Afford Anything - Ask Paula: How to Invest When You’re Unsure of the Goal

Episode Date: June 8, 2022

#385: Anonymous (“Jennifer”) keeps hearing us say that you should “start with the end in mind” – that your investments should match your goals and timeline. But what if you don’t have any specific financial goal? What if your risk tolerance is different than you once thought? Rachel’s new employer won’t let her contribute to retirement for more than a year - what should she do?? Carri’s parents are in poor health and can’t work much - what should they do about their life insurance policy and their health insurance? 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! For more information, visit the show notes at https://affordanything.com/episode385 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, to any limited resource that you need to manage. And that opens up two questions. Number one, what matters most? And number two, 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 do. My name is Paula Pan. 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 answer these questions. What's up, Joe? You know, a lifetime practice, lifetime.

Right? I like the idea of a lifetime membership. I get really excited about that. Is this like a lifetime membership thing? Yeah, it's a lifetime membership to being. a human who exists and has money that they need to manage. And who's open to sharpening the saw on a continuing basis, which is always a good thing. Yeah, that commitment to curiosity to lifelong learning.

That's such an important skill. I do love it. You know what I heard the other day, though, that was a good kind of counter to that. And I think this is stoic philosophy, is that while it is important to continually have this learning growth mentality, where I'm consistently thinking about how am I wrong and what don't I know and in which areas can I grow more, there does come time when you have to stop sharpening the saw and you need to start moving. You need to start doing things. Because some people, as you know, are quote, lifelong learners so that they never have to do

anything, which is a whole different battle. Exactly. Yeah, there's a risk of getting mired in analysis paralysis. But the reality is taking action is itself a teacher. So it's that combination of gathering knowledge, reading books, listening to podcasts, asking questions while simultaneously practicing, right? Yeah. Taking action, staying current. I think that's why the word practice is so important. And you're right.

It's not what you know. It's what you do. What do you do? So let's do something. How about we answer some questions? What questions we got, Paula? We have three questions today. So we are going to kick off with a question from an anonymous caller who is speaking about

the topic of lifelong learning. this anonymous caller is a tenured professor, loves her job, does not ever want to retire from her job. And so she's wondering, you know, she keeps hearing us talk about the importance of starting with the end in mind. But what if you don't have any specific financial goals? What if you just generally want good financial health, but you don't have a particular goal like early retirement or any other big ticket investment goal? What do you do? We're going to kick off with that question. Then we're going to answer a question from Rachel.

whose new employer won't let her contribute to her retirement accounts for more than a year. What should she do in the meantime? Finally, we'll wrap with a question from Carrie, whose parents are in poor health and can't work much. So what should they do about health insurance and life insurance? We're going to tackle all of these questions right now before we do, Joe. I want to take a brief moment on the topic of lifelong learning to let people know about a learning opportunity that is only going to be here for the next couple of weeks and then it's going to disappear for the rest of the year. You cool with that? No. Oh, well, tough. Of course I am. Yes, what is the opportunity?

Because I've got my pencil right here and I'm ready. Let's do it. What is it? All right. So, you know, I teach a course on rental property investing. It's called your first rental property. Yes. And you know, Joe, how much has gone into that course. It is robust. It's not just a handful of videos that we threw up on the internet. It is this white glove experience where you have a course syllabus, a cohort of peers, you have teachers assistants, checklists, worksheets, spreadsheets. It is an incredibly robust and detailed learning experience. Typically, we open our doors for enrollment twice a year, but this year, we're only doing it once. This year, 2022, you only have one shot to enroll. And that shot happens this month, June of 2022. So we're going to open our doors for enrollment on Tuesday,

June 21st, and we're going to shut those doors on June 30th. And after that, boom, that's it. Doors are closed for the rest of the year. If you want to learn more about it, head to Afford Anything.com slash enroll. There's a ton of information there. Afford anything.com slash enroll. With that said, let's get to the questions. What do you say, Joe? How about that? Let's do it. Joe, the first caller is anonymous, and we give every anonymous caller a nickname. Do you have any suggestions for this one? Absolutely, I do. Like 95% of people in America, maybe everybody but Paula Pan, I would guess, if I were guessing, went to see this movie in the last couple weeks. Top Gun, the new Top Gun movie has been just at the top of the charts and is sold

more tickets than I think any Tom Cruise movie yet. But has Paula Pant seen it? No, I have not. Has not, as I thought. But Jennifer Connolly, who I think is a fantastic actor, is in this movie. And she has a great part, kind of slaps Tom Cruise around a few times, which I think that guy could use some slapping around from time to time. So let's say Jennifer. All right. Then our first question comes from Jennifer. Hi, Paul and Joe. This is Anonymous from College Town. I love your show and I've learned a lot through listening. My situation is a little bit different than that of most listeners, I believe, but the questions that I have are probably not unusual because they relate to topics that you talk about a lot, aligning your investment strategy with your goals, knowing your own risk tolerance

while acknowledging that goals can change. In a nutshell, if you don't have a specific financial goal, what is a good strategy to make sure that you can be flexible with your money and also allow it to grow in a smart way, both within brokerage accounts and retirement accounts? And how do you make changes when you realize your risk tolerance is actually different than you thought without going down a rabbit hole about trying to time the market? Let me make this a little a bit more concrete. I'm a tenured professor in my late 30s and I love my job to the extent that I don't see myself wanting to retire until, I don't know, maybe my late 80s if I can. My job offers me a lot of flexibility and freedom, opportunities for personal and professional growth, and access to a community

where I've made a lot of friends. When I retire, I'll get a pension, and I'm also investing in my 4-3B in a way that would give me the option to retire at 65, but I really don't think I'll retire at that age. After taxes and retirement contributions, I'm spending about half of my net income on my child's 529 travel, general living expenses, as well as our mortgage on which we still owe about 144,000. My total retirement savings are at about $235,000. I have a nine-month emergency fund and $140,000 in investments. I don't have a very specific goal for my investments. While we would like to move to a bigger condo at some point,

we're not sure when within the next 10 years and we're open to selling or keeping our current condo as a rental. That makes the financial side of this plan very flexible. Beyond that, I really don't have a goal whatsoever, but I want to keep my money in a flexible place because I plan on a very late retirement. given that I'm tenured and can't lose my job, I underestimated my risk tolerance. 28% of my total investments are in the Vanguard core bond index fund within a brokerage account

and a Roth IRA, and I think that's too much. That fund has been performing very poorly, but that's not the reason why I would like to move out of it. The reason is that I would like higher returns and I'm okay with the risks. I'd like to exchange most of it for shares in the VTSAX fund where I already have about 53% of my investments. But if I do that now, I'd be selling at a loss. This gets a little bit into timing the market, but wouldn't it be smart to wait until the bond fund is up and perhaps other funds I'd like to buy our down?

In addition, I wonder when and how to start moving some money into safety, so to speak, for a down payment for our next condo. I like the idea of iBonds, but I can only buy a 10K per year. Tips aren't a good option in case we want to buy a condo in less than five years. Any suggestions? The remaining 19% of my investments are in mutual funds with TIA-Cref. Speaking of which, my 4-3B is with TIA-A-A-A-Cref, and my employer doesn't offer any other options. Through TIA-Cref, I have about 75% of my 403B in a 2050 fund, and the rest is in various other funds that seem okay. But I don't even know what my strategy should be for investing my retirement funds since I don't really plan to retire in 2050.

Any thoughts? Thank you so much for considering my question. Jennifer, thank you for that question. First of all, congratulations on the situation that you're currently in. you have a job that you love that has a high degree of job security, and you love it so much that you want to stay in this job for the next 50 years. You're in your late 30s, and you say that you want to stay in this job until you're in your late 80s if your health allows you to do so.

So big kudos to you for finding the calling that lights you up so much that you want to stay in this field for as long as you can. That is the ultimate goal. I think a lot of people who want to retire early are struggling with the fact that their career or their industry isn't the right fit for them. And so what you have is the real dream. What you have is the career that you love so much that you know this is where you want to make your contributions. And you want to do it for as long as your health will allow you to do so. With that said, let's talk about how to invest when you don't invest.

have a specific goal. Now, what I hear in your question is that you do have, at a minimum, one relatively short-term goal, which is that you'd like to move to a bigger condo within the next 10 years. And given that you would be open to keeping your current condo as a rental property, that might mean that you'd be starting from scratch in terms of saving up the down payment. So I want to question your assumption that you don't have a goal. What I hear is, a down payment goal or a home buying goal, I hear a goal about your child's 529 plan, and I hear some travel goals in there. You mentioned travel. So I hear at least three goals that reflect investment timelines that are 10 or fewer years. I would start with those, start by

calculating precisely how much you think you'll need, and buy when you think you'll need it, and then reverse calculate from there to decipher, hey, if I need X amount of money, within Y number of years, assuming Z% returns, that means that I need to save this particular amount every year or this particular amount every month in order to reach X amount of money in Y years assuming Z returns. So I would start with that and do that with the 529 plan goal, with the travel goal, and with the goal of moving to a bigger condo. Yeah, Paul, it's funny where you said that you heard one goal.

I actually heard three goals. When you mention a 529 plan, college is going to come whether you wanted to come or not. And saving into that 529 plan, what's the right amount to save? So to your point, that's number one. The second one, the kind of goal, we can get back to that. But the third one that escapes most people is the fact that in the future, you may not feel the way that you feel right now. And I would not set up your non-retirement thinking that you're going to work until your 8, you're 90. I love that too. I think that's absolutely fantastic. But I do know that things change

and I would much rather be conservative with my money so it's there when I need it than be aggressive and go, oh, I thought I wasn't going to need this money until I'm 80. So I put it in these things that aren't great until I get to 80. And now I'm 65 and I really want to get that money today. So what I would do, even though there isn't an explicit, I want to retire now goal, I would operate my money as if, things may change and pick what that date is. Just pick an arbitrary date where you'd like to have the ability to go, you know what, I changed my mind. But Joe, let me, let me interrupt you for a moment. Given that she has a pension and given that she's investing her 403B in a way that would give her the option to retire at 65, given both of those factors, is there any need for her to do this

outside of that 403B? I don't think so, but this is the thing. Do we know that she's saving the right amount of money. Do we know that she's saving enough, that she's saving too much? I mean, you went through the equation. I would still use that same exact equation here, because let's say that she's doing what you're suggesting, Paula, that she may be saving enough money there already. Let's say she's saving too much money there. If she's saving too much money, now when I was a financial planner, I'd ask the question, I'd say, okay, we got that funded. What else do you want to do? And if you don't want to do anything, if I press you and you really don't want to do anything, here was the next goal, which is I would create a nice slush fund for if things are going to change. And then I would project that any money that I'm going to save is money that I'm passing on a generation.

You know, so many people now, and this is super exciting to me in our community are beginning to talk about intergenerational wealth. And I haven't heard that many people talk about intergenerational wealth during my entire career as I have maybe the last four or five years. And I don't know if I'm listening for it or if it really is a thing, but I'm certainly hoping that this is a thing that we can build a legacy that maybe is bigger than us. We may be able to think even bigger now about our goals than we have in the past. So now I start thinking, if I'm not going to spend this money, what is my legacy, which can turn into a whole phenomenal conversation. about either planning for your child and using this money or planning for your community, planning for other things that you care about. And even the other way, it's exciting. If you say to yourself, you know what, I don't need this money for the future so I can take longer sabbaticals.

I can take more time off and travel. You know, this guy, Wes Moss, who is a radio show host in Atlanta, wrote a book recently called What the Happiest Retirees know. The Happiest Retirees have five. at least five outside things over and above their job that they absolutely love. Those are the happiest people. So my question would be, what are some of these things outside of your job? Because once again, part of the reason why you may love your job is also because the people around you are great. Maybe the dean of your school is great.

The students right now are great. But what happens if those things change? Somebody enters your department that you don't like as much as you did. your dean changes the game on you. And even though you can't get fired when you have tenure, you certainly may want to leave, right? You might hope to get fired because you just don't like working there anymore. Or just, you know, the nature of students and what you thought that you liked about students changes over time as generations change. So knowing that we don't know of those things developing, I think, these other pursuits or thinking about what these other pursuits

are, then I think also helps you build goals. Joe, let's talk about a few of her specific questions. With regard to the money that she's saving for the down payment on her next condo, she's wondering where to park that money. As she says, she likes eye bonds, but she's limited to $10,000. Yeah. Tips aren't great. They provide an inflation hedge, but she might want to buy that condo.

earlier than tips would allow for. And I think this is the crux of the discussion, Paula, because she says that that is a flexible goal and she's not really sure, I would ask her one question. I would say, Jennifer, if you put money in a spot for this condo and the money's not right to harvest this year, you have this condo of your dreams waiting for you and the money's not ready. Let's say the market is kind of like it is right now, right? And it just seems like a suboptimal time to take it out because you were a little more aggressive than you should have been because of the fact that this was kind of a nebulous goal.

Are you okay with letting this one go and waiting another year? In other words, how flexible is a timeline? Yeah, because the answer to that question tells me how aggressive we can get with that money. If back in the day when I was a planner, you'd look me in the eye and you said, no, I would let that go. You know what? I'm not that married to a place. It's not that big a deal for me. we've been doing the thing that we're doing now for a long time.

I really don't care about the specific day. Then I think we can be a little more aggressive, especially, by the way, especially, and this is the counterthinking, Paula, that you and I like to do, especially knowing that the market's down right now. And she's talking about 10 years away from now because 10 years is kind of that line where you think about the stock market a little bit, right? You start thinking, maybe the stock market is a good place to park this money. but if she wants that money sooner rather than later, she comes upon a place six years, seven years, eight years out, and she really wants that,

well, then I'm not so sure, but given 10 years and a market that's down now that she can invest in for 10 years from now, I can't think of a time when we've had a market that has been a horrible malaise for a 10-year period. I'm thinking about maybe the S&P 500 from 2000 to 2010, ish, you know, but still, if she used the stock market, she wouldn't have lost money,

she just wouldn't have made any. So the risk of losing money wouldn't have been there during that time. The risk of not making any money was. And I think that's a bet that I would take. Happened also in the Japanese economy where the Japanese stock market didn't do anything for a long, long period of time. But threats of losing money over a 10-year period, I think I kind of like that bet. But if you tell me six or seven years, I'm thinking about other things. there are other asset classes that are also down that aren't down very often. So if you tell me a six-year time frame, I think I'm looking at those bonds because the bond market is also, she mentions this with her 403B plan and how bad her bonds are performing. I think that I think there's an

opportunity short-term also in bonds. There's opportunities all over the place right now for a longer term investor, meaning long term is five or six years in bonds or 10 years in stocks, that that may be a better place to be. You know, you and I have talked about the fact that the Ginny May market is doing something that it rarely ever does. It's horrible, right? Right. Which means when we combine the fact that it's rarely horrible with the fact that it's really horrible right now makes me even more excited about that asset class for a five-year time frame if you're a low-risk investor. And what strikes me as I hear Jennifer's question, you know, she mentioned that she wants to buy this bigger condo within the next 10 years, but she wants to avoid tips in case she buys

the condo in fewer than five years. So as I hear her question, there's a huge range of possible timeframes for this condo goal. And I think that's probably at the heart of what makes it difficult for her to choose an investment, because to your point, we're talking 10 years, hey, the stock market, if we're talking four years, right, you wouldn't go anywhere near the stock market with a four-year time frame. And I think this is why she doesn't need a set date. And she doesn't need this to be perfect. But I think Paula, that range is way too wide to choose an investment. So I think we have to go back to that question.

If we put it in a five-year spot and she decides she wants it three years from now, is she unhappy if she has to wait? And if the answer is yes, then we have to put it in a three-year spot, right? And then we ask the question, if we put it in a three-year spot and you want it a year and a half from now and you have to wait, will you be, then we have to put it in and realize that ultimately what that could lead you to is I need the money in a cash position that is sitting, you know, in a savings account earning half a percent. What's the problem with that? With the consumer price index, well over 8 percent, what that means is she is very safely

losing buying power the longer she sits on it. Right. So if you put this in a position where you need it a year and a half from now, you better buy it a year and a half from now. Otherwise, you're definitely losing buying power. So I think Paula, to wrap that up, I think she has to just continually ask herself that question. If I say five years and I find a place in three, am I okay with the fact that I got to let that

go and let it sit for five? Because that ultimately, answering that question over and over and over until she finds her pain point is going to determine how she does it. So here, this technique that we're using, instead of choosing what the goal is, which is hard for so many people. So many people tell me, I don't have any goals. But you can get there by saying, okay, let's say that this happens. Would you be happy or unhappy? And everybody's going to answer that question differently, but you're definitely going to find the point, maybe not when you buy the condo, but the point where you definitely want the money to be available. And that's really the key. It isn't being

definitive and worrying yourself to death about buying the condo on March 14th of 2026. I got to buy it that day. It's not about that. It's about when do I want to have the money available? And then recognizing the tradeoffs of that, right? The earlier you go, the more safe your capital is going to be, but the more at risk you are of inflation kicking your butt is going to happen. Right. Exactly. It's essentially the liquidity premium. It really truly. is. And I tried to stay away from the $1,000 word, but there you go. It's a $1,000 price tag. Yes. And actually, this is interesting for people that don't know what those words mean

that Paula said, is that you pay a premium. It's like insurance, right? You pay an insurance cost. I think it's a great way of thinking about it, an insurance cost, if you want the money sooner. So if you need the money in 10 years, the stock market and real estate have averaged just over 10% an average 10 year period doesn't mean it's going to continue. Most experts tell you to look at 7 to 8%, maybe 8 and a half even. So stick with that and you'll be happy. But it's averaged around 10. But if you need the money in five, well, now we know that that stock market is like a roller coaster or a casino ride. And we definitely don't want to take our money to the casino when we want it for whatever the goal might be, a condo. And now we have to look at bonds, which are going to

yield us maybe somewhere in the four to six range, if we're lucky. And that having my money available premium is that cost, that insurance cost, is the difference in interest rates that you hope to gain because you want the money sooner. Speaking of that, can we parlay that into another discussion? Yes, absolutely. And I'm guessing, I think I know what you're about to bring up because it's exactly what was on my mind. Yeah, she's talking about going from the bond index over to the stock index.

Yep. Twenty-eight percent of her total investments are in the bond index. And your thought, Paula, is? Move it. Amen, sister. I am totally team Paula Pan on that one. You definitely need to move it. Here's the thing. Bonds are less volatile than stocks are. So especially when we're moving to more volatile places, I definitely, Jennifer, look at the bond market and I say what you say, which is, man, this is down. But you know, it's down even more, the place you're moving it to, which is super exciting. because you're moving from a swing that doesn't move a lot to a swing that moves even more that's down, which means your upside potential over a long period of time is higher than it was six months ago,

higher than it was a year ago. It's an exciting time to move from bonds to stocks. If you are somebody who's sitting where Jennifer is and you're just listening to Paula and I talk to Jennifer about this move, and you're like, you know what, I got too much money in bonds, it is a fantastic time to move from bonds to stocks. And I'm not talking, but don't evaluate this in the next three months or the next six months, but call up Paula in 15 years and you will want to high-five her because this was a much better time than it was a year ago to make that move. Absolutely. And the thing is, Joe, we don't know how long this market decline will continue to happen. We don't know, number one, if we are presently in a recession, a recession is defined as two consecutive quarters of negative economic growth as measured by GDP, which means that by definition, we only know in hindsight.

if we are in a recession, so we might be in one right now. And if we are, it might last for any given X amount of time. But Joe, to your previous point about how we are not investing for one, two, three year time horizons, we're investing for seven, eight plus year time horizons, 10 year time horizons, at a minimum. The questions that often plague people around, well, you know, the market's dropped, but is it going to drop further? That's a six-month question. That's a three-month to six-month question. That's not a question you need to be concerned with if you're investing with a 10-year time frame. So, Jennifer, to your question about market timing, deciding to shuffle your money today versus two months from now, yeah, that's a market timing question.

And market timing as a long-term investor should generally be avoided because you might as well set your asset allocation to where it ought to be based on your risk tolerance and then let it ride. I'm so excited for her. I think this is just a, it is a great opportunity. And by the way, what a great introspection to have to realize that she got her risk tolerance wrong. This is a great time, I think, for all of us, Paula, maybe not to make the move, but to think about, is my risk tolerance today what I thought it was 12 months ago? Because most people are not going Jennifer's way. I, I, I, I promise you, there's far more people that go, man, I was way more aggressive with my money. And I thought I'd handle it better than I'm handling it.

Because it was always during this time frame, always during these down markets when people that told me they were super aggressive would call me. Rarely, rarely would I have somebody talk to me about the thing that Jennifer's talking about, which is, you know what? I think I got that wrong. And I'll tell you, this happens too often with people in their 20s, I've found. People in their 20s with their long-term 401k money are way too conservative with that money. When you have $1,000 or $5,000 or $10,000 invested, losing 20% feels like a lot, and that's a big down. But it's far more of an opportunity, Paula, because as Nick Bajuli said on your show, it's far more important that you're putting money in. Far more important.

And so get really aggressive and let it wiggle so you have more opportunities if it goes down to invest. invest more money. And when it goes up, it goes up faster because there's very little money on that train. It's more important to be conservative or more conservative when you get within 20 years of that goal. At that point, I think it's going to be really important what your risk tolerance is and to invest based on that. And actually, there's even a better point than that that Nick talked about as well, which is when you find that the changes, the day by day changes of your investments seem to be more important to your portfolio growth than you putting money in, that's when you need to really look at your risk dollars. Right.

That's the time when it becomes super important. Right. Exactly. Which, by the way, she mentioned she has TIA craft and she's not able to invest elsewhere. I'm not against TIA craft. I think it's a fine company. Just don't invest in the TIA side. So people have TIA craft, there's two sides of that.

There's the TIA side, which is like a guaranteed pension type fund. And then there's the KREF side, which is a bunch of investments, individual investments. Stick with the KREF side where you have the individual investments. You've much more flexibility and opportunity for growth than you do on the TIA side. Perfect. One last question that Jennifer asked before we move on. She mentioned that about 75% of the money that's in her 403B through TIACREF is in a target retirement 2050 fund. But she doesn't actually plan on retiring in 2050.

Now, I know you and I have talked about how it's wise for her to set herself up such that she could change her mind. She could retire in 2050 if she wants to. But should she be hedging that by putting a portion of her money into some more aggressive assets? I'm generally not a fan of Target Date funds at all. and not because it's not a fine place to begin, but I think that Target date funds, Paula, get more dangerous toward what you're talking about, the closer you get to that 2050 date,

which they get too conservative too quickly. Even if it is a target where the money is managed through 2050 versus to 2050, it still is going to get more conservative than you want it to, if 2050 is the first possible date that you want that money. What I mean by that is by through versus two is there are some target date funds and it's fewer and fewer now that invest so that the money's in a liquid spot and you can take it out right at 2050. Other funds, most funds, realize that if 2050 is the first date you're going to want it,

you're still going to want some money for 2060, 2070. I mean, you might be alive another 20 years. So you might want that. However, because they want to err on the side of being conservative with your money, they will put more money than you will potentially need by a lot into a more conservative position in 2050 than you would possibly need if you think you're going to live for another 20 or 30 years past that date. So for that reason, because you are more likely to miss out on that last doubling, and most

people need that last double on their money, I'm much more excited about doing the little bit more work it takes to create your own diversified portfolio than just pressing a button having somebody else do it. This is not beyond you. You can do this. You don't need a target date fund. Perfect. And I agree. Jennifer knows her portfolio so well. She's involved. She's active. She's not one of those people, you know, I sometimes talk to beginners who are so overwhelmed by everything that a target date fund is a substitute for doing nothing. But in Jennifer's case, she self-selects as someone who listens to a finance podcast. Right. She knows what her percentages are. She can tell you every detail about her portfolio composition. So I agree, she has the knowledge

and the skills to be able to construct a portfolio allocation that is more suited for her. And Jennifer, putting a portion of that allocation into a design that would allow you to change your mind, that would allow you to retire at the age of 65 if you chose to, you know, set aside enough money so that that is an option. And then for the rest of it, you can design that such that you don't change your mind, such that you do continue working until you're in your late age. which means you can be much more aggressive with that other portion. But I agree, target date funds are not the way to construct that design.

Or those two dual designs, which is really what you're doing. So thank you, Jennifer, for asking that question. And congratulations on having a job that you love and a great financial setup. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, But they're not just fast and efficient. They're also powered by the latest in payments technology, built to evolve with your business.

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That's W-A-Y-F-A-I-R dot com. Sale ends December 7th. Our next question comes from Rachel. Hi, Paul and Joe. I love the podcast in your dynamic. I'm hoping you can help me with a job change, rollover, and 401K question. I changed jobs about a month ago, and long story short, I can't contribute to my new jobs 401K for about 13 months. I can enroll in July 23. I'm W2, and my salary is 100K, and I live in a state with sort of high income taxes, so I'd really like to contribute something pre-tax to save.

If not for this lockout, I would be maxing it out, so that sucks. For 2023, I think I'll be fine because I can just enroll in. July and double the monthly contributions so that I can still max it out. The issue is 2022. My understanding is that based on my income, I won't be able to deduct traditional IRA contributions. And I'm already maxing out my Roth IRA, which is actually done already for this year. So I can't backdoor that. Correct? That's a question for you. However, I do have some 1099 in income from a side gig. It's just a few grand per year, but I had an idea to open a solo 401k and just put all the income from the 1099 gig into that. The other thing I could do is roll my previous

jobs 401k into the solo. And I believe that I'm not mistaken that I can do that. And I need to get the money out of that previous 401k because the fees are super high. So that's convenient, if so. my questions are I kind of don't know anything about solo 401ks except for what I read online and I'm just kind of anxious about opening one. Do you see any problems that I'm not thinking of or do you have any better ideas for just where to save for retirement while I'm in this situation? If it matters, here's some background. I own a house and my mortgage is my only debt. I don't have any vehicle, student, or credit card debts. I have various retirement from previous jobs, Anna Roth IRA.

There's about 70K and a Roth and 90 in pre-tax. I also have a brokerage with about 7K with index funds in it. Another idea is to just take what I'd normally save into a 401k and shove it all into the brokerage, just because I don't know where else to put it, basically. I'm in the Midwest and I am 31 years old, if that matters. I'm not sure what my long-term goals are, maybe early. retirement. Any sort of feedback or ideas would be super appreciated. Thank you so much. Bye. Rachel, thank you for your question. First of all, yes, you can open up a solo 401k. So you can be

simultaneously an employee of somebody else's business and also the owner of your own business. And as long as your business, your side hustle only employs you, the owner, and doesn't have any other employees, then yes, you can establish a 401k through that side hustle. There are no specific business income requirements. And you can put as an employee 100% of your compensation up to a certain limit. and as the employer, 25% of your compensation up to the limit, you can put that into the solo 401K. And by the way, when I say employee and employer, and this kind of trips people up, when you run your own business, you are your own employer and you are also your own employee. So when you open a solo 401K, you can make employee contributions and employer contributions because you are the employer and employee of yourself. So through your side hustle, in 2022, you can contribute up to $61,000 as the total solo 401k contribution.

And that total gets split between a maximum of 20,500 that you can contribute as the employee and a maximum of 25% of your compensation or your net self-employment income as the employer. So that's how that adds up. I don't think there's anything better for her to do, do you? I mean, this, I think she's nailed it. I think for this year, do it because she's already put money in the Roth IRA and her traditional would not be deductible than by all means. I think this is, this is her path. It's certainly the best opportunity she has. The thing that concerns me is that her self-employment income is only a few grand per year. So it's not really going to be a significant amount of money. So, Rachel, if there's a reasonable way for you to pour more effort into increasing your side gig income, particularly this year, when you can't contribute to your employer's retirement funds, that's going to be a very powerful way for you to make retirement contributions this year that you otherwise wouldn't be able to make. I think I like the idea of her having that open anyway because it gives her some flexibility if she ends up later on pursuing her side hustle even more to have an easy place to put more

money. It can give her some diversification from anything that's available with her 401K that she's going to put money into. There's only, you know, so many different investments that a 401k will have and maybe it's weak in a certain area so she can supplement that with things that she does by herself on the side. So even though it's not a substantial amount of money, I think that while she has the opportunity, she can open it, leave it open, and then contribute to it as she's able. Right. And Rachel, you're correct in that you don't need to make a backdoor Roth IRA contribution because you're perfectly eligible to make a front door Roth IRA contribution. Right. You mentioned your income is about $100,000 per year. And if you are a single taxpayer or

head of household than in 2022, the Roth IRA contribution income phase out is between $129,000 to $144,000. So you are well qualified to walk in right through the front door and make a front door Roth IRA contribution, otherwise just known as a contribution. And you are correct. You cannot make a traditional IRA contribution for a couple of reasons. Number one, Even if you were to split money between the Trad IRA and the Roth IRA, you can't contribute more than $6,000 in total. So even if you were eligible to contribute to a traditional IRA, to make a deductible contribution to a traditional IRA, you still would not be able to contribute more than a total of $6,000 to both the Trad IRA and the Roth IRA combined. But that's a moot point anyway for you, because with a salary of 100,000, you're already

passed the phaseout range for deductible TRAD IRA contributions. And besides, your goal is not tax treatment diversification by splitting money between a trad and a Roth. Your goal is to boost your total contributions to retirement accounts. And you can do that by putting everything into the Roth IRA. So we're good there. I have one more thing, Paula, I'd like to suggest to her even though it wasn't her core question, which is that with the money that she's rolling over from her old job, I would not roll that over to the new job, even if the new job has fantastic options.

Because if her new job, if her new employer decides to go from what right now looks like a great menu to a much more limited menu in the future, let's say that they decide to go cheap. They decide to pass on cost to employees. They change the rules. She then is in a spot where she cannot get out of that. You don't want to put yourself in that. You want to stay flexible. So I would roll it over to an IRA that she manages herself and then begin an new with her new company. It's not about whether the new company is good or bad.

The new company might be fantastic. It's about what the new company may do in the future and setting yourself up so that you're able to have the flexibility to move at least some of your money in case your new employer decides to do things with the 401k that you're not happy with. Not her core question, but I think important nonetheless. Yeah, absolutely. So Rachel, I think your next moves are you've already maxed out your Roth IRA for the year. So awesome. Your next moves are to roll over your previous jobs 401k into an IRA. Bam. And to open a solo 401k that is tied to your side hustle.

Double bam. And if possible, increase the effort and ideally, as a result, the income that you receive from that side hustle so that you can pile as much of it as possible into that solo 401K. Bam, bam, bam. The other other thing that I would say, and again, this is, you know, I know that her core question is, hey, I live in this state that has really high taxes. So I want to get as many tax advantages as possible. and that's why I'm asking about retirement plans. But given the lockout, given the limitations, given the fact that she might not have time

to pour more effort into her side gig, because maybe she's juggling a whole bunch of other priorities. Given all of that, I'd like to take a moment to sing the praises of the not tax-advantaged taxable brokerage account. Oftentimes people are frustrated, understandably, by being shut out of opportunities to invest in tax-advantaged accounts, and I certainly get that frustration.

But if the alternative is to then make fewer contributions to your investment portfolio than you otherwise would have, then that's cutting off your nose to spite your face. So even if you do have to swallow the bitter pill of pouring money into a taxable brokerage account, knowing that you're not going to get a tax advantage from it, you still at least get to make bigger contributions to your investment portfolio that will grow and compound over time. And you're doing so during a market pullback when stocks are significantly cheaper than they were in recent history. So you're buying stocks at a relative discount and holding them for the long term. I just can't do bam, bam, bam, bam. Just one bam too many. I ran out.

Got it. It's like that Flintstone's character, Bam Bam. Bam, bam. Right. Yeah, I didn't even start there, and then we ended there. Look at the unintended consequences of all that. So thank you, Rachel, for asking that question. Congrats on the new job and on the side hustle income. I know you're going to break here, Paula, but three conspiracy theorists walk into a bar.

Tell me that's a coincidence. Hey, Joe, did you hear about the guy who invented the guy who invented. the knock-knock joke? No. He won the Nobel Prize. And on that note, we're going to take one final break for a word from our sponsors. And when we come back, we're going to answer a question from Carrie, whose parents are not in good health. And she's wondering what they should do regarding health insurance and life insurance.

Stick around. Our final question today comes from Carrie. Hi, Paula and Joe. This is Carrie in Boise, Idaho. My parents are reaching a new phase of life because of their poor health. My dad is 58 and my mom is 53. My dad has been on disability since 2010. My mom currently works full-time making about $30,000 a year. She spends the majority of her time off work just trying to recuperate.

My siblings and I have finally convinced her to cut back her work hours. In this next phase of their life, my mom would like to make just enough to keep up with their monthly expenses. My parents are going to get a detailed budget put together so they know exactly. how much that will need to be. My mom also mentioned finding her other retirement account policy that my sister set up for her. My sister calls herself a financial advisor. She's actually an insurance salesman. I don't think it's a terrible idea for my parents to keep their whole life insurance policy, but what question should I ask about their policy? I know it's a flexible premium, so my gut feeling is if they pay the minimum, they'll keep the life insurance benefit.

under what circumstances would you recommend they back out of their policy altogether? Well, should we consider as my parents enter their pre-retirement years. We have a few options we're looking into as far as their health insurance. They own their trailer house and pay $600 a month for their law space. They don't have any debt. They also don't have much as far as retirement savings. Their vehicles are old, but my mechanic siblings keep them running. They don't travel much.

And I'm just looking for the best free advice. a former journalist and financial planner can give. Tell Joffrey, I said hi. Carrie, thank you so much for that question. And what a difficult time for you and for your parents and for your family. And I think this is a really important question to ask about their life insurance and what they should do with it. And I'm glad that you called us because Paula, I really worry about Carrie advising her parents to end this policy. And here's part of the reason is that if their health is bad enough, that their life expectancy is not that long. This is what they've been paying into the policy for.

So leaving it in force so that there is some money there for this thing they've been paying for for a long time. We may be close to that. Now, I know other people who have what some people call disabilities, but really it's they're going to live a long time. time. While there's a lot of pain, and I'm thinking about one family member of mine in particular, there's a lot of pain. She's projected to live a long, long time, even though she may have a painful existence. So I think there's a longevity discussion there, first of all, because if they are going to live a long time, and what you're saying is, is they're short of money and they could use the cash that's inside of that policy, I would then, Paula, think differently about this than I would

if their life expectancy now is much shorter. But I also worry about this flexible premium policy. That's when I grown, Paula, when I heard this, because flexible premium, a straight out guaranteed whole life policy does not have a flexible premium. It is a set premium. A universal life policy,

which is a set policy that does last your whole life, but it's not technically a whole life policy because you decide how much money to put into it. you can minimum fund those policies and they will die. And so my first question, Carrie, would be of all the questions for you to ask, if we do minimum fund this policy, how long does it last? And that's that is question number one. Will it last forever?

And I will bet I kind of think, Paula, that it won't. Because usually these policies, when you minimum fund them and you get to later years in life, internally, the cost of that insurance gets more and more expensive. You don't see it in the premium because you're prepaying for a lot of the expensive years early on, which is why these policies cost a lot of money to put in force because of the fact that when you're young and the insurance is cheap, you're shoving extra money into the cash value so that you're subsidizing the premiums that you don't want to make when the insurance cost per unit is very, very high. I would ask that first. And if the answer is, how much money do we need to put into this policy to guarantee that it will last forever?

And I want the word guarantee in there. What is that number? And by the way, insurance companies can project that number in their projection equipment, that guaranteed number. If you do this, this will ensure that forever no matter what, no matter what happens with interest rate fluctuations or if it's a variable policy, and it has things that look like mutual funds inside of it, regardless of what the markets do, this will last forever. I want to know what that number is.

So once I'm armed with those numbers and I've thought about longevity of my parents, then I think, Paula, it's much easier for Carrie and her family to make an informed decision. Is this amount of money going into this policy worth it or is it money that's better spent on a monthly basis doing the things that we want to do? But without that information, obviously, I think it's going to be really difficult for us to do it.

But if by entering a new phase of life, you mean that they may have a shortened life expectancy, man, I would be reticent to just out and out cancel the policy. I think another important question is how much of each premium is going towards the cash value of the policy versus how much is going towards insurance? Yeah, and that number is going to continue. The issue, Paula, is going to be, if it goes toward the cash view, it might still be subsidizing what these later years are. Right. And you could even do, you know, you could even do some calculations saying, okay, my parents are in their 50s. Let's say they live till 70 and we don't see them living past 70.

How much money would it take per month to guarantee that it lasts to 70? Like you can pick a day in the future and say, what's the amount of money? Now, when you do that, what's going to happen is that some of that money is still going to go into the cash value every month. But the reason for that is to keep the premium level because part of the money is going to be the cost of insurance for now. And the rest of it is going to be a bump up, which is the money that goes into the cash value to subsidize future years. Because remember, every year with these policies, that internal premium cost is going to actually be higher even though you're paying the same amount. follow me. So even though you're putting money in cash today, you might need to put that money in cash to make sure it lasts to 70. Are there any other questions that she should ask related to the whole life policy beyond what we've discussed?

I think there's one more, but this is a third party question, which is interesting as well. Often when people are in poor health and they need the money more than they need the death benefit, if Carrie and her sister are doing just fine, and really the need for this policy is, is gone and parents need the money, often what people will do is they'll let the policy lapse or they will take out the cash. Let's say it's a $100,000 policy with $5,000 of cash in it. And let's be incredibly morbid and say that mom and dad are expected between them to live a maximum of seven or eight years. And you'll see why I'm being very morbid in a second. There are companies that purchase these policies. And they don't purchase the policy based on the cash

value inside Paula. They purchase the policy based on the death benefit. So in other words, Carrie and her sister give up the right to be the beneficiary on the policy. They instead sell it to a third party. And instead of a hundred thousand, they give up the right to the $100,000 in seven or eight years. Mom and dad might get $60,000 today instead of the $5,000 of cash that's in it. so you can sell the right to the death benefit to an outside company. There is a bunch of work that you need to do in that area. There are companies on the radio that prey on people offering this. I will give you a name of a company that I personally do not like, and it's called J.D.

Wentworth. And when I say the name, J.D. Wentworth, a bunch of people go, oh, yeah, I've heard them on the radio. I've heard that name before. Yes, you have. they're generally a company that does a lot of marketing because they're also the lowest bidder for these types of policies, which means by doing some homework and looking at other companies that do this work, you may be able to help your parents get more money that may help them live today in exchange for a death benefit that they don't need tomorrow.

Carrie, the only other thing that I have to contribute is that we've done a number of episodes in the recent past related to Whole Life policies. And in the show notes, we will link to those episodes. The show notes will be available at afford anything.com slash episode 385. For some reason, Joe, the topic of Whole Life Insurance seems to come up in a lot of questions lately. I think that what might have happened was you and I got geeky on it a few episodes ago. And I think people begin to understand. how complex these policies truly are.

And to dig into them, unfortunately, takes hours and hours and hours to understand how they work, which the frustrating thing, to go back to my thesis from several episodes ago, the problem with whole life insurance is not that it's a rip-off, which is what you hear all the time. It's that it can be a wonderful product, but it's super hard to understand. which is why it's often used incorrectly. And that's the reason why vise people often not to use it. Do not use it because some moron on TikTok says it's a great way to save money. Right, exactly.

It isn't that the tool is bad. It's that you need the right tool for the right job. Yes. It can be difficult to know if this is the right tool for the right job. There's a guy on TikTok who sells using whole life insurance as an, an investment tool on TikTok. He has two and a half million followers. He was recently on a big podcast that's a podcast that I'm not a fan of and I'll just

leave it alone, what podcast that is. And why the podcast host would have this guy on, by the way, besides the fact that he's a brilliant, maybe he have him on because he's a brilliant entrepreneur, do not have him on for what he's selling because he's selling people's stuff that is an empty bag. And he's using these assumptions in his videos that are one of, 100% smoke and mirrors. There's nothing there. He makes $75 million a year. Wow. The reason he makes really good videos telling you to do something that's not very good is because it really pays. The commissions on selling these products are why so many people market them incorrectly,

which is why you heard Kerry talking about her sister, right, saying, you know, my sister calls herself a financial planner. She's really an insurance salesperson. Carrie's sister might be doing some great stuff. I don't know. Might be doing very good stuff. But this guy on the internet with two and half million followers and I watch his videos, they are horrible. And they're telling you to do a bunch of stuff you shouldn't do. And that's the challenge when it comes to finances is being cautious about who you listen to, being cautious about whose words you heed. Often, those, those, The ones who captivate our attention the most are not the ones who approach topics with the appropriate level of nuance to help you develop a true tree trunk understanding.

On this guy's website, you and I have talked about the importance of having your advisors be fiduciaries. Feduciary means that they have to do legally what's in your best interest. He has an article on his website talking about fiduciaries, which is incredibly interesting, Paula because he said, well, let's not get too much into fiduciaries because it's not the big deal that you think it is. There are times when you just need a product salesperson, especially for something as important as life insurance. He doesn't say that last part. That's me. That last snarky part was me, but he does say, don't worry about whether you have a fiduciary or not. It's not that important.

And the bad news is two and a half million people go to this guy first, right? And then they read that fiduciary isn't important from this guy first. And they read some suspect math where money that you put into a whole life policy is going to perform better than a Roth IRA by far, not even by a little, by a lot. And that if you don't put money into a life insurance policy, Paula, and instead you put it into a Roth IRA, well, guess what you're doing? You are harming yourself. And the stock market as bad as it is right now, you know what you need, Paula?

you need the security that you don't have to worry about the stock market. Ugh. Yes. It's good. It's good. Cells based on fear. His office is in Arizona. He's not a licensed agent in his own home state.

And he just appeared on one of the top 50 podcasts for business in the United States about how amazing he is. Yeah, it goes to illustrate. Be careful who you listen to. Absolutely. I want to address the other aspect of Carrie's question, which was about health insurance. And Kerry, I'm afraid that my answer for you, and Joe, I'm interested in hearing what you say, but my answer is not overly sophisticated. It is for your parents to buy health insurance on the open market through health care.gov,

and given their income, they ought to be able to qualify for massively subsidized health insurance, which will cover the bulk of the cost of the premiums. Beyond that, I don't know of any special way to buy health insurance outside of simply buying it on the open market and then applying for the subsidies. But the silver lining is that your parents should definitely be eligible for the subsidies. At which point in terms of planning for future medical costs, that then becomes a budgeting question of saving enough money

that there's a fund set aside to cover their deductible and any co-pays. Yeah, I can't think of anything to add, Paula, I think. As always, you nailed it. Oh, well, thank you, Joe. And Carrie, thank you for saying hi to Joffrey, my turtle. He says hello back and appreciates getting the shout out. How did you say that, Paula? You know, the way that turtles communicate.

Swimming around in his little tank. Can you verbalize that for us? Like make the noise that Joffrey would make if he were saying thank you. It's the noise of paddling in water. It's the noise of sloshing water. That's the noise of a turtle. Not good. That's a one-star answer. But it's an honest answer. I think we needed the, oh. Thank you, Carrie. All right. On that note, Joe, I think we have answered three questions today. And they were three great questions. Lots of financial planning. Absolutely. Joe, thank you for joining us. Where can people find you if they would like to know more about you and what you're up to?

How about hanging out with me, Paula? Because while your part of the book tour is done, I know you're exhausted. I'm still out here. That's right. You are as of today, Wednesday, June 8th. I am in Kansas City. Nice. Kansas City here I come. I'll be at the Barnes & Noble in Zona Rosa. And I have to tell people, I really feel bad. Kansas City because as Paula knows, I was pretty under the weather last week and did not get the word out. And our Kansas City group, which don't get me wrong, I love the fact that we're going to have a small group because we can, with some of these small groups, we can dive into some discussions, some back and forth that we can't have with some of the larger groups that we've had, but we have a really small group. So if you really want some one-on-one-one time with Joe, come join me at Barnes & Noble.

I think right now we're looking at. at a nice small group, so I'm super excited. Tomorrow I will be in Omaha, Nebraska. So that's Thursday, June 9? Yes. And these are both at 6.30 in the evening, by the way. And you can find me, Elder Law of Omaha, and to get directions there, go to Stackabergens.com slash stacked, which you can also for Kansas City.

And on Saturday, I will be in Des Moines, Iowa. I've never been to Des Moines. So can't wait. I will be at pastry brewing downtown, a place that our friend Adam Carroll in Des Moines found us. Great guy. Do you know, Adam? No, I don't think I do. He's a fantastic guy, Paula, who you would love.

He has a documentary that people may have seen on CNBC about the student loan crisis called broke, busted, and disgusted. Just a great and horrible documentaries, as you can imagine. The subject is horrible. he and his crew did a great job of it. He lives in Des Moines and hooked us up with pastry brewing and he'll be there as our MC in Des Moines. So if you're in any of those fine cities, come hang out with me. Oh, that's awesome. All right. So Wednesday, June 8 in Kansas City, Thursday, June 9 in Omaha and Saturday, June 11 in Des Moines. Next three stops on the book tour. And Saturday in Des Moines is at 1 p.m. The others are at,

630. Awesome. Awesome. Well, thank you, Joe, for hanging out with us. As somebody who traveled with you to six cities on book tour, I can say it's a lot of fun. It is a great time. Fantastic time. It is so fun meeting people, especially the woman who said she thought I would have been fatter. Yes, that was in Washington, D.C. There are some memorable people out there, and if that was you, I remember you. Well, Joe, that's basically a compliment that you look thinner. in real life than you do in your photos, right? I'm not unhappy.

That's why I love the comment. It was great. And I answered, of course, she was talking about PHAT. It was a good reply. All right, well, thank you so much for tuning in. This is the Afford Anything podcast. If you enjoyed today's episode, please do three things. Number one, share it with a friend or a family member.

Number two, subscribe to this podcast and whatever app you're using to listen to this show. And number three, walk. you're in that app, please leave us a review. Remember, we have a course on rental property investing. It's called Your First Rental Property, and we are only offering it once this year, one and only one time. Normally, we open our doors for enrollment twice, but this year we are only opening our doors for enrollment once, and those doors will open on Tuesday, June 21st, 2022, and those doors will close on June 30th. So if you want to enroll in our premium flagship course on how to invest in rental properties, this is your window. Go to afford anything.com slash enroll for all the details. That's

afford anything.com slash enroll for tons of details. Thank you again for tuning in. My name is Paula Pant. This is the Afford Anything podcast, and I'll catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet, hear on a podcast, see on social media that relates to finance. All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything Afford Anything produces. And financial media is not a regulated industry. There are no licensure requirements.

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