Afford Anything - Ask Paula: How Should I Plan a Mini-Retirement?

Episode Date: March 4, 2019

#181: Imagine that you’re going to take a 6-month to 9-month mini-retirement. How should you plan? What should you do? Sure, you’ll need to have enough savings to cover your expenses. You might want to find some part-time work. You may need to sell off a few investment. And of course, you’ll need to think about health insurance. But what else should you consider? And how will your first taste of voluntary unemployment impact your mental and emotional health? Former financial planner Joe Saul-Sehy and I discuss this in today’s podcast episode. For more information, visit the show notes at https://affordanything.com/episode181  Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else, and that doesn't just apply to your money. It applies to your time, focus, energy, attention, anything in your life that's a scarce or limited resource. When this leads to two questions. Number one, what matters most to you? What are your highest priorities? Number two, how do you align your daily decisions in a way that reflects that? Answering these two questions is a lifetime practice, and that's what this podcast is here to explore.

My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other week we interview a guest and on the weeks in between we answer questions that come from you, the community. Now, of these episodes in which we answer audience questions, half of them are general personal finance topics. And that is one of today's episodes. Today we're answering a smattering of questions about general personal finance topics. And with me is former financial advisor Joe Saul Seehigh. What's up, Joe? Hey, Paula. I am caffeinated and excited about the next hour-ish that we get to spend with our afford-anything friends. I am super caffeinated as well. Drink some butter coffee this morning. Butter and coffee together. Yes.

Two great tastes that go well together. Absolutely. And it's giving me energy to answer this first question, which comes from Aaron. Hi, Paula. This is Aaron in California. I had a question for you regarding many retirements. and, you know, retire early and often. I'm going to be turning 30 next year and have a fair amount in my brokerage account that I

plan to use for a mini retirement of around six to nine months, possibly a year. Without cost of living in mind, what other things should someone think about before they make this move? I do have some part-time streams of income that I might consider. I know that I will need to switch my health insurance and going to be looking into options options on Cover California. But I was just wondering if there's anything else that I'm not thinking of that you think I should keep in mind. Thanks. Aaron, first of all, I love this plan. I'm super excited that you're going to take a mini retirement. First of all, for the sake of everybody who's

listening, who has not yet heard the phrase, retire early and often, that's something that I write about on my blog a lot. The phrase retire early and often is a phrase that describes this idea of taking frequent mini-retirements as you are on the road to an early retirement. The premise behind it is that oftentimes when people have a goal of financial independence or a goal of early retirement, people can sometimes get so focused on that goal that they sacrifice the present in exchange for the future. Tanya Hester, who was a recent guest on this podcast, she talked about how one of her regrets is that For the last few years prior to her retirement, she didn't even take vacation.

She just worked her tail off, waking up at 5 a.m., no vacation, working around the clock so that she could make really good money so that she could retire early. While it's great to have a long-term goal, it's also essential to enjoy now because five years from now is not guaranteed to any of us. 10 years from now is not guaranteed to any of us. So it's important to balance the two, and that's where this notion of retire early and often comes into play. So with that background established, Erin, I love your plan for taking a mini-retirement that's between six months to a year. And I love the fact that you are already thinking about buying health insurance, which you can buy an individual health insurance policy through health care.gov or through policygenius.com. and also forming other types of side income. One other thing that I would want you to think about,

you mentioned that the money that you have saved for this mini-retirement is in a brokerage account. Assuming that this money in a brokerage account is invested in the market, you may want to think about how you are going to convert investments into cash because what you don't want to have happen is you don't want to arrive at day one of your mini retirement, wake up that morning and realize it's October 29th, 1929, all over again, and the market has just tanked. You absolutely don't want that to happen on day one or day 10 or day 100 of your mini retirement. And so start converting stocks into cash now

while the market is high, while you have gains, lock in those gains, even if there's a bit of opportunity cost associated with it, given that you need to harness this money and live on it in the short term. It's funny, Paula, when you think about any of these situations, I realized today, as I was listening to Aaron's question, that there's the answer to the question, which I think that you gave brilliantly, but there's also a framework that we work from. And the thing that is missing a lot for people, and that was missing for me before I was a financial planner, is how does of financial planner or any financial person think about these. So I thought, Paula, I would talk about the framework by which I'm not just going to help answer Aaron's question. I'm going to show you

how I answer Aaron's question so that people can answer this themselves more easily in the future. How about that? Perfect. Do it. So when I was a financial planner, I was taught to think about this as if we're building a house. And a house that's built on solid ground has these four cornerstones on each cornerstone. The first cornerstone that we deal with, we call financial position. And this is where a debt management strategy comes in, having positive cash flow, looking at your budget. If you don't have that first cornerstone in place, nothing moves. That's kind of the engine of the entire machine. So my first question always is, is there something we have to deal with when it comes to financial

position, cash flow, debt management? Then second, the second cornerstone, and we do these two on the top, these are the two that you live by, we then have protection planning. And this is, what if something goes wrong for Aaron or for anybody with their financial plan? How do we make sure that those are covered? A lot of people think about insurance and whether they should have insurance or not. I would assert that's the wrong question to ask. It's how do we protect ourselves? And then insurance is one of the vehicles whereby we can actually make that happen. And I like having that wider lens, Paula, because if we have the wider lens, we're not asking the question that the insurance company wants us to ask, which is how

much insurance should we get? Instead, we start off with the question of how do we cover it and do we need insurance at all? And a lot of the time, the answer is no. And unfortunately, sometimes it is yes, and we need lots of it. So we look at that. But that also encompasses a couple other things. Your emergency fund goes here because, you know, the more emergency fund we have, the less insurance we need. And then our estate plan is also a part of that. So that's protection planning. So those two are the ones that we live by. And then we look at short-term goals that we're going to invest for. And generally, I think of those as maybe the next, depending on where you're at in life, maybe the next five to 15 years. And then longer-term goals, stuff that's out further than that. And we do the bottom half,

those bottom two parts of the four cornerstones using what I call the Stephen Covey method. we start with the end of mind, what's the goal, and then we look back at what we have and what's the discrepancy. Will what we have and the trajectory that we're on, will that help us reach that goal? And so by separating those into short-term, long-term goals and on the top financial position protection planning, we know where our strengths are, we know where our weaknesses are. And in our head, we can very easily look at that. So that might have just sound complicated what I said. It's a little like riding a bike. So when I hear Aaron's question, I think, okay, what do we need to?

to solve. So now that I've done that, let's, let's tackle Aaron's question. The first thing I think about is when she re-enters the workforce, is there a plan to reenter the workforce? And if not, is there a strategy about how to have enough money after, after that for, you know, maybe another six, nine, 12 months? We'd have to have a conversation. If I were her financial planner about how long she thinks it's going to take and then maybe double that number to make sure there's enough resources in place for her to be able to get the job that she wants or to be able to cover expenses. The next question that I'd ask is actually around expenses. When you look at your expenses, are there expenses then that need to be cut or should be cut to make sure that she doesn't have

a problem when she enters the workforce? She already mentioned health care. Of course, that's a big one. And then credit lines. Credit lines are absolutely a horrible cash reserve, but some people in the finance world look at it as kind of the top of the ice cream cone, meaning we have our first tier cash reserve as the bottom of the cone. Then we have the second tier,

which might be a high interest savings account, maybe in some markets, it might be a CD ladder. It doesn't work that well now, but has worked a lot in the past. But then having an open credit line where if I really need money, I can go there.

It's an ugly place to go. I'm not a huge fan of it. But if I need to open a credit line, I want to do that before the mini retirement, because if I'm in the middle of my sabbatical and I go to a bank and I go, hey, I got, you know, very little income coming in right now. What do you think of me? Even if you have assets, I had this problem when clients were permanently retired. Even if they have assets, banks for a lot of silly reasons are addicted to this income stream

coming in. And so I would make sure you have those in place. Those are some of the things I look at. Now, using my four cornerstones, you could probably see areas that I might have missed. But if so, you know how to look at those yourself. Perfect. I like that answer a lot, Joe. And you're correct.

Erin, if you have any aspirations of taking out a mortgage within the next few years, if you're going to take a year off of work, essentially, and you'll have some side income coming in. But if your income is going to drastically drop during this period of, mini-retirement, then applying for a mortgage for in the context of a rental property, you know, in the context in which this would be a cash flow positive thing that would not impact your mini-retirement, that's something that you would want to do now prior to quitting your job. Once you quit that job, it's going to be a lot harder.

Yeah, any refinancing she needs to do. Do it now. Absolutely. Aaron, the one other thing I would encourage you to think about is we've talked a lot about the financial considerations about mini retirements, but there's a huge psychological and emotional component of it that you will probably experience once you get into the space of mini retirement, which is that when your day is completely unstructured and you don't know when you're going to wake up or where you're going to wake up or what you're going to do,

there's a lot of excitement and opportunity that comes with that. There's also a strong possibility of stress, anxiety, a sense of on-wee, a sense of hopelessness, depression. All of those can emerge from being in that situation as well. It's the Instagramable life is one that can be incredibly anxiety-provoking and one that can really allow you to spiral into negative thought patterns. or behaviors, when you have nothing to distract you and you are forced to sit with yourself, there may be emotions or issues or past traumas or experiences that come up during that time that you face when you don't have the distraction of a job. And so on the surface, life might seem great. Maybe I don't know what you plan on doing during your mini retirement, but maybe you'll be

traveling around Argentina going to wineries or maybe you'll be surfing in Hawaii or maybe you'll be climbing mountains in around the Swiss Alps and those on the surface might all look and sound like fantastic options but the day to day of it that what your mind is ruminating on at 342 in the afternoon on a Thursday can sometimes be not what you expected that's the other thing that I would urge you to check in with yourself about, not just now, but frequently while you are on your mini retirement, sit with yourself and feel how you're feeling and process it in whatever way you do, whether that's through prayer or meditation or yoga or therapy or all of the above. That's a very important piece of it.

This is a big reason I like mini retirements is because I have yet to meet a retiree who doesn't go through this existential crisis at some point. In fact, there have been studies done in Paula, maybe you've seen them that show that people go through all these stages of why am I here, what am I really about? Because we attach so much meaning to our job. I mean, you go to a party. One of the first throwout questions people always say is, what do you do? Right. And the second that that job that you've identified with for X number of years is gone creates this crisis that you're talking about. And I love the idea of getting over that hump as early as possible. And I think during a mini retirement, it's easy to, A, no, it's coming in the future. B, realize how you handle it. And C, begin having

these inner conversations about no matter what you do, you're going to have, about what is this about, what is my life about? What am I really doing? What do I really want for myself? A lot of people think it's, I want away from here, wherever this job is. And when you leave that job, you realize that the subtraction of a job is not the addition of other meaning in your life that you hoped it would have been. It's not about retiring from leaving something. It's about what are you going to? And man, that's something that everybody grapples with.

The subtraction of a job is not the addition of meaning. I love that. I'm going to steal that quote from you, Joe. I'll attribute it to you. Don't worry. I put a TM on that thing right now. Man, that must have cost you like five grand. I just got to afford anything trademarked.

It was expensive A.F. Just pay the royalty and you can use it whenever you want, Paula. Thank you, Aaron, for asking that question. Our next question comes from Jay. Hi, Bola. I'm a big fan of your show and I have two questions for you. I'm from Europe. I currently live in the US with my wife and my two kids and I'm thinking of moving back to Europe next year in 2019. I'm moving back to Amsterdam and I have a question. I work at, let's call it, a big tech company, a social media and I have a 401k with them with about $45,000. I have RSUs, about 50,000. dollars and I don't know what to do with it should I sell them should I get rid of them or should I leave them where they are even though I'm moving back to Europe I don't know if I'm going to pay taxes on them I don't know if it's yeah more efficient to get rid of them and get the money

in cash and bring that money back to my bank accounts in Europe and also once I'm in Europe, should I invest that money in index funds or keep that stock as it is or turn it into cash in case there's a meltdown? Is it more interesting to stick to that one stock of this big social media company or should I invest in index funds instead? So it's not as vulnerable. I hope you can help me figure it out. And again, thanks for all the info, share on the show. Jay, thanks for asking that question. And congratulations. on deciding to move back to Amsterdam with your wife and your two kids. My first question to you is, do you think that you will continue to live in Amsterdam or in Europe forever? Or do you think

that there's a possibility that you might move back to the United States? Because the way that you plan your finances and the way that you plan what currency you want your money to be in will depend on the answer to that question. If you think that you're going to spend the rest of your life in Europe, that will have certain repercussions that would be different than if you think that maybe 10 years from now, you'll come back to the U.S. and spend five or 10 more years here. Do you know what's funny, Paula? What's that?

I used to worry about that same stuff. Oh, for yourself. Yes. When I worked with clients that would move, they were going through what Jay's going through, I used to worry about everything that you said, and I used to ask that question. and I stopped because of the fact that I realized once I had clients that were in other places that they had something that a lot of my just U.S.-based clients didn't have. Or people that were from Europe, they already had assets in Europe and they were living here.

We were doing the same question in reverse. Should they move everything here? And the answer to that generally was no. And the reason is that if you already have money in two different, countries, you have a form of diversification, which is very complicated for most people to get into, which is you're diversifying currencies. And if you know anything about the Forex exchange, A, you don't want to get involved unless you have to. But B, if you're somebody in Jay's position, you had to already. You're already there. Why not have money in two different places? A lot of the time,

Europe's up, U.S. is down. You know, you look at the exchange rate. If I've got money in my left hand in one country, my right hand in another country, and I can decide which currency to take it from, that's another cool form of diversification that a lot of people don't have. So my general advice is if you can leave it, leave it. Now, there's some issues that brokerage firms are going to have with that when you leave the United States because of a lot of laws, number one around what was called the Patriot Act. And even before that, there were some laws, some rules. So here's what you have to look for. I would tell your brokerage firm that you're leaving the country and ask if there's going to be any issue with you living in Amsterdam and having this money in the United

States as far as they're concerned. Different brokerages are going to have different what they call compliance issues related to that. And I'll tell you, if you have a financial advisor, your financial advisor may not be able to work with you anymore. A few can. Most won't. So you may have to look for a brokerage firm outside of your financial advisor to hold your assets if you decide to leave them in the United States. But that's specifically the question that you want to ask. You want to tell them what you're doing and make sure it's okay that you leave the money here. You don't want to move to Amsterdam and then all of a sudden have all these hangups about being able to get your cash. When it comes to the restricted stock units, restricted stock units are going to be plan specific.

So not to be able to advise you much on those, except the key critical piece of advice is read the plan document, make sure you have no issues being in another country. If you're not going to have any issues moving and you are still working for the same company, which it sounds like you're going to, if that's the case, then with your restricted stock units, your bigger financial plan, whatever your plan was before,

leave that plan in place, don't change it. if you are leaving the company, then the restricted stock unit plan will tell you whether you can hold on to those, how long you can hold on to those for, what the, what the criteria is around selling them, you're going to want to read all of those things. When I worked with people that worked with tech firms, as an example, me personally, I had quite a few clients at Microsoft. We would always refer right back to that plan document because it was different. at Microsoft than it would have been at Facebook or Google as an example. With regard to company stock, it's also important not to keep too high of a percentage of your portfolio in company stock. Once you have the ability to do so, diversify into broad market funds, diversify into index funds for the simple reason that that creates that diversification

rather than putting all of your eggs in one basket and sinking with the Titanic. anything were to happen to that company. One comment that I will make, Joe, with regard to what you said about keeping your money in multiple currencies if you are from two different countries and if you already have money in two different currencies as a result of having had a life in two different countries, if the other currency that we're talking about is a very stable currency such as euros or pounds or the Australian dollar, then I would absolutely agree with that.

But for the sake of everybody who's listening, if you have money that is in a currency that has been historically volatile, and I'll use the Nepalese rupee as an example. In 2009, the inflation rate in Nepal hit just under 13%. 2015, we had tamed the inflation rate back down to 10.4%. And now we're doing quite well. And now we're at 4.6% as of January 2019.

So go us. But the fact that inflation in Nepal hit almost 13%. That's not money that you want sitting around in cash. And of course, don't make me bring up the example of Zimbabwe if you want a very extreme example of what can happen when there's hyperinflation in a country. Yeah, that's a great point. And I need to mitigate what I said earlier based on. No, that's great. Because I'm even thinking that when I was practicing, I remember Brazil hitting the reset

button on their currency. And a lot of the South American currencies were going through some huge fluctuation. I think you're exactly right. If it's a very stable country with a stable currency, it's very good. I have many clients from India. And even in India, the swings in India were sometimes very big depending on what was going on with the government in India. I had some clients, though, that, quote, played that game and did very well.

But in any game where you do very well, there's also a lot of risk where you won't. As the standard deviation goes up, the risk becomes higher. So even in a big country that's fairly stable like India, you may want to really think before keeping money in two currencies. Yeah, absolutely. But that said, that was something I never considered at all. It was usually move the money to the country that you're going to. and I love the idea that that's not the only option, that there is this other option that you have.

And especially if it's a stable currency, you know, especially between Europe and the U.S. There's so many opportunities there. If you're living in one and you're comfortable with the other, meaning you're in Europe, but you know enough about the United States, what's happened in the United States, U.S. dollar, how that dollar reacts to the euro.

I think it's a great opportunity for those people. One last thing that I'll say about that, sometimes in nations that have high inflation, it's easy to be seduced by the high rates of return that you believe that you can get from a bank there. You will see a bank that's advertising a savings account with an enormously high APY. Or you'll see a bank that's offering CDs or the equivalent of CDs with an enormous, enormously high payout, and it's very easy to think, wow, I can transfer my U.S. dollars to this other currency, and I can make X percent on a savings account. What could possibly go wrong, right? But even if you can make, let's say, 8 percent or 10 percent on a savings account, if the inflation

rate is 13 or 14 percent, you're still losing money. So I give that warning because I almost went that way when I was seeing the interest rates that the banks in Kathmandu were offering on their savings accounts. In my thinking at the time, I thought, wow, it's a high payout and it's just a savings account, so it's not subject to market risk. That sounds great. What is the risk here? Why wouldn't you do it? And inflation is the answer. Which brings up some jargon that they use in the financial realms, this idea of real rate. return because real rate or return, Paula, is exactly what you're talking about. If inflation is seven and you're earning four or five, which sounds pretty great for a savings account,

you're actually losing money against inflation. So it's funny because I have thought some people were incredibly doom and gloom when they say, well, you know, real rate of return, you're only going to get 5%, or you're only going to get 4%. What they're really saying is if they think inflation in the future, their inflation expectation is three, they're actually saying you're going to get a seven to eight percent rate of return. And then you go, oh, okay, yeah, I buy that. So some of the doom and gloom people I found out once I learned what the terminology meant weren't quite as doom and gloomy as I had thought they were. Yeah. A lot of times with the savings account, you're just looking for a real rate of return that is not even positive, just neutral, just break even. If you can

get to that, you'll be solid. Which is said, I was reading something today at literally, today as we record this, that Wealthfront has offered recently a cash account that is FDIC insured and they're going to pay an interest rate that's above 2% on that money.

And it's funny because when people hear 2%, that's fantastic. But once again, Paula, to your point, if inflation is 3, 2%, still, it's closer to keeping up, but it still isn't keeping up. But in this piece, this Reuters piece I was reading,

that was talking about this, they were talking about FDIC shared a statistic that the average person that has an interest-bearing cash account is earning 0.06%. So when you compare it to 0.06, you're doing fantastic in this new wealth-front account. But when you compare it against inflation, you're still losing. So the moral of the story is even the best savings accounts, are not a good place to park money long term. They are a good place to hold an emergency fund or cash reserves, but they're not a place that you want to keep a lot of money forever. Well, and it brings up something that financial planners talk about all the time,

is often when people are avoiding stock market risk, they're inadvertently subjecting themselves to other types of risk. And in this case, it's the risk that your money is actually losing purchasing power while sitting in a place you think is safe. You think it's safe, but you just took a position that may or may not lose money and turned into a position that will guaranteed lose purchasing power as long as inflation stays where it historically has been between 3 and 4%. That's true.

But I think the reason that a lot of people feel more comfortable with that and the reason that emergency funds often get left in cash is because even though you know that you will lose purchasing power, you will lose real. money by leaving your money in a savings account, you also know, assuming that the money is in U.S. dollars, that that loss will be limited to around 2%. And every financial planner would tell you to take that risk with your emergency fund. The problem is, is what you were talking about earlier, which is it's not a great place long-term. People take long-term investments. As you know, we saw it in December.

In December, so many questions you and I both had about, should I take my money out? looks like the worst is going to happen. As of the time we've recorded this, the market in 2019 has done nothing but go up. Right. And a lot of people took their money out and they put it in a spot where it is guaranteed to lose purchasing power and at the same time, they lost the market win that's happened the last couple months. Right.

Absolutely. So cash is not safer necessarily. Your losses will be limited, but they will still be losses in cash. Right. And I'm happy to take that little tiny loss if I need money available if my refrigerator breaks down, you know, or if I have some. I had a plumber at my house today, as Paula, you very well, as you know, because you were waiting on me to record this. And I was waiting on Dave to fix my shower. If I have that type of expense, I want to have that emergency fund available.

So I don't have to worry about where that cash is going to come from. We've strayed far from Jay's question, but I think that this is a valuable. conversation for everybody who's listening. Yeah, this idea of real returns I think is super important, so I'm glad you brought it up. Thank you. And thank you, Jay, for asking that question. We'll come back to this episode after this word from our sponsors. You probably have some momentos that you really cherish, right? Like maybe you have movie ticket stubs or concert ticket stubs from the first date that you went on with the person who is now your spouse. Or maybe you have photos of a favorite trip that's on your phone. And you have, you know,

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so you have the tools that you need when you need them. Join the 24 million people who have used FreshBooks by trying it for free for 30 days, no catch, and no credit card required. Go to FreshBooks.com slash Paula. And when they ask, how did you hear about us? Type in, Afford Anything. Again, that's FreshBooks, F-R-E-S-H Books.com slash Paula, P-A-U-L-A. Our next question comes from Ingrid. Hi, Paula.

This is Ingrid. I so love your show. been binge listening to it for the last couple of weeks. And I wanted to ask a question because I don't know that this particular question has been answered or maybe in this way. If it has, maybe direct me to where it has been answered. Anyway, my husband and I have made too much in the last couple of years, which is a great problem, right, but to qualify for the Roth. So we made over that limit. And so we haven't been able to put money into a Roth IRA. And so what we've been using is a SEP IRA. This year, however, we did get under that limit so we are able to contribute to the Roth.

So my question is, do I just put the $5,500 in the Roth or the other option we have is in the SEP, we have about $100,000. And I'm wondering, do we take this opportunity to roll over that step into a Roth, that means we'd have to come up with about $30,000 in taxes because we are in about a 32% tax bracket. That seems like a lot. And we will potentially be in a lower tax bracket in retirement. My plan is to just be living off of rental income, so passive income, and we won't have as much income in retirement. So my question is, do we leave it in the SEP and just pay taxes later or maybe roll it into the Roth and take advantage of this huge chunk of money that we could put into the Roth. I'm pretty sure we can. Hopefully I'm right on that. Or maybe we do half. Maybe I put

half of that, maybe $50,000 into the Roth and keep the other half in the set. I should say that next year and the years after we will be again making too much to qualify for it. It's just this one year that we have the opportunity to use that Roth. And then the other question is, or do we do a backdoor conversion when we're in a lower tax bracket and just keep adding to this up. So those are my questions. Thank you so much. Hopefully I'll hear your answer. Hey, Ingrid, this is a great question and one where people think it's an all or nothing move. I really like the middle ground. And here's what you're going to have to pay attention to, which is your tax bracket. So if you look at your tax bracket in the future and you think you're

going to be in a lower tax bracket, it sounds like you have some income changes coming down the road. Maybe I inferred that for anybody listening. If you have income changes down the road, those are going to be really important. And also, as I mentioned a second ago, looking at current tax brackets this year are important. Because while I might do some this year to do what my mom talks about, the bird in the hand, right? We know what things are right now. We don't know what things are going to be like in the future. We think we might know, but we don't know for sure.

I may take up to the top of this tax bracket that you're in current. out this year and only pay that amount of tax. And the reason for that is this, you don't have to take it all out right now. You can take it out over time. And if you're either going to be in a lower tax bracket later or you're going to be in the same tax bracket later, why do it all now when a lot of that income might not chew up into a higher tax bracket? So in other words, let's let's say that half of this distribution would be in this tax

bracket and half of it's in the higher tax bracket. You're going to pay more tax doing it at once than you would if you took it over a two-year period. So I'd pay attention at the end of the year, or as you close in on the end of the year, this is a move I'd make toward the end of the year. If your income's variable, if it's not variable and you don't see any of their income coming in this year, you can safely then do it now. But generally speaking, what we do is we'd wait until November, December, we'd know about where we're at. and then add in now all this money that's never been taxed, go ahead and add that money in so that I know I'm not crossing a tax bracket line and paying more tax than I would need to

if I took part of it this year, part of it next year. So you can string this out over a number of years. My advice will always vary based on where you're at with regard to tax brackets. And those all changed this year. So a good year to get reacquainted with the tax brackets. Thank you, Joe. Awesome answer. Now, Ingrid, at a big picture level, there are a few things that I want to say.

Number one, I want to add clarification around an assumption that you might have. Your income affects your eligibility to make new contributions into a Roth IRA. As you've mentioned, there have been years both in the past and most likely also in the future when you and your husband made too much money to make a new contribution. directly into a Roth IRA. But I do want to clarify that your income does not affect your eligibility to process a backdoor Roth conversion. And that's why you can string this out over a number of years.

So that's point number one. And then closely related to that, point number two, is that what does affect your eligibility, the amount of money that you can convert into a Roth is a pro rate a share of the total amount in your traditional pre-tax IRA accounts. So you're going to want to work with a CPA who's going to oversee this process because back-door Roth conversions must be made in the context of your total IRA assets. But now, stepping away from the granular, let's zoom out and look at the big picture pros and cons, because what you're really asking about is strategy.

At a strategic level, the advantage to holding money in a Roth account is that this money grows tax-exempt, meaning all the capital gains, all the dividends are tax-exempt, and that is awesome. The disadvantage, of course, is that when you make the conversion, as you know, you'll be paying taxes on that conversion at your current tax bracket at the time that you make the conversion. And if you think that your tax bracket might decrease in the near-term future, then there is an argument for waiting. But if it'll take a while before your tax bracket drops, or if you have doubts about how tax laws are going to change five years into the future,

what are the tax rates going to be in the year 2024? I don't know. So given that uncertainty, then there's also an argument for making the conversion now. When A, you know what the numbers currently are, and B, the gains are going to have more time to accrue tax-exempt growth. So those are the two major pros and cons that you're balancing. And that's why I like Joe's approach of converting the money slowly over a handful of years in a way that doesn't bump you up into the next highest marginal tax bracket. So with all of that being said, Joe, I want to know at a high conceptual level. I want to know what you think. Generally, the younger you are and the further you are from the goal, the better that decision is because of the fact that with all of these years between now and the time that you're going to start,

spend the money, that money now gets to grow tax-free. And chances are, with most careers, you advance in your career and the probability that you're going to make more money in the future and then be in a higher tax bracket, the risk of that is greater. So the younger you are, the more it makes sense. If Ingrid tells me that she's going to be using this money in the next four or five years, I think I might do the math before I convert that money over. So assuming that her timeline to retirement is at least 10 years or more, 10 to 15 years or more? Oh, absolutely love it. Absolutely love it. And for my longtime listeners, this goes without saying, but as most people who know me, know, I'm a big fan of Roth accounts as well.

I love the notion of paying the taxes up front and then letting everything grow tax exempt, all of the capital gains, all of the dividends, just compounding. tax-exempt growth for years. There's a certain beauty to that. The only thing that's not beautiful about the Roth is the name. It was named after William Roth, who was a sender from Delaware, I believe. I love all that. And no offense, and I don't know. But if only there were a place, we could look that up. But the piece that I don't like is it doesn't describe. It doesn't make this stuff easier. I like everything that makes all of this stuff easier. And when you call it a Roth IRA, there's a big amount of our audience that goes, well, what the heck is that? In Canada, they call it a TFSA, which I love so much more.

A tax-free savings account tells you, Paula, what it is, what it does. Let's do something. Now, I don't necessarily like the savings account part because it doesn't have to be in a savings account, right? It can be something else. Could be a mutual fund, could be an exchange-traded fund, could be a exchange-traded fund, could be All stock and Jay's company that he works for. Bad idea.

Could be all kinds of different things. But a TFSA comes so much closer to telling us what exactly that is than a Roth IRA. Boo. I just looked it up. He was from Delaware. Winner. And his dad owned a beer company. Well, there you go.

I think that the congresspeople might have been drinking that beer when they decide a Roth IRA. No offense, Mr. Roth. It's a great idea. And I'm with Paul. It's a fantastic plan. But let's rename the 401K, the 403B, the 457, the Roth. Let's get rid of all those names. And let's call it what it is.

A tax deferred retirement account, wouldn't that be great? Put money in your tax deferred retirement account. Ooh, that sounds good. What's that? We don't say that. We say put money in your 401K. Okay. Joe's rant.

Absolutely makes sense. Why would I put money into an ambiguous string of letters and numbers? Right. That all a 401k is, that's the tax code. Right. Like they went, oh, the tax code is, it's tax code 401K. Let's do that. Use IRS rule 72T.

It makes me sound brilliant when I say it. Sell your property and buy a different one through a 1031 exchange. Oh. Yeah, we refer to everything based on the IRS code. Change your annuity over with a 1035 exchange. 1035, 1031, all these numbers so little time. Did you see the episode of Friends where Phoebe refers to her 401K as a 401K? No.

No, but I love that. There was that movie with Amy Poehler and Will Farrell where they went to meet with a financial planner. And they had to inform them that they didn't have $401,000. They had a 401k. And apparently it was empty. That'd be a great benefit, though, wouldn't it? If you went to, we're going to give you $401,000. Oh, thank you.

401k in your 401k. That should be an internet, like, not a meme, but that should just be something that people celebrate, like screenshots. Well, thank you, Ingrid, for that question. We'll come back to this episode in just a minute. But first, hiring used to be hard. Multiple job sites, stacks of resumes, a confusing review process. But today, hiring can be easy. And you only have to go to one place to get it done.

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And right now, my listeners can try ZipRecruiter for free at this exclusive web address. ZipRecruiter.com slash afford. That's ZipRecruiter.com slash AFFO-R-D. ZipRecruiter.com slash afford. ZipRecruiter, the smartest way to hire. One of the major themes of this show is lifelong learning, because everything that we talk about, whether it's investing, entrepreneurship, side hustles, even time management, there's a big lifelong learning component to all of this. And that's why I'm proud to have Skillshare as a sponsor of this show. Skillshare has thousands of classes and everything from photography to creative writing, to design, to productivity. So regardless of whether you want to start a side hustle or just get involved in a passion project, Skillshare is a great resource that can help you develop those skills and learn what you need. Mike Vardy, who is also a previous guest on this show, teaches a class on Skillshare called Productivity Habits That Stick. And one class that I think would be very

useful is Emily Simcox teaches one called bookkeeping for freelancers, how to handle your finances. So if you want to check out these classes and many more, you can get two months free when you sign up at Skillshare.com slash Paula. That's two months of unlimited access to thousands of classes for free. You can get that at Skillshare.com slash Paula. Again, two months free at skillshare.com slash Paula. Our next question comes from Sam. Hey, Paula. This is Sam calling from Kalamazoo, Michigan. Really enjoyed listening to your podcast. Learned a lot from you over the past year. My wife and I are both 31 and just starting to invest.

We spent the last year's working hard and have eliminated all the student loan debt from our master's degree and VHB at high interest rates. In our first year of investing, we've each to our Roth IRAs, we each contribute 10% of our pre-check income to a 457 and a 403B plan, respectively. We also are saving $1,000 a month in cash until we reach $20,000 in our savings, and we make an extra $500 a month payment toward our home, which has a remaining balance of $107,000 at 3.75% on a 20-year loan. For purpose of context, our combined gross income is $130,000, and our actual take-home pay is about $78,000. Deductions are coming out for pre-tax investments, and my pension with the state of Michigan, in addition to the standard taxes, social security, et cetera. It's calculated that our savings rate is about 55%, which includes those pre-tax employee investments, the Roth IRA, savings, principal payment, and extra-principal payment on the home. My question relates to the path to FI.

It seems that most advice I've read and heard is to make use of the tax-advantage buckets like the Roth IRA, the 457, and the 403B that we can contribute to. However, I feel a little frustrated that we have a relatively high overall savings rate, but it feels like we won't be able to access or shouldn't access the majority of our money until we hit the ripe old age of 59 and a half. Is a taxable account a better vehicle for our goals? I'm considering a taxable lazy man vanguard portfolio of total stock market, total international, and total bond at about a 90-10 stock-to-bond ratio is a potential solution, but I feel torn as with what the right move is. My motivation for the question is that my wife and I want to have kids in a couple years, and I'd like our money to work for us in the next 10 to 15 years to help us spend more time with kids, more time with the community, and maybe starting a joint private practice for mental health, that she's a psychologist and I'm a council.

We'd love to have your insight and Joe's too if he's around. Thanks again for all you do. Sam, I'm going to answer first because I am from Kalamazoo, Michigan. Paula, I'm from Kalamazoo, this guy's my BFF. Home of Western Michigan University and the Buffaloes. Oh, boy. Right? The Broncos.

The Broncos. Yes. We think Broncos, it's the first thing we think about. and buffaloes, minus the buffaloes. Begin with a B. Yes, Calamazoo, Michigan, fantastic place. And I went Sam to, at the time, Hackett Catholic Central, go fighting Irish. Now I think it's called Hackett Prep.

So Hackett Catholic Prep. And my nephew goes there now. My nephews go to Hackett. So yay, school. My take on this, Paula, is this. this is why, and we've answered this now, and a couple of questions, this is why a lot of people get stuck in the all or nothing approach. And the cool thing is, it doesn't have to be. And what I'm referring to is, is that if we begin with the end in mind, we're going to pick the right tax bucket.

I think a lot of people start with the tax bucket they want. Ooh, I love HSAs. Those sound great. Or the Roth IRA, it's fantastic. And we hear these things and we think, okay, I'm going to put all my money there because everybody thinks it's fantastic. They are fantastic, but they're fantastic based on a timeframe and a specific outcome that you're looking to achieve.

So if we start with the outcome and work backwards, we're not going to make mistakes. So as an example, a traditional IRA is fantastic for a goal that's after 59.5. Because that's the age that you can get at it. There's a few exceptions to get at it early.

And there's also some kind of ugly ways to get at the money early, but without worrying about any of those, if we want to have no special exceptions, no intricate tax work to go through, 59.5 is when we can get at that money. So an IRA is a great place for money that we're going to use after 59.5.

So Sam, what I would do is if you want to retire, let's say at 45 to be phenomenally aggressive or 50, well, I would look at how much money do I need to get me from 50 to 59.5? I may double that amount and put that money inside of a much more flexible account like, let's say, a brokerage

account like you're talking about. But then money I know, because I know that my life isn't going to end, I hope my I don't know this, but I hope my life doesn't end at 59.5. Study show we're also living longer. I want money that I'm saving for after 59.5.

I want all that money in tax shelters so that I don't have this friction as I move toward my goal. So I would begin with what's the goal and then work backward, put as much money into the tax shelter that I feel comfortable with. With money that I know is going to be money I need before tax shelters, I may then double that amount of money just so I have as much flexibility as possible. And I'm not worried about having to use some obscure rules that do not work in my favor to get at that cash.

I completely agree. I'm a big fan of not letting the tax tail wag the dog. Your goal is to set up your finances and choose your investments as well as your investment accounts and vehicles in the way that makes the most sense in your life. And once you have decided what your strategy is, then you look at how you can tax optimize that strategy. But start with the strategy and then tax optimize. optimize the strategy, don't start with the tax optimization. And too many people make this mistake. I hear about this in real estate all the time where people say, what's the best X, Y, Z for the sake of saving taxes? And I'm like, your goal is not to save taxes. Your goal is to make excellent risk-adjusted returns. I would love to have Bill Gates tax bill. Exactly. Exactly. At the end of the day, it's better to make more money and pay higher taxes than it is to save a ton of money on tax and be miserable for it and have everything not the way that you want it and to have chosen your accounts, your vehicles, your investments in a way that doesn't make sense for your life just because

you're saving an extra little bit of money on taxes. Yeah, Joe, I'll echo what you said. I love the two-bucket approach for an early retirement. And to bring up Tanya Hester again, she also talked about this in the first interview that we did with her when both she and her husband Mark were on the show. They talked about how in planning for their retirement, they mentally conceptualized two different buckets, one of which got them from the ages of 38 and 41 respectively to the age of 59 and a half. and the other of which carries them forward from age 59 and a half on. What that also does, Paula, with any plan, there are some unintended results. And sometimes those unintended results are good.

Sometimes they're bad, right? You make an action and sometimes there's a reaction. You go, oh, didn't expect that to happen. So there's these things. I'll tell you what's cool is when the market drops, which it will drop again, you know that that after 59.5 money is protected by the money that you have before that. And it actually makes you more comfortable staying aggressive. So when we think about behavioral finance, and I think about, oh, my goodness, my statement is much, much smaller than it was three months ago. Like we saw,

many of us saw this fall. If I know I don't need that money until after I use some other money that's in a more conservative spot, I then have more fortitude to stick it out and do the right thing and not sabotage my own plan by moving the money. I find that people that begin with the end of mind are generally better investors, more disciplined investors, because they're not going to make short-term decisions

with long-term money. Wow, you are a quote machine today. Don't make short-term decisions with long-term money. TM, just pay the fee and you can use that. Is that your retirement plan, Joe? I'll just be paying you royalties for all of the gems that you throw out in the show. It's a whole reason I agreed to come on this thing. The quotables.

The quotables. It sounds like lunchables. It does sound like lunchables. Let's open up some Joe quotables. Look at that one. That's a good one. One last thing that I'll say. You mentioned that there is $107,000 left on your mortgage.

And you also mentioned that after taxes, your net take-home income is about $78,000. If you plan on, and I know that you're already paying an extra $500 a month towards your mortgage, so by the time that you get to 10 years into the future, I don't know if you're currently on a 15 year or a 30-year, so I don't know what your rate of principal pay down is. But by the time, 10 years from now, when you are ready for an early retirement, your mortgage balance will be a five-figure number rather than a six-figure number. Given your net take-home pay and given the fact that you will also have a five-figure mortgage balance, I think that you would be in a good position to be able to wipe out that mortgage prior to retirement.

So let's say 10 years from now you decided that you wanted to take an early retirement. if you set up your accounts leading up to that early retirement and then in that very last year, you wipe out your mortgage balance. That'll put you in a very strong cash flow position once you get into year one of early retirement. It's so exciting. Thank you, Sam, for asking that question. Our final question of the day comes from Dane. Hello, Paula.

This is Dane from Queens, New York. I wanted to know if you could go over the HSA investing strategy. I have two young kids, and I'm trying to determine whether or not the HSA medical investing strategy would be a route that I should take, opposed to just getting a regular health plan through my employer. I'm a big fan of the podcast and Instagram, and thank you. Dane, that's a great question. Now, first of all, I want to clarify something because within your question, you compared getting an HSA plan to getting a plan from your employer. However, I want to make this distinction

here, you can get an HSA compatible plan through your employer and you can also get an HSA compatible plan through individual insurance plans such as healthcare.gov. So regardless of from whom you are buying this health insurance plan, whether it's your employer or the individual health care market, you can get HSA compatible plans either way. Now, of course, that's assuming that your employer specifically offers an HSA compatible plan. Not all employers do. But I do want to make that clarification for everybody who's listening that HSA compatible plans are available, in theory at least, depending on the specifics of what your employer offers. They're across the board. Now, if you do have a job in which your employer offers health insurance plans,

most likely the plans and premiums and benefits that are offered through your employer are going to be better than what you can buy on the individual market. So in all probability, and of course, you can double-check this, just go to health care.gov or go to policygenius.com and type in some basic information about yourself, your name, your age, your address. And it'll take about 15 minutes and you can see what plans are available for you. But in all probability, the plans that your employer offers are going to be the better ones. You'll probably pay lower premiums relative to getting into a plan that has a lower deductible, a lower out-of-pocket annual maximum, lower co-payments, lower co-insurance, just overall better benefits. And that's generally, just to explain why that is, generally either A, your company's working with an insurance broker who's been able to package them with other companies so they get some scale.

And that makes them more attractive to some of these insurance companies. We're on the ACA website. You're a single individual by yourself. You don't have that scale. Or the second thing is that the company is a bigger company, in which case they've been able to negotiate better plans and better rates on your behalf. That's why why that's true. So in your specific case, I think that answers the question for you because given that you have an employer who's going to offer health insurance plans, then if you can get an HSA compatible plan through your employer, assuming that you and your kids are in good health and you don't expect to have any major medical expenses, nor do you have any expensive prescriptions. if you expect generally to be healthy and to not see a doctor very often,

then, yes, an HSA-compatible plan with a high deductible and low premiums that is offered from your employer is the creme de la creme of what you can get. If your employer does not offer an HSA-compatible plan, it's probably still going to be a better plan than what you can get on the open market. So go for the employer plan. Now, to everybody else who's listening, who is willing, who is wondering what we're talking about and why we're so in love with HSAs. For context, an HSA is a health savings account, and it is a tax-advantaged savings account.

So you can put money into an HSA account. The money that you put in is tax-deferred, and if you spend that money on a qualified medical expense, then that money is tax-exempt. So when you make the contribution, the year that you make the contribution, you get that tax-deferment benefit, and assuming that you spend that money on some sort of qualified medical expense at any point during your life, it doesn't have to be that year, then you don't have to pay taxes on that money ever, which is fantastic. And if you make it to the age of 65, let's say you're incredibly healthy, you spend almost zero money on medical costs throughout your life, you make it to the age of 65 and you still have a bunch of money left over in your HSA. Well, then when you withdraw that money,

for reasons that are not a qualified medical expense, it is treated just as a 401k would be. The money was tax deferred going in and you pay taxes on it when it comes out. But there are no penalties. It's treated just like a traditional 401k would be. So in that regard, it's a very flexible and extremely attractive tax optimized savings account. But again, we go back to what we said in an answer that we gave earlier, which is don't let the tax. tail, wag the strategy dog. You want to choose the account and the insurance plan that is best for you. After choosing that, if there's a way to get some tax optimization out of it, then go for it. But don't let taxes alone drive your decision making. All right, well, that is our show for today. Joe, where can people find you if they'd like to know more about you? I am the co-host of another show where Paula appears nearly every first. Friday called the Stacky Benjamin's podcast. It's a place that leads people toward these more deep and meaningful discussions like you have on the Afford Anything podcast by being a much lighter

kind of first word of personal finance versus last word of personal finance place. That's stacking benjamins.com, a variety show from my mom's basement every Monday, Wednesday, Friday. Right. Yours is the show where people don't learn anything. If you do, you keep it to yourself. Awesome. Well, thanks, Joe. Always good having you on this show where you do learn something, let's hope. Well, what you learn is that every once in a while I can have, I can throw out some things that I can then charge a fee to Paula on to use your quotables, Joe's quotables. Open up a box of my quotables. Ten quotables and the 11th is free. Only for you, Paula. 11th one free. Oh, thank you, Joe. Well, this is the Afford Anything

podcast. My name is Paula Pan. If you enjoyed today's show, please hit the a subscribe button in whatever app you're using to listen to this podcast. That way you won't miss any of our upcoming episodes. Also, please share this episode with a friend. If you know somebody who has a question that's similar to any of the five questions that we answered today, send them this episode. You can follow me on Instagram at Paula P-A-U-L-A-P-A-N-T. Thank you again so much for tuning in and I'll catch you next week. Reentry to the workforce is also a very good point. I can't believe I overlooked that, actually. That's like two of us. My job is Paula backup. I know. I think my brain is so permanently unemployable that I sometimes forget employment exists.