Afford Anything - Ask Paula: I Think I Can Retire Early. Am I Crazy?!

Episode Date: November 23, 2022

#414: Amanda is worried that her recently diagnosed health condition might force her to stop working. How should she financially prepare her family? Anonymous is a savvy DIY investor who wants to retire early and is wondering if she should hire a financial advisor. Should Krista tap into the equity from one of her rentals to rebalance a portfolio that is weighted heavily in real estate? Natasha thinks she and her husband have saved enough to retire early but it feels scary. Is she truly ready or is she nuts?  Former financial planner Joe Saul-Sehy and I tackle these four questions in today’s episode. Enjoy! P.S. Got a question? Leave it here. For more information, visit the show notes at https://affordanything.com/episode414 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, 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 explore and facilitate. facilitate. My name is Paula Pant. I am the host of the Afford Anything podcast. Every other episode, we answer your questions. And my buddy, former financial planner, Joe Saul C-high, joins me to answer these questions. What's up, Joe? What's up? We are recording this at a really weird time for you, me. Ah, so tell me why it's weird for you. Well, just to pull the curtain back, it's a Sunday afternoon. And we normally don't do this on a Sunday afternoon. Wow. When you've said time, I was thinking more metaphorical, like era in our lives. No, you literally meant day and time.

I did, yes. I did not mean the season of our life. I did not mean that. No. But it is that too, right? It is that too. You're in the middle of this incredible program. I've been super busy the first two-thirds of the year going around America.

And I'm finally back in Texarkana, mom's basement, and doing. Not a lot, except talking to you and the wonderful Afford Anything community and answering questions. And speaking of answering questions, here are the four questions that we're going to answer today. Anonymous is a savvy DIY investor who wants to retire early. She's wondering, can she do this herself? Or should she hire a financial advisor? Krista is wondering if she should tap into the equity from one of her rentals to rebalance, a portfolio that is weighted a little too heavily in real estate.

Natasha thinks that she and her husband have saved enough to retire early, but it feels scary. How do they know when they're ready? And Amanda has a health condition that might force her to stop working. How should she financially prepare her family for the possibility that she might end up disabled to the point where she can't work? We're going to answer all four of these questions right now, starting with the anonymous caller. And Paula, the first half of this year, I named them after people that were in movies or TV shows I've watched. But lately, you have been naming our anonymous callers after famous journalist.

Yes. So we have this tradition where we name every anonymous caller. If you're new to the show and you're wondering why we're giving everyone a name, it's because saying this question comes from anonymous. sounds super boring. So instead... I mean, unless it was like anonymous, the whatever group, Anonymous. If it was a question from Anonymous, you know, the computer people organization. There's an organization called Anonymous? You don't know the...

Really? No. No. I have no idea. I heard of journalism program. I would do some investigative journalism on that topic. Well, I'm not a tech reporter. Clearly. No, these guys are, and I say guys, meaning just people, these people are hacking into computer systems where there's geopolitical issues going on that they think are unjust.

Today I learned. I was this many years old when I learned that Anonymous was a thing. So anyway, it would be cool. It's always that guy with that mask on. they always have to do with a mask on and they always then record you're looking at me like you have no idea you've never seen me do this stuff I have literally no clue what you're talking about holy man paula can I buy a vowel wow all right well well back to this anonymous caller she's a DIY investor she wants to retire early we need to give her a name so that we can answer her question yes earlier today I was listening to a book by tim Wu it's called the curse of big It's an assignment for one of my business and econ seminar classes. And he makes reference to one of the most influential investigative reporters of the 20th century, a reporter by the name of Ida Tarbell.

She wrote extensively about the Rockefellers and Standard Oil and her investigative journalism in many ways changed the core. of turn of the century economic history by exposing Standard Oil and Rockefeller's brutal business practices. So in honor of this great investigative journalist, I'm going to refer to this anonymous caller as Ida. Hey, Paul and Joe. I am an anonymous caller with a question for you guys. At what point do I know it's time to work with a CFP or a financial advisor? Some background, I'm 25. I make 70 grand. I get a 10% bonus. And I am hoping to retire early, hopefully my 40s. And I know that there are withdrawal ages and required distributions on some of my retirement accounts. And I also know that I'm probably going to need some taxable investment accounts to

make up the difference between when I can draw on those and when I want to retire my 40s. I think I have pretty good allocations across all these accounts. They're very aggressive because I'm trying to buy and hold for a long time. I've about 40 years until I need to draw out of those retirement accounts. But I'm at the point where I don't know if I can continue doing this on my own and just keep doing what I'm doing. Or if there are considerations that a CFP might be able to bring to the forefront that I'm not thinking about. I've read all these books on fire and everyone seems to be DIY in this.

And I'm a smart person. I'm very savvy, but I'm just concerned that there's something I'm not thinking about. So I don't know what y'all's advice is on that. I have about nine grand that I keep in cash. I have a 401k. 1% of my salary goes into a traditional 401k with a 3% an employer match, and then 9% goes into a Roth 401K, which is delightful. And again, I've literally just used the calculator on the 401k provider website to figure out my allocations there of traditional and Roth. So for my Roth IRAs, I have about 18 grand in an L of S Roth IRA. That's a robo advisory account.

I have about $600 across a bunch of different IRAs at Fidelity that are all self-managed. So I'm buying those funds. I'm trying to buy ERG funds. like responsible funds, that's what I'm attempting to do. And then I have a couple different investment accounts, a robo advisory account, Fidelity with $15,000, and then about $500 and L of S robo advisory account. So I'm kind of at the point where I don't know what else that I need to be planning on.

I have a whole life policy. You actually answered my question earlier. My dad bought this whole life policy for me when I was a child. So it's probably going to be something that I believe, until the end of my life and then allow that to be a charitable contribution. So I've got this financial situation. It doesn't feel like it's that complex in the scheme of things. But what would you guys recommend?

Oh, another consideration. My mom works for a couple CFPs that are not fee only. They were actually trying to sell some annuities to 27-year-olds. So I don't want to work with them. What do I do? Thank you. Ida, thank you so much for the question. and is a former advisor and the fact, Paula, that this is a topic in my book, I think this would be a perfect one for me to kick off, although I'm very interested to hear your take on this. I think first of all, I think we need to talk about what an advisor truly is and what it isn't, what it should be, because she said, you know, a lot of people DIY this, and I feel like I'm pretty smart so I can do this myself.

That is the wrong question to ask when talking about advisors. I see it all the time in online forums. And it drives me crazy because having an advisor is not about whether you're smart enough or not. The answer to that question is, of course, you're smart enough. Yes. There is nothing so difficult here that you can't handle it. There are a few things where you may need some very technical expertise. 99% of the stuff out there, you are smart enough.

to do it. Here's the thing. When I was an advisor, Paula, the smartest, most capable clients I had were generally also some of the wealthiest people that I worked with. And they demanded that they surround themselves with smart people who would challenge them. I think too many people think an advisor is an investment picker, which by the way, even though you didn't say that, it certainly felt to me, Paula, like she's questioning like her asset allocation, right, where she's balancing and is she overlooking some things? For a good financial advisor, that may be the last thing that they do. And there's a big misconception in the world that a financial advisor, that's what they do. They somehow magically pick better investments than you do. They don't do that. Great, great

CFPs are not investment pickers. They are people who help you look at you. You know, yourself holistically and make sure that you're not stepping in it in a critical area of your life. And often a good CFP will have you do nothing, will literally tell you to do nothing. To that end, Joe, I'm wondering a couple of things. Number one, I'm wondering if she can get a checkup from a CFP without having an ongoing relationship, because it sounds as though that checkup might serve what I think she's looking for, which is to have an expert, give it the once over, spot any unknown unknowns, and either give a stamp of approval or point out some oversight.

Could, but I don't know that she needs that right now. So when I think of, when people think of financial advisors, we get into all this talk all the time about fiduciary, CFP, all that, I want to throw that away for now. Don't get me wrong. I think if you have a financial advisor should be a CFP. Number two, I do think they should be a fiduciary, although that word increasingly means nothing. It's so frustrating. And by the way, it is the financial brokerage industry that is made sure that they've muddied that term enough that the word fiduciary is frustrating. However, what I really think we need to focus on is just surrounding yourself with smart people. And having a, board of directors. And I think when you think about yourself that way, you think about your advisors differently. What I'm saying specifically, Paula, is when you hire advisors, you are not abdicating the throne. You are not stepping down from your CEO position. You still have to be the smartest person who knows the most about your company. You cannot delegate your financial health

to somebody else, period. You need to be in control. I love the expression. Delegation is not abdication. Yeah, it's not. And yet, you see people act like when they talk about rotten, especially when they talk about rotten relationships with financial advisors, well, you know, we met only twice a year and the guy wasn't doing anything. I couldn't do myself. Why do you hire somebody to fight with you? And by fight with you, I mean somebody to challenge you, somebody to tell you that you can do better, to point out areas that might be weaknesses or to help you improve on the things that you're strong on or to give you the knowledge that you need in a very specific area that's going to help you go to the next level or point people out.

Like those type of advisors mean that you're still taking all the classes yourself. You're still doing all the reading. You're going to the, you know, camp fives of the world. You're attending conferences. You are literate financially by yourself. And then, then you find people who have your. back who are smarter than you in very specific areas to challenge you to do even better and to move faster.

I think a good analogy is imagine Joe, you and I are both writers. Imagine working with an editor if you only saw them twice a year, four times a year. There would be no value in that, right? Any writer who works with an editor needs to talk to their editor on a weekly basis at a minimum in order to get any kind of valuable feedback. And the same is true with sports coaching. Totally agree. Nutrition coaching, literally any vertical of your life that you're trying to improve in,

whether it's the backstroke in the swimming pool or your tennis serve or your ability to weld. If you're trying to get good at any skill, you need regular tutelage. I mean, that's what I'm devoting this entire year to doing. I think the first thing she should do at her age would be to think about finding kind of a board of directors, Paula, find mentors out there, people that have walked the path that she's thinking about walking that are very smart and that she gives permission to challenge her. And those women and those men that she has do that for her, maybe she goes. goes and has coffee with them once a month. Maybe she forms a mastermind of like-minded people on top of that that are people that are, you know, in her peer group, but they're going to hold each other accountable to do better.

I think the idea that because you're smart means you disavow yourself of surrounding yourself with smart people is the most ridiculous thing that I see online all the time. Why I would even want that is beyond me. Like why do I want that? I want smart people. But I'm with you, Paula. If she got a CFP, do it for a one-time check-in. But I frankly don't think she needs that.

You know what I think she needs? I think for her net worth, she is way too much complexity. She has way too many funds for the amount of money that she has. And what that's doing, Ida, I think is creating this jumble. mass in your head, I would have much fewer funds. Well, let's take the S&P 500 because I know how many are in that. Right. So you've got 500 companies. Why do I need eight different funds that own 500 different companies? I don't. I think she can do what she's trying to do, Paula, with like three. Hey, Joe, fun fact, the S&P 500 has 503 companies. Oh. I

Oh, somebody's got to call S&P. The S&P 503. No how to count. It doesn't have the ring, Paula, that 500 has. But I think she needs to simplify how she's managing her money. She needs to build herself a dashboard. And I think she needs to surround herself with smart people. And she's still in control.

Yeah. That would be my advice. You know, Ida, my first thought when I heard your question was, your life situation right now is pretty simple. You're 25. You have a full-time W-2 job in which you make a salary and a bonus. You have your standard retirement accounts and brokerage accounts. There's nothing really complicated about your situation.

It's very straightforward. I think if there's a point in your life where you decide to start your own business or you go through a divorce, That might be a good time to have some very strong check-ins with a CFP. But at this point, your situation is simple enough that I don't really see the need. You know, and there are people, Paula, and I'm thinking about, once again, some of my wealthiest clients, these are people that could have handled all the stuff themselves. And what they did was they delegated some of it to me. I don't have time to babysit my investments or I want to have.

an approach where I want you to do it for me. Okay, we offered that service to people that needed it. People felt like that was the piece of the puzzle that would allow them to continue. You know, some of my clients would fly globally all the time. They were consistently on the road doing a thousand things. They just wanted somebody to be the shepherd, right? While they own the sheep, they wanted somebody who was watching it. That's fine. I had other clients that wanted whenever they had a specific financial question to have somebody on their team that they could reliably call on and they could talk to. And it was based on their financial plan, not based on some rule of thumb that a group of people online decided was, you know, best for the

masses. It was just very specific advice. Those people, it was great for them to have me in their corner to have a financial planner in their corner. So I think it can be smart. I think delegating things could be super smart. But I really hope that she just takes away from this, surrounding yourself with smart people who have done what you're trying to do is the best thing she could possibly do. Want to go on a different little tangent here as well, Paula? Yeah. I also don't necessarily think selling annuities to 27-year-olds is bad. Oh, oh, them spiting words. We don't know.

All we know is their age. And this is another thing, Ida, that people fall into, and maybe you know more about this situation. But I do see people online make this assumption all the time. Somebody who's 85 years old, why do they own tech stock, right? Why do they own small company stocks? They assume that based on their age that they shouldn't have X, Y, Z, investment. None of that is true. It's not true. If we know somebody's financial situation, it may turn out that it's super. As an example, for the 80-year-old owning small cap or tech stocks,

maybe it's not about investing for them. Maybe it's now investing for their beneficiaries who are going to be people in their 20s, right? So even though the investments in their name, you don't know what their estate plan looks like. And they're investing this money, not for their lifetime, but for generational wealth. So I would often see that. Somebody looks from the outside in at somebody's situation and goes, yeah, I don't think that's a great idea. I hear it loud and clear, though, Ida, it usually is a rotten idea.

And it usually signals that a quote advisor is much more of a commission salesperson looking to chiching the cash register on some 20-something year old that doesn't know any better. However, we don't know that. If this person was looking for a stable source of retirement income and some of that money came from an inheritance and they wanted to lock down a pension that they could never outlive and not worry about retirement anymore from an early age and they were risk adverse, I could see that. I love this question, Paula, at her age. Why? Because defining how you're going to be the CEO of your financial life early on, I think it's going to make things way easier as you go. I see people in their 40s, 50s, 60s having this debate, when do I abdicate and have somebody else to it?

And if you clear that up in your 20s that you will never abdicate. My greatest concern is that I find that often people either have overconfidence, which means they don't seek outside opinions, or underconfidence, in which case they abdicate and or give excess credence to outside opinions at the expense of their own. And this is not just a concern about Ida. this is a general statement. It's hard to nail that balance, confident enough to trust your own knowledge and instincts, yet humble enough to listen to outside advisors. That, I think, is the challenge. And I think social media makes it more difficult for us because I feel like we live in a time now

where we're so busy trying to make sure that we're heard, that we don't spend a lot of time, Paula, finding people that have different opinions that us that have different feelings at us. We're not used to being challenged. Well, social media will certainly challenge you. There's a troll commenters who are going to let you know if they don't like what you've just said. Yeah, but not challenged in that way.

You're right in that we can also develop our own echo chambers. Yes. I think we like to block people who don't think the way that we think. And we also like to yell at each other and make ad hominem attacks. We don't have constructive discussions, constructive debates. constructive debate that helps us understand another point of view. So I think that makes it very difficult. I love the idea of focusing on having a growth mindset because if you have a growth mindset, you're not asking where am I right? You're asking where am I wrong. And I love starting

with, where am I wrong? It's a great place to begin. Exactly. There's an author by the name of Carol Dweck who writes about this in a book called Mindset. Great book and a phenomenal idea. So Ida, I think the takeaways are, it's great that you're asking this question right now. Your situation is not that complicated, so don't stress out about it. Assemble a board of directors around you so that you are constantly surrounded by advisors, plural,

who can offer feedback and support. Continue what you are already doing in terms of being financially literate. use a CFP in the event that you deal with some complication and simplify your investments because you have a lot of accounts and that is creating cognitive overhead, cognitive load that might make your relatively simple situation feel more stressful or more daunting than it actually is. So thank you, Ida, for asking that question. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware.

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That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments of fifth third better. Our next question comes from Natasha. Hey, Paula. This is Natasha. I came across your podcast a few months ago. I love it.

Love your show. Love your newsletters. Very educational and informative. I wanted to get your input on early retirements. I am 53. My husband is 57. We have put over 37 years worth of work in and I've had some part-time jobs along the way as well. I've done a lot of research on retirement and I've done every retirement calculator that is out there. And we just haven't come across real life examples of people retiring earlier in their 50s. is a bit scary and what we think we are ready to move forward with it and travel, do more

extended travel. I wanted to give you some background information. Once again, I'm 53. My husband is 57. We don't have any kids. We don't have any pets. We have about $150,000 in mortgage that we are going to pay off by end of the year. We do have about 230 in our Roth accounts. our mutual fund account, brokerage account, has about 900,000. Our 401k is about 400. We do have some RSUs that are about 120, and we have about 250 in cash. And we both also planning to take our Social Security about 62 at age 62. And we don't have to worry about leaving a legacy behind, so it's just us.

and I think we're budgeting about 70 to 85,000 a year for expenses moving forward starting next year. And also, we are definitely planning on working part-time when not traveling. So, question for you. Are we nuts to want to retire earlier? Love to hear your input and your thoughts on this. Appreciate you. Keep up the great work. Thank you.

Natasha, thank you for the question and congratulations on everything that you've built. I'll tell you in one sentence, my summary takeaway. Your numbers look good, but I'm not sure that what you're asking is a numbers question. Now, here's what I mean by that. In terms of your numbers look good, you have no debt other than a mortgage, which will be paid off by the end of this year. You also have just shy of $2 million across a variety of accounts. And this variety of accounts represents the tax triangle, tax deferred accounts, tax exempt accounts, tax abhorred accounts, tax exempt accounts, tax abel accounts. So you've got just shy of $2 million across a wide variety of accounts that have different forms of tax treatment, different levels of flexibility, different rules around when you can tap the money.

So you've got that variation going on as well. You will also be working part-time when you're not traveling. And you don't have any dependence. So you have financially a fantastic situation. The reason why I'm not sure that you are asking a finance question is because of the way that you phrase the question, Are we nuts to want to retire early? We haven't seen any real life examples. It's scary.

The emotion that I hear in the way that you ask the question, what that signals to me is that this is not really a question about numbers or logistics. This is a question about how do I develop the confidence to go through with this, to walk away from everything that I'm. I've known, you've worked over the past 37 years, that's the majority of your life, certainly your entire adult life. And so to walk away from the only thing that you've ever experienced as an adult, that requires a certain level of mental fortitude. And I think that's the question around how to develop that is where we really,

really need to work. You know, I like the idea, Paula, for them, of getting more comfortable by surrounding yourself with like-minded people, because she said she hasn't heard of people very often doing what she's hoping to do. And yet for you and I, we're surrounded by these people all the time. I feel like we're in this community of people where I know a bigillion of these people. But I do remember before doing this that I would have been in the same place. So meeting people locally and maybe just, you know, going to dinner and finding out that

these are normal people like you also makes it so much easier, you know, because, and I'll give you an example, going to Camp Phi as an example. You go to Camp Phi and you look around at these 30 to 40 people and these Paula are very normal people. You think about people that would go to a camp where you sit around and talk about money discussions all the time. Don't get me wrong for people listening to this show. Heaven.

But out there in the bigger universe, when I talk to people about a camp five, they're like, are you crazy? Are you what? But as you know, and I know, going to a camp five is not talking about money. It's about talking about values and doing these things that are people think are crazy. like retiring in your 50s. I think building some surround sound might be part of that journey for her. Do you think so?

I think Campify is one of many examples, but I think if she wants to go to an online community, for example, and develop relationships with people there, Zoom with them, FaceTime with them, I think that is also a low friction way of getting the 80-20 of it. Yeah, mine was less about Camp Five. That was just one example, but really surrounding herself with more people in whatever way she wants that are doing what she's doing. I feel like based on that question, the way she asked that question, she'll feel less alone. When it comes to the numbers, I think Natasha is in the situation where hiring a pro who's looked at these numbers before in detail will also give her more confidence. because while she shared the amount of assets she had and what she's generally going to live in,

what a pro is going to do is ask much more granular questions, like big expenses that she's going to have, which can affect your portfolio at different times. Also, she talked about making some money during retirement, working part-time. How much money would she project that she's going to make? might even challenge her on this assumption of taking Social Security at 62. If there's any longevity in her family and she can afford to wait longer, it might be advantageous to wait on taking Social Security later. But I can't challenge any of those things because I haven't looked at the actual numbers of her plan. So I think that idea that you had earlier of hiring one maybe series of meetings with an advisor just to get their approval,

Look for a fee-only advisor or a certified financial planner and get that stamp that you're looking for, I think would be a great idea. Exactly. Natasha has a complicated and unique enough situation that she, rather than Ida, whose question we just answered previously, would be a much better candidate for that one-time checkup. Yeah. And she's doing something that she hopes is irrevocable, right? She wants to do this one time. So meeting with somebody who does this maybe, you know, 20 times a year, right? Helps 20, maybe 30, maybe 40 people do what she's trying to do per year.

And has seen the things that she's looking at over and over and over will ensure for her that she only is going to do this process once. So she wants to make sure she gets this right. This is very important to stick the landing at this really critical moment for her. Right. Exactly. You know, I think that often, when it comes to, and this kind of goes back to something that Ida asked about when she described the financial independence space as a very DIY space, there's no shortage of skills that you could possibly learn. And particularly in the financial independence community, many people will justify not outsourcing a task. by saying, but you get to learn a new skill, as though there is some shortage of possible skills

that we could learn, as though there is no opportunity cost associated with learning that skill at the expense of any other skill you could possibly be learning or any other thing that you could possibly be doing. It's a highly illogical statement. But the way that I often think through that is by asking myself, how? How many times throughout my life will I repeat this skill? So if it's the type of task that I'm unlikely to do often, such as installing flooring, even as someone who owns seven rental units, I don't install flooring that often.

So for the average person who has just one home, maybe two, how often are you really going to do that versus some other skill set, like, frankly, getting really good at Microsoft Excel, that could pay much. I know that doesn't sound like a great Friday night, but that could actually pay much bigger dividends over the span of your life. Yeah, because that's going to be the bedrock for a lot of different functions later on, right? I mean, that's a bedrock skill that you'll plug into 800 different things that you're going to do in your life where a spreadsheet's going to make sense.

Right. Yeah. I was just thinking while you were saying. And if you are installing lots and lots and lots of flooring and you own two rental properties, you're definitely doing it wrong. And then you should get help anyway. So, Natasha, the takeaways are financially you look great. You're in a great position.

But checking in with someone who is a professional, fee only. who has a fiduciary duty to you, and who is practiced at helping people retire, who's practiced at making this one-time major and irrevocable life decision. Not to say that you can't go back to work, but obviously it's different if you retire, if you're out of the workforce for a while, and then if you come back, you will have charted a different path no matter what. that's what Joe and I both mean when we say irrevocable. So given the stakes and given the one-timeness of it,

it's understandable that you would feel anxious about it. And having those check-ins could be a wise use of funds. So thank you, Natasha, for asking that question. And congratulations on everything that you've built. And have fun on your travels. I think it's wonderful to travel when you have the youth and health of your 50s or your early to mid-60s, I mean, those are precious years. And when you are in your 70s or 80s, you know, you don't have the energy of someone who's in their early 60s

or late 50s. So the fact that you are prioritizing travel at this age, I think you're going to look back on that and be very happy that you did. So thank you, Natasha, for asking that question. Our next question comes from Krista. Hi, Paula and Joe, big fan of your show here. I have been listening to you guys for years, and I always love the really practical and great advice that you give. I had a question about leveraging the equity in a home that I own. This was my primary home for two of the last five years,

and I now rent it. And I'm wondering if there is a better way to utilize all the equity that I have earned in that house over the years. So numbers-wise, it rents for $2,095 a month. I have really great, easy tenants. It's worth about $385,000, and I owe $109,000 at 3.75% interest. I do have a he lock on this house for $125k with about a $25,000 balance on that he lock. I have used that HALOC over the last few years to buy five other rental properties, which has worked out great. It's also been good to kind of have as a safety net. I'm also a business owner and own my own marketing business. So these rentals are kind of my side hustle. And the HILOC has given me the

flexibility and safety to kind of cover things just in case. That said, most of my net worth is in real estate. And I'm considering rebalancing or maybe just kind of looking for other. ways to move all that equity and make more money from it. So I'm wondering what some of my options are. Should I sell the house and put that money in the market? Should I better leverage the HELAC, private loans or something? Should I just keep the house and keep renting and, you know, be good with what I have? Or is there just something that I don't even know about that your wisdom and knowledge could share with me? So my goals are, financial independence as soon as possible and easy hands-off investments. I do have money in the

market. Ross, I do all of that. But again, there's just this big chunk of activity sitting there, and I'm really curious to hear what you guys think and appreciate your answer. Thanks so much. Krista, thank you for your question. And huge congratulations on everything that you've built. You started with your own primary residence. You turned it into a rental property. And then you turned that into the basis of buying five other rental properties. So you've got six rental properties now. That is impressive growth. And such a great example, I think particularly to people who are wondering how they can get started.

And I want anyone who's listening to this who's a beginner to go back and listen again to Christa's question, listen to what she said. She started with one home, which she bought as a prime. residence, meaning she got the type of loan that carries the lowest interest rate, relative to the interest rate on a second home or an investment loan. She got the type of loan that is most easily approved, you know, relative again to a second home loan and investment loan, all the other types of loans out there are much harder to get approved than a primary residence loan in aggregate. You know, starting with that primary residence, she was,

able to make it a force multiplier. So Krista, huge congrats on doing that while also creating and running a marketing business. That is entrepreneurship on all levels. So let's talk about your strategy from this point forward. I have some thoughts on the concept of return on equity, which is fundamentally what you're asking about. In the real estate space, it is fashionable for people to decry having too much equity, because that equity is supposedly just sitting there, not being put to use, you know, not being turned into that force multiplier that can expand from six properties to 12 to 18. In the real estate investing world, it's very common for people to say, hey, my return on equity is too high, I should tap this equity and use it to more aggressively acquire.

But the flip side to that is that every time you tap your equity, you are putting what you've already built at risk. Leverage inherently increases the amount of risk that you're carrying, decreases your safety margins, and makes your future success that much more tenuous. And when you also are relying on your own business for your primary source of income, it would be one thing if you said, I'm a tenured professor, but you're not. You own your own business. And that is also a risky main hustle. I think you want to think carefully about whether or not increasing,

your risk is worthwhile, or whether it would be a potentially better use of your limited time, energy, cognitive bandwidth to focus on your primary hustle, your marketing business, see if you can grow that and let the rental properties ride in the background. This would have been an easier question, Paula, eight months ago, 10 months ago, a year ago, when interest rates were so much lower. But now the risk premium, which is the difference in expected return you can get from the money that you borrow versus the interest rate you're going to have to pay to the bank to get that money is so much less that it's a much more perilous approach to try to attack that equity now than it used to be. This question. I mean, yes and no, because she also has so much more equity now than she did two years ago.

Assuming that she bought her properties or the majority of her properties prior to the pandemic, she's sitting on massive equity gains. But her goal is not to put it in real estate. Her goal is to diversify the portfolio into other things. Well, her goal is to tap the equity and she's asking what she's open to the possibility. of what she might put it into, whether it's real estate or market investments. But her goal is to essentially utilize the equity that she's built over the span of owning these homes, and particularly over the last two years. But she still have, let's say that she gets a six and a half percent interest rate right now versus two and a half that she would have gotten before. I don't know

why that's not more precarious. Because she has greater room to fall. If, Pre-pandemic, she had a home that was valued at, let's say, $300,000 and a note on it for $280,000. And then from January 1st, 2020 through today, that home that was valued at $300,000 on January 1, 2020 is now worth, let's say, $400,000. She can lose more money and still not be underwater on that original loan. she could, but the opportunity, her ability to make that money, the risk that she will not make that money, though, is so much greater today still. I don't think the amount of money matters. It's just more zero. It's the same list.

And I took out this money at six and a half and I only got four. And yes, she might not be underwater and maybe there is more money available. but still her chance of making a return that beats the interest rate she's paying out is still so, so much less than it was when interest rates were lower. Well, certainly in all markets, she's going to need to hunt for the best investments, not just do what people did during the pandemic, which is blindfold yourself, throw a dart at an asset and assume it's going to go up. I agree.

Right? But if you told me that you had to pay two and a half and you're actually, expectation was getting eight, well, then we know you could get six and you're still going to be okay. In this environment, if your expectation is eight and you get six, you're not okay. But nobody, no good real estate investor would have an expectation of a total return, and we're not talking cap rate, we're talking total return of 8%. That's just not worth buying a rental for. not in an environment in which the inflation rate is also 8%, right? Because you expect your total return to be at a minimum market appreciation that keeps pace with inflation plus your cap rate.

So in this environment, if you've got market appreciation that's keeping pace with inflation, and inflation is 8%, right? That's 8% of appreciation plus, let's say, a 5% cap rate. That's a 13% total return. Okay, let's do this. Let's agree on one thing here. Doing anything other than real estate with this money would be a mistake. I don't want to go into any equities.

I don't want to go into any stocks. I don't want to go in anything that's not going to get that 13% that you're talking about. I'll save that battle for a different day. If you're going to get the 8.5% that long-term stock market investors using their financial plan, it's a no. I wouldn't do it. Yeah. Absolutely. I think that putting what she has built at risk is a dubious proposition, one that she would have to really think carefully about, particularly given that her main hustle also has huge profitability potential.

When you're the owner of your own business, as she is, there's no upward cap on what she might make. there's no ceiling. But there is volatility. There is risk associated with that. She does not have the income security of a person with a very stable W-2 job. Like a tenured professor. Go back to that example. And so the justification for putting her assets at risk, I think has a much higher threshold

than the one that I can really see. in her situation. I think it's a much better use of her time to focus on the marketing business. Yeah, agreed. But the reason, Joe, to go back to what we were saying earlier, and I want the people who are listening to understand this, the reason that I talk about the fact that she has so much more equity now than she did pre-pandemic is because any time that we're discussing risk, we always want to think about a concept referred to as the risk of ruin.

And if you listen to our podcast interview with Annie Duke, professional poker player, this concept of risk of ruin is a concept that is familiar to poker players. It's this notion that in any given hand, you may win, you may lose, and there's going to be variation related to the hands that you're dealt. and sometimes you might have a sequence of wins or a sequence of losses that by sheer happenstance occur in rapid succession. Law of large numbers, probabilistically speaking, sometimes you just get dealt multiple bad hands in a row. Due to the reality of that risk, the thing that any good poker player wants to protect themselves from is the risk of ruin, meaning the risk that they bet so much that they

eventually can't play the game anymore. They're eventually out of the game, right? That is the downside risk that I immediately think about when Krista asks, should I borrow against my equity? Because if she goes underwater on a property, that's far worse than, oh, I borrowed this money, I invested it somewhere, and the investment broke you. even. Okay, cool. Your investment broke even, fine. It was a big hassle and you ended up not really making anything from it. Boohoo. Sucks to be you, but you'll live. The much worse scenario is that she loses so much money that she then becomes underwater on a property, at which point foreclosure or default becomes an actual risk. And that's when she ends up running the risk of losing

what she has already built. What a fantastic problem to have, though, Paula, when doing what you are already doing may be the optimal solution. Right. No action is the best action. Right. I love that. Oh, I can just keep doing it this way?

Okay. Yeah. Much like I also enjoy when taking a nap is the right idea. And often it is. People are chronically underslept. Many people are. Sometimes the best thing you can do for you. your health is a couple extra hours asleep. Big advocate of nap time. All right. Well, thank you,

Krista, for asking that question. And congratulations on everything you've built. We'll come back to this episode in just a minute. But first, our final question today comes from Amanda. Hi, Paula and Joe. This is Amanda from Paula's hometown of Cincinnati. I'm calling with a question I haven't heard posed before. And I really respect the well-rounded and thoughtful answers I hear from you guys on the podcast. So I'm hoping to hear what you have to say about my situation. As a bit of background, I was recently diagnosed with a pain condition that is not terminal, but has a high chance of disabling me to the point where I won't be able to work anymore. My dad also had this condition and was on disability by the time he was 35 years old, and I turned 35

later this year. I have a job I love with good benefits and a fair salary. Luckily, I also have long-term disability insurance through my employer. For now, I'm still able to do my job with just the occasional use of FMLA time, but I'm a planner, and I would like to make the best moves I can now, essentially hoping for the best and preparing for the worst. I'm married, and my husband works, but my salary is two-thirds of our household income, and we get our health insurance through my job, so it'll be a big blow to our finances if I can no longer work. I have a 401k with a 5% match and a Roth 401k option within that, so I contribute 5% to the Roth side,

and the match obviously goes to the traditional side. My husband has a simple IRA with a 3% match that we contribute to, and I try to max out both of our Roth IRAs every year. I also have invested in I bonds this year for the first time, and I hope to continue to do that as long as the rates are still favorable. So my questions are, if I do have to go on disability, will they take my assets into account and could that lower my benefit? If that is the case, are there accounts that are better protected from that calculation that I should be focusing on? My current strategy emphasizes Roth accounts with the thought that we will be able to withdraw our contributions if we need them.

I'm not sure what the rules are with the different retirement accounts when it comes to disability. So do the rules change so that I would be able to access the money without the large penalties I would normally incur? Years before this diagnosis, my husband and I clawed our way from $180,000 in student loan debt, then saved for a down payment for a home. And we were just starting to get our retirement accounts where we needed them. I originally had dreams of early retirement, maybe in our mid-50s, but now I'm just focusing on my health and being able to work as long as I can. Anyway, I love this podcast as well as stacking Benjamins, and I can't wait to hear what you guys have to say. Thank you. Amanda, thank you so much for the kind words.

And I'm so sorry to hear about your struggle, but I absolutely love the fact that you're meeting this with planning and head on. Because I think because of the fact that you're on the offensive right now looking at all your options and exploring all the different. things you can do. It is going to not just make things easier, but keep you in the driver's seat, which I think is so important. I'm going to start off with just talking about disability coverages, because this is going to be super important for your situation. There are two different types of disability coverages. There's the disability coverage that you buy yourself or that you'll get through your company. Those disability types do not generally, take assets into account. You paid a premium for a benefit and you will then receive that benefit. And

hopefully you have that type of disability coverage because I think that will make things easier. Some disability coverages do have rules where if you are able to get any type of work, they will reduce benefits, which is why I often like something and this is a rider you want to look for on your policy. Is it a policy that ensures that if you're unable to do your own occupation, the industry term for it is onoc, own occupation coverage where the insurance company can't force you to do some other type of work outside of what you normally do. So look for own occupation coverage on your policies. Good time, though, to go through those policies and understand them and how they work. The type of disability coverage, I think you're talking,

about though is known as SSI which is Social Security disability coverage and Social Security disability coverage limits the amount you can have in assets and still get disability insurance. That amount unfortunately is incredibly, incredibly small to be eligible to receive SSI benefits based on disability and SSI applicant who is single can have no more than $2,000. in assets. So I'm not going to go into this completely, but you can already see if we're starting Paula with the number like 2000, Amanda's going to have more assets than what Social Security disability allows.

Now, what counts as assets, cash in hand, money in a checking or savings account, cash value in life insurance policies over the first $1,500, stocks and bonds, household goods and personal effects over $2,000. Cars and trucks, except for one, they give you an allowance for one, and real estate other than your primary residence. Those assets all count. So that means your primary house, one car, wedding rings, any money that is in ABLE accounts, past savings, Ida savings. These are individual.

Development Accounts, plan for achieving self-support accounts, achieving a better life experience accounts, those types of accounts don't count. So I might also try to get comfortable with how ABLE accounts work and how you take money out of ABLE accounts, because that may... Joe, a quick asterisk here. So ABLE accounts, because I know that this is a bit of, in audio form, can be a bit of a word soup. So ABLE, A, A, B, L is achieving a better life experience account. Yes, exactly. ABLE accounts are special bank accounts for individuals with disabilities. And so you'll want to explore those types of accounts in the future. So I guess my answer, Paula, is if the type of disability coverage she's talking about is government coverage because she's not specific, I think she needs to plan on that not being available for her. Now that sounds quite scary on its face because let's say she does not have private disability insurance. Let's just imagine the worst case scenario.

She doesn't have private disability insurance and she's imagining that government support won't be there. Then what? Yeah. I mean, at that point, and this is the great thing about looking at this early on, is that now she needs to have those conversations. And by the way, this is not just for Amanda. this is for everybody. What is it that you really value and build a moat around those things? What are those things in your life that you value because those things you're not going to

discount? But then I think for Amanda and her spouse, she begins them becoming incredibly frugal on everything else so that she's able to pack money away for as long as she can and also get used to the idea of spending whatever. she wants on those things that she really loves and being relentless about not spending money on things that she doesn't value because the budget, to your point, Paula, I think becomes really, really, really important. Other than incredibly disciplined budgeting, what else should Amanda be doing?

I think she rethinks her asset allocation. So for Amanda being in her mid-30s, she's probably put her money into investments that are for 60 years old, 65 years old, 70 years old. The good news is she will be eligible to remove money from her retirement accounts pre-59.5 because of her disability coverage. Now, she's going to want to talk to her tax professionals about how to make sure she doesn't step in it, getting that done, but that can be done. What she needs to do is rethink when's that next dollar she's going to need and become more, probably in most cases, will become a little more conservative with her investments, assuming that she may need a dollar sooner in her current circumstances than she would have before her diagnosis.

A couple of other things I'll add here, Amanda. there are many books written about this topic, as well as many online communities, with people who are dealing with this on a day-to-day basis. I would encourage you to seek out both of them between the two. What I like about books, and books specifically, not blogs, not even podcasts, books or audiobooks, specifically, is that because they go through a public, publishing house are held to a certain level of fact-checking, editing, a certain level of rigor. And so when you're thinking about the reliability of your sources, professionally published

well-regarded books that are recent and that are written by authors who are well-reputed within this field, that is a great place to start. And then from there, you can continue to follow those authors, you can follow major journalists who cover specifically this beat. I would start with finding those highly reliable information sources and then from there you will have enough basic information that when you then go into the online communities, you'll find tips, tricks, little tidbits of advice, but you'll also know enough going into those online conversations that you'll be able to sniff out the good from the bad, separate the wheat from the chaff.

But this is a topic, you know, personal finance or financial independence is wide, it's broad. Financial planning for people who are dealing with a disability is a topic that is much narrower, which means it can go very deep. Joe and I specialize in going wide, and I think what you need are resources that go narrow and deep. I also want to say congratulations on paying off $180,000 in student loan debt. Right. How about that?

That's incredible. Huge. Steve, can we get a round of applause? That is such a fantastic achievement. You should be incredibly proud of yourself. The fact that you did that and then saved for a down payment on a home, You've done all of that before you've turned 35. That tells me that you are very attentive to managing your money. You're excellent at managing your money.

You're excellent at setting a goal and going for it. And it gives me a lot of confidence in your ability to deal with the financial ramifications of this next great challenge. So thank you, Amanda, for asking that question. Well, Joe, we've come to the end of another episode. No! No, no, no. It goes by fast, doesn't it?

It does go by fast. It's always so interesting. And just like every time you and I sit here and do this, Paula, the questions are so different. And the nuances and the questions are so different. Right? Exactly. Yeah. And that is why I love that you just said that this is so,

wide because it is wide. There's a lot of nuance. There's a lot of specificity to any given situation. Joe, where can people find you if they want to hear more of your ideas? Yeah, when I'm not hanging out with you here, Paula, I am orchestrating the greatest money show on earth, the stacking Benjamin show, which has a single purpose, you know, 330 million people in the United States, nearly half of them say they cry about their money. So it helps people realize what we talked about early on here with Ida, that you can do this. And so we just try to keep it fun and have a lot of different segments and give people a little bit of a, I don't know, a little bit of a Tonight Show feel, I think, to their financial planning mix.

Nice. Every Monday, Wednesday, Friday, where finer podcasts are distributed. Only the apps that distribute the finest of podcasts. Yes, and part of the same badass network that Paula Pants on. That's right. We are part of the same podcast network. I can't stop calling them Westwood One because I love Westwood One. Cumulus doesn't roll off the tongue. Cumulus.

As much. Yes, the Cumulus Network. Isn't Cumulus a type of cloud? It is, which is why I just don't like that name. I think Cumulus, you need to change it. Here's what we're going to do, Paula. when our contracts are up with the network, we should tell them to change it back to Westwood One. That'll be our single demand.

I mean, why not just change it to like the Joe network? Yeah, duh. That's what we totally should do. I can't wait to hear that negotiation. I'm sure that'll go really well. John Wardock at Westwood One, not accepting my call anymore. Every time you call, he's like, what's that? I can't hear all going through a tunnel.

Just hanging up on me. Yeah. Wait a minute. He does that now. What are you talking about? He's not going through a tunnel, not getting on an elevator. John, I'm on to you. All right.

Well, thank you for spending this time with us, Joe. Thank you, Paula. Absolutely. It's always a fun time. And one that lately we haven't gotten to do very often. People don't know that, but we have not gotten to do this very often lately. Yeah. It's nice to be back, back in the seat.

Old times, yes. Thank you for tuning in to the Afford Anything podcast. If you enjoy today's show, please do three things. Number one, most importantly, share it with a friend or a family member. Number two, chat about it with other members of the community. There is a lot to be said. I think we've alluded to it throughout today's episode about the importance of community support, you can find our community at afford anything.com slash community. And that's where you

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Except talking to you and the wonderful afford anything community and answering questions. And speaking of answering questions, here are the four questions that we're going to answer today. Anonymous. Can I just put out how ninja we are? We also have not recorded together in a little bit, and we've still got it. Steve, use that, including the preamble as the blooper. Thank you. That was a really, I mean, you, you queued up a great transition.

God, I got to say. Just put it on a T. Oh, my God, is that funny? Okay.