Afford Anything - Ask Paula: How Can We Reach Financial Independence by 35?

Episode Date: November 2, 2021

#346: Pensions make Chad uncomfortable, to the point of quitting his job to roll his $175,000 over to an IRA. Is the 12 percent match his employer offers good enough to beat the two percent growth of his pension? Or should he leave and never look back? Anonymous and his wife have $275,000 saved and a child on the way. They’re 27 and want to reach financial independence by 35. They want to buy a house, but with this crazy market, what’s the smartest way for them to use their savings? Anonymous and his wife are 30 and hope to reach financial independence in five years. They want to know: is a taxable brokerage account the best place for their leftover $1,000 after they max out their pre-tax 401k contributions? Norm wants to buy a house in cash and doesn’t want his name on public record. Is it possible for him to stay anonymous? Sharon called in on episode 336 and called back to clarify her question. Her husband purchased a below-market property which has a cap that limits how much they can sell it for. Should they keep the home, or sell it, even if they can’t get the full price for it? Joe Saul-Sehy, my friend and former financial planner, joins me to tackle these questions on today’s episode. Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it here and we’ll answer them in a future episode. For more information, visit the show notes at https://affordanything.com/episode346 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. It applies to any limited resource that you need to manage. Saying yes to something implicitly means. Turning away all other opportunities, and that opens up two questions. First, what matters most? Second, how do you align your decision-making around that which matters most?

Answering these two questions is a lifetime practice, and that is what this podcast is here to explore and facilitate. My name is Paula Pant. I am the host of the Afford Anything podcast. Every other episode, I answer questions that come from you, the community, and I do it alongside my good buddy, former financial planner, Joe Saul C. High from the Stacking Benjamin's podcast. What's up, Joe? Paula, it's a doggie dog world, and I'm wearing milkbone underwear. Wow. I did not need to know that.

This is a family show, Joe. I was just watching an old episode. And by the way, they don't really hold up at this old show, Cheers, right? That was the show Cheers. And Norm would come in, and one day he said that. So I just tried it out and see even that line didn't hold up. So sometimes going back and watching the old favorites is not the fun you thought it would be. I guess Cheers just maybe just hasn't aged with...

Has not. Maybe you just need the context. I've never seen Cheers, actually. That's a confession. Of course you haven't. Of course I haven't. Well, why would you see it? But there were other shows.

There are other shows I've seen. One or two. Yes. Yes. There have been a few. I watched Save by the Bell. That must count for something. Of course.

That explains a ton. No judgment. That just explains a ton. So here is what we are going to cover in today's episode. An anonymous caller and his wife want to reach financial independence by the time they're 35. They're currently 27. They have a baby on the way. They live in an RV, and they have 275,000 saved.

They'd like to buy a house, but the market is kind of nuts right now, so they're wondering, what should they do with their money? A different anonymous caller and his wife are 30, and they also want to reach financial independence by age 35. Ooh, the race is on. They want to know if a taxable brokerage account is the best place for their leftover $1,000 that they have after they max out their pre-tax 401k contributions.

Meanwhile, pensions make Chad uncomfortable to the point of quitting his job to roll his $175,000 over to an IRA. Is the 12% match that his employer offers good enough to beat the 2% growth of his pension, or should he leave and never look back? Norm wants to buy a house in cash, but he doesn't want his name on the public record.

Can he stay anonymous? And Sharon called in in episode 336 and she called back to add some clarity to her question. Her husband purchased a below market property, which has a cap that limits how much they can sell it for. Should they keep the home or sell it even if they can't get full price for it? We're going to cover all of these questions right now. Starting with Anonymous, Joey give every anonymous caller a nickname. What do you have in store for us today? I just finished watching this very fun light show on Apple Plus, which is called Mythic Quest.

And it's about these people that make a video game together. And the creative director, just so he seems cool and different, his name looks like it's Ian, but he pronounces it Ian. Ion. Yes. And he's a great character. And I thought, what a great way for us to honor the show. and this caller. We should call them Ion. Iron. All right? Well, our first question comes from Ion.

Hi, Paula. I'm a first-time caller and absolutely love your show. Thank you for all you do for the community. My question is a little long, so I'll get right to it. Because of the pandemic, my wife and I have been pretty fortunate with big raises in our income and have been able to accumulate a large sum of cash, which totals about $275,000, which is basically sitting in two separate money markets. accounts. We are both 27 years old with a goal of fire by 35 if possible. We also just found out that my wife is pregnant, which is very exciting, and she will be due in March. So my question to you is, if you were my age and in my position with such a large sum of cash, what would you do? Our initial goal was to buy a house in cash and have a large nest egg so that we could retire comfortably and safely. However, now with the housing market as expensive as it is, we are getting out of price of our local area where our families live, so paying off cash for a house is a little more

difficult. But living near family is an absolute must for us. So I'm wondering if it would be better to put down a large down payment on a house and take out a small mortgage, or put down a small amount and invest the rest in the market or an investment property. We aren't super keen on being landlords at this time, but are willing to do so to help me our financial goals. A little background on us, we already have about $120,000 saved in our Roth IRAs, traditional IRAs and 401Ks together, and have about $7,000 in an HSA plan, which we plan to use from the delivery of our child, unless, of course, you think we should pay cash for the delivery and leave the HSA for retirement. We have no debt and currently live out of our RV, and are happy to continue doing so

until we figure out exactly what we want to do with the money. but we are starting to get a little antsy about having that much money sitting around in our savings account, especially with inflation as it high as it is today. My wife plans on stopping working after the baby is born, and I will continue to work as long as I need to until we reach our fire goals. In your opinion, what would you do on our situation? Any thoughts and ideas are greatly appreciated. Thank you again for answering my questions and all you do for the financial community.

Ian, thank you so much for your question. Congratulations on saving $275,000. Congratulations on the growth of your family. You've got so much good that is coming your way. So I'm very, very happy for you. Now, let's tackle your question. Number one, I share your concern about having such a large amount of money, $275,000. And it's not just the raw number.

It's the fact that this represents, I'm guessing, probably the bulk of your net worth. You've got the bulk of your net worth sitting in a month. money market account. And so I share your concern in that I want to be decisive and move that into something that will pay you a higher amount. But I also understand that if the next move is to buy a home, then of course it makes sense to keep it in cash until that home is purchased. So this decision needs to be made immediately. With that context established, let's look at the options. Now, first, you said that you want to reach fire within the next seven years by the time that the two of you are 35 years old. I don't know what number you need in order to consider yourself financially independent.

In other words, I don't know what your basic cost of living is and therefore don't know how much you would need in monthly cash flow in order to be financially independent. I also don't know your income or the amount of money that you can continue to save. every month. So those are a few questions that you yourself could easily calculate. With that established, not knowing what the ultimate goal number is and not knowing the trajectory, the monthly trajectory between here and there, what I would say is the following. Number one, from an investment perspective, from a pure mathematical perspective, it makes the most sense to put a down payment on a home and invest the remainder of the cash.

So your suggestion about making a small down payment on a home that's in the location that you and your wife want to live in and taking out a mortgage for the rest, yes, that suggestion will have an implication on your monthly cash flow, and that's something that you're going to want to consider particularly in light of the fact

that you're about to be a one-income household. But assuming that your monthly cash flow can stomach that new, burden, that would, over the long term, have the highest likelihood of being mathematically the most sound decision. The risk involved, of course, is number one, if that would take such a big bite out of your income that you would then be unable to continually save. Or number two, if you have the type of occupation in which your income is volatile or in flux,

meaning that you're a one-income household, but your income is unstable, if that's the case, you would want to design a system that gives you as few recurring monthly expenses as possible. Assuming that neither of those are the case, though, assuming that you have a stable job or career, and that you can stomach the mortgage while still being able to save, using a portion of this money to make a small down payment and investing the rest, and then using the proceeds after some period of time, using the dividends or the capital gains of some of that investment, if you so choose to accelerate the mortgage paydown as something of a hybrid option between the two, those would be perfectly valid strategies. The other thing that you could do, and I know you mentioned

you don't want to be a landlord, but you'd be willing to do so temporarily if it's going to accelerate your progress towards your financial goals, you could potentially, particularly before the baby is born, live in your RV in the backyard of a home that you purchase, rent out that home on Airbnb, perhaps, or to a short-term renter, and offset at a minimum some of those initial down payment expenses or some of those closing costs and other ancillary moving costs by virtue of monetizing that property for the first six months that you're in there. I think a key term here, Paula, for Ion is tradeoffs because whatever decision he makes, there's a tradeoff that goes against that. And if he decides to get what he describes is the comfort and security of paying cash for that house, he's trading off a massive amount of money down the road because of the interest rate arbitrage in that equation.

And that's a valid tradeoff, by the way. But you have to know that if the goal is firing at a young age, which he mentioned in his question, that could disrupt that. Which gets to your second point, which is the idea of timelining your goals, I think can't be overstated. With a baby on the way, there might be some goals for baby and family coming up down the road. I'm not sure exactly what those are. But putting those out there versus that fire goal is really going to orchestrate. what needs to happen with that money. And clearly, by the way, for anybody else listening, the idea of stocking a lot of money away into a money market is admirable. Number one, it's phenomenal that Ian and his spouse were able to do that. But it also just makes me grown. And the reason is, is the magnitude now of this decision,

is so much bigger than it would have been if he were investing it monthly into the financial markets. Because if he puts $200,000 into financial markets today and the market goes down by 10%, which is well in the realm of things that could happen in an average year, the market goes down 10% immediately. He's going to doubt his decision, which is not something that should happen. And he's not going to doubt it because it went down 10%. he's going to doubt it because he lost $20,000.

And anybody who's ever lost that kind of money knows the feeling in the pit of your stomach that this money that was there yesterday or last week is now gone. So whenever possible, it's a great reason to try to dollar cost average into your position so that you don't have these magnificently huge decisions that have a lot of weight behind them. So I think it's a it's a blessing. It's great that he's been able to do that. I mean, it's fantastic. But on the other side, it's definitely a curse.

And what I worry is, is that you and I are both going to say, invest that money, which I also think is the right thing to do. The market's going to go down, and he's going to doubt that he made the right decision. When clearly, given a longer runway, a longer set of time, it I think is clearly the right decision. And I also like the idea of the HSA about using cash and leaving it. Yeah, I agree. I like that idea as well. Yeah. Statistically speaking, and I say this not just for I and but for everyone listening, on balance, the market goes up more days than it goes down. Statistically speaking, if you have a lump sum of money, which for people who are listening, maybe they got a bonus, maybe they're getting a tax refund, maybe they got a big commission check. There are many reasons that a person might get a lump sum. You have a higher probability of gains by investing the entire lump sum into the market in, one fell swoop, then you do piecemealing it out and investing that lump sum over the span of

the next X period of time. In other words, dollar cost averaging is great when it happens retroactively. Instantaneously. Yeah. As you're earning the money, if you're making these smaller decisions, you're earning it. You're right, though, but taking $250,000 and now divving it out in the little pieces is not good. Yeah. And the reason for that is if you are trying to perform forward-looking dollar-cost averaging, then you're holding a larger cash allocation than you otherwise should during the time period in which you are performing that forward-looking dollar-cost averaging. And number two, you're violating the basic principles of EV-expected value, which is if you

know that a given decision is more likely to go up than go down, than it is a plus EV decision to put the money in the market. even if the immediate result is not in your favor. If you want to learn more about plus EV decisions, listen to our episode with Annie Duke. We will link to that episode in the show notes. You can subscribe to the show notes for free at afford anything.com slash show notes. Annie Duke, by the way, is a former professional poker player who speaks to us about probabilistic thinking. But I am going back to your question.

I'm going to make the devil's advocate argument here. Joe, you and I both believe that he should make a small down payment on a property and invest the remainder of the cash. Just for the sake of clarity, you and I, Joe... Mathematically, I agree. Right. But having worked with people who are hella conservative in the past, if somebody tells me that they are going to feel much more comfortable,

like I ain said in his note, feel much more comfortable paying all cash. So he's got that out of the way and has the security. I think even use the word security. Just understanding what the trade-off is because mathematically it's a big, big trade-off. Right. So with that established, let's make the devil's advocate argument. He wants to reach fire within the next seven years. If he lives in a house that's paid in cash, then his fire number becomes a lot lower

because the amount that he needs to live on each month is significant. lower. Now, over the long term, mathematically, it's still a loss. Over the long term, mathematically, he would still do better to hold a mortgage and invest that money. But if the goal is not mathematical optimization, if the goal is to create the smallest possible fire number so that he can improve his chances of reaching it by the age of 35, then eliminating his housing payment could be a decision that's aligned with that goal, at least in the short term. In the long term, mathematically, it won't serve him, but in the short term, it could be aligned. And the question we'd have then is, what's the rest of the need? Like, how big is the rest of

that number that he needs to achieve if he's eliminated the house payment? Right. But it could be 25% gone. Right, from the ultimate number that he would need in order to reach fire. Yeah. It could potentially be even higher. It could be 30%, 35%. Who knows? 36.

Ooh, 37.5. Whoa, whoa. And that does shave years off your fire timeline when you're reducing the total amount that you need by that much. I mean, that's a huge difference. And we don't know what Ian wants to do once he, reaches early retirement, if he plans on shifting into some alternate type of work, you know, because of course there are a variety of life after fire goals that people in this community have, if his objective is to shift into perhaps some more meaningful but lower paying work

or perhaps some riskier entrepreneurial work, then accelerating that fire timeline, allowing him to make that career change, and then having the possibility that that career change might inadvertently lead him to what is ultimately a lifetime bigger payoff in the end, perhaps because he's engaged in work that he's more into, you know, that could be the unintentional butterfly effect of making the choice that is mathematically non-optimized, but life optimized. So that's my devil's advocate argument on the other side, on the pay cash for house side. Well, I don't know if I would describe it as devil's advocate as much as that is a big pop on the short term if he really wants to be aggressive about getting that short term number

versus the long term number. Like I see it as as two separate things, right? One's going to help you a ton early on. The other one's going to help you a ton later on. Right. And that goes back to what you were saying at the beginning of this answer about trade-offs, this is essentially a question about the trade-off between short-term versus long-term. Which one does he prioritize more? Yeah. Fire at 35 versus lifetime wealth. And that creates an interesting discussion about the possibility of some short-term goals that are reached that you may have to change later on down the road. because you went for security early on, that may mean that if your goals change, there may not be

enough fuel for later. Right. And by the way, for a lot of people, that's okay. That's fine. No problem. Go back to work at 45, 50, whatever. Right, which he may want to do. I mean, if he goes back to work at 45 or 50, it'll be when his child is mostly grown and out

of the house. At the very least, kid wants nothing to do with him. I've got kids who are 26. I know that. I feel very lucky that my kids want a lot to do with me. But still, yeah, but very seriously, later on, they're busy, right? They're busy. They're with friends. The amount of time you spend with them at that time versus the amount of time that you're going to miss in those early years is exponentially different. Right, exactly. So that would be a reason why prioritizing this time in the short term, even if that means that maybe he and his wife both go back to work. at the age of 50, that could be the strategy that they take on. Which, by the way, brings up some other statistics that are fascinating.

Do you know that older students who go back to college after taking time in the workforce perform far better? And by the way, also have a higher ROI than people that just immediately go in to get an advanced degree, somebody that goes to get a master's or a PhD. later on, gets some sort of advanced certificate. If you have some life under you, you generally do very, very well in school. Because I think, Paula, you know why you're there. You know what the return on investment is. You're also much easier able to determine which of these pieces of information are going to be vital to me doing what I need to do versus which pieces can I throw

away. Right. Well, and also, I think you generally just have more maturity. Sure. If you're older, hopefully more mature. Well, and that maturity is life experience, right? Because then you're in the classroom and you go, yeah, I don't think I need this. Or this is something that is really a hole in my repertoire. So that could be favorable later too. If he decides at age 50, hey, I want to go become XYZ. I think getting the requisite education to either catch back up on what's happening

with technology or get the skill set or at the very least the certificate. get that everybody demands to do that particular job, I think would be not as difficult as we seem to make it. Right. I have a good friend who recently turned 50, and he told me that he views his career. He's like, you know, I have, he's like, I feel like I've got about 15 to 20 good years left in me of working. And he was like, that gives me just enough time to do something pretty epic, but not so much time

that I have any to waste. And I thought that was a really good way of viewing that age, that birthday. Yeah. As a 53-year-old guy, I feel that. As a 37-year-old, I am taking notes. You totally feel time. I thought I felt time at 37. I hella feel time at 53.

I really feel time now. So that's, uh, oh, it's only going to suck worse. Wow. Great. And by suck. And by suck, I mean, it's so exciting. There's so many exciting things you want to do. but you realize that time's your enemy.

Which makes prioritizing even more important. Yes, absolutely. Which is, fortunately, the theme of this show. Da-a-da-da. So thank you, Ayan, for that question. And best of luck with whichever priority you choose. We'll come back to the show in just a second. But first, the holidays are right around the corner.

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That's W-A-Y-F-F-A-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.

thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments, a fifth-third better. Our next question comes from Chad. Hi, Paula. I have a few questions about pensions. I guess my first question is that pensions make me uncomfortable. Should they? I'll give you a little background about mine. As a teacher in Arizona, I'm forced to contribute 12% of my salary to the pension system, but it only grows in around 2% or so. There is a benefit. The school district I work for matches the full 12%, but I know that I'm never going to retire in Arizona,

and I just can't stand the thought of so much of my retirement savings sitting there growing at such a low rate. What I'm hoping for is I'm hoping for additional time in the market. I'm 43 years old, so I have about 20 years or so before I hope to retire. I just love your advice on my current plan. So I plan on quitting at the end of the school year, primarily to roll over around $175,000 out of the pension and into IRA that I can invest much more aggressively. I'm fully vested, and so I would take that entire balance and invest it for retirement.

I have enough savings for an eight-month job hunt, and I do like the idea of trying something new, but I can always fall back on another Arizona teaching job if my savings runs out. I'd be again forced into that mandatory pension, but the $175,000 would remain mine and rolled over in that IRA. I've already checked and it would not need to be paid back. Is this an okay plan? Is it as brilliant as I think it is to make this short-term choice in order to have a balance of $175,000 that can be aggressively invested? or have I just convinced myself that pensions, even those that match 12% are evil? Thanks. Look forward to your answer.

Chad, thank you so much for the question. A few comments here. First of all, a 12% contribution with a 12% match. So 24% of your income is going into this pension. Wow, that's enormous. Your contributions are the single biggest determinant of, your investment growth. To have 24% of your income going into this pension, 12 from you, 12 from your employer, is an impressive amount. To the mathematical part of your question, it would be

easy enough to game out using any type of returns calculator, if you just go online and just Google compounding interest calculator. It would be easy enough to game out mathematically what it would mean if you put $175,000 into an account that you could manage yourself, and then you made certain return assumptions about the types of returns that you could generate within that account over the span of the next 20 years to 25 years, right? You could make those return assumptions and then contrast that against scenario B, which is future years of higher contributions with lower returns. So if you wanted to spend an hour playing with different scenarios with a compounding interest calculator, you could certainly math it out and come up with different projected return scenarios.

But my suspicion is that this is not actually a finance question. My suspicion is that this is a question about the job that you want to be in, the employer that you want to have, even the state that you want to live in. and it's being cloaked as a financial question. Not just to me and Joe, but to yourself. I believe that you believe that it's a financial question. Paula? Yep. Take that mic sitting in front of you.

Yep. And just drop it and walk away. Well, all right. Because there it is. Now, Paula's gone. That is exactly the question. The first thing I thought about Paula, Chad, what do you want to do?

Yep. And then does it work? Because staying in the job that you don't want or leaving the job that you do want, I think is the real question. Exactly. I don't think that he is quitting this job or thinking about quitting this job because the job has a pension. I think there are other factors at play. And if he's leaving, by the way, rolling it over is the correct answer. It is the correct answer.

If he's staying, he's getting this monster contribution. Yeah. But I don't think that the pension has anything to do with the decision to stay or go. There are other reasons that he's thinking about making this move, but there's some blockage that makes it difficult to want to come face to face with those reasons, even to himself. I think we all like verification and justification. Yeah. And it makes us feel better about our decision as somebody goes, yes, that's right. yes. Right. And our answer, I think, Chad, either way, is yes. Yeah. Yeah, oftentimes people,

it can be reassuring to get permission to do the thing that you deep down know you want to do. So if that's what you're asking for, then no matter what your decision, whether you stay in the job or you leave the job, whether you stay in Arizona or you leave Arizona, no matter what your decision, you have our permission, not that you need it. Just like we said to I, What's your epic life, man? Right. Dude. Do you want to calculate, by the way, for everybody how much that $175,000 would be just for fun when he rolls it over?

For funsies? Yeah, there's this cool thing that people might not know about. A lot of you may, a lot of you may not, call the Rule 72, and you take the interest rate that you're going to get divided into 72. And it happens to be this mathematical kind of magical number that tells you how long it's going to take for your money to double. So if Chad's going to get 8% divides 8 into 72, nine years. So if he's 43 now, then it doubles again when he's 52, again when he's 61. So that money's going to double twice during that time. So that's not $175,000.

It's $350. It's $700,000. Yeah. And if he, and for some reason, he does need to touch it for another. nine years doesn't touch it till 70 and by the way go back to what you want to do don't not spend it and wait for 70 just for the next double but then he's looking at 1.4 right it's just fun i think just think it's fun yeah that's a it's a fun exercise of course assuming inflation also stays at about 3% that 1.4 will not have the same purchasing power that 1.4 has today it would be more like a in that

case a 5% real return after subtracting for the inflationary increase. But that's neither here nor there because, number one, that amount would need to be contextualized or compared against how much would he have if he continues with these 24% annual contributions. And number two, it doesn't really matter anyway because your life is short and you shouldn't spend it at a job that you don't want to be at for the sake of the retirement plan that it offers, for better or for worse. Done, Paula. Yeah.

Sniffing out the financial questions that are not actually financial questions. And there are a lot of those. Even in my own life, I sometimes catch myself thinking that something is a financial question and only weeks or months later realizing that it's not. So thank you, Chad, for asking that question. And whatever you decide, forget the retirement. retirement savings aspect of it entirely, and make the career choice, the job choice, the location choice that allows you to live your best life today.

Speaking of location, our next caller is moving back to India and is wondering about the best way to save. And this caller is also anonymous. Oh, so it's your turn. You and I, Joe, both are big fans of the show Never Have I Ever on Netflix. So good. So good. So good. So good. And on that show, the father of the, so the main character is named Devi, and her father is named Mohan. So we're going to call this anonymous caller, Mohan. Hi, Paula and Joe. I'm anonymous. A long-term

listener of the show and first time asker. Thanks for all your great work so far. My question is about investment accounts. My wife and I both are 30 and work as software engineers. We don't have it's yet. Combined, we have about 100,000 in our 401k accounts and 40,000 in our taxable brokerage accounts. All our money is in broad market index funds. About 80% of our 401k money is in the pre-tax bucket. The rest of it is in Roth. We contribute a total of about 4,200 and month towards investments. 3200 of it goes towards pre-tax 413K contributions till we each reach the 19,500 cap. And rest of the money we invest in, we invest in. We invest in, and the

in the taxable brokerage account. We would like to work five more years in the US, then sell our current home and go back to India. If all goes well, we'll have about 500,000 in our investment accounts and 150,000 from the sale of our house at that time. That, along with another paid-off house in India, we should be able to reach FI by the time we go to India, although we might not retire early just yet.

My question is, is the taxable brokerage account best place for the leftover thousand after we max out pre-taxed for one-k contributions. Ideally, I would have preferred keeping all the money in tax-deaford accounts and use the Roth conversion ladder to withdraw once we go back to India and are in the lowest tax bracket. Since I am reaching the pre-tax limits and I am paying tax on this $1,000 anyway, I would have allowed to contribute this to a Roth IRA account, but we are above the income limits for Roth IRA. and doing Backdoor Roth IRA restricts the access to even the contributions for five years. Also, the additional tax paper work for Backdoor Roth didn't seem worth it to me just to save tax on the dividends.

My company offers post-tax 401K contributions and subsequent Roth conversions of those contributions after the 19.5K limit. I briefly considered that, but it seemed like I was giving up a lot of flexibility for not a lot of benefits. I would love to know your thoughts on this. Thank you and have a great day. I love this question, Paula, because it is very specific to a specific situation, a specific goal. And I don't know about you, but my answer may be different for Mohan than it would be for somebody who is going to be in the United States for the next 30 years. Elaborate. Why would your answer be different?

I mean, and I know it seems obvious, but why would? Well, because I do think that there is, I think Mohan is underestimating the amount of tax savings he would get from the Roth. However, I also know that when I was a financial planner, and I had clients that moved from the United States to India, that having money in U.S. tax shelters while in a foreign country and trying to extricate this money every year from these plans, can be a gigantic pain. And then I think about the ROI on the amount of time it's going to take to unwind this short-term efficiency. So while I think he's underselling the efficiency of the tax shelter, I'm with him. I would completely leave this money in a taxable brokerage account for ease of management.

Plus, if he wants to change currencies and change it for something in India, far, far, far easier to have it. in a taxable brokerage account where he'll be able to do a quick exchange of money. So in other words, simplicity is more important than optimization? For me, I think yes. For anyone who plans on staying in the United States forever, get in that Roth. The one question that I have is, given that he plans on living here for at least five more years, how certain is he that he will live in India forever? Like, Mohan, is there a possibility that perhaps at some point you'll decide that maybe you want to split your time between the U.S. and India?

And not to spoil the show, but in season two, Davy's mom figures out that India, she remembers is not the India that she's going back to. Mm-hmm. Exactly. I have a lot of family that come here from Nepal and they come with the idea that they'll just be here for a little while. They'll go to grad school. They'll work for a while. They'll cash up. And then they'll go back to Kathmandu. And inevitably, they never do. You know, it's because of Starbucks. That's true. Catmandu, to the best of my knowledge, does not have a Starbucks. That must be three years. reason. Well, you can't pay $8.50 for a coffee in Ketmandu. We drink tea there, Joe. Well, like I said, you cannot pay $8.50 for a coffee in Kathmandu. So that would be, you know, I know that that's your plan now is to move back, but will you have that same plan or those same goals in five years? And if you do, and you do move back, after an additional five years pass,

you know, 10 years into the future, 15 years into the future, will a day come when you say, you know what, I think I do want to split my time. I would perhaps hedge my bets and financially plan to keep that door open so that just in case you do change your mind or your feelings change. But he has that already. I mean, if he's going to do that, Paula, then I think he messes with the pretext contribution and makes part of those Roth instead. That would allow, yeah, maximum flexibility because then he could pull out the principal from the Roth at any point without any penalty. Because I kind of like with this goal, he said, $3,200 is going toward tax sheltering, but he just changes that allocation. So part of that is Roth. And then the other thousand is going

into taxable brokerage. So he's got, he has more than three quarters of it already going into shelters. Right. So leaving a thousand in a flexible account, I think I'm on board with that. Yeah, that makes sense to me. for the amount that's going into tax shelters. I mean, Roth IRAs are the most flexible of those shelters. And the good news is just because, just so everybody's clear, the cool thing about the five-year rule from where Mohan sits is you have to have the account for five years. So it's not five years on the individual contribution. And that's why everyone, even if you think that you can't contribute regularly to a Roth IRA, open that account ASAP to get that five-year meter running. That's a dumb rule, by the way. It is just, there's a lot of, like, who came up with, remember when RMD's requirement of distributions used to be 70 and a half? Who came up with 70 and a half?

And by the way, it's not 70 and a half. It's the April after you turn 70 and a half. Like, what? What is 70? Who's making this stuff up? What happens if your half birthday is in April? Your head explodes. I think that's in the.

tax code. Well, luckily, they solved it, so it's 72 now. And may change again, by the way. Stuff going through Congress right now may change it again and make it 75, but who knows. So, but the five-year rule is just, okay. But I agree with you, Joe. The additional paperwork, and Mohan talks about this in his question. He talks about the additional tax paperwork that would be required just to save the tax on the dividends that makes the backdoor Roth much less viable for him, and that so much of his money is going into tax-advantaged accounts anyway, that trying to shoehorn a little bit more in there

just seems to be the wrong end of the 80-20. Well, especially with this goal that just to me demands flexibility. At the very least, I know from having sold my house in most of my possessions a year ago and then realizing that everything I'd, thought that was going to be the future for my life was not the way I thought it was going to be at all. That's right.

I'm in a totally different situation that for him making a much bigger move to India, to me, has flexibility written all over it. Right, right. And so that should be the number one priority. Yeah. Goes back to priorities, just like we were talking about in the first question. I think we have a theme, Paula. I think we do.

It's trade-off and priority. And in Mohan's case, if the trade-off is flexibility, Flexibility versus tax optimization. Choose flexibility. Flexibility and simplicity. Yeah. Well, so there's your answer. Wow.

Joe, I think that is the first question today that we've actually answered rather than handing it back to the caller and saying, whatever you decide, we support. We can't continue this. Right? Right. No, we actually answered that question. Don't. Should we pat ourselves on the back for this? No, I just want, I don't want people to be disappointed.

I don't want them to think we're going to do that again. Right, right. Don't get used to it. Right. Realize this is an anomaly. Well, you know what the difference is? The first two questions, Ions and Chads, were questions about life and career. And so those are the subjective questions that we can't answer for them because we don't know what they want in life.

We don't know what kind of career they want. Mulhans question was a very specific tax optimization question. That's why we were able to answer it. Yeah. I also like the fact, though, that we were able to answer it in a way that is specific to his goal because our answer was not appropriate for everybody. I felt like I was petting us on the back a little bit. You know how awesome our answer was? Did you see what we did?

Here's why we're great, folks. It's like when I flex as I'm pointing. It's over there. Joe, it doesn't work as well when you're wearing sleeves. Hey, easy. No, no, I'm just saying your shirt. You need to tear the sleeves off. Oh, yes. Suns out, guns out. I need to do that. Exactly. Rip the sleeves off, like right at the threads. Well, if I really point like that, I'd rip the shirt anyway, so I try not to.

You're not supposed to laugh there, Paula. Oh, right, right. Yes. This is my serious face. Right. Thank you. So thank you, Mohan, for the question. We'll come back to this episode after this word from our sponsors. Our next question comes from Sharon. Hey, Paula, this is Sharon. Thank you for answering my question on your September 3 podcast episode.

Unfortunately, I was asking the wrong question or using the wrong term. It wasn't actually a below market rate. My husband has a below market property that he purchased in 2000. He was qualified at that time as a low-income applicant. And now our concern is that do we keep this property, even though it's not appreciating in value in terms of what, say, our neighbor would be selling a property exactly the same size as ours? There is a cap price if my husband plans to sell it now. So, for example, my neighbor could sell their property at $600,000. ours will be cap at a certain dollar amount.

I believe it's only in the 400s. So we wanted to know if it's worth keeping this place. We still have about 20 or 25 years to get out of this below market property rules in terms of selling and getting a full price in terms of selling price in the neighborhood. Please let me know. Thank you. Sharon, thank you so much for calling back and clarifying that question. who wants to listen to Sharon's original question, you can find that in episode 336. You can get to that episode by going to afford anything.com slash episode 336.

And in that episode, you'll hear Paula and I say, Sharon, we're not really sure what you're talking about. Aww. And then Sharon did a great job of defining it today, though, didn't she? Because we know exactly what she's talking about. Yes, exactly. So Sharon, thank you for calling back and clarifying the detail. of your question. So my answer is actually fairly simple. If you do not want to live in this

property any longer, then I think you should sell it. Because to wait for another 20 to 25 years before you get out of the cap. Like essentially the issue that you're facing is that there is a cap on the price that you are allowed to sell this property for because of the way in which it was purchased, the fact that your husband qualified as a low-income applicant. There are rules around the program that he used in order to qualify for this property. There's a cap on the amount that he can sell it for, and there's a 20 to 25 year wait if you want to get out of that cap. That is a big chunk of a person's lifetime, and there's no reason to stay in a property that you don't want to be in for such a significant length of time. And we're not

talking two or three years. We're talking 20 to 25. If you don't want to live there, sell it. Yeah. And for me, for me, Paula, it's not about the 400,000 versus 600,000. It's about the future ROI from here on out, right? Because that return on investment is going to be nothing compared to what she could do with another investment. That's at least my assumption. Right. Is that it's going to be a lower rate of return. I think it's your assumption too. And I think, Sharon, I think from your original question, the first time you called in, that was your assumption too during that time. So I think Paula and I both on board that selling it is the only answer if it's not going to be your primary residence.

Right, exactly. That was a quick answer. Well, it really is a clarification. We spent more time the first time we share it. And Sharon, we love you, but we're going to move on. But thank you so much for calling back and clarifying your question. And best of luck with the sale of your property. Our final question today comes from Norm.

Hey, Paula. I'm wondering if you have any information on remaining anonymous in public records in a home purchase. My situation is that I have an overly attached X that has tracked me down from public records before, and I'd prefer to make this harder impossible with my next purchase. I'm not a real estate investor nor a landlord looking for protection from lawsuits or creditors. I've seen mention of using an LLC as countermeasures to a public record search, or also the use of revocable trusts or special land trusts in some states. Here's a few more details.

This would be my primary residence. I'd like to retain the federal capital gains exclusion or understand the tax impact if I couldn't. The property is located in Washington State and I would be paying cash for the property. So no mortgage company would be involved. Thanks, Norm. Norm, thank you so much for your question. First of all, wow, that is a time. tough situation. I'm sorry that you have to deal with that. I don't know if you've looked into getting

a restraining order, but I mean, I'm sure you have. I'm sure you've probably explored all of those routes. But wow, what a terrible, terrible situation to have to deal with. You could purchase this property through an LLC. And the fact that you don't need a mortgage, the fact that you are purchasing this in cash, makes it very easy for you to purchase this with an LLC. Oftentimes if you need to take out a loan, the bank will insist that that loan be put into your personal name, which means the house would need to be sold to you as an individual, and then investors will typically then use what's called a quick claim deed in order to then deed the property out of their individual name and into the name of an LLC. You, however, don't need to deal with any

of that rigmarole. Because you're buying in cash, you can go ahead and buy the property through an LLC or through an entity without having to worry about any type of financing related obstacles. So, absolutely, LLC ownership would be a good route to take. And if you form a single member LLC, which it sounds like that's exactly what you're going to do, then Treasury regulations allow for the capital gains exclusion as long as the title is held by a single member LLC or a single member disregarded entity. So you could still preserve the federal capital gains tax exclusion even if an LLC owns the property. However, the LLC itself could be traced back to you.

While the public records for that property would state that your LLC is the owner of that property, a person could then look up the public records around who filed that LLC and trace that back. to you. So it would be a two-step process, but you still could be traceable. I think a purchase of this magnitude in a specific place, you know, where you're moving to Washington, I would have the added insurance protection of consulting with a good local real estate attorney to make sure that this works in the community where you're buying. 100%. Money well spent. Yeah, absolutely. And really, feels more, Paula, like a verification. Like, I can't imagine that you pay for a lot of attorney time

with that question if you walk in and just get a verification. Hey, will this work? Right. And there are some more sophisticated things that Norm could do, have the LLC owned by another LLC, which is then held in a trust, if you want to create layer after layer of complexity. But a determined sleuth could still trace the paper trail. However, it will be a lot harder for him to be found if there's no starting point. Yeah. Somebody would have to be looking specifically in Washington and maybe specifically in your community. Well, I mean, so I'm thinking that the reverse of it would be that she would be looking in Washington. She would first search LLCs formed in Washington, find his name. No, she would first search his name, find his name tied to that LLC that is formed in Washington, and then conduct a

public record search of houses in Washington, property in Washington, to trace that to the LLC. So I think the search would work in reverse. It's not that she would find the house first and then trace him from it. She'd go the other way. Right. Exactly. I think that's how she would track him down. But she'd need to know to start with an LLC that he was going that route.

Right. Exactly. I mean, it's still public records findable, is the point of that. you're not avoiding the public records trail, you're just creating additional friction. Which brings up another thought I have, which is there are plenty of solid, strategic privacy experts on the internet. Because even as Norm asked the question, I thought, well, I can appreciate privacy. I think for me personally, this is a little outside of my realm of competence. That's right. We're not privacy experts. Yeah. We're playing one for a few minutes here on a podcast. But generally, I think there are better people to ask that question too.

You know, that's a good point, Joe, because if we, what you and I have just done is we've answered the question as asked. The question as asked is, could I purchase this home through an LLC? Would I still get the federal capital gains tax exclusion if I were to do so? We can easily answer that question as asked. That's just a matter of knowing some of the basics of the tax code and some of the basics of mortgage financing. But if we move away from the question as asked and zoom out to the broader question of what is the most efficacious way to protect my privacy when purchasing a home? That would be a question for a privacy expert. I think back to especially the first two answers we gave today. we were able to broaden the question and change it. And I think that a privacy expert who does this every day would have the experience in that arena of being able to ask the broader questions, too, that maybe Norm isn't asking. Right.

Exactly. So thank you, Norm, for asking that question. Best of luck with this home purchase and with the protection of your privacy. Joey, did it again. I can't believe it. It was really fun. What are you up to? What's happening in Joe World?

I am getting ready to do two really fun interviews over on stacking Benjamins. One is Barbara Corcoran is coming on. And I'm sure a lot of people here know, of course, Barbara from Shark Tank. And so we'll be speaking with her about small businesses and the holidays. And if you're thinking about starting a business or you are a small business owner or you're somebody even working for a small business. We're going to talk to her about those things. And then I talked to Robin Rigglesworth. who is a financial times reporter.

He's got a new book out called Trillions about the creation of something you and me and everybody in the afford anything community loves the index fund. How did the index fund come about? John Bogle? Not at all. What? No. Not at all.

I thought John Bogle is the inventor of the index fund. How about if I spoil it a little for you, the interview just slightly. I will spoil it a little bit. a gentleman in 1960 who wrote a piece under an alias called, I believe his name was John Armstrong, wrote a piece belittling people that thought that passive managed stuff that an index couldn't be beaten by active managers, just ripping the idea. That piece was written by Jack Bogle in 1960. and then Jack Bogle changed his mind.

It's really a lot of the people who are behind now dimensional funds and really the pedigree of what's happened at dimensional funds. And don't get me wrong, Jack Bogle had a huge part to play. But the reason why Jack Bogle did what he did was a little bit of being angry and giving the basically telling some people who had fired him that he was going to do better than they did. Wow. Salty. It's pretty great. It is pretty great. Jack Bogle had a lot to do with it, but nowhere close to the founder of the index fund. Interesting. By the way, for people who are wondering why we've alternated between calling him John Bogle and Jack Bogle, he goes by both.

Yeah. Well, he did. Well, yeah, exactly. He passed. But he is for people who are wondering why we both know his name. He's the founder of Vanguard. Yes. And until a few minutes ago, I also believed the inventor of the index fund. What's very interesting. One of the inventors. of the index fund. I will tell you something that's in the book that we don't talk about in the interview because we actually talk about some much more powerful stuff, I believe, in the interview than this. But Warren Buffett actually in a big interview, mistakenly called him the father of the index fund and Jack Bogle let it go because he's a marketing genius. and he very much knew that the misappropriation would stick and coming from Warren Buffett

and it did. And so most people believe that it's him. Wow. Yeah. And don't get me wrong. This is not me saying Jack Bogle's horrible or what, fantastic. And his contributions to bringing, and Robin will talk about this in the interview, his contributions to bringing the index fund to you and I was huge, was absolutely huge.

And that's coming up on the Stacking Benjamin show. Ah, nice marketing genius plug there yourself, Joe. Thank you. Thank you very much. Thank you so much for tuning in. This is the Afford Anything podcast. I am Paula Pant. If you enjoyed today's episode, please do three things.

Number one, share it with a friend or a family member. That's the single most important thing that you can do to spread the message of great financial health, financial independence, taking charge of your money in your life. So if somebody asked a question that resonated with you and reminded you of an issue that maybe a friend, a coworker, a sibling, a family member faces, send this episode to them. You can get a link to this episode at afford anything.com slash episode 346. Of course, you can subscribe to the show notes and then that makes it really easy to just forward the show notes over. you can subscribe to that by going to afford anything.com slash show notes. So thing number one is to share this episode with the people that you love and care about.

Thing number two is to make sure that you yourself are following this show in your favorite podcast playing app, whether that is Spotify, Pandora, Apple Podcasts, YouTube, however you are listening to this. Make sure that you hit that follow button so that you don't miss any of our amazing upcoming shows. and while you're there, please leave us a review. In fact, if you go to afford anything.com slash iTunes, that'll take you directly to the page on the Apple podcast website where you can leave us a review. Thank you again for tuning in. My name is Paula Pant.

This is the Afford Anything podcast, 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 every, 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. 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

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silence your phone before you record a podcast. Very important. I remember that. Thank you.