Afford Anything - Ask Paula: I Came Into A Lot of Money. What Should I Do With It?

Episode Date: November 8, 2023

#471: Bob split a $350,000 windfall between savings and paying down his mortgage. But now he’s wondering if he made a good choice. Can Paula and Joe do the math to justify his gut-driven decisions? Julia wants to tap the equity from a second home to buy a third home in Texarkana, Texas. Is this a good plan? Joey Jr. wants to retire early, put two kids through college and buy a vacation home within the next five years. How can he afford to do it all? An anonymous caller wonders if $1 million is a good budget for a retirement pad. Former financial planner Joe Saul-Sehy and I tackle these four questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode471 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Hey, Joe, have you ever received a huge windfall? I have not, but if somebody wants to, they can mail me at Joe in Texarkana, Texas. All right. Well, imagine you got a sudden $350,000. Well, I can imagine that. What would you do? I would invest it. Well, that is not one of the two options on the table because we're about to tackle a question from a guy by the name of Bob, who, well, I won't spoil it. his question, you'll hear it. And by the way, welcome to the Afford Anything podcast. The show that

understands you can afford anything, not everything. Every choice that you make is a tradeoff against something else, which means if you have a windfall, you've got to do one thing with it or the other, and every decision carries tradeoffs. So which tradeoffs are worth it? I am the host of the podcast, Paula Pan. You, Joe, you are a former financial planner, and you join me every other week to answer questions that come from this community. Oh, I do. You certainly do. You certainly do. So let's kick off today with a question from Bob. Hey, Paul and Joe, my name is Bob. And while that's my real name, I just want you to be aware that if I were to call in anonymously, I would have loved to have been called Bob after Bob from the movie,

What About Bob? It's a great movie that Paul has never seen or heard of, and Joe, of course, has seen several times. Anyway, my question is more of a statement of what I already did, followed by a plea for your validation. So I hope you can indulge. Here's the scenario. My wife and I purchased a primary residence about a year ago in a high cost of living area. Our loan was for $650,000 against a house worth somewhere in the mid-800s, and our interest rate is locked in at 5%. Now, we just got a windfall of about $350,000 after tax, and the question is, what should we do with it? Here are the options. Option A, dump it all into the house. Option B, dump it all into a high-yield savings account that's exactly the same interest rate in question, 5%. Option C, do some partial version of

A and B. Option D, invest in the market. But here's the thing. Assume we've already maxed out our retirements, we have good savings, we're otherwise pretty conservative investors. And so just pretend option B isn't really an option. So while I'm sure your answer is going to be filled with statements like start with the end in mind, and we don't have Bob's entire financial story. And what about Bob's emotions and feelings based on the tone of his voice, yada, yada. Yes, feel free. Please feel free to do that part of your answer too. But again, if you'll indulge me, I'm really wondering about the math here. Have you confronted this before? Two options for deploying capital that are both the same interest rate, but only sort of because they're calculated differently. Is there a sweet

spot here? Which 5% is more valuable than the other in a pure math sense? How would you go about calculating this. I want to assume that since we're in a newly purchased home, that there's more value deploying at least some capital toward that loan because of how amortization works and the fact that we can literally knock off a decade of debt while limiting hundreds of thousands of dollars of interest. But how do you math that against the point of just making straight up 5% returns in a high yield savings account for years and years to come? I can't figure out how to make these apples and oranges be comparable as the same fruit. What are your thoughts? Oh, and actually, what did we do? We took half the windfall and applied it to the loan, took the other half, and have it in a high-yield savings account.

But why did we do that? I wish I had some formula to back it up. It just felt right. So what would each of you do? Thank you so much for indulging my question, and I really do appreciate all you do. Bob, first of all, you have a future in radio. If you ever want to go into radio or podcasting, you have such a good personality for it. How many times have you seen? What about Bob? Zero. I've never even heard of it.

Is that really a movie? He called it. I can't believe he called it. Yeah. I've heard of Bob the Builder. Richard Dreyfus, Bill Murray, big names, funny movie. Nothing to do with Bob the Builder then. Got it.

It has to do with, yeah. A guy named Bob who has a, as a psychiatrist, psychologist, something. Oh, okay. Well, great. Cool. Great. Fantastic. Well, Bob, mathematically, and Joe, I'm curious if you agree, mathematically,

dumping it into the house to pay off the mortgage is mathematically the better option. And that is for two reasons. One is the amortization like you talked about. So the value of that 5%, and here's how you would calculate it in a pure math, sense, Google amortization calculator and see what the impact of making that giant lump sum payment towards your mortgage is in terms of the total amount of interest that you save. Then Google, like, simple interest calculator, and you'll see that that 5% is actually more than 5% in an amortization sense.

So that's how you would calculate it. That's one of two reasons. The second reason is because any interest income that you earn is subject to tax, whereas, you know, the amount of money that you save on not paying interest on your primary residence is straight up savings. So, yeah. The 5% doesn't equal 5%. Exactly. The tax on the money sitting in the high yield savings count, I think is the big thing. Yeah.

Yeah, exactly. That's that's taxable income. And so the 5% that you would be earning, that's pre-tax 5%. There's two things, Paula. Number one is, we don't know about Bob's feelings. I'm contractual. I'm glad to say that. We don't know his whole financial picture. But you know what's important, Paula? It's how much money he's already got sitting in high yield savings. Because here's the deal. If he's already got money sitting in high yield savings is emergency fund, cash reserve, whichever name you want to use, no reason to have more money sitting at 5%. There is none. So then that extra money sitting in the high yield savings account is then has one mission, because Bob said he doesn't want to invest it. So it then has one mission, which is to pay off the mortgage quicker, which means that Bob needs to invest it in a way so as to outgrow what's called the risk premium, meaning that he's going to invest it aggressively enough at the point that it actually makes sense to. have it invested versus just paying down the mortgage.

So it would need to be 100% in stocks because over long periods of time, we've gotten 10, 10.2. But if we even calculate 7, 8%, 9%, you know, that he might get over the next 10, 15, 20 years, that will substantially beat what he's paying out an interest on the mortgage. So if he's going to leave it not on the mortgage, then I would invest it or, or I do what we mentioned earlier, which is just put it all on the mortgage. Yeah, absolutely. Bob, if you have more money sitting around, then number one, that means you're very lucky. And number two, there is that case for putting more towards the mortgage. You know, the other thing, the option, and I get Bob, you don't want to invest it in the stock market.

But the other option, in addition to a high-old savings account, are treasury bills. As of October 24th, the daily T-bill rate is 5.3%, 5.4%. Let me look at this. It's 5.4% for a one-month T-bill, and it's 5.1% for a one-year T-bill. So that's a solid option as well. I don't know. Why would you do that? So with a high-yield savings account, you don't know that the bank is going to keep that interest rate for a solid year.

With a T-bill, if you get the one year, you know, you've got it locked in. Right. Okay. Yeah. But if he needs it for emergency fund purposes, I kind of don't like locking it up for a year. And if he... Yeah, that you could, but you could ladder it with a couple of different T-bills, right? Like a second tier. Yeah, yeah. Get a couple four weeks, you know, build a ladder.

so that you have that combination of interest and liquidity. So get some four week, eight week, 13 week, 17 week, 26 week, and then go. So the way you do that, Bob, is that you leave part of it in that high yield savings account. And the other, you create the latter that Paul is talking about. So if you have an emergency, you've got someone you can get it right away. And then you got the rest of it, assuming that, you know, you can use the T bills to make payments later, whatever the trouble is that might come up. Joe, what would you do with $350,000?

Well, based on all the factors that Bob gave us, which were not nearly enough, and we haven't thought about Bob's feelings, I would. What about his goals? Don't we need to timeline them? I know, right? Based on everything he gave me,

I would have put it all on the mortgage. I would have put it all, assuming that he had the emergency fund in place. Just put it on the mortgage. If he's conservative, he doesn't want to invest it, you know, you and I talked about this before, the happiest retirees pay off their debt. So it's not a math equation for Bob at this point.

He's conservative, get the debt paid off, which is why with that other half, now that he hasn't done that, I would either make one fat lump sum payment right now or I would invest it in stocks, one or the other, because it becomes arbitrage in stocks to pay that down quicker, right? That becomes a vehicle. Let's say he buys a fund. I wouldn't put it with all his other funds. I mean, I might put it in the same if he's at Schwab or wherever he is.

I might put it there. But I might buy a specific fund that I think of as my pay down the house fund. And when that fund gets to be the same amount as what he owes on the mortgage, which historically would have always been faster if you give it 15 years, I'd sell that out and then pay down the mortgage. But if he's conservative, you know what, Bob, just put it on the mortgage right now. Just make one more lump sum. Yeah. Well, and the other thing is, if he can get the mortgage,

mortgage wiped out entirely, then that generates additional cash flow in the form of money that he's no longer paying, that monthly mortgage payment. And that additional cash flow can then become investment money. Yeah, the problem with that approach, of course, is that might be, you know, let's say he took out a 30-year loan. So that might be 15 years down the road with all these extra payments he's making. And we look at the doubling of money. He's losing a couple doubles by doing that, well, maybe one and a half doubles by doing that. So he is losing some time, but, but yeah, that's a nice conservative option. Yeah. Well, and it's, it's clear from Bob's question. He's, he's looking for conservative options. So, yeah, excellent. All right, Bob, I think, I hope we've

mathed it out for you. Mathematically paying off the mortgage is the better bet. I just wish we knew more about Bob's situation. Entirety. Great call, Bob. Yeah. Yeah. Fantastic. Fantastic. And Bob, I'm serious. If you want to go into radio, you've got a future there. Side hustle. Side hustle. Exactly. So thank you, Bob, for the question. Our next caller, Joe, tell the world where you live for people who don't know. I actually foreshadowed it earlier because I knew this was coming, but beautiful, glorious, Texarkana, Texas.

Texarkana, Texas. Well, our next caller is moving to Texarkana. What? Yeah, it's true. It's true. Let's hear from Julia. Hi, Paula and Joe. My name is Julia. I'm calling from Florida.

I wanted to thank you for everything you do. The awesome information and knowledge that you share with us is just amazing. I recently received a civilian job offer for Red River Army Depot in Texarkana, Texas. I have a three-year-old and two dogs, and I'm interested in purchasing a home in three to six months. if the job seems like it's going to work out. I have a property that's paid off in Florida where my spouse would continue to live. I have a rental property in Georgia with a 15-year 2.25% mortgage, which is where the down payment for the Texas property would come from.

I wanted to stay under $200,000 to purchase a home with a few acres so I could add some mobile homes for rental income. I wanted to ask if there were any good parts of town Joe could recommend and Paula and Joe's thoughts on purchasing. Any and all thoughts would be greatly appreciated. Thanks. Wow. Yeah. Yeah. Fantastic. Julie is coming to heaven. Julia, you are coming to heaven. That makes it sound like she's about to die. Heaven on earth. How about that? Coming to a fabulous place. It's fantastic. We have a symphony. We have a speakeasy.

In all seriousness, what do you like about Texarkana? There's lots of beautiful places. There's historic homes. It's quiet. Most people that come through Texarkana just see the strip malls along the highway, which frankly is the ugliest part of town by far. I really like our downtown is coming back to life. It was very alive in the early and mid-1900s,

completely died like a lot of small town America. And now, Paula, we had a new restaurant open last week. We have a downtown entertainment district. I actually took the Pioneer stayed with us. They're cool online creators. They stayed with us a couple weeks ago. I took them downtown. There were two festivals going on at the same time.

There was an October fest on one side, a battle the bands over on the other side. By the way, when I say other side, it's because Texarkana is half in Texas and half in Arkansas. So it really is two towns. But, but yeah, I mean, it just, it is quaint. It's quirky. It's fun. You know, you go places everybody, you know, like Cheers, where everybody knows your name. Paula doesn't even know that reference.

I do know that reference. I've never seen an episode, but I know the reference. So everybody knows your name. I absolutely love it. Nice people here. Yeah, yeah. You know, and I've come to visit, and I did a backbend over the Texas Arkansas state line.

You did, yes. All dates at the same time. Exactly. Exactly. So, Julia, you've got to do that while you're there. Got to. What I liked about it, and I could completely understand the appeal, is there was a, and maybe Joe, this is a testament to what you've built, a very solid community vibe. Like, it was clear just going to that restaurant with you and people coming by the table and knowing who you are. And, you know, we had a board game night and you have neighbors who live in walking distance, who could just stroll. over. So there was a real kind of small town community vibe there. You have to reach out and get it.

Like any community, like it's not going to come to you. People aren't going to, you know, when you move in Julia, people aren't going to bring cupcakes over. You've, you've got to reach out. Like, I got involved in a nonprofit called Partnership for the Pathway, building, building walking trails around town. Once you get involved a little, it becomes such a nice, nice place. All right. So let's, let's tackle Julia's question. So she wants a problem. with a few acres so that she can add in some mobile homes that she can generate rental income from. So partially she wants to know where should she buy that property. That's a very specific question.

To broaden that out, though, as a lesson for anyone who's listening who is interested in investing in rental property in a location that you're not familiar with. I want you to take note of what Julia is doing right now. She's reaching out to literally a stranger on the internet, Joe, because that's what you are to her, and saying, hey, I know you live in Texarkana. This is what I want to do. I also do own a rental property. So here's my credibility. You know that I'm not just kicking tires.

You know, you know that I do actually make moves. I do actually put my money where my mouth is. So, yeah, look, I already own a rental property. I am interested in buying another one in your location. What advice can you offer? And so that is like just a perfect example of how to scuttle butt, how to get the information that you need. I think she, I think there's another way to widen this out too, which is she talks about putting mobile homes on the property. You know, she's got to no zoning requirements in the area.

I mean, there are lots of communities where they won't allow you to put a second home on a property. So you want to make sure you check that box that in a local area that you don't buy. a property thinking I can put multiple domiciles on that property and then you find out later that you can't. So before you buy, make sure you check that out. But I'll tell her for what she's looking for, the area between Texarkana and the Army Depot just west of town along the highway. Those are Paula the perfect communities for her. Texarkana is leery. And then as she goes further out, there's a town called Hooks. Those. those towns close enough to Texarkana for shopping and all the things that she needs to do.

And she'll be able to pay a small enough price for the property that she can do what she wants to do. If she had children, and it sounds like she's not bringing children with her, I'd look at an area called Redwater. They have a good elementary school and a part of the Texarkana school system. So I like that. By the way, hooks in Texas in northeast Texas, what I love, I love accents. I love all kinds of accents. But Paula, people around here pronounce hooks with like three syllables.

It isn't hooks, H-O-O-K-S, which is the way you spell it. It's like, hooks. I cannot pronounce it correctly. It's pretty awesome the way people can just make that word super long. Nice. Well, I mean, her questions, I think we've covered it. She wants to buy a home. Her budget is about $200,000.

and she wants to put some mobile homes on it. So she's reached out to you, Joe, for recommendations for locations. She absolutely needs to know whether or not there is proper zoning for what she wants to do. And this, you know, I hear this come up a lot. In Austin, Texas, for example, a lot of people go the ADU route. So ADU is an accessory dwelling unit. and there are parts of Austin where you can put an ADU on your property and so long as it meets certain specifications in terms of size and, you know, so long as you kind of meet the local specifications, you can put an ADU on your property, rent it out, and generate some income that can help you with the payments on a portion of those expensive Austin prices. You could also go the other route, live in the ADU, rent out the main house.

Then you generate significantly more money as well. I see that in Vegas a lot, too, on bigger parcels of property where people build what in Vegas is referred to as a caseta, which is basically the same thing. But absolutely check the zoning. That's going to be the most important thing because every locality has different regulations. I got a couple other interesting ones that I think we can also widen out here, Paula. which is in a lot of towns, you know, Texarkana has Texas A&M branch, Texas A&M, Texarkana, and Texarkana College.

Texarkana College is in a tight residential area. You can definitely get property there around 200,000 or less. However, she won't be able to put additional units on it. And the neighborhoods there are okay, not wonderful, not a place that I would go if I were Julia. If she knew more about specific streets and where to live, then maybe. I wouldn't start around Texas or Canada College. But a lot of people, when they buy, when they're thinking about renting places and they see colleges, they immediately think opportunity.

Let me tell you what's going on with our college, even though it's the least expensive university, a four-year university in the Texas public school system, the dorm is not full. And a lot of people don't come here because we're in the middle of nowhere. And when you're competing specifically with the university, in a lot of college towns, you know, you think like Chapel Hill, North Carolina. I mean, you put a house there, even though you're going to pay a ton for it, if you're in the, in the university's backyard, you're probably going to always have renters. You're going to struggle to get renters in Texarkana.

So I would always check what's going on with enrollment, even though Texarkana has these college experiences. I would not buy around the university. In our case, especially right now when the university is really trying to, hard and lowering dorm prices just to get the dorms full. So don't, don't compete against the university. Right. Right. And that's a great point because, you know, at some universities, there's overflow. They don't have enough. Yeah, exactly, exactly. Michigan, Michigan State where I went, buy a house in East Lansing, Michigan. You're good. You're going to pay a bunch for it, but you will always have a flow of renters and should be able to do pretty well there.

Right. So not all college areas are created equal in a big way. Yeah. I would definitely especially with smaller schools like ours. Make sure you look into that before you buy. That's a widening out. Second thing is we are a border town and sometimes there's opportunities across the border. Now, the thing for Julie is if she's going to be at Red River Army Depot, she's maybe 25 miles across the Arkansas state line. Because Texas doesn't have income tax, property taxes are how Texas makes money. So her property tax bill in Texas is going to be pretty darned.

big, right? But she's not going to pay income tax working at the Army Depot. So for some people, they like buying on maybe the Arkansas side. However, for her to really get the properties she wants, Arkansas properties are so hit and miss and she's so new here, I would not, I wouldn't advise her to do that. Plus, if she's going to try to try to make that commute every day, it just, it, it, it, it ends up being a 30 mile commute to work back and forth, which would, which would stink. I know people, Paula, that live on the Arkansas side, so they get lower property taxes, and they work on the Texas side. They end up with lower property taxes. Now, they are going to pay income tax because they are taking that money back home to Arkansas.

But that's a factor looking at the border. So if you're buying right on the border, make sure you look at both sides. Yeah, you see that in Tahoe as well. Right, California. It's right at that California, Nevada border. and so I know people who are very careful about making sure that they live on the Nevada side of the border. Boy, you can see it too. Where there's no state in the back.

Yeah. Yeah. And Texarkana gets compared to Tahoe a lot. I'm not supposed to laugh. Sorry. The mayor hears this. Julia, thank you for your question. And enjoy the move.

Good luck with the move. Julia, when you get here, make sure to look us up and Cheryl and I will take you to one of our fine restaurants. We'll get you acquainted. 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. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size.

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I'm a longtime listener, first-time caller from Maryland. Why don't you just call me Joey Jr.? I'm a 48-year-old special category federal employee who can retire with a first pension at age 50. My current salary is $180,000 with a gross take-home pay. of $100,000 after all deductions. I anticipate my pension will gross about $50,000 a year after withholdings. This gross pension will drop about $10,000 a year once I'm eligible for Social Security at age 62. My wife changed jobs a summer and her salary income has dropped from $105,000 a year to $80,000 a year. However, she will spend more time on her 10-month-old coaching business,

which has yet to earn a profit in part due to high startup costs. We have two children. and expect to pay out-of-pocket college tuition costs of approximately $375,000 over the next five years. I know there are cheaper options out there. Our current invested assets include $1.35 million in traditional IRAs and 401ks, $1,000 in Roth IRAs, and about $530,000 in a taxable brokerage. We also have $167,000 in cash, earning more than 4% interest, and current principal residence is currently worth about $800,000. Our debts include $440,000 on our principal mortgage of 2.875% and a $48,000 car loan at 4.49%. I'd like to retire at 50, take six months off, then get back into part-time or volunteer work without worrying about my income. My wife plans to continue working for another five to 10 years. We are also interested in buying a vacation home or cabin on the coast of Maine.

I have several questions. First, should we pay off the entire $48,000 car loan, or should we continue to preserve the large cash balance? Because the difference in interest rates on the car loan and our savings account is minimal, keeping the large cash cushion has its advantages due to our looming college expenses. Second, because of my pension, should we be investing more aggressively than the current mix of 85% stocks and 15% bonds in our retirement accounts? finally, given the large looming college expenses and my waste drop in fixed income, should I delay retiring?

Should we delay purchasing the vacation home? I'm admittedly having trouble estimating our future living expenses due to the large number of significant life changes on the horizon. Thanks for your help, Paul and Joe. I look forward to hearing your answer. Joey Jr., thanks for the call. And from one Joe to another, congratulations on all of all the, all of all the great things that you've got coming up. You've got so much fun coming up in the future.

And it looks like you've worked hard to get where you are. So congratulations. Let's take this, Paula, a piece at a time because I think this is a big old onion. We need to work through. And so rather than just answer the question, I think we have to talk about how we think about this. So the first thing I think about is Joey seems pretty immovable when it comes to that 375,000 number for the kids college. And I think that if that is a non-contestable, this is what we're going to do. My first question is going to be, where does that money come from and how are we going to finance that? So that is job one, because I think that's going to answer all of the other questions. Are you going to use debt? Are the kids going to take on some of that

debt? Or are you responsible for 375? How are you going to do? do that. The reason I want to do that first, by the way, I probably won't end up, Paula, directly answering the question because there's too many ifs. And if Bob, if you're still listening, it's because we don't know enough about Joey's situation. That was just for Bob. But what I really do want to know, frankly, is how does he feel about those things? I would ask some more probing questions about that. But then we want to come up with that strategy first, because what I need to do, Paula, is I need to move assets, not physically move assets, but I need to earmark things for, this is college money, this isn't college money.

That will give me then the pot of money. Once I have the strategy down for college, it will give me then the final pot of money that we're going to use for the vacation home and for retirement. Right. Now, I got to say I notice he's got $530,000 in a taxable brokerage account. So if he wanted to earmark that 375 of that for the kids college, that could be one fell swoop, done. Did he tell us how much he's going to spend in retirement? He didn't say what his living expenses in retirement would be, but he did outline the money that he and his spouse have that's saved towards retirement is very substantial.

1.35 million in traditional IRAs and 401Ks, 170,000 in Roth IRAs, plus there's a patent. It could be, but based on his current income. Now he's got a family he's feeding now and it's going to be only two people later. So, Joey, I'm with you when you talk about the moving parts and that is hard to look at. I'm 100% there. But I would try to begin modeling that. Like give yourself some numbers so that you can look at what that lifestyle is going to be. And then I would, I'm thinking of a spreadsheet where I'm running out the pension. I've Obviously, the pension going down is going to be offset by Social Security. So, you know, just in my head, if we're doing it the easy way, I'm just, I'm just forgetting about Social Security and having the pension go the same because Social Security pension, it's all going to be melded together when it's all finished. I also want to know more about your wife's intentions for working on this coaching business because if it's like me, Paula, and I'm going to do this for a good long time, as long as my mouth. I'll keep running. I will, I'll keep bringing in some money with stacking benjamins, right? And even though I don't do it for the money and I don't care, frankly, but that is not my

mission is to make money. I will still have some money coming in from stacking benjamin's as a result of me just loving doing this. If it's the same for his spouse and she's going to do it for a long time, we should talk about how long we're going to model that income coming in as well. Because the thing that breaks the bank is a house on the coast of Maine. And so the big question is, is how much house and how then do you finance that house? Part of me, Paula, because he wants to retire so early, a question I'm really curious about is how important is going at 50 to him?

the reason I ask is going at 50 more important or is the second home more important? If the second home is more important and he doesn't care about working a few more years, I would love to see him do that as early as possible. I'd love to see him do that and then he gets used to it and he knows like how he's going to use it, how much money it's going to cost him. And that's not so much a nebulous figure. I kind of want to get everything out of the five-year range, right, and move one up, one back. But if he doesn't really care about the house in Maine, as much as he cares about going early,

that's going to also change my number. So I kind of want to put priorities on these. I don't even kind of. Let's get rid of the word kind of. I want to put priorities on these. Priority one sounds like I am going to spend $375,000 on my kids college, period. That's going to happen. They're on a fixed timeline.

nothing's going to change. Between the house in Maine and the early retirement, how do those two get along? Right, right. Well, the thing is we don't have a price point or a budget for that house in Maine. We don't know, is this a $200,000 house? Is it an $800,000 house? What's cool, though, is we can model affordability if we go the other way around, right? So once we get an idea what expenses are, we can say, okay, we have this, we have this amount of money that's not needed for the retirement engine, so it can be used as down payment. And then we begin factoring in mortgages, that, that kind of thing. So one thing that strikes me, right now, he brings home $100,000 after withholdings. When he retires, his pension after withholdings will allow him to bring

home $50,000. Now, the way that he actually said it was he said that his pension would gross 50, but then he also said that the 50,000 was after withholdings. Steve, can we hear that clip? I anticipate my pension will gross about $50,000 a year after withholdings. This gross pension will drop about $10,000 a year once I'm eligible for Social Security. So I think he's talking about net. Right, right. See, he says gross, but I, if, But he also says after withholdings. Which means net. Right.

So if he is bringing home a net $50,000 after withholdings, then that means that we're only talking about bridging a $50,000 gap. And so what strikes me is that his wife's income in this nascent coaching business might, might be able to bridge that gap. This coaching business is very young. It's only 10 months old. It has not yet become profitable, but that's normal for a new company. They've already adjusted to her new salary, right?

She's already switched jobs, and the family finances are already adjusted to the drop in income from $105,000 down to $80,000 in the job switch. if she can bridge that $50,000 gap, then they might, as a family unit, be able to continue in retirement on the same budget that they have today. Yes, which is why the modeling of how long do we want to model that for becomes really important. Right, right. And there's two ways to look at that, Paula. I mean, number one is that that can answer the, how do I invest, my being too conservative question,

which we can get to in a second. because of the fact that you don't need the money for a longer period of time makes it safer to take a little bit more risk with that money. But on the other side, you know, if she wants to enjoy it and doesn't want to have to bridge that gap, then I also like, you know, going back to Bob's question earlier, I like being conservative and saying, you know what? Work when you like it. Don't work when you don't because we didn't model this as if you're going to do it. You know what I mean? so I think you can play that either way. To his question about paying off the car,

I am not a fan of doing that right now. Not until we come up with a college strategy. Yeah, exactly, exactly. We need college to be funded first before that car loan gets paid down. And the car owns that a very reasonable interest rate. But Paula, if the college thing wasn't on the table, let's talk to everybody else in the community,

pay off the car because because the interest rate he's getting is very comparable to what he's paying out. There's no reason to leave that money in cash. Pay the car and then take the money that you're saving by not having a car payment and add that money to a next car fund. So you always pay cash for your cars. But in this case, set it aside because he's got these big college things coming up. That struck me as well. he's got $167,000 in cash. That is a hefty, hefty cash allocation.

I was thinking maybe he started building that because he saw the future coming. You know, I mean, maybe he's, maybe he's been building this chess the last couple of years, which would be a great idea with all this college looming. Right. Now, the thing also, Joey, that you may find is what I found with college, which is some of the college, that 375,000. I'd love to talk about that. some of it ends up being a cost transfer.

There was a cost to having my kids, Nick and Autumn at home that it surprised me how much, especially my son ate, you know, my grocery bill, Paula, went down forever and I was paying for him to eat now in the dorm. So it was a cost transfer. You know what I mean? So even though I've got, even though he's got three hundred seventy five thousand set aside, a part of that is for food while he's living on campus, you're going to see. a direct correlation with your grocery bill going down on your end.

Right. Other than groceries, other than the cost of feeding the kids, were there any other major ways in which your daily budget changed? And that cost ended up just. Utilities went down by a fair amount, almost a third when my kids left, you know, especially the water bill, just showers every morning. The second piece was car usage. You know, my kids, especially during high school years, they were social kids, so they used the autos a lot more than I do.

So I found that piece of the budget to substantially go down. In terms of gas, in terms of car maintenance. In terms of gas, they took the car with them. Both my son and my daughter had part-time jobs. So by that time, the cars, well, actually, we bought the cars paid off. So the cars were already paid off. But I transferred any cost of usage to them while they were in school and they paid for it themselves. Nice.

But yeah, finding the $375,000 for college comes first. Bridging the gap when it comes to the daily budget in retirement comes second. Then that determines your budget for the main house. Yeah, you know, paying off the car, I think is tied with that house in Maine. It's, I don't think that. Yeah. I kind of put house in Maine. ahead of the car even. It depends on how badly he wants that house, I think. Yeah, that is the question.

You know, is it a strong priority or is it kind of a fleeting nice to have? So depending on the level of desire for that house, that's going to determine how it ranks, whether it ranks in the number three position or the number four position relative to the car. But the number one position is definitely college. And then the number two position is the day to day, covering the day to day upon retirement. So Joey Jr., I would look at all of your questions through the lens of that priority hierarchy, because whether or not to pay off the car, whether or not to invest more aggressively, those questions can't be solved until, number one, the college question is solved. And number two, the question of how the daily budget will be financed in retirement

is solved. Once those two questions are addressed, then you'll know how much, if any, you plan to draw down from your investments in retirement, and that's going to influence whether or not you invest more aggressively. You'll know how much house you're able to afford in Maine, and that's going to determine whether or not you retire at 50 or work a few extra years.

And that's also going to determine and whether or not you pay off that car. Joe, what do you think of his mix of assets? He's 85% equities, 15% bonds. Man, I like what he's alluding to, which is that the pension really plays the part of bonds. Bonds are in a portfolio for stability. He's got that stability,

so he can consider that the bond portion of his portfolio. Always based it on time frame, but given that he may need the money 10 years or long, Any money he needs 10 years or longer, go ahead and put that in stocks. Right. Yeah, I think the operative question is going to be, where is his budget in retirement going to come from? And is he going to be drawing down from his current mix of investments, right? That money that's in a taxable brokerage account, is he going to be drawing down from that?

Because if so, that's going to influence his mix of assets. Yes. So, Joey, if your spouse is going to be filling in that gap like we talked about during your early retirement, if she's going to keep working on the coaching business and you're not going to need to touch any of that money, then certainly. I think where you're headed it sounds like with that question was all stock. I would be very comfortable with that if you don't need it for 10 years. Right, right. But it's a different answer if he does plan on drawing down. Absolutely. Yeah. Well, thank you for asking that question, Joey Jr. And congratulations on being two years away from retirement. Oh, yeah. Fantastic. Right? Retiring at 50. Incredible.

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Only one. Only one more. And this one comes from an anonymous caller. Do you have any suggestions for what we should name her? Why am I unprepared? Like, I should be completely 100% prepared for this. What have I been watching lately, Paula? I have been watching Acosa on Disney Plus, which is a, which is part of the Star Wars universe.

So I've been watching some Star Wars stuff. And I really like this character who is just awesome and resilient and really a fun part of watching the show, who's named Sabine Wren on the show. So Acosa is a great show, by the way. two very strong female leads. If you like Star Wars stuff, I highly recommend this one. I know Paula, some of it's been sketchy for us Star Wars fans. Paul has no idea what that we're talking about. No.

But for Star Wars fans, it's been some are great, some not so much, really, really enjoying Acosa. Boba fat, no, that was okay. But Acosa, very, very good. Get to the name, Joe. Wait. Sabine. Sabine.

Sabine. All right. Would you like me to talk more about Acosa? No. Can I tell you more about just a little bit? I have no idea what you're talking about. Let's go to the question. Our final question today comes from Sabine.

Hi, Paula and Joe. This is anonymous. I am calling to ask for advice for my mom. She is 62 and is a widow. She had just sold our family home that we lived in for over 20 years and moved to Florida when Hurricane Ian completely destroyed the place she was staying. Since then, she has struggled to figure out where to live and how much she can afford for a new home. I think she's decided she wants to live near the beach, preferably within walking distance, if possible, and had narrowed in on an island off South Carolina.

However, unsurprisingly, a home walkable to the beach is very expensive. She's really struggling to figure out how much house she can afford to buy, and she is particularly worried about running out of money. Previously, she had about $2 million in her account, and she sold her home during the height of the pandemic for another $1 million. This home has already paid off, so her accounts total about $3 million now. Her yearly expenses are about 80,000. She's currently receiving her social security of about 500 per month. However, once she turned 67, she plans to switch and take my dad's social security, which should give her about 3,000 a month. She's really at a loss to understand how much house she can afford while still being conservative with her money so she doesn't run out. She does have a financial advisor who she likes and trusts, and the annual investment growth goal is 6% for her portfolio.

First, she is deciding whether to buy a home in cash or get a mortgage. Her financial advisor recommended a mortgage because it would allow for a larger nesting to draw from for her monthly expenses and she would still have the opportunity to refinance if rates ever went lower. However, I think she's leaning towards paying in cash just for the peace of mind and frankly with interest rates as high as they are now around 7%. I think that may be the better financial decision anyway, but I wanted to get your thoughts. Second, she is trying to figure out how much house she can afford and what her budget is when looking at the cost of different homes. I'm having a hard time helping her figure out what this purchase price number should be.

As I mentioned, her yearly expenses are about $80,000, and she would also need to factor in the HOA fees, property taxes, and insurance, which I think may be another $20,000 to $30,000 per year. She also will be receiving about $36,000 per year for Social Security in about five years from now, though. I think she would be okay to look for another home around one million, but I wanted to understand how you both would think through this. Thank you so much for everything you do, and I appreciate all your advice. Sabine, thank you for the question. So the first thing that comes to mind, because she wants a home that is walkable to the beach, the first thing that comes to mind is, would she be open to living in a condo?

Because if she is open to that, well, there are a few advantages. is number one is she could find something walkable to the beach, perhaps even right on the beach, depending on location, for under a million. In addition, she's 62. She's a widow. Many condos have very active communities. There are social events. There's an opportunity to socialize with other people in the building and have a kind of a community feel.

So it would be a little bit less isolating. So I think there are both financial and social. advantages to the condo option if she would be open to it. It could be better value for the money and also a more fun experience. I think it's interesting that you let off of that though, Paula, because I started from the opposite side. I started with let's lock down retirement and then talk about the house, right? So we can spend money on the house that's left over from retirement. So let's do this. Let's say that her social security negates based on Sabina. call negates the the the the the the the the price of the add-ons that she doesn't have now with living tall

assumption sloppy assumption but for now let's just do it if we say she's she has three million dollars we we take her lifestyle 80,000 dollars that she needs to live on we use the we use the four percent rule it's a sloppy rule as we know but we also know pretty conservative rule. Like you could actually use a lower number than four and you would be okay. So I think that using that 4% rule, which I think would be great, she needs $2 million. So Sabine's, you know, using back of the envelope math, $2 million to live means her budget then is a million dollars. So Sabine, your math goes right along with back of the envelope math that I'm doing as I'm hearing

what you're talking about. The phrase that I really don't like is for peace of mind. Because let me tell you what gives some people more peace of mind because it depends on who you are. For some people, more peace of mind means more cash on hand. As an example, we just talked to Joey about not paying off the car loan so we have has more cash on hand. And sure, even though there's this sucking sound of a mortgage that's slowly coming out, having more cash on hand today means that maybe we got to figure out how we get the mortgage paid later, right? Or we sell the house. We do all these things. For some people,

peace of mind means I've got a bigger pool of cash and I'm not putting so much money toward the property today right now. Other people, and I think this frankly is more people, is, hey, I don't have this monthly payment hanging over my head. And so I've got, you know, I don't have to worry about this mortgage payment. But I think we need to be careful that one is peace of mind and the other one isn't. Because I think they can both give you peace of mind and they both have different Achilles seals. Right.

That's also going to be very personal depending on her feelings towards debt and her attitude towards debt. Some people are so debt averse. that having any type of debt is necessarily going to disrupt their peace of mind, right? That can be a cultural thing. That can be how she was raised. I mean, that they're, you know, debt is inherently an emotional subject. And it makes sense to me that, you know, what you're saying, Joe, makes sense to me in an

absolute sense. But I also recognize that there are some people for whom having any type of debt is simply something that's going to keep them up at night, right? You hear people who have student loans and they have this mindset that they can't do anything until those student loans are paid off. And then you ask them, well, what's the monthly payment? Oh, it's 300 a month, right? If you were to reframe that into anything else, right, if you were to reframe that into, they get a house with an HOA and there's a $300 monthly payment, right? They would not see that as such an albatron. But because it's a student loan rather than an HOA payment, even if the monthly layout is the same, it feels different emotionally.

I think that's why, you know, earlier in the show I talked about the happiest retirees pay off their debt is specifically for the reason that you're talking about. Right. So I agree in theory, peace of mind can come either way. But for many people, and it sounds like her mom is one of them, lingering debt. is upsetting in an emotional way. Well, maybe the reason, here's the reason I bring it up. When I would meet with people, because she talked about they had a financial advisor and the financial advisor brought up this and she said, well, you know, I want peace of mind, so I'm going to go this other way. My job was to bring up that both give you peace of mind and both have unintended consequences.

And when presented with more facts about how both of these responses are, as an example, here's something conservative people don't like if i run out of money i can't sell my bathroom right i can't peel off a little piece of the bathroom to go pay off this thing that's the emergency so if we cut it too close and we don't have enough money on hand how does that make you feel when when you have to downside because of the fact that you decided to go too conservative and not leave enough money in a spot where I could get at it to pay for this unexpected emergency that I had. A conservative person hates that too, right? So I think we got to look at, we often look at things through this rosy lens of nothing's

going to happen to me. Like the thing people don't want is disability insurance because disability happens to other people and doesn't happen to me. I'm a safe skier. I drive really well, right? Yeah. It isn't about you. It's about all these factors that happen.

And when you see the law of large numbers like I used to, you realize. that bad things happen to good people. Right. Yeah. It's the same logic nobody wants to get a pre-up, right? Because they're like, oh. Exactly. Oh, well, my relationship is safe.

Yeah. And then, you know, somebody walks out on you and you realize there's nothing you can do about that. Yeah. You never know what's going on to somebody's brain. Right. I think the advisor's doing the responsible thing by saying, you know what? There is a flexible way to do this.

I tend to agree with exactly what you're saying, Paula. put the money toward that do not have debt study show people are happier when they don't have debt but i do think that maybe mom's heard this before maybe mom hasn't there's this other piece of mind that we might not be considering my job as an advisor was to go paula this might be your achilles heel you may not have thought about this and then get that on the table then you go you know what i'm going to go ahead and put that toward the house but now you go in with your eyes open knowing that, you know what, I made this conscious decision and my Achilles heel is I'm taking money off the table that could have been used for emergencies and other things to give me peace

of mind in a different way. You know, the advantage to buying this home with a mortgage, it's a psychological advantage, but I think this is one that a lot of people who are buying homes today are going to experience, but they're not going to know that it's an advantage for a few years. because interest rates today are so high, and because the natural human tendency is not to buy based on final sticker price, but rather to buy based on monthly payment, right? Psychologically, that's how people tend to think.

And of course, when it comes to loan approval, right, that's also an upward bound of approval that people have, bank approval. because of that, anyone who buys today at today's interest rates is necessarily going to buy a less expensive home than they otherwise would have. People who bought two years ago bought a more expensive home than they would if they were buying today. Right. And vice versa. The contrary is people who buy today are necessarily going to buy a less expensive home. And what that means is that when interest rates drop, when they drop from 8% of, down to, let's say, 5%, right? They may never go back to 2.

But if they drop to 5%, which eventually they will, and those people refinance, they're going to see that they are in a significantly cheaper home with, you know, now once they refinance, with a very reasonable interest rate that they get to keep in perpetuity, right? Marry the property, date the rate. Well, I mean, let's look at peace of mind from somebody that has a 3%

mortgage, right? You were able to buy a ton of house. Yeah. A house that you're going to love if you had a 3% interest rate, you were able to buy so much more house than today. And we've all seen these stories all over the internet. You can't buy nearly that house today. So that is peace of mind.

I got a better house. But let's flip that. On the other side, you are stuck there. Yeah. Gordon handcuffs. Well, well, and there's these stories. we actually did this as a headline on our real estate show. Stacking Deeds talked about how if you if you're trying to downsize your property, Paula,

you know, kids have left home. Joey's about to go through this. Kids leave home. We don't need this much house. You go to look at a house that two of you would like versus four of you lived in. It may be comparable to the bigger, nicer house you have today because of the change in interest rates in some parts of the country. It's crazy.

Right. So, so you may not. not be able to downsize as much as you thought that you would have. So where 3% seem like peace of mind, 3% can also be, to use your words, the handcuffs. Right. Yeah. So the advantage to mom buying with a mortgage is that it may motivate her to buy a cheaper property.

But again, that's psychological. That's behavioral rather than purely mathematical, right? because in theory she could have exactly the same outcome if she just decided on a price point. Absolutely, Paul. Based on everything that Sabine gave us, two million is going to be fine to live. She's a million dollar budget. Social Security, if my numbers are right, and Social Security will cover a lot of the HOA, that type of, you know, the additional cost of the house that she has.

I think, I think mom's making a good decision. And whether that one million is going to come from cash, versus from a mortgage, I don't think there's a strong case for one being better than the other. I think both of those are equally good options, and there are advantages and disadvantages to both of those options, which we've just outlined. But I don't have a strong feeling in one direction or the other. I think a lot of that is going to depend on your mom's behavioral sense. psychology more so than mathematics. Yeah.

So thank you, Sabine, for asking that question. And best of luck with helping your mom move to this new home and move into retirement. Joe, we have done it again. We are just the time flies because I love answering these questions. It absolutely does. Joe, where can people find you if they would like to hear more of you? man we talked a little bit about one new place you can find me with my good friend crystal hammond and i co-host a show called stacking deeds which comes out once a week every tuesday

and paula we just won the plutoz award for best new personal finance podcast oh fantastic congratulations was very amazing and great in that show if you are interested in real estate you'll hear the amazing paula pant as one of our guests talking about her journey through real estate But we've had some, we've had people on the realtor side selling real estate. We've had people talk. Whitney Hansen talked about the new flower pot that Airbnb has helped her finance to build. She's literally building a short-term rental that looks like a big flower pot. How's that?

So we talk about quirky stuff. We talk about straightforward stuff. Talk about building communities that's stacking deeds every Tuesday. Nice. Fantastic. Well, thank you so much for tuning in. This is the Afford Anything podcast. And if you have any questions that you want to hear on a future episode, click the link in the show notes.

You can get the show notes for free by going to afford anything.com slash show notes. And we will always have a link in there where our show notes subscribers can ask questions. So afford anything.com slash show notes is where you can get updates about what we're producing here and where you can also ask questions. Thank you so much for tuning in. I'm Paula Pan. I'm Joe Sal Si-hi. And we will catch you in the next episode. Here is an important disclaimer.

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