Afford Anything - Ask Paula: How Do I Invest For My Parents' Retirement?

Episode Date: February 24, 2022

#366: Micheal’s parents just sold their home to pay off debt and fund their retirement. How should he invest the profits? Ryker would like to understand what it would take for cryptocurrency to be considered as a good investment option for a diversified portfolio. Megan has qualified for her employer's 401k and needs help deciding between investing in a Roth 401K and a Roth IRA. In today's episode, former financial planner Joe Saul-Sehy and I tackle these tough questions. 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. Enjoy! Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything. You just can't afford everything. Each choice that you make presents a trade-off. And that doesn't just apply to your money. That applies to any limited resource you need to manage. Like your time, your focus, your energy, your attention. 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's what this podcast is here to help you get right, or at least help you get less wrong. My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other episode, we answer questions that come from you, the community, and my buddy, former financial planner, Joe Saul Seahy, joins me to help answer these questions. What's up, Joe? Hey, Paula, how are you? I'm good. How are you doing? I'm doing good. I'm sitting here studying different states. And do you know which state is known for the smallest soft drinks? The smallest soft drinks. I would assume that soft drinks are distributed nationwide and therefore standardized.

So, wait, I'm actually really thinking through this. As a result, if a state would have smaller soft drinks that would have to come from smaller fountain cups. But, I mean, fountain cup distribution should also be standardized. So I'm trying to figure out how specifically soft drinks could be. be smaller. Do you mean in terms of total volume consumed? Yeah, yeah. I mean, just smallest soft drinks.

You know what? I'm just going to, I'm going to guess Rhode Island. No, actually, it's Minnesota. You did name the state that's known for all the roads. But I love you thinking through that. Doing some serious research here. You know, it's gone too far. when Paula goes, I'm going to think this out. I'm like, oh, please don't. Please, please don't.

I'm like, well, let's see. As I consider the supply chain. Is it the volume? Anyway, we start off with some tomfoolery, but we actually have some very serious and great questions today. Absolutely. We're going to kick off with a question from Michael, who is concerned about helping his parents through retirement. His parents are both in their 60s. One thing that I appreciate about his question. Part of the reason that Joe and I discussed his question and wanted to bring it to the forefront is oftentimes in the world of finance, we hear conversations about caring for family members in which the implicit assumption is that the flow of support goes from the older generation to the younger generation. So we'll hear a lot of conversations about how to take care

of your children or your grandchildren. But I think one thing that's often overlooked, in the world of finance, are these important conversations about how to take care of your parents and your grandparents and your uncles and aunts, how to take care of the generations that have come before us who may not be financially stable. And so, with that said, let's hear from Michael. Hey, Paula, this is Michael in Knoxville, Tennessee. My question is how I should allocate my parents' cash from selling their home. Just a little background. My mom is 66. and my dad is 69. They've always struggled with money and debt.

So I convinced them to move in with my wife and kids and to sell their house to pay off their debt and hopefully have some leftover for retirement. So as of right now, they only have about $10,000 saved in a 401K through my mom's work. And my dad is retired logger. And he's drawn about $12.50 a month from Social Security while my mom is still working and drawing Social Security around 1,500 a month, and then she makes about $30,000 per year gross with plans of retiring in a year.

They've already moved in with us, and their house is actually under contracts. So my question is how we should invest the money they make from the sale. Should I max out two Roth accounts for them first and then just put the rest in after-tax accounts at Vanguard? Since I'm taking care of the house and upkeep, they really just need enough money to buy clothes, food, phone, medical payments. Does this mean that I can be more aggressive with their retirement allocation,

maybe more aggressive like 70, 30 with stocks so I can get them some growth and allow them to start drawing 4% when my mom retires? This is all just new to us. And so any help would be appreciated. Thanks a lot. Keep up to good work. Michael, thank you so much for that question. And first of all, huge kudos to you for taking care of your parents and for being so proactive in giving them a place to live and wanting to make sure that whatever decision they make about how to manage the proceeds from the sale of their home is handled in the best manner possible.

What a great thing to do as their child, yet to make sure that the people who took care of you are going to be taken care of in their senior years. So huge congrats to you for that. It speaks highly of your character. Now, a few things right off the bat. First of all, the great news is that because your parents are selling their primary residence, the proceeds from that sale will not be subject to capital gains tax.

And as a caveat here, that's assuming it's under a certain threshold, which in your case, I assume it is. So the good news is that you and your parents, specifically your parents, are about to get a big bucket of tax-free money. Now, you asked about how your parents should invest it. And I noticed that within your question, you asked, should we max out their Roth IRAs, each of their Roth IRAs, and then put the rest of the money into a taxable brokerage account. I want to pause and make an observation about the nature of that question. Whenever we ask, how do we invest money, there are two conversations that need to take place. one is what types of accounts should we use?

And the second is which types of investments should we hold within those accounts? And so the analogy that I like to use is that one is a vessel and the other is the thing that fills the vessel. So one is a coffee mug, the types of accounts, if you picture a bunch of different types of mugs, pint glasses, wine glasses, champagne flutes, coffee mugs. teacups, right? These are all different types of vessels. And that's analogous to the types of accounts that are available. And then there are also the specific investments that get held inside of those accounts. And so, Michael, what I liked about your question is, first you asked, hey, what types of accounts should we use, i.e. which types of vessels? And then later in your question, you also asked, should we take on excess risk or enhanced risk in order to compensate for a lost time?

And so I want to, for the sake of everyone listening, make an observation about the nature of those two questions because one is a question about vessel and the other is a question about what should fill that vessel. And we definitely have to distinguish between those two things because given the right vessel, the right holding tank, we can get rid of some of that friction that is the tax treatment on the investment, right? So if we have a, we just have a brokerage account and our fund, whatever we have pays a dividend or we sell a bit, we have a capital gain, well, then we're going to pay tax on that, even if we don't need the money right now. I can't tell you the number times back when I was a financial advisor, Paula, and I would recommend that we make a move, my client would make the move. And then at tax time, they would say, hey, I didn't take the money

out of the account and I still have to pay a tax. Well, if it's not inside the right vessel to use your language, you know, if it's not inside an IRA or some sort of a tax shelter, you're going to pay tax whether you spend the money or not, whether it hits your hand or not, you're still going to pay tax. So I do like sheltering some of that money. I actually have a bigger question than all that, Paula. You know, and this is the kind of thing that I think financial advisors think about because when you look at just your own situation, maybe something bad happens, but usually things go pretty well. But when you work with 100, 120 families, you see things go wrong all the time. Something surprising happened in my client base a fair amount of the time.

that I always think about downside far more now than I did before I was in the financial planning business. And the thing that I wonder about with this investment strategy is if for some reason something happens to Michael and he can't help them anymore, if he gets more aggressive with investments, do his parents have the ability to continue to manage the investments the way that he would set it up. So part of what I think I always had to think about as an advisor was, was this isn't about me. It's about this other person. If I'm helping them and I get hit by a bus as their advisor, can they continue this strategy? So it was always very important that my client knew the strategy.

They internalized the strategy and they got it. Michael's parents at their age, I think if they were able to do a great job of investing money. And I I don't know what their circumstances are, but there's a high probability they would have had more, more investments than they have. And certainly, I don't know all the facts. So possibly I'm wrong there. I could very well be wrong. But if I'm right, I'm not sure that I get more aggressive, partly because when you try to make up for lost time, I think it's gambling. But also, second, can Michael's parents, would they be okay with the roller coaster ride?

that a more aggressive portfolio is going to bring them. And by the way, if they only need money for the things that he talks about, just Social Security, so they're not going to need this money right away? Certainly, I could make the case that Michael makes, which is, yes, if they were knowledgeable investors, I think investing for investing in a more aggressive way because they don't need the money today would be a fine way to invest. Well, let me jump in there because when we ask the question, all right, let's say hypothetically, Michael gets hit by a bus. He can no longer help his parents manage their money. His parents then have to handle their investments on their own. Right. So we'll talk about that hypothetical case in which the parents outlive Michael. To the question, how well could they manage the money, it strikes me that there are two components to that. There's the tactical and then there's the psychological or behavioral.

psychologically or behaviorally, yes, they might panic during a market decline, which is something that we see a lot of new investors do, and they are, for all intensive purposes, new investors. So certainly the psychological risk is there, but the tactical risk, the actual technical, how do I manage this money, how do I rebalance periodically and make sure that my asset allocation is on point, that element could be solved by putting them in a target date retirement fund at a place like Vanguard that has low fee target date funds. In fact, Vanguard is the only brokerage I would use for that. But the tactical piece of that could be solved by just putting them in a target date fund that carries a more aggressive date than their actual age or timeline would warrant.

And this is why I like framing the question that way, because we start to, to think about this next domino, which I think is just a really important domino. And I'm with you. I think this is a place, and you know, I'm not a big fan of target date funds in a lot of circumstances. This is clearly a case where I think a target date fund would be great because it can also, not only will you rebalance at the right time because it's done automatically with just a little bit of education, it's very easy to teach mom and dad that this is

being professionally handled. This is all, there is nothing for you to do with the Mark, goes down, market goes up, and you and I know, there's nothing to do anyway, right? If you buy the total market index, there's still nothing to do. But I think in this case, with a new investor who may worry about safety in the future, having that knowledge, that little bit of knowledge that there is a mechanism that's taking care of things if the market goes down, if the market goes up, and make sure that the money's being well managed is pretty attractive. I mean, this, This is the case.

This is the reason why. And this was really surprising. You know Ben Stein, the economist, who was also on Ferris Peeler's Day Off, right? Yes. And I have seen that movie. Wow. Really? Yes, it is a movie that it's one of the few movies I've actually seen.

That is fantastic. Well, Ben Stein has a story famously where he recommended in a case very much like this. This is a case where he actually recommended an annuity to his parents because of the fact, look at what's working for his parents now, Paula, a stream of income, right? And they exist on the budget from one social security check to the next social security check. What an annuity does is just makes that check bigger and they can't outlive it. Now there's zero money management. They can't outlive the stream of income. It gives them a pension that they can solidly rely on for the rest of their life. And I'm, by the way, Michael, I'm not by any means suggesting that. But I am suggesting

that somebody who's smart like Michael or somebody who's smart like Ben Stein is going to manage money differently for their parents than they will for themselves. That's interesting. So let's float annuity out there as a possibility. I don't think it's necessarily something that we have to either endorse or eliminate. I was going to say, we got people screaming at their device right now. Yeah, exactly. The annuity haters are out in full.

Exactly. So yes, we will neither endorse nor. eliminate the possibility of an annuity. That's a controversial topic. And we have plenty of previous episodes in which we go into annuities in depth. So we don't need to rehash all of those arguments. No, but what we can do is just very briefly say this. The reason why annuities have such a black eye with many investors, and I'm sure many listeners to the show, and also, Paula, in a lot of ways, you and I, there are many annuities that are chalk full of fees that really are much more about the profit for the insurance company that runs them than they are for the person who really

needs the money. In this case, we're actually stripping that term really to the bone. A lot of the annuities that are ugly are not at all what we're talking about. We're actually talking about creating a pension fund for them that they can't outlive, period. So all of the horrible side shows that go on in the annuity industry, we strip all that stuff away and say, what if they just had a stream of income that they cannot live? And we made it a bigger stream of income. Now, the reason why I said that I might not recommend an annuity, though, Paula, is if they already have enough money on a monthly basis, giving them more money on a monthly basis isn't really a phenomenal strategy. So while I like the security of it, we create a new problem.

while we solve an existing one. It certainly takes away the freedom from needing to worry about a complex investing strategy and parents handling it if Michael isn't able to. There's nothing to handle. They will continue to get a stream of income. And by the way, the other neat thing, if they have health care issues in the future and they end up needing long-term care or needing somebody to provide for them, they still have the same stream of income. So this isn't part of an asset base that would stop them from qualifying for Medicaid as an example. Although they wouldn't need Medicaid based on their age, they'd qualify for Medicare, yes? Medicaid is when you run out of assets because there's so much money that's going to the long-term care facility.

So if they're paying, let's say, $80,000 a year to a long-term care facility, the Medicaid system requires you to spend your money before you qualify for government assistance. to have help with those payments. So it's actually an apple and an orange. They're going to be two different things. Got it. Because Medicaid would handle the custodial care issue where Medicare is truly the health care. So I wanted to put that out there, but I really, the more that we talk through this,

I truly like the Target Day Fund idea. And I can't believe I'm hearing myself say that because I don't think I ever like the Target Day Fund idea. I rarely like the Target Date Fund idea. So, Michael, to the question, you've asked two questions, what type of vessel should this money be in and what underlying investments should fill that vessel? And so to that second part of the question, should we amp up the risk to make up for lost time, I think a Vanguard Target Date fund that is a little bit more aggressive, maybe Target date 25, for example, that? that coupled with educating your parents about the fact that they should not touch this money, making sure that they know what's going on so that they can independently handle it themselves if they ever needed to do so. That's the answer to that second part of your question.

But let's address that first part, specifically what type of vessels are best for this money? because as you said, Joe, money that's in a taxable brokerage account, they will have to pay taxes on the gains that they make on those investments, even if those gains are reinvested. Well, I like the Roth IRA idea. There's no age 72 rule that parents will need to take that money back out of the Roth IRA. they can leave it in there forever if they don't end up spending it. Also, it sounds like if it's from the proceeds of the sale of a house, this will be after tax money anyway, Paula. Mm-hmm. Exactly.

So you could get a small tax break by putting it in a pre-tax plan because mom's still working. But I think I'm a much bigger fan of putting it in the Roth and having this be tax-free money forever. A Roth is great for the first 14,000, that's 7,000 each per parent, based on their age. Yeah. Yeah. Beyond that, I don't know that I get fancy.

I mean, I do. I think it's non-qualified brokers. I mean, what are our other opportunities? Once again, we can put it in the ugly type of annuity where you get diversified investments inside. You're going to pay fees through the nose for this diversified collection of investments and the ability to tax shelter. and the other downside of that type of an annuity is that annuities are LIFO, which becomes a tax

trap, meaning it's last in first out. So last in is going to be the gains that the annuity makes. And the reason why people never tap their annuities is because the first money they take out of it's all going to be 100% taxable because it's 100% gain. Plus, often there are fees for six to 10 years to get at that money. I mean, this is the side of the annuity that people were screaming about earlier when I brought up the word. So I'm not a fan of that. You know, municipal bonds are great for people that have high income, but really what his parents want and need is growth on their money because they don't have that much.

And municipal bonds are never going to provide any growth. So I don't think that that's a suitable tax shelter. That actually is so municipal bond, even though it's the fluid in the cup, not the cup, it's still because of the type of fluid it is, it has this tax treatment that allows it to be tax-free or both state and federally tax-free. But the growth aspect isn't there. So I'm just walking through these and I'm not seeing any other place that we can go. I think that having it in a non-qualified, flexible brokerage account.

And then next year, if for whatever reason, mom's still working or dad brings in enough money to make a rough contribution next year, transfer more in. And the cool thing is they get a catch-up contribution because of their age as well. Right. Yeah. So 7,000 each rather than 6,000. Yeah. So there's a little bit more there. Exactly.

So it'll be 14,000 combined rather than 12. Yeah. I don't know. There's another option, Paula. So, Michael, I guess we've got the answer, which is, In terms of the vessel, it's precisely what you suggested, max out their Roth IRAs and put the rest in a taxable brokerage account. And then in terms of the underlying holdings, vanguard target date retirement accounts that are slightly more aggressive. So target date 2030, 2030, 2035, 2040.

And that's not based on anything that we know. So that's not investment advice. That's based on just the assumptions that we're making from your question, Michael. and I think in terms of their investment readiness, at the very least, that's the way I'd be thinking about this. What's an investment where they would feel comfortable if you weren't around to help manage it anymore? And I think, Joe, that was the most interesting part of your answer, not to pat you on the back in the middle of, but you know how we introduced this question? Even before we played Michael's question, we introduced it by saying so much of the conversation in finance happens. around how do parents support children, right? The flow goes from the older generation to the younger

generation. And what I like about Michael's question is that we get to very publicly in front of tens of thousands of people have a conversation about what to do when support flows in the other direction, when the younger generation supports the older generation. It strikes me when you bring up the point that we can't assume, to put it bluntly, we can't assume that Michael will outlive them, it reminds me of, like, the parenting challenge is to make sure that your kids learn how to be independent so that they can take care of themselves when you're not around. And that's precisely what Michael needs to do with his parents. He needs to parent his parents so that they can take care of them.

if Michael is not around. And that's where the investor education piece comes in. And that is why Target Date funds are so beautiful because a Target Date Fund makes investor education very simple. And again, if you're going to go the Target Date Fund route, I would recommend Vanguard. There are many other brokerages that have super high fees. So if you go the Target Date Fund route, be very, very cognizant of fees. Vanguards are great. That's where I put my parents. I put my own parents into Vanguard target date.

So Michael, while this is not investing advice, this is simply a podcast, here for educational and entertainment purposes only, I hope that that provided a little bit of education that helps you make the decision about what you'd like to do. And once again, huge props to you for taking care of your parents. It's a very noble thing to do. We're going to take a break for a word from our sponsors. And when we come back, a caller named Riker has a really interesting question about cryptocurrencies, a big picture, wide-angle lens question that lends itself to some pretty interesting discussion.

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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, a fifth, third better. Our next call comes from Riker. Hi, Paula and Joe. This is Riker from Wyoming. I have a question regarding cryptocurrency. I listen to a lot of financial podcasts, including afford anything, stacking Benjamins, earn and invest.

And it seems like overall the theme across the financial podcast is that there's a lot of uncertainty and doubt in regards to cryptocurrency and not really recommended to be in a portfolio. It's more of just a play money thing. What would cryptocurrency need to achieve for it to be a recommendation to be in a diversified portfolio? Like, is it a market cap issue? Is it a volatility issue? Basically, what would we have to see in the future for any reasonable advisor to say,

yeah, you should have a certain percentage of your money in cryptocurrency? hopefully that makes sense. Thank you so much. Oh, I definitely have feelings here, Riker. I got all the feelings, Paula. I got them all. Well, you might have a few as well. All the feels.

All right. Let's hear it, Joe. It's interesting to me, Riker, because I hear that a lot too. And I hope that listening to stacking Benjamins, you mentioned, that you didn't get that feeling because I think two things. Number one is I think that crypto can be a piece of an investment portfolio. Mm-hmm. I often joke, and I hope that people hear this for what it is, that I'm not sure that crypto

truly is an investment because I don't know what it is. It is supposed to be a currency, which is generally what I use when I go to the store to buy milk, but we're investing in it. And I don't invest in currencies on the Forex Exchange. I know some people do. I have a thought that really jives with this. Yes. I totally agree with you that I hope that no one listening to afford anything has gotten the impression that you shouldn't yet invest in crypto. I have a percentage of my portfolio that's allocated to crypto. I wouldn't go so far as to say that everybody needs to have it in the same way that I wouldn't say that everybody needs to have real estate. Obviously, I'm a big fan of real estate. Anyone who's listened to me for any length of time knows that. But I accept the fact that you can have a perfectly wonderful,

life by sticking purely with a target date fund, right? And so anything that we do beyond that is additional optimization. Sure, yeah, we can try to asset allocate better. We can study the efficient frontier. But no, nobody, quote, unquote, needs anything more than a target date fund. And yet, I love crypto, so long as that crypto is kept to a reasonable portion of your portfolio. But Joe, to what you are saying, when I think of cryptocurrency, quote unquote, investing, and I'm putting that in air quotes, I see it as currency exchange, exactly as you just said. So if you adopt the framework that a given cryptocurrency like Bitcoin or Ether is a medium of exchange, just like any other Fiat currency, just like the euro, or the British pound, or the Nepalese rupee, then you're engaging in currency conversion. And whenever you engage in currency conversion, sometimes there are differences between the currency

in which you earn your income, which for most of us is the US dollar, and the currency that you've converted those US dollars into. And, you know, the reason that people make huge gains in crypto is because sometimes that delta gets huge. And I like that. I mean, I like that framework a lot and that I think solves some of that angst that not just me, but a lot of people have. And frankly, I think there's a bigger question than this, Riker, which is I feel like there are a lot of advisors who are very quickly being left behind.

And the reason they're being left behind is because they haven't done. the homework and they don't appreciate cryptocurrency in a portfolio. So while I'll, Paula, right alongside you say, I hope you're not hearing that in Stack of Benjamins. You're hoping people don't hear it here. And we both know Doc G. I'm sure Doc G doesn't feel that way. In fact, he had a great episode with a pro and a con talking about cryptos. It's a great earn and invest episode. So I like the debates that we have and the discussions that we have about crypto. I really get frustrated when I read about so many advisors that just go, yeah, not a thing. Don't do it. Really? Really? That is, I feel like that's somebody, Paula, that hasn't done their

homework. It just feels lazy to me. Whenever I talk about cryptocurrency, I always get a couple of people on Twitter who have a knee-jerk reaction to the word crypto, which is probably fueled by the antics of some of its adherence, meaning that the YOLO, FOMO, to the moon, high-risk, party in Miami culture that has been built around cryptocurrency can distract and detract from people taking seriously the rise of crypto as an authentic medium of exchange. And while I don't know which cryptocurrencies will be, the dominant mediums of exchange in the future, I certainly think that we're living in another 1999. This is the year 1999 or the year 2000 when it comes to crypto. And when I say 1999, 2000, I'm referring to the rise of the internet. Back in 1999, back in 2000, I think most observers

understood that the internet was more than just a fad, but we had no sense of how fundamentally it would shift all of our lives. And I think that's where we stand today with blockchain technology broadly. And if you haven't heard it, the episode that we did, it's episode number 325. So if you go to afford anything.com slash episode three to five, that was our cryptocurrency episode. It explains in much greater detail why I'm extremely bullish on this asset class. But Joe, to your point, when I say asset class, what I'm referring to is not an asset that is comparable to equities or bonds or real estate, but rather to an alternative form of currency, a currency that is non-fayot and not backed by any given government. Here's the thing. Investments are valued based on their

growth and their income stream. So if you buy a stock or if you buy a piece of real estate, That stock or that piece of real estate has a particular valuation that is based on the income stream that it provides. And a share of Coca-Cola or a share of Johnson & Johnson or Nike is going to be based on the income stream that that share provides and on investors' expectations of the growth of that income stream over time. Same thing with investment properties. If you buy an 80-unit apartment complex, it's going to be valued based on the income stream that it currently provides and on investors' expectations of how that could grow in the future. Cryptocurrencies are fundamentally different in that they are not income-producing assets. And so to see them as an investment requires a speculative approach.

If a person buys a piece of bare land, that bare land is special. speculative. The land itself does not provide a stream of income. And so the only growth in that asset would come from the assumption that that land would be worth more in the future than it is today, given that the land itself is not producing any other form of income. You could view cryptocurrency as analogous to an investment in bare land. Sure. I think many people adopt that framework. but while it's true that people go into crypto as a speculative investment, it's also true that unlike bare land, crypto has actual use right now. And that actual use is that it operates as a medium of exchange between buyers and sellers. And that's what makes it analogous to a foreign currency

rather than to a non-income producing asset like bareland. Can we talk about where to put it in a portfolio? So now that we have cleared the assumption that it shouldn't be and us saying that it should be where it goes, and kind of popular asset allocation thought. So in the CFP community, the thought is that this as a speculative investment should be no more than 5 to 10% of your portfolio. So if you talk to a professional, that's what they're going to recommend.

Crypto 5 to 10%. In my book, I actually talk about the fact that when you talk to CFPs, they're never going to recommend more than that for two reasons. Number one is you will not get poor that way, keeping 90% of your money in stuff that is going to not be the Wild West like crypto still is, but much less than three years ago, even. You know, if you look at things like Ethereum and some of the stronger coins are pretty exciting spaces where I think there's much more of a floor than we felt that there were just two, three years ago. But the second reason is CFPs won't tell you that because they don't want you to fire them when you get on a gigantic roller coaster ride. So I think that the more that you under diversify your portfolio, the easier it is to get wealthy, which also means on the other hand, Paul, easier it is to go broke. Right. Strategic under diversification.

Yeah. So to load up on anything, to load up on any one thing, you just have to know what the downside is. So I like that 5 to 10 percent as a starting point. I know people that own more than 4 to 5 percent. The people that tell me that they yoloed into doge coin 100 percent and have diamond hands, that's a dangerous place to be, my friend. that is a dangerous place to be.

So Riker, hopefully this shed some light on your question, but as a key takeaway, I would not hesitate to start allocating a piece of your portfolio towards crypto. And I have investments not only in cryptocurrencies themselves, but also in companies that are involved in the cryptocurrency industry. So I've invested in the growth of cryptocurrencies in two different. different ways. One is through that foreign currency exchange, that currency conversion, and the other is by holding shares of publicly traded companies whose primary existence is rooted in the growth of the crypto markets. I got a question for you about investor psychology on this note before we

turn to our next topic. It might even kind of be a bridge to our next topic a little bit, which is that how do otherwise incredibly savvy investors that dive into every aspect of investment and love crypto completely overlook some of the extremely high fees you pay when you're trading in and out of the crypto space? Because some of these companies, by the way, if you're looking at financial brokerage accounts, people will look at these little tiny deviations and fees and compare and contrast them. But there is a much, but you talk about a big delta, there's a much bigger difference between places that you can do crypto exchanges.

The crypto exchanging fee structure is also the Wild West. So be careful there. Don't just, whatever the first company that you hear of to trade crypto, don't just dive into that one. I would seriously, if you want to look at fees, let's look at the fees on some of these crypto accounts. Yep. It's really interesting. You know, it's the, you asked about investor psychology. There are people who will decline to buy a $2 Coca-Cola at Chipotle because it gives them the psychological sense that they have made a financially responsible decision. but these same people will not review their home or car insurance premiums.

They won't refinance their mortgage. They won't add weather stripping and caulking to increase the energy efficiency of their home. They won't do these non-sexy things that will save them significantly more money in the long term. Because nobody wants to talk about putting more air in your tires to improve your fuel. mileage. Nobody wants to talk about reviewing your insurance premiums annually. That doesn't make for interesting headlines, and as a result, it's not in the zeitgeist. But don't buy lattes. That's in the zeitgeist because it's sticky. Why? Because it's visible. It's tangible. It's visceral. We're physically holding it in our hands. We are physically drinking it and consuming it. And so

that salience causes us to overweight the significance. of a daily cup of coffee while underweighting the significance of these invisible drags that add up to substantially more. And similarly, when we talk about the zeitgeist, sure, there are a million headlines about expense ratios

once you get into the personal finance community. It's a favorite topic because it produces an easy win. And I think it's because a lot of writers don't know what else to write about. Yeah. It's easier to write about expense ratio, than it is to write about the Efficient Frontier. Which is so sad.

Because I want to write poems to the Efficient Frontier. That's right. Efficient Frontier poetry. It's your next book. I'll be wearing this Mr. Roger sweater sitting by a fireplace, reading it aloud to scores of adoring children. Read us the one about Dr. Markowitz again, Uncle Joe. Oh, on that note, we're going to take one final break for one final word.

from our sponsors. When we come back, we will answer a question from a caller named Megan who lives in Denver who's working a job that she loves, but that doesn't pay a whole lot. She's wondering how she can best invest her money so that she can still retire in her 50s. Our final call today is from Megan. Hi, Paula. My name is Megan from Denver, Colorado. I'm 30 years old, have no debt, 9K and non-retirement savings and earn about 60K pre-tax doing a meaningful nonprofit job that I love. Still, it's work and I want to at least partially retire by age 50. Thanks to my six years in graduate school earning my master's in PhD and my initial employment contract, this year is my first year ever to be eligible for an employer-sponsored 401K.

Very exciting. This 401k is through guideline, comes with a first year. a 4% employer match and a 0.08% expense ratio. I chose a Roth option considering my current low tax bracket. This year, I hope to save about 30% of my income, which is about 18K. My question is whether I should put all of my savings in my Roth 401k or to also put a portion in my Roth IRA I set up in grad school through Betterment. My Roth IRA has an expense ratio of 0.25%, and tax loss harvesting. It contains all of my current retirement savings, which is about 30K. Is the lower expense ratio a key reason to prioritize funding my 401k? Or is there a key advantage

to the IRA that I'm missing? Both portfolios are aggressive with about 85 to 90% stocks and 10 to 15% bonds. I'm still early in this financial independence journey, and so appreciate any help that you can give. Thank you so much. Megan, first of all, congratulations on getting your PhD. Congratulations on finding meaningful work that you love. That is indescribably significant. People spend their entire lives hoping to find meaningful work that makes a difference. And the fact that you have found that, that you love what you're doing, that's a huge blessing. So congratulations. Now, you're 30 years old, you would like to at least partially retire by age 50, so 20 years. You've got an amazing savings rate.

Big congratulations there. And I love the fact that you have a Roth-centric strategy. A, because of your low-tax bracket, and B, because of your age. The longer that your money is kept in a tax-exempt account, such as a Roth account, the more you enjoy that tax advantage. And given that you're young, that money is going to grow, presumably, for a lot longer, which means you get more years of enjoying that tax advantage. Now, a couple of things strike me right away. Number one, your Roth IRA is with Betterment. Betterman invests in underlying Vanguard funds. So I know what types of funds you have access to through your

betterment account. My question to you is, do you also get access to Vanguard funds through your 401k? If so, great, you would be able to invest in Vanguard funds if you chose to do so through either one. But if not, if there is a limited selection of the index funds that you can hold, then that might influence your decision. So question number one, to summarize that is, what types of funds are available to you? Is your fund selection curtailed or limited through one provider versus the other? That's one factor to consider. A second factor to consider when choosing between a 401k versus an IRA is liability. If there's any chance that you might be sued, and again, this is not legal advice, but there is at least the possibility that money in a 401k may be more

protected from a lawsuit than money in an IRA. Now, that being said, consideration number three, the principal contributions that you make to a Roth IRA is money that you are welcome to tap any time without penalty. So while a 401k might have an advantage with regard to liability protection, the IRA has an advantage with regard to giving you the freedom and flexibility to tap. the principle in the event of an emergency. In the event, obviously, you don't want to do it, but if some unexpected calamity happened and you really needed to tap the contributions, you can remove those contributions penalty-free. So those are the top three considerations

that came to my mind as soon as I heard your question. Number one, fund selection, number two, liability protection, and number three, ability to tap the principal contributions, penalty-free. All right. Do we want to talk about the fees, Paula? Let's do it. Let's talk about the fees, Megan. Because a lot of investors get sucked into the fee game first.

And the fee game is not the first thing that you look at. The difference in fees to me is irrelevant at the beginning of the argument. Because if I'm investing, I want to make sure first, that the investment that I have meets the time frame and the expectation that I have for it. So if I begin with the goal and you get this very aggressive goal at being semi-retired at age 50, and I love that goal. But with that goal, then we have to make sure that what you're invested in has the ability to help you reach that goal.

So we could have something that is very, very inexpensive and is completely. in the wrong asset class to achieve that goal. And yet investors will flock there sometimes because it's cheaper. Cheaper does not equal better. Cheaper equals cheaper. Now, once I find two investments that both reach the goal and they do it the same way, then I want to choose the one that's less expensive of the two. Why would I overpay to achieve my goal?

And I'm wondering, by the way, about some of the expenses that you talk about, because you mentioned that your 401k has an expense ratio is 0.08. And 401Ks generally have a lot of different choices inside of them. And each different investment choice has a different expense ratio. So I don't know if you're saying that your 401k has an administration cost of that amount over or above what the, fees are inside the funds, or if the fund that you've chosen inside of your 401k has that low, low expense ratio. So I would get that straight first because there's a possibility that what you're seeing in is administration cost for your 401K that's been passed on to the participants.

And there's an additional fee that you're not seeing that's actually inside of the fund. I don't know if that's the case, but if I were you, I would look into it. The second thing is you mentioned tax lost harvesting with your betterment account. If your betterment account is in a Roth IRA, I want to be clear, tax lost harvesting does not matter. And the reason is you are harvesting tax losses to show on your income taxes at the end of the year. And because it's inside a tax shelter, you're paying for a benefit that gives you no benefit inside the Roth IRA. inside the Roth IRA when you sequence. As long as you keep the money inside the Roth,

you're going to be good. So I think that Betterment, frankly, Paula overplays the, we're doing tax loss harvesting thing with a lot of investors. I think a lot of investors think it's a great thing. And especially when you're starting out, tax loss harvesting doesn't change the game for you significantly. And that's definitely not a reason I would choose betterment.

So I think what I would do when it comes, comes to choosing investments first would be forget about expenses and think first what's going to get me there. And then once I look at different investment choices that get me there, then look for the one that does it at a lower fee that I can be sure is going to make it to my destination. I did have that question too when she talked about the expense ratio associated with her 401k. as you said, Joe, every underlying fund has a given expense ratio. If that underlying fund comes from Vanguard or Schwab or Fidelity, that underlying fund is going

to have its own expense ratio. And so, sure, the provider is going to tack their own fee on top of that. But that doesn't necessarily mean that you get a uniform fee. Correct. Yeah. I don't know. I would dive into that a little. bit harder, Megan. We get very obsessed as investors about fees. A fee obsession, I think,

is healthy. But when we're choosing investments that don't meet our goal because they're cheaper than investments that do meet our goal, we're very successfully and cheaply not getting where we want to go. And that's what frustrates me. That's what's frustrated me. Ever since I went from the financial planning side to the financial media side, the obsession with fees. And Megan, I'm not talking to you now. I'm just talking to the wide audience that there's a lot of people out there that we're all going to hear that are just overly obsessed with fees, fees, fees, fees, fees, fee, fee, fees.

I want to know first, what do I get? And then second is the price of what I get actually worth it. Because often people will ask a financial planner as an example, what's your fee before the financial planner even tells you what they get. That's like going into a restaurant and saying, your food's overpriced. Hand me a menu. I have no idea what you actually serve here. But I know it's overpriced. There's a quote from Oscar Wilde. A cynic is a man who knows the price of everything and the value of nothing. Oh, man. Fantastic. But yes, placing the fee before the value is the cart before the horse. Well, one of the other things we often repeat on this podcast,

is not to let the tail wag the dog. And we usually say that in the context of taxes. When people say, what's the most tax-optimized decision that I should make? And we're like, whoa, whoa, whoa. The question is, what is the optimal decision that you should make? And once you choose that optimal decision, you would then tax-optimize it. You don't let the tax tail-wag the decision dog. So typically on this podcast, that's how I talk about the tail-wagging the dog concept.

but you could use that same metaphor for fees. Rather than asking what is the most low fee investment, it's what investment, or Megan, in your case, what type of account, what type of vessel with which provider is most optimal for me? And once you choose that, then you want to make sure that the fees are at least reasonable. Well, and it's almost like we were just talking about with Riker with crypto, right? If I decide crypto and I want to buy some, and now I know that all these brokerages are going to do the same thing, then what's a broker that I know is not a shi broker?

And I know that I will get my crypto and I know that the fee is commiserate with the service is a low fee. So I still have fees in the equation. It's just a little further down the list. the other thing that that i often wonder and megan i think this is a really great exercise is to look at to get that partial retirement at 50 now that you have this job and you're thinking about how much money you're putting in your 401k or how much money you're putting in investments how much money do i need to put into investments to make that 50 a reality Like, I would love for you to do that.

And here's the reason why. I think it's going to be a significant number. I think it's going to be a big number to get that done in a 20-year period, especially if you're going to live for a long time, which we definitely hope. So to be able to do that is going to initially be exciting. But at some point, the excitement's going to wear off. And you're going to ask yourself maybe five years from now, maybe two years from now, maybe 10 years from now, you're going to go, what am I doing all this for?

And so I think it's important, Paula, that Megan or anybody else listening build some milestones in. Where do I need to be this time next year? Where do I need to be in two years? Where I need to be five years from now? Because those milestones are many celebrations you can have on the way that will keep, you keep your focus on this prize. And I found that building milestones in my life for some of the biggest goals that I have

are essential to me getting where I want to go. So I would start doing that math now. How much money do you need to save per paycheck and what rate or return you're going to need an average year to make that a reality? And then based on that where I need to be one, two, five years from now. Absolutely. And it's a difficult calculation because over the span of the next 20 years, who knows what types of promotions she'll achieve?

what types of pay raises she'll receive. The growth of her income will most likely not follow some neat 3% annually or 4% annually trajectory. But that doesn't change the math on what she needs to do. It changes how easy it is. Correct. Yes. And the cool thing is, is if she's able to save, I mean, let's say it's 50% of her income right now, right? Let's say it's a big number. Right now she's saving 30%. Yeah. But let's say the real number is, 50. And she has to save this big number. The cool thing about those raises, Paula, if she's able to make it work, is that now she no longer has to save any more money from the raise. Now the raise can go to lifestyle because of the fact that she already is saving the amount

that she needs to reach that pre-range goal. So what you're saying is regardless of whatever percentage of her income she knows she calculates that she'll need to save. Once she has that locked in, the rest is gravy. Absolutely. Yeah. And now she's taking guilt-free vacations along the way. She's doing more things today that she really wants to do today. So she's not spending so much money ensuring the future later on. That's one way to tackle it. Obviously, another way to tackle it would be if she's saving 30%, she's not going to reach it.

And she knows what the difference is between what she needs to do and what she's able to do. Well, now she can look at side hustles. She can think about future raises. She can think about strategies to make more money. And I like that approach too. Obviously, to your point, that's going to be a lot more nebulous than let's lock it in. And then every other dollar we get on top of this goes in the today pocket instead of the future pocket. So, Megan, thank you for that question.

And best of luck with your new career and your entry into the financial independence community. glad that you're here and I'm looking forward to the next 20 years plus life after FI from that point forward. Joe, I think we did it again. We did it. And not only did we talk crypto and taking care of parents and getting started on your financial journey and finding the right fun, we also had some education about a few of our states, which I think was very important as well.

No, I had already blocked that from my memory. It was so good. It was so good. There was nothing bad about that. Now you can tell all your friends. I'll tell exactly zero of my friends. And by exactly zero, I mean, I will broadcast this to 60,000 people. You're welcome, world.

Well, Joe, where can people find you if they would like to hear more cheesy dad jokes? Oh, there's no such thing as cheesy, but there's only great dad. jokes and they're found every Monday, Wednesday, Friday at the Stacking Benjamin's podcast, the greatest money show on earth, because, as you know, Paula, it is a circus. We recently talked to, we had one of my favorite interviews in a long, long, long, long time. I spoke with Daniel Lamar, who was the longtime CEO of Cirque de Soleil about creativity in your life, speaking of circuses. Yeah. And it was a wonderful discussion. And I love his new book, Balances. team X. I can't recommend it enough. I bought it for our whole team. I just think that adding some

creativity in your life is so important. So I'm on that train. But yeah, that was a recent show. And we also talk to Terry Trispecio about unfollowing your passion. You know this advice to people that are already rich tell people, hey, just follow your passion. Terry thinks that's not the case. that truly the sweat that it takes to really get into something will create the passion. It's not the other way around. So don't block yourself from life experiences by waiting for your passion to show up. That sounds very similar to Cal Newport's philosophy, where he argues that passion is the consequence rather than the precursor. I think there's a lot of people on that train.

I saw Scott Galloway talking about the same thing recently. And Terry has a TEDx talk that over 7 million people have watched. So I think a lot of people, this resonates with many of us. Absolutely. Do the work and the passion will follow. Assuming you have minimum viable interest, I think you do need a minimum threshold of interest in a given topic. But assuming that floor exists,

then the more you get into a topic or a field, oftentimes the more enthusiastic you become. And I think a large piece of that is because at the beginning of learning about any given topic or field, we all operate in the realm of unconscious incompetence, meaning we don't know what we don't know. And we often assume that a given field is much simpler or easier than it actually is. I encounter that all the time when I tell people what I do for a living, that I host a podcast, and I have a website. with web articles and an email newsletter.

Like you roll out of bed at 1030 and tap on your keyboard a little bit, sidle up to the mic for 20 minutes, and that's your day. Exactly, exactly. And people don't understand how much overhead exists in a business like this. Literally hundreds of thousands of dollars of overhead at Joe, at the scale that you and I operate at. People don't get that because fundamentally they don't get the complexity of what we do. It's always weird when people hear that there's, you know, they just think on stacking

Benjamin's, of course, that you and Len join my co-host OG and I and mom's neighbor Doug, but there's actually six people behind the scenes that make that work. And I've had people tell me, like, what would they do? I think you might be mismanaging this, Joe. It's just a podcast. You know, I've been doing a new employee onboarding and new employee training for the last, Like, we've been deep in it for two months now. And Joe, you and I were texting about it earlier today, how even after two months there's just so much.

And we have a pretty rigorous knowledge base built out internally with our processes and systems and there's tutorial videos for a lot of what we do. But even with a very built-out knowledge base and with me being in the trenches every day answering questions, it's still been. a bit of a shock even for me, even after having done this for 11 years, to see how much goes into the training and onboarding of each new employee. And that is to say that's how complicated the systems are. Anyway, all of that to go back to unfollowing your passion, when we begin in a new topic or industry, we don't appreciate the complexity of that topic or industry. but the more we learn about it, the more we realize how little we know. And therefore, the more we realize how much there is left to learn.

And I think anyone who carries a spirit of lifelong learning or curiosity, once you ascend to conscious incompetence and you understand how little you know, that's when true passion ignites, because that's when you become curious and excited to learn, about all of the things that you now know that you don't know. This is such a fun topic because I feel like half of the fights that people have on social media are them defending half thought out positions. And instead of asking yourself, how do I continue to defend my position?

If you go into discussions with the question, what is it that I still have to learn? you not only avoid those, that conflict immediately, you also realize there might be a different point of view and there may be some knowledge out there that you call me crazy. There might be some knowledge that we don't know, Paula. It's a great discussion. And yeah, Terry Trispecio with her big TED talk coming on to talk about it on Stacky Benjamin's. That's right. So the Stacking Benjamin's podcast available anywhere where finer podcasts are downloaded. Finer. Well, that's our show for today. Thank you so much for tuning in.

If you enjoyed today's episode, please do three things. First, share it with a friend or a family member or a coworker or some random person on the bus or the subway. Just share it with someone. Share it with someone who you think could benefit from it. That is the most important thing that you can do, the single most important thing, to spread the message of great financial health and financial independence. Number two, open up your favorite podcast playing app, whatever you're using to listen to this show. and hit the follow button so that you don't miss any of our amazing upcoming episodes. And while you're there, please leave us a review.

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