. Like we want to project that out. When you have a lower amount of money coming in the front door every month, which is part of the goal,

we know that the chance they may have to test that nest egg, that they may have to grab some of that money at a time, becomes the probability of it becomes higher. I'm not saying that it's probable that they will touch that money, but I'm saying there's a much higher probability when you're close to the vest and lower income jobs than there is if you've got plenty of cash flow coming in. Right.

So you've got to add that to it, which means as a financial planner then, the interest rate assumption I would use on that money would be lower because of the chance that they might touch it becomes higher. You know what I mean? Right. Right. So there would be less contribution of capital, potentially. Yes. I mean, if they still had their income stream and they were going to take the sabbatical, come back and continue with that income stream, I would probably say, based on the assumption that they have great cash flow, okay, we could put an 8% on this number.

knowing that over long periods of time we've gotten 10-ish, but using eight for a long-term projection is a good solid number. I might look in this scenario closer to seven or if you want to be really conservative six, but oh my goodness, if you can do it on six and not count the disability money, that means they've saved some serious money already, Paula. Right. I mean, that's true. Are they then at the risk of over-saving?

Are they at the risk of working longer than they otherwise would need to? Well, the good news is if the goal is what the goal is, and they're not going to procrastinate about it, they're not going to go, I don't know, because I'm using such a low interest rate assumption, I think that every year that they get more, you just re-look at your plan, which with the market going up roughly 70% of the time, most years you're going to exceed your assumption. So it's almost like when you and I have talked before that the biggest risk in retirement is those first few years, that risk that you're going to need it right away. It's a sequence of returns risk, we call it, right? But that risk fades over time.

If you have a few good years in a row, it fades. In this case, for Terry, if she plans very conservatively, she could actually three or four years on go, okay, I've now accumulated enough cushions. that I can say, all right, 7%, 8%. It's cool planning. It's a great planning exercise. So it's funny, Terry, in addition to giving you the recommendation to calculate a range of potential outcomes, we've also given you a range of ways to factor in this $2,100 per month. Yeah.

Which is, I think, truly what the answer is. Right, right. I don't think you think about it as one thing. I think about what about here, what about here, what about here. Right. Yes. At the most conservative end, could you do it without it? Or at the most aggressive end, bake it in there and assume it's going to also keep pace with inflation.

I mean, that's very aggressive, right? Yeah, yeah. I would not do that. Right, yeah, I would not do that either. Not in a million years. Well, bake it in and assume maybe half of inflation, 1.5% a year or something. If I were predicting, I would say that is what's going to happen. Inflation is going to most certainly probably be baked in.

Like, what's the chance you think it's really going to change? What do you mean? What is, just from a gut feeling, what do you think the chances that you think that the VA would change this income stream in the future? Well, I would look at what they've done over the past 20 years and use that as a guy. Absolutely. So I will give you my unscientific, completely non-cerebral gut-only level. There is probably less than a 2% chance that things will go differently than they have gone already. So in terms of this conservative planning we're talking about, you know, that I think we're both advocating, I think that just makes your plan more robust.

but Terry, I wanted to have, I wanted to at least address that because I don't want to scare you that, oh my goodness, this is going to change. When the government has changed things historically, by the way, they factor it in for new people first. They change it for new people. And for people that have existing programs that they're on, they generally tend to keep those programs alive. But, and, you know, I hate the term grandfather you in, but they grandfather you in to the program. so I can think historically of one time that didn't happen. And that goes way back to the Reagan administration. So a long, long time ago, they changed the rules on limited partnerships,

which is a whole different issue. Right. And by saying things will continue the way they're going now, Paula, what I'm not saying is they will continue to get worse, like for my dad. I'm saying that this stream of income, I am 98% sure. Sure, we'll continue. We'll continue to get cost of living, aka inflation adjustments.

And the program will be alive and well for Terry's husband. But I wouldn't plan on that. I would plan on a much more worst case scenario or lesser scenario. Right. Yeah, a lesser scenario. Something, yeah. So perhaps the theme of this episode, we've discussed divorce, we've discussed disability payments, The theme of this episode is hope for the best, plan for the worst.

Maybe that's your title. Well, I don't want to spoil. That's a spoiler alert title. And now everybody just looked at their device to see what the title was. Well, Joe, we have done it again. We have closed out. We have literally closed the place. All of the other booths around us, they have blankets over their tables.

Right. Yeah, we're the last podcast recording of the day, and we have shut this place down. The good news is... We can drop the mic. And nobody would... Actually, the good news is the people around us are literally giving a sustaining ovation.

Well, there's no ovation. They're just standing because they're getting ready to leave. Yes. Joe, where can people find you if they'd like to hear more from you? You can find me and another live episode from podcast movement, where you'll hear Paula and our friend, Shawna Game and OG and I at Stacking Benjamin's, which is every Monday, Wednesday, Friday. The greatest money and personal finance show on Earth, we call it, because, as you know, Paula, it's a circus.

Shauna, the namesake of this episode's Shauna. That is. Well, thank you so much for tuning in. If you enjoyed today's episode, please share it with friends, share it with family, share it with neighbors and colleagues and coworkers. Share it with John Wardock from Cumulus. who's taking our picture right now. There is so much paparazzi in this. You can subscribe to the show notes

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I'm Paula Pan. I'm Joe Solicay. And we will catch you in the next episode. Here is an important disclaimant. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet, hear on a podcast, see on social media that relates to finance. All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything Afford Anything produces.

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including but not limited to attorneys, tax professionals, certified financial planners or certified financial advisors, always, always, always consult with them before you make any decision. Never use anything in the financial media, and that includes this show, and that includes everything that I say and do, never use the financial media as a substitute for actual professional advice. All right, there's your disclaimer. Have a great day. All right. Well, then this anonymous caller is named Shauna. And here's her question. Oh, there's Steve Stewart. Should we have Steve read it? Steve Stewart. Mr. Stewart? Steve.

Oh, Mr. Stewart. Steve. Hi, Steve. Are they like specifically ignoring us? Mr. Steve Stewart. Okay, fuck it. Steve is like right here. I've been waving my arms like a crazy person. Steve's going to hear this. Steve, you d'u-turn around.