Afford Anything - Ask Paula and Joe: Should I Sell My $575,000 in Tesla Stock?

Episode Date: February 5, 2021

#299: Chris bought Tesla a few years ago and Jinko Solar eight months ago. Both of these have gone up in value by a lot. What tax strategies can he use to sell these shares? Holly and her three sisters stand to inherit two side-by-side duplexes. How can they structure the ownership of these properties in a fair way? Eric feels hopeless about health insurance as a self-employed business owner. Are DPCs or healthshares the way to go? Frank and his wife have a nine-year retirement plan that involves selling their home and moving to Costa Rica. How can they maximize their savings and existing investments to set themselves up for success? My friend and former financial planner Joe Saul-Sehy joins me to answer these four questions on today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode299 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that 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, anything in your life that is a scarce or limited resource. Saying yes to something implicitly means. Saying no to other opportunities. And that opens up two questions.

Number one, what matters most to you? Number two, how do you align your daily, weekly, monthly, yearly decisions to reflect that which matters most. Now, answering these two questions is a lifetime practice, and that is what this podcast is here to explore. My name is Paula Pant. I am the host of the Afford Anything podcast. Every other episode-ish, we answer questions that come from you, the community.

Today, former financial planner Joe Saul C-Hai is here to help me answer these questions. What's up, Joe? Well, Paul, I had nothing better to do. I know we had some great questions this week, so I decided to show up, On time, ready to go, make it happen for your fans. Awesome. I can't wait. We've got some great questions today, starting with a question from a guy named Chris,

who owns a lot of Tesla stock. We're talking to the tune of almost $600,000. It's $575, if you want to be specific. And there's going to be an interesting conversation that I think is going to unfold as to what happens next. So, let's hear from Chris. Hi, Paula, this is Chris calling from Florida. I am addicted to thinking about fire and I love your podcast. Your interview with Go Curry Cracker about never paying taxes again and the reset basis strategy blew my mind. So thank you for all of the knowledge that you share with us. And let's get into it. The short version is that I'm extremely lucky and bought a single stock, Tesla stock, for 25K a couple years ago and now it's worth about 300k. So 12 times my money. I have 675 shares if you want to recalculate the current value when you listen to this.

But I also bought another single stock, Jinko Solar, about eight months ago for 20K, and now it's worth about 70K. And I own 1,100 shares if you want to recalculate that as well. As you can see, these are very large capital gains. If I were to sell all of my shares in one sale, the taxes would be almost as much as my annual salary. If I have to bite the bullet and just look at the bright side rather than the amount of taxes that I'd be paying, I will. But given the amount of taxes in this scenario, I thought it was at least worth looking into other options. Is there any advice you have on selling and rebalancing in a tax-efficient way? I'm age 27.

My salary is about 80K. I do put about 25% of that straight into my 401k to max it out. And that all goes into a Vanguard, a targeted fund. I also own a house. It's on a 14, probably 14 years left on the mortgage. That's about 180K to go. And the value of the house probably is like a quarter million. I do own a few other stocks.

However, the value is pretty minimal in comparison to my Tesla and Jinko stock. Thanks for all you do. I really appreciate it. I hope to hear your advice soon. Chris, first of all, congratulations on having a very enviable problem. Now, as of the time that we are recording this, as of Thursday, February 4th, the value of 675 shares of Tesla is just shy of $575,000. So for a $25,000 initial investment, that's an amazing problem to have.

As you mentioned, you're obsessed with fire, and this is going to rapidly get you to that fire number. There are two questions to address here. One is, when do you want to harvest those gains and how do you want to do it? Do you want to place a sell as a market order? Or do you want to place a stop loss order? That's the first question. Those are the two components of the first question.

When and how do you want to sell it? That's like big picture, zoom out. That's the first question. And then the second question is, how do you sell in a way that is optimized around taxes? The reason that I make a distinction between those questions and the reason that I order them in that way, with the first thing being when and how do you want to sell, and the second question being, how do you make that tax efficient is because you zooming out philosophically broadly, you don't want to let the tax tail wag the decision dog. So first decide what you want to do, what's your priority, what's your goal, and then once you decide on that goal, then figure out how to tax optimize it. So let's start first with the goal.

Do you want to sell all of your shares? Is that the goal? Is it that you want to liquidate all 675 shares? Is it that you want to liquidate a portion of those shares and hold on to another portion? If you do liquidate those shares, is it that you want to sell? at its current valuation and lock it in right now? Or is it that you want to use what's called a stop loss order in which you say, hey, if it falls below this number, then please system, trigger, system, please trigger a cell. But if it does not fall below this number,

then I will continue to let it ride, therefore allowing myself to continue capturing the upside while limiting my exposure to the downside. So which strategy are you going to use in terms of the way that you sell. I think that's the very, very first question that you need to answer for yourself. Each of those strategies has their various pros and cons, and with human nature being what it is, no matter what you do, there's a decent chance that you'll regret it in the future. If you sell and the stock price continues to rise, you may regret selling. If you don't sell and the stock price falls, you may regret not selling. That's the Murphy's Law of trying to time a selling decision.

If you place a stop loss order and trigger a sale and then later have seller's remorse and want to buy back in, at what price would you be willing to buy back in, given that that sale would trigger capital gains taxes. You would need the price to drop enough that the share price at which you buy back in would be a price that adjusts for the amount of taxes that you've paid by virtue of harvesting the sale. But that said, I don't think you should be afraid, though, I'm making a mistake. There are times that I've gotten out of a stock because I think that it was the time to sell. I realized later that it wasn't, the stock's gone up. I don't not buy back in because of the fact

that the stock went up. If I like it today, I like it today. The fact that I've got this, you know, we talk about sunk cost. This is like a sunk loss, right? A sunk, I missed it. I can't look back on this. I miss it. I have to deal with the data the way it is now. So if new information comes out, something new happens and I decide I want to buy back in, I don't think still buying it a higher price point. I think people worry too much about that. Right. I mean, certainly when you look at when you do a fundamental analysis look at Tesla and you see its PE ratio of 1700, it's hard to make a case that there's any fundamental reason to hold it. A friend of mine told me that he sold his Tesla when Elon Musk was smoking pot with Joe Rogan.

And then he said last week, he's like, maybe the criteria I needed that I don't have is, if a CEO is smoking pot with Joe Rogan, I should go buy the stock based on what the stock's done. And I realize that's a faulty analogy, but I thought it was pretty funny. You know, Joe, I'm glad that you brought up the Elon Musk Joe Rogan episode because that speaks to the cult-like following that Elon has created and how that may have fueled some of the momentum behind the people who believed his story, the people who believed in him as a leader and in the story of the type of company he was trying to create, and who piled into Tesla stock and fueled a momentum stock. price run up. Now, broadly speaking, and this is for everybody who's listening, there are typically two ways that stocks are evaluated by investors. One is through fundamental analysis, where investors are looking at the revenue of a company, they're looking at the earnings of a company, they're looking at all of these mathematical metrics, and they're trying to decide, based on a fundamental analysis perspective, how much is this company worth? And do I want to

be a part owner in this company based on what I believe it's worth, based on its revenue and its potential for growth. That's the fundamental analysis framework. Then there's also momentum-driven trades where people buy a stock because they believe that that stock will go up in the future. It plays to this thing called Greater Fool's Theory, where if you think that there's a fool greater than you, somebody's more of a fool than you, and they're willing to buy a stock at an inflated valuation at some point in the future, you get in to capitalize on the fact that somebody else is going to get in at a higher price. That's what happened with GameStop. That's arguably what's happened with Tesla and with companies like Amazon where their

valuations cannot be supported by their underlying fundamentals. And so, Joe, not to overanalyze the Elon Musk Joe Rogan episode, but the celebrity around Elon may have contributed to the momentum-driven growth that has been part of the Tesla backstory. And of course, that's not the only reason. That's one of many factors. But it's a symptom of the celebrity around Elon that has potentially fueled the fact that Chris now has almost $600,000 worth of Tesla stock. Sure.

People get excited because they see what he's done in the cult of personality. But also there's, you know, when you talk about the two types of analysis, It's fundamental analysis, you said, was one. And you talked about momentum, momentum's part of what we refer to as technical analysis, where a technical analysis, as you know, Paula, is largely voodoo. Yeah. They're looking at teacups and candlesticks. Yeah.

I remember early my career as a financial planner and I was at a party and some guy was telling me that this one stock, I don't even remember the stock anymore. He said, yeah, I saw the upside down teacup and I'm ready to go. And I'm like, I'm sorry. I didn't know what the hell the upside down teacup is. And he said, well, you know, you look at the chart. And if it looks like it, it goes up like the bottom of the teacup, like an upside down teacup goes up and then comes back down. But then it just starts going up again.

That's the handle. And you get in when it hits the handle. So wait for that big part. And I looked at him and I said, this is fantastic. How much money are we talking about? And he said, well, I haven't done it yet. But what's funny is the more I looked into that, the more I saw that with traders, technical analysis, even though it's voodoo, it was. works over short periods of time, but it works because everybody believes it. So it's this self-fulfilling

thing. So when one person sees the upside down teacup, a bunch of other people see the teacup, and because we all believe it's going to form a teacup, the stock then goes up. It's crazy. And I have no idea what that has to do with Chris's question on taxes, but just thrilling information. It speaks to the speculative nature of a trade. It's, again, the Greater Falls theory, we buy it because we believe other people will buy it. And that's certainly what's happening with Tesla. And I bring that up because it links back to the first question that I think Chris should be asking, which is, when and how do I want to sell these shares? Do I just want to liquidate all of them and do I want to do it now? Or do I want to go piecemeal? And I think that question should not be born of tax strategy.

It should be born of how to handle the investment. And once he decides how to handle the investment, then tax optimize it from there. Because it doesn't make sense to try to, you know, if you do not want to hold on to Tesla stock for a long period of time, if you believe that this is, that the party is going to end and that the game of musical, the music is going to stop in this game of musical chairs and the stock will come crashing back down to lower PE levels. And I'm not saying that's what will happen. but if you believe that that is, if Chris thinks that that's what's going to happen, then there's no reason for him to be holding a portion of those shares until the year 2022 or 2023 just to save on taxes, right? He's going to lose a lot more if the share price falls.

He's going to lose a lot more by holding for an additional year or an additional two years, by holding a portion of it than he would in paying the cost of long-term capital gains tax. There are some option strategies which are a little complicated that will skip that are ways to sell shares. But one that I like that isn't complicated helps out with investors that are worried about the fact. And this happens every time, Paula, I sell my shares and the thing spikes the next day or the next hour, the next 15 minutes. Right after I sold, it goes up.

And Chris has made so much money on this stock already. and there is no perfect way to sell. One thing that I've used and I used to use with clients' portfolios was to set a stop loss, what's called a trailing stop loss, and most brokerages offer a trailing stop loss that's just below the single-day moving average. So if I have a stock that in a single day will usually move, let's say it moves $1.50,

I'll set it maybe $1.55 below where it is right now. So I don't get bumped out just in the average daily volume. And when I sell, I'm going to sell for a little less than it is today. But that little bit is insurance for me in case the 70% of the time the market goes up happens the day after I'm going to sell. And I'll tell you, there have been so many times where we place that stop loss because we know we want to get out. And then the stock goes up the next day. So the stop loss raises. Then the next day and the stop loss raises.

And if we just get a couple good days, we end up with a stop loss that's right at the place that we're at today. And then we get more, we get more. So if the stock takes off, I'm not regretting the fact that I sold the stock. Now, obviously, if I need the money today, I just place a market order and I get out. But it doesn't sound like Chris needs the money. It sounds like Chris is worried about selling. I've talked to some people that were in on the GameStop. Madness.

Yeah, the trades. And I have a family member that put 15,000. dollars in GameStop and for four days had a net worth of in that one stock of a million dollars he'd a million dollars worth of stock cheese but paula he wrote it all the way back down he sold a bunch of his shares to make sure that he covered his initial investment and then he went up and he went back down but what he told me was there was never an entry point he said the stock just kept remember the stock just kept falling and falling and falling after it hit it's high and he was sure that there would be a rally coming where he could then grab on and sell his shares.

There was a safe exit point. If he would have just placed a stop loss order just below X number points below, he could have held on to some of those dollars. I actually told him to do that when he was at a million bucks. I said at the very least, man, put a stop loss on this. Nope, I believe in the cause. I believe in it. And, you know, that speaks to the third type of investing. So we talked about fundamental investing and we talked about momentum, respect.

speculative investing. But then there's, with GameStop specifically, dogma investing, where you're investing for the purpose of making a statement, you know, because you believe in a cause, rather than for the purpose of profit. But that discussion aside, let's tackle Chris's specific question, which is, how does he handle a capital gains tax bill that is, if he were to sell everything all at once in one fell swoop, would be about equal to his annual salary. Well, he has, assuming that he doesn't do that, I think is where the interesting thing lays, because if he, where the interesting strategies lie, there really is only one strategy that I know of. Well, there's two. Pay the tax or do this other thing if he sells them all.

Right. But if he's not selling them at all, if he's not selling them all at once, he has three choices. He can either go, FIFO, which is the first ones he bought, assuming he bought these over time, the first ones he bought are the first ones that he sells. By the way, whatever he does, he has to continue doing. The IRS wants you to follow that route. So if you go, the first ones I bought are the first ones I'm claiming on my taxes and whatever the gain is on those, I follow, that's one way to do it. The next way to do it is LIFO, last in, first out.

So the one that I bought most recently is the first one I sell. Generally, I don't like that, especially if you bought recently because you might have a short-term capital gain, and you might have some of these. Unless you have a huge tax problem this year, it usually is better. And I'll get back to this to sell the ones that were first, but which is why I like the third way, the best, Paula, which is the specific share method. I'm going to choose specific shares that fit my tax situation right now, and I'm going to sell those. Usually as humans, we only think about today. We think, hey, how do I minimize my tax? bill today. I like thinking longer term. If I can sell a mix of some that are high tax bill and some

that are low tax bill, I can make sure that I don't have a tax trap later on. And I'll tell you what happens often is people don't sell stuff when they should because they worry about the taxes. They build themselves such a tax trap. Like, oh, if I sell that, I'm going to have this huge tax bill. So take a bite out of some of the tax bill today on other shares, take advantage of the fact that there's not as big a tax bill. And so you kind of get the middle ground. For him, by the way, I would want to talk to him based on his age, on his career trajectory and money he thinks he's going to have in the future. Because if he thinks that he's going to have more cash flow, more taxes, more stuff, more problems later, well, let's get rid of all the high tax stuff today. Let's get

rid of as much of it as possible. For most of us, the capital gains tax is a flat tax, meaning once you get to a certain point, it just is what it is, right? You pay it. It isn't like income tax, which is measured out depending on how much you make. So either you're going to pay that tax or you're not going to pay it. I would say take the high cost shares and do it now if he thinks he's going to have a high tax bill later on. But those two things are a little bit different than each other. The tax strategy he can use, which I don't think I would use based on his age, but I'll bring it up for other people listening is he can donate those shares to a trust that is a charitable trust, which then, as an example, charitable remainder trust, he can take income from that trust.

So I would have clients that would take all these highly appreciated shares they have. They would move them into a trust. They could live on the money. And there's, this is, it gets a little complicated, but you can live on the money. and at the same time you get a nice big tax credit for giving money to charity. Now, that generally works with older people far, far better than it does with somebody who's Chris's age. But as far as I know, that's really the only tax strategy in terms of getting out of the

capital gains tax that could work. And the other elephant in the room is, will the capital gains tax increase in the future? And that is something that simultaneously needs to be on our mind, but also is unanswerable because we do not know how changes in policy will impact capital gains tax rates. It's interesting. You say that, Paula, because I've talked to two tax experts recently, David McKnight, who has this book, The Power of Zero, where he talks about trying to get your taxes to zero, and Ed Slott, who is the crazy tax man that everybody knows and loves. Right. I'll be talking to Ed Slot later this month. Ed is nuts. That I love him. I love the fact. that he's so nuts about taxes.

But talking to these guys, what they talk about a lot right now, which is true, if you look at tax rates historically, we're at very, very low tax rates. So what does that mean? That means pay as much tax as you can right now, because if we look historically, taxes have a better chance of going up in the future than going down from here. If that's the case, you know, you and I and everybody else doing this talks about Roth conversions as much as possible, convert as much money to a Roth while we're still at this current tax rate as possible. Pay that tax now, because if you look in the past and probably where we have to go

in the future because of all the stimulus packages and all the money the government's going to have to raise, there's a great probability that taxes will be higher. So Roth conversions are a huge strategy right now for that reason. In the show notes, we were, will link to an article from Investopedia about taxes, about what we've just been discussing. So there's an article that deep dives into that. That'll be available in the show notes for today's episode. Affordainthing.com slash podcast brings you to a list of all of the show notes of our recent episodes. You can also subscribe to the show notes at afford anything.com slash show notes. Joe, to emphasize a comment that you made earlier, you've stated that you know so many people who

don't sell their shares because they're worried about the tax bill. And that, I think, is the final remark that I would like to leave Chris with is don't hang on to shares for the purpose of wanting to spread out this tax bill over multiple years. If you decide that you want to hold on to a portion of your shares because you believe that Tesla will continue to outperform the broad market, okay, cool, fine. Same with Cinco Solar. If you want to hold on to a portion of your current shares because you believe it will outperform the market, okay, if you come to that conclusion, that is a good reason to hold on to a portion of your, I'm not saying that it will, but I'm saying if you come to the conclusion that it will, that would be a good reason for

making that decision about how to handle your investments. But if your only reason for holding is that you want to spread out the time in which you realize the gains across several years, know that that alone is not a very good reason to hold on to shares, given that those shares could fall drastically, and they could fall to a degree that is far, far greater than the capital gains tax that you would pay. So thank you, Chris, for asking that question. We'll come back to this episode after this word from our sponsors.

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, linen, maybe you need serveware 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. Wayfair has Can't Miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving that's in the entryway, in the bathroom, very space saving. I have a daybed from them that's multi-purpose.

You can use it as a couch, but you can slowly. sleep on it as a bed. It's got shelving. It's got drawers underneath for storage. But you can get whatever it is you want. No matter your style, no matter your budget, Wayfair has something for everyone. Plus, they have a loyalty program, 5% back on every item across Wayfair's family of brands. Free shipping, members-only sales, and more. Terms apply. Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-I-R.com. Sale ends. December 7th. 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. That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big Bank muscle, Fintech hustle. That's your commercial payments of fifth-third better. Our next question comes from Frank. Hi, Paula. My wife and I have a nine-year plan to retire and move to Costa Rica. The reason it's a nine-year plan is because our son will be turning 18 and hopefully be going to college. We will also be

turning 50 at that point, and it has always been a dream of ours to retire at 50. We are debt-free, other than a newly refinanced 15-year mortgage, we are very frugal and generally save $2,000 a month, approximately 40% of our take-home pay. We also contribute $6,000 a year each to our Roth retirement accounts. I will also have about $500 a month from a state pension that I will start collecting around age 55. Additionally, we have $110,000 in index funds currently, as well as $35,000 that is split between a six-month emergency fund and a vacation fund to celebrate the end of the pandemic, if it ever ends. These pots of money are in separate accounts. Through side hustles, including renting a room in our home, through short-term rental sites and selling items online, we net an additional $1,200 a month

for a total of $3,200 a month of possible investing. Finally, we have two rental properties that generate $450 in income each month. Our nine-year plan for Costa Rica is to sell our home in the States and pay cash for a home there. We will buy a place with a separate dwelling for friends and family to visit, but also to generate income when we don't have visitors. We anticipate needing $2,500 a month for living expenses and fun excursions. Since we will start drawing from our retirement funds at 59.5, we will need to make sure we're financially covered for approximately 10 years before that happens. My question, given a 9.5. year timeframe to make the most of our investments, what should we do with our 110,000 currently

in index funds, plus the $3,200 a month, we have to add to it? Should we stick with index funds? Should we buy more rental properties? Is there something we're missing we should consider? Two quick side notes. First, our hope is to either live off rental income or interest from investments or a combination of the two. Second, we live in an area where home prices are overinflated with home selling for well above asking price within four days of being on the market. We're thinking the bubble has to burst at some point, but buying a rental today seems insane. Thank you. Frank, thank you so much for calling in and congratulations on everything that you've done right to get you to this point, as well as on having a clear vision for your retirement. You've laid out

clear goals around when you want to retire, where you want to retire, where you want to retire, the type of lifestyle that you're going to have, you clearly have spent some time identifying your priorities and deciding how to align your money, your time, the direction of your careers and your life along that vision. So big congratulations on that. Now, I'll address some of the commentary on rentals. First, you mentioned that you in Costa Rica would have a primary home that has a separate dwelling that can be used as a rental when family and friends are not staying there. So you would ideally be using this as some type of a short-term rental. I think that's a great plan. The one comment that I would make is as you are, and I realize this is nine years down the

road, but as you are shopping for that particular property in Costa Rica, do not think of that as an investment property, think of that as a primary residence that you are partially monetizing. And the reason for that distinction is when you buy a rental property, a pure investment property that is purchased for the purpose, the sole purpose of being an investment, you are making a mathematical decision and your personal preferences do not get taken into account. But when you are house hacking or doing some form of a modified house hack, which is what you've just described, then you're trying to find that then diagram intersection of financial sensibility as well as personal enjoyment, which means that the selection of a property is not based on

pure investment criteria alone. And for that reason, anytime that somebody is buying a property that they want to monetize, what I emphasize is do not think of monetizing a property as the same thing as buying an investment property. In the same way that if I were to purchase a car for myself and then rent out that car on Turo when I'm not using it, that wouldn't make the car an investment. That would make the car a personal purchase that I'm monetizing, but it wouldn't be comparable to a person owning a car dealership, even a small one. In that same way, a property that you are monetizing is not necessarily an investment property. So I make those remarks about the property in Costa Rica, knowing that that's nine years down the road.

And then let's rewind the clock nine years. We'll go to present day and talk about the possibility of buying a rental. property because you mentioned that rentals in your area are, you believe, highly overvalued. If you are interested in owning an investment property, I would encourage you not to use geographic proximity as investment criterion, because if what you are interested in doing is finding the right investment, meaning that it produces a strong cap rate relative to its risk profile, then limiting the geographic purview of that investment is not a good investment strategy. So if you are truly interested in buying a rental property as an investment, I would encourage you

to go where the money is, go where the returns are. That's a formula four choosing an investment that will have a higher likelihood of giving you strong cash flow and a strong cap rate for decades into the future. I mean, wherever you live right now, you're not going to live there in nine years. Your plan is to move out of the country in nine years. So it's not going to matter if it's close to you or not nine years from now. And if this is a property that you plan to hold for 20, 30, 40 years, then the fact that you happen to be close to it for the first few years of holding it is not going to justify the lower returns that you continually get on it even when you're in your 80s. For that reason, if you do buy a rental property, if you decide to go that route, I would

strongly encourage you to look where the returns are. And when it comes to the overall financial plan, this gets kind of difficult. And I really like taking the timeline, which you have such a great grasp on, like Paula said. And by the way, for everyone else, when you're looking at your long-term goals, the more you can be crystal clear about what those things are, the easier it is to say for them. And there is no doubt my mind that Frank is going to reach this goal because it's not a 10 year goal. It's a nine year goal. And it's Costa Rica.

And it's not one house. It's two houses. And specifically, but I get the feeling, Paul, when I hear him talk that he can see the house. He totally has this image in his head, which the more you can do that, the easier it gets. And you can hear by the amount of money now that he's stuffing toward these goals that he's going to get there. The problem is exactly what he asks is how. Now, when he says that he wants to live on 2,500 a month, the very first thing that my financial planner ears does is says, what about inflation, right? Because $2,500 today is not the same thing as

$2,500 nine years from now or 20 years from now or 30 years from now. So we had to plan on that. That's number one. What is $2,500 going to be in all those time frames? So there has to be, to some degree an engine to continue growing the portfolio to make those later years happen. A nice thing that he has that $500 a month pension coming in makes it considerably easier. So that's a nice thing to have in his back pocket. The problem that I have with the nine-year goal, and this will be from nine years, what, to 19 and a half years, those first couple years are the only ones that bother me, because when you get to less than 10 years and you start talking about, equities, whether it's real estate or it's the stock market, more and more it becomes a casino.

It's not a casino right now, Paula, but if we invest those dollars that he wants to spend in year number one, I don't feel as confident about nine years as I would feel about 12. And the fact is, a year from now, he'll be at eight years and then seven and then six. So adding any money to that fund is incredibly difficult. So there's, this is a conundrum that anybody, not just financial planners, but anybody should have, is when you get below that 10-year time frame to the five-year time frame, what do you do? Well, traditionally, you would back it down to something like a balanced fund where maybe it's stocks and bonds. So you have the upside of stocks, but if things go poorly, you've got the dividends that bonds will provide.

That might buoy it a little bit. The problem we have in this environment, however, is that we know when interest rates are really low, interest rates have only one way they can go, which is up. And when interest rates go up, the value bonds go down. So the chance of losing money in bonds right now is better than average, I would say, in a bond fund. So I honestly don't know which way to go. If it were me, I'll tell you what I would do. I think that the, and people will fight with me about this all day.

And I actually had somebody fight with me about this last week. Someone, very similar argument. said, well, wouldn't you take the stock market with the nine years time frame? Because nine years, close to 10, you got the upside. I would. But Paul, if it goes bad, it goes really bad. Like, it goes really, really bad. This nine year goal becomes a 12 year goal. If you're adamant about it being nine years, I think I depend less on interest rates and I depend more on money in my hand. So I go with mid-level risk and lower risk bond funds. Now, I just got done saying I think those are going to lose money. Here's what we think about, though, when we think about bond funds.

The cool thing that bonds do is they pay you this nice dividend check that you can reinvest. And because you're reinvesting it as bonds fall in value, you're just automatically buying more. So the chance of you losing money, I think, because of those reinvested dividends, is a lot less. So what I'm doing by saying I would go more with bonds is I'm limiting the downside. However, the upside, which is stocks, you're not going to get. You're not going to get. So I think my job here is probably to tell you where the problem is and what I'm thinking about. And that is specifically what I'm thinking about.

What you do with that, I think really is up to you. Now, for those later years, year 14, 15, 16, 17, 18, definitely be in a fund that's based on the stock market. I would do that all day. That's easy. Those early years, they'll give me a problem. So I might have a couple different buckets for that time before 59.5. Joe, the takeaway that I hear is you need a plan that all dovetails together. Yeah.

That this thing cannot be looked at piecemeal. This seriously is when we talk about fee only financial planners, somebody that they're not going to manage money for you. They're not going to do anything except help you put together this plan, give you some peace of mind, somebody that's not emotional about your goals. clearly Frank is already smart about this. Having another smart person who's not emotional about this and can say, here's the upsides and downsides and here's how these dovetailed together, all these things. I think this is perfect for that situation. Thank you, Frank, for asking that question.

We'll come back to the show in just a second. But first, our next question comes from Eric. Hey, Paula. This is Eric from Austin, Texas. And I wanted to ask you about deep. PCs and health shares. I need to sign up for health insurance on the marketplace. I run my own business. And I get super stressed every time I have to do this because the costs go up at least $50. And the costs are probably double what they were when I started my business back in 2014.

I'm at a point where I may need to give up my business and maybe get a full-time job so I just don't have to deal with this anymore. But I was reading Mr. Money Mustaches post on DPCs and HealthShare, and he was talking about Sedera, and I just want to get your opinion on that. What do you think? Is this a good solution? What happens if I get cancer? Car wreck? I don't know. Thank you for everything you do. I love your podcast. Thank you so much. Hey Eric, thanks for that question. And this is something that I've worried about a lot because when I was a financial planner, I had a front row seat to a law of larger numbers, not a law of huge numbers, but certainly when you're working with 200 families at once, stuff would come at you from out of the blue all the time. A client of mine fell off a ladder while taking ice off of his roof and nearly died. And it was completely random. And then a few days later, I had another client that was in a car accident that was not her fault. Somebody else broadsided her as she was driving legally through an intersection.

So these weird things happen all the time. And the reason I bring that up is because insurance is called insurance and is regulated by states because it has to be actuarially sound. Meaning the state, every state wants to make sure that for the protection of consumers, that the prices, the insurance companies, are charging are not doing two things. Number one, not ripping people off and we can have a, you know, long debate about getting ripped off. We could also, by the way, have some interesting conversations about how to pay less for coverage, which is interesting. As an example, you see all the time, Paula, people will go to Mexico or will go to some other country to get some dental work done or to get some procedure done. You can often, we had a medical expert on our

show and he was Scott Heiser and Scott was talking about how often you can just drive across town. If you drive from one side of Detroit where I used to live to the other side, you can get a significantly lower rate if you just start asking questions about prices. But on the insurance side, getting back to that, insurance needs to be actuarially sound because the one thing we don't want to have happen is we don't want our insurance coverage to not be there when we need it. The whole reason we have it is so that it exists when we're there. So everybody asks, about price, the thing we want is an appropriate price that's going to ensure that when I have a problem, I don't have to worry later about it.

This is my only problem with shared coverage plans that are not insurance policies. You'll notice right on the top of these sites, it says not actuarially sound because they don't have enough people in these plans to make them actuarially sound, which means they're telling you that there is a chance. There's a chance. And by the way, I totally agree that it's an outside chance that if something happens to you, something could happen that's catastrophic enough that this might not be able to cover it. And without getting into one plan in particular, the general risk that you open yourself up to

is that something so bad happens either to you or to somebody else that has the coverage. Because if something happens to somebody else that has the coverage, they end up paying a bunch of money out to that person. and then, or those people, and then you need coverage right after them and there's no money left in the barrel for you? Well, then you're done. So what I worry about is that. Now, have I told that story to people and they still take that risk? Yeah, absolutely.

People take that risk all the time. And Eric, you're exactly right. The cost of insurance is just crazy what's going on in the healthcare industry. And that's a huge, long discussion. This is a way to fight it. But there is no magic bullet, right? So whenever you pay less for something, you also have to realize that there's a reason for that. And this is the reason for it is that it's not actuarially sound. Right. So there are two things come to mind. First of all, a good analogy for what you're talking about, Joe, is what happened with Robin Hood when it ran out of capital and shut down trading. Yeah, just not enough money in the barrel.

Yeah, exactly. Yeah. They literally ran out of money to do their job. They ran out of money to do their operations. And the problem is that from the perspective of you and I, the problem from the user perspective, is that banking and insurance are highly regulated industries. And what that means is that they are required to run risk modeling that says, hey, what's going to happen if there's a two sigma or three sigma event? Like, what's going to happen if something that is such a, an outlier takes place, like, are we prepared for that? Do we have the parameters? Do we have that capital in place? Are we prepared for these outlier events? Banking has to do that by law. Insurance has to do that by law. Some startup that is a medical cost sharing program,

they don't have the same regulations as insurance companies because they are not insurance. And so, as you said, Joe, you're paying less because you're getting less. There is a chance that they're not going to be there when you need them because they aren't subject to the same regulations as insurance. And therefore, they do not offer you the same level of protection as insurance. And so if you have taken the time to accrue some assets, you know, the thing about health insurance is that don't think of it as something that's supposed to pay your doctor's bills. think of it as something that is supposed to prevent you from having a bankruptcy related to your medical bills.

And if you amass a bunch of medical bills and the thing that you thought was supposed to protect you isn't there, well, then all the time that you spent building this business, all the time that you spent building your portfolio of index funds, all the time that you spent buying rental properties, guess what? now your assets are under threat. You don't want to be in a position where you might have to declare bankruptcy because your medical bills were too high, and insurance is protection against that. So I hear what you're saying that you're frustrated with the cost of premiums, but if you think that the cost of monthly premiums are expensive, just wait until you discover the cost of uncovered medical bills. Yeah, and that doesn't make it a bad option. If you know what

your Achilles heel is, right? Going into any situation and knowing that there's an Achilles heel, I think is half the battle. And then possibly creating an alternate strategy to deal with that. And offhand, I don't know what that would be for this, but it doesn't make it wrong. It just, I think, to a lot of people, and I've even talked to some bloggers about this, Paula, certainly not somebody with the audience of Mr. Money Mustache, but I've talked to some bloggers about this that didn't realize that these plans aren't actually sound, because initially it just sounds like I'm getting something for a hell of a lot less

than these insurance companies are charging. And what we all like to think is it, and I would love to think this, is that the insurance companies are ripping us off, right? When you see how insurance companies are regulated, you'll realize that, yes, insurance is expensive. Yes, there are some things they could do to cut costs, but unless we have people in all 50 states

that regulate these companies all in on the collusion, right? I could see maybe one state or two states maybe in on the collusion, but when 50 states all separately are in on the collusion, I think there's a different answer to this, which is the system is broken, but from a statistical standpoint, insurance sadly, right now, as ugly as this sounds, is fairly priced. Yeah, and to be clear, we are not apologists for the insurance system. It is definitely a broken system, but it is a regulated system. And they have to do risk modeling.

And again, I'll go back to the Robin Hood analogy. And I know I'll get some comments about this from people pointing to the differences between comparing, you know, something like Robin Hood to something like a medical cost sharing. Yes, I'm aware that there are differences. Yes, I'm aware it's not a perfect analogy. But in the case of Robin Hood, they failed to do the proper risk. risk modeling necessary to understand that if they had high trading volume, and particularly if people were buying call options on margin, their whole system would collapse. Their system was so

fragile that a couple of days of high trading volume was enough to make their system collapse. And it was because they didn't do the proper risk modeling. It was a failure of management. And that can happen with a private company that isn't subject to the same regulations that a bank is, or that in this case, an insurance company is. But, Paula, you're mistaken. The CEO went on that day and said they're not having cash problems. Which is amazing because just before he said that, he said they were having cash problems. Like in the longest way ever, he said we're having cash problems.

And then Andrew Ross Sorkin on CBC asked in point blanks, are you saying you have cash problems? No, we're not having any cash problems. Yet you just said you are. Yeah. And later they released a press release saying, yeah, we're having cash problems. Yeah. Yeah. Yeah. You don't want your insurance to be the Robin Hood of insurances because it's not insurance. So thank you, Eric, for asking that question. Our final question today comes from Holly. Hi, Paula. Thank you so much for all of your work educating people like me. I have a real estate inheritance question. My three sisters and I stand to inherit two duplexes that are. are right next to each other. So basically, it's four one-bedroom units, two attached. We'll be inheriting them through a trust, and hopefully not anytime soon, as I'd much rather have my father alive. But eventually, we should inherit this. I have a question about the ownership

structure. I think we should operate them as a multi-unit property, where we run the income and expenses together and divide by four. That way, we'd get some economies of scale and also mitigate the losses of a vacancy in one of the units. Besides, how would we assign a unit to each one of us fairly? The units together are worth about $1.1 million and they can rent for $1,600. I figured out using your calculations on your website that they make about a net income of about $47,000 a year. So it's a really nice inheritance. I would like these to be professionally managed. And I'm just wondering, besides the four Ds, do you see any other issues? If we inherit them through a trust, would we have to set up some other sort of company to hold them? And once we're running them, where do you park the emergency

reserves? I don't think that we can count or we should count on each of the sisters to maintain one quarter of the necessary reserves because that person might get tempted or really need to spend that money and then we wouldn't have it if the units needed it. A related question is if what would we do if one of our sisters wants to live in a unit rather than rent it out. Would she just rent it like any tenant who happens to enjoy part of the profits, the proceeds? Or do you think she should just separate her unit from the others and live in it and then not share in the profit from the other three? I'd like to avoid tension between the four of us by setting this up in advance once we inherit the units. Thank you for all your help. I hope that you understand my question.

Hey, Holly, planning ahead is so important when you're talking about some of these big decisions. So I like the fact that you're planning well into the future. Here's my best advice. Certainly, you want this separate from the four of you because if something happens, it's another layer of liability insurance. It's not insurance per se, but it definitely puts a little layer between the four of you siblings and these properties. So I personally would put them in a company and have the company co-owned by the four of you. Now, the issue with the company then is that then the company builds up the reserves and holds onto the reserves to take care of the property.

Even if you have professional management, I don't think that you want all four of you in on every little decision with a professional manager. So you should probably the four of you sit down and decide one of you that's going to get a small little bit of compensation to be the representative for you. the family that deals with a professional manager and then X number of times per year, the board, meaning the four of you, get together and go over everything so that it's all on the up and up and we don't have one person that's running it. Let's say you are, Holly, and you know everything about everything and everybody else is just in the dark. You want to make sure everything's above board. Everything's in writing. In fact, I would have an accountant that draws up P&L and the professional manager that you hire, even maybe show.

up at one of those meetings a year and talks about the status of upkeep and what's going on so that all the siblings know what's going on. That's what I would do with all of them together. If one person wants to live in them, I'm with you, there's definitely two ways to go. Number one, four kids, four units, pick a unit. They take theirs. They go do their own thing. Or they pay for it, whatever the rent is that you would have charged someone else. And maybe when you're doing a disbursement, they don't take their percentage of the disbursement instead of it's applied to their rent, which might actually be a little more cash flow friendly for them, right? So instead of getting inheritance money cash flow off of this duplex, they're, quote, reinvesting it by living in that unit or spending it on living in that unit. So, Paula, those are my thoughts, but I would definitely at the very least have a layer between the four of them and their tenants by having this in a company. Yeah, I agree. And with regard to the logistics of how that is run, you know, when that company is,

formed, the company will open its own company bank account, a business bank account. And so all of the income from that property flows into the business bank account. All of the expenses from that property or those properties get paid out of that business bank account, and then cash reserves are held within that business bank account. So it's just like any other company. If the four of you were all inheriting a pizza restaurant, right, that pizza restaurant would be its own company with its own bank account with all of the revenue from the sale of pizzas going in and all of the expenses on pepperoni and bread coming out. And it would be managed by the general manager of that pizza restaurant. There would be an accountant there. You know, there would be legal. So think of it

just like that. And similarly, if one of you wants to live in one of the units, the way that I would handle that would be similar to if one of you wants to eat a pizza at the restaurant that you own I would handle it as that person pays rent like any other tenant, but, you know, that person might not literally need to write a check. It could be, as Joe said, that in lieu of getting paid out, they get a credit towards their cost of living. So it's sort of the credits and debits system of accounting, where they have a debit to the company in the form of the rent that they're occupying. and then they get a credit from the company in the form of what the company owes them and then you just adjust accordingly,

credits, credits. Yeah, I think it can be really smooth. Once you get it, setting this all up is a pain. It's a complete pain. But man, once it's set up, this can run really, really well. Yeah. But I do think, Paul,

what do you think about having one person in charge from the family and maybe pay them a little bit instead of having all four of them have to agree on everything? Love that, love that. Because one of the big, so Holly asked, You know, other than the four Ds, what do we need to think about? And by the way, for the sake of

everybody who's listening to this, if you are in a similar situation or if you are wondering how to co-own an asset, such as a piece of income producing real estate with other family members, we won't go into the four D's in this answer because that can be a long discussion, but Holly, I'm glad that you're already aware of it. For everybody else, I'll refer you again to afford anything.com slash podcast. We've had previous episodes where we've talked about the four D's. definitely look that up. We'll discuss that in the show notes as well. We'll link to some of those episodes.

That is something that you absolutely want to drop an agreement on. But, Joe, to answer your question, in addition to drawing up an agreement around the 4Ds, I'm a huge fan of appointing one particular point person to manage the manager. Because, yes, it's great to have a property manager on there, but you need one person, one representative who manages the manager. There should also be, you know, when the board meets, high-level discussion about the vision that you're trying to create. Are you trying to create, you know, when you make decisions around repairing an appliance

versus replacing it, when you make decisions around how much to renovate a unit during a turnover, do you renovate it to a level that's feasible, or do you renovate it to a level that's optimal or somewhere in between? You know, those are high-level vision-based decisions about what kind of, essentially, what kind of company are you building? What kind of property do you want this to be? And how do you execute decisions on a day-to-day level about renovations, about CAP-X? You know, how do you execute those decisions in a way that's aligned with the vision? And those are board-level conversations. So thank you, Holly, for asking that question. Best of luck with eventually, and hopefully at no time

soon, managing these four units. That is our show for today. Thank you so much for tuning in. Joe, where can people find you if they want to hear more of you? Thanks for asking, Paula. You can find me as the ringmaster at the three-day-week circus we call The Stacky Benjamin Show. It's a variety show. Feels a little bit like late-night TV, but we're talking about money, kind of. Money-adjacent topics, one of our fans said.

So if you're interested in hearing more Paula, too. More Paula, almost every Friday. she joins us for a roundtable conversation. If you're looking for really insightful deep Paula, I would find her here. If you're looking for Paula messing around and not getting a lot done with the rest of us, usually she's getting more done than the rest of us. But if you're looking for Paula mixing it up with our contributors every Friday on the stacking Benjamin show. Yeah, my lighter goofier side comes out on the stacking Benjamin show. It totally is. I love both halves of Paula.

the way. Thank you. Thank you. Thank you. Thank you so much for tuning in. This is the Afford Anything podcast. I am Paula Pant, and I will catch you in the next episode. Here is an important disclaimer. 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 This Podcast, this podcast, as well as everything afford anything produces. And financial media is not a regulated industry. There are no licensure requirements.

There are no mandatory credentials. There's no oversight board or review board. The financial media, including this show, is fundamentally part of the media. And the media is never a substitute for professional advice. That means anytime you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, 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. What's up, Joe? What's up, Paula? I am...

She's like, I got nothing. All right. Look at my face. I'm turning bright red. It was pretty damn funny. All right, here we go. What's up, Joe? All right, three, two, one.

Thank you so much for tuning in. Joe, where can people find you if they want to hear more of you? You can find me. Oh my God, my brain is not working. Sacking Benjamins. Oh, shit. Yeah. There was a word I was looking for.

Hold on a second. All right, three, two, one.