Ask Paula: I Want to Travel After I Retire; How Much Should I Save?
00:00You 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,anything in your life that's a scarce or limited resource,saying yes to something implicitly means turning away other opportunities,and that reality leads to two questions.First, what matters most?
00:32Second, how do you align your decision-making accordingly?Answering those two questions is a lifetime practice.And that's what this podcast is here to explore.My name is Paula Pant.I am the host of the Afford Anything podcast.Every other episode, we answer questions that come from you, the community.And today, and most days when we answer these questions, former financial planner Joe Sal Cahy is with me to answer these questions.What's up, Joe?
01:01You mixed it up a little bit.I was waiting for the ish, every other episode ish.I know, exactly, exactly.I say that every other intro-ish.You got to keep people on their toes.Exactly.You can hear these slight, like, nuanced differences in the ways in which I do the intro,like the ways that I'll ask the two questions or the order in which I will say,
01:23your time, your focus, your energy, your attention.Sometimes I'll drop one of those.I'm always wondering, like, when the ice cream is going to get into open, like,which flavor is the best.Answering that is a lifetime decision, too, because I like thevanilla, but I also like chocolate.Ooh, Ben and Jerry's fish food.Favorite.
01:42Oh, yeah.I like, what's it called?New York Super Crunch, I think.Oh, I don't think I've had that.Oh, much better.You know what, but as a great, as somebody who's from Cincinnati, Grater's ice cream,that's where my loyalty is.Which is so funny because being in Texas, it actually is Bluebell.
01:59Whoa.The gallon stuff that you find in.Oh, yeah.Yes.And you eat it in one sitting and then you just feel shameful about yourself the rest ofthe day or the rest of the week. Well, so we've talked about Ohio. We've talked about Texas.And our first caller is anonymous. I know right. Do you like this transition?Nice. Ninja. Our first caller refers to herself as anonymous in Virginia. And because we give all of
02:27our anonymous callers a name, let's call her Virginia. Hi, Paula and maybe Joe. This isanonymous in Virginia. My question has to do with withdrawal.in retirement. My question really comes down to, I want to withdraw more for a short period of timeat the beginning of my retirement than I am comfortable calculating, withdrawing over the lifetimeof my retirement. Right now, I calculate that if I withdraw 4% over the life of my retirement,I'll have a comfortable retirement with a few extras. However, I would like to retire at 60 or 62,which is 8 to 10 years from now. And until the time I'm probably 60,or 68, I'd like to do some extensive traveling. I anticipate I'd need an extra $8 to $10,000 a year over a period of five to seven years. That takes me way above my 4% withdrawal rate. How do I tell if that's going to sink my retirement in the long term, or am I better off designating a bucket of money for that travel? A few details about me. I will be receiving a pension when I turn 60 or 60.
03:37It'll be a little bit higher when I turn 62.I will have lifetime subsidized health care.And I'll have approximately $800,000, hopefully in my retirement accounts when I retire.I anticipate taking Social Security at 67.And at that point, my withdrawal rate would drop probably to 2% or less until I take RMDs.Thanks for your help.Love to hear your opinions.Thanks for the question, Virginia.
04:05and Paul, I love this question.And I'm wondering if you and I have the same answer.Ooh, dun, done, done, done, done.Because I think we might.So the way that I am framing this question in my mind is that I'm thinking about her retirement in two buckets.I'm thinking about that bucket of the first seven years after retirement in which she wants to make a higher withdrawal rate.She wants to plan for a higher withdrawal rate.And then I'm thinking for everything beyond that in which she wants to plan for a lower withdrawal rate.
04:41And so mentally, I'm framing that time period after she's done traveling, that time period when she goes back to a 4% withdrawal rate approximately.I'm thinking of that as one specific segment of retirement with a particular timeline based on average life expectancy or longevity, how long she wants to plan for, let's say to the age of 100.or 105, you know, so I think of that in one bucket. And then I kind of, I think of those firstseven years in a different regard. And rather than asking, you know, how do we adjust retirementplanning such that I'm withdrawing a different rate for a few years, I'm instead sort ofreframing that question as, how do I withdraw at the 4% rate, but then also have enough, come up withenough money to fill in that gap between the 4% withdrawal for my retirement and the additionalsum that I'll need for those first seven years. Well, she's going to need two additional sums.
05:47She wants more money, but also if she's not going to take Social Security until 67, she also is inshe's got to fill in that income too. Right. Right. Exactly. But I'm totally with you. I look at these astwo different buckets as well. I think it's the only.way to look at it because of the fact that they're going to be so dramatically different.I also know Virginia is unique and the things that she's doing are going to be unique.But this idea of spending a lot more money, your first several years of retirement, you're young,you're healthy.If you're going to travel, you're going to do it then.
06:27If you're going to make capital improvements to your house or whatever you want to do,usually those first seven to 10 years are the big spending years.I think she's right on having a plan that way versus a lot of what I always hear is this static income forever, this static income stream.And I think making those first healthy, hopefully healthy years where you have more money available to spend, much, much better plan.So how would you plan for that increase in spending?You, she says she's going to need between 8 to 10,000 additional dollars for approximately the first seven years.How would you plan for her to get that surplus?Well, I think she's got a couple cool things.
07:13Number one is because it's after 59 and a half, she can go ahead and use tax shelters.So if she has the ability to save more into tax shelters, I would certainly do that.Where a lot of times when you and I take these questions, if somebody wants to retire at 50,and then we'll generally say, don't use a tax shelter, build your non-IRA brokerage account.So I would save the money into her 401K, 457, whatever it is that she has available at work.And then I would use one of the many calculators out there to figure out exactly how much she needs to save to get there, how much to change it by.Where she invests it, just look at investments historically that right now she's seven,years away, I think she said, from that date. So if she's seven, eight years away from that date,
08:03we can make the median 10 years. So I think looking at growth and income style mutual fundswould be a nice place to be. Or index funds? Index. Yeah, I mean, same thing. I'm with you there.I would definitely use tax advantaged accounts because of the fact that she will be over 59.5when she taps any of this, if we take the higher end of that estimate and assume that she needs$10,000 a year for seven years. So she needs $70,000, essentially, as the surplus money above andbeyond the baseline that she's planning. From there, it becomes that calculation of, all right,if I assume that my investments will grow X percent a year over, you know, as a long-termannualized average, then based on those return assumptions, how much money do I need to set
08:58aside every month or every year in order to grow that $70,000 bucket?You know, I think if she approaches it like that, and then I'm with you, Joe, use a calculatorto do that planning based on that framework.You know, what goal is $70,000, how much do I need to save at what return assumption to getto that amount of money, that's the way that I would approach that retirement planning calculator.I think that's, it's a close enough goal to, I love, I love conservative planning. So if we use a rateof return assumption of zero, I mean, we're looking at $9,000 a year for that, for that period.Now, that also assumes that we're starting from zero, which she's not. She already has money
09:45based on the 4% rule that she's that she's using.So on $800,000, she already has $32,000 a year using the 4% rule.So it's going to be the difference between those 32,000 and whatever the number is that sheneeds to either save additionally or have available additionally.But I love this idea.Just like I love the idea when people tell me that they're not counting on social security,so great.So great.
10:15Even though everybody tells you Social Security will probably be there for a multitude of reasons,I love not counting it because then it ends up being extra money that I have available.So if she can do this at zero percent interest, that would be fantastic.Right.Also makes the calculating easier.Right.But to be clear, she doesn't have to make a zero percent assumption.I mean, even a 5 percent rate of return assumption.
10:44I think it definitely needs to be low, though, like a five or a four.I don't know that with an eight-year time frame, and, you know, I don't like the crystal ball and actively make fun of people looking into the crystal ball.But I do look at this with all of the stimulus that we've just had plowed into the system, there is a tsunami coming called inflation.Like there's no, there's no way we don't have inflation coming, which means that your stock market returns could very well be diluted.So the threat of that happening in the next several years, there's always a threat.I would just use a lower assumption, invest for the best, but plan for the worst.True.But if there is an inflationary environment, then there would, at a minimum, I think, be more opportunities for savers to earn interest on their money.
11:33You know, the rates of returns that she can derive from CDs, from high-yield savings accounts, from conservative bond funds, those will likely be higher.in the future than they are today because today they are like nothing.And so that's also because we have a, I mean, if we're talking about spending power,spending power is not going to be much higher though, because if inflation is through theroof and you're getting a higher interest rate from your savings account, that's just offsettingthe buying power that you're losing.Right.So I think in terms of buying power, that ends up being awash, not a better opportunity.
12:07Right, right.But for this, I mean, for the sake of calculating what that amount is going to be in her.portfolio. What your return could be? Yeah. I mean, I think that even if she invests very conservatively,assuming that she will keep pace with inflation and perhaps beat inflation, even conservatively,to beat inflation by maybe one or two percent, I think that that's a reasonable assumption thatshe can make. Again, also given that she's got, like you said, a median 10-year time frame.Yeah. I just don't know that I go over 5 or 6 percent. Right, right. Yeah. I mean, I'm not planningon her dumping all of this in Tesla stock.
12:44No, not buying into the whole SPAC thing today?Exactly.That's a whole different can of worms.Some other day, people.So, Virginia, I think in the part of your question in which you asked,am I better off designating a bucket of money for that travel?What we're both saying is, the answer is mentally yes.It doesn't literally need to be a different bucket.
13:07In fact, using tax-advantaged retirement accounts is the way to go.from a tax planning point of view, but mentally designating a portion of it as a differentbucket of money and investing accordingly is the way that you can get that additional $70,000that you need. So thank you, Virginia, for asking that question. Our next question comes fromJess. Hi, Paula. My name is Jess, and I have a little bit of a random question for student loans.I have $50,000 approximately out in student loans, 15 in federal and the rest in private student loans.My private student loans have 3.99% interest rate, and my federal loans have between, there's multiple federal loans that are combined for the 15K, and they have between 3 and 6.5% interest.And right now, the federal loans don't have any interest, so I'm focusing on my private loans and really getting those down.
14:05however I've heard in the news Schumer pressuring Biden to possibly, and is, you know,early on in his presidency for gift of $2,000 of student loans.So I was really pushing it down.And then when that recent article came out, I saw online, I just, I'm not sure if I shouldjust be making the minimum payments now and putting the extra money I would have into asavings account.And if something doesn't pass, you know, within a certain amount of time, just like payoff so I'm not paying all this extra interest when I could be paying it down. So I'm not sure what you'd
14:40recommend. I'd like to buy a house within three to five years. So I could definitely put that moneytowards something else. You know, if this is past, I kind of don't want to miss out on something likethis. So just let me know what you'd suggest. Any help would be great. Thank you.Hey, Jess, thanks for that question. And it's funny because as Paul and I were talking about this episode,So we talk specifically about your question and about over the last 30 years between my practice and financial media stuff I've done.I've had this question about so many different government programs.And the answer historically has always been this.If you're waiting for the government to do something, that's not great.
15:24But I totally agree with you that, you know, when the government is going to do something, right after you pay off the loan,They're going to forgive it for other people.It's just, you know, that's just the way the world works, isn't it?The Murphy's Law of Debt Payoff.Absolutely.So let's look at probabilities.When it comes to your private loans, the chance that the government would do somethingaround your private loans, small to zero because of the fact that the subsidized and unsubsidized
15:55loans often backed by the U.S. government, those are the ones that they're going to takecare of, not something that you did as a private loan through Citigroup or through whoever.So I would feel very comfortable continuing with your strategy on the private loan side.That means one of two things, either with the public loans at the lower interest rate,I would either take the extra money that you're going to pay toward that and put it towardthe private loans to knock those out, what you're doing now, or I would put it.it in that fund that you're talking about. Wait for some clarity. I do think just based on followingthe news that we'll have some clarity around this in the last six months, the place that we're at
16:41now is that you mentioned Chuck Schumer. There are a lot of Democrats pushing for a big number.President Biden has said that he may be willing to do a small number for a lot more people.He's also talked about maybe narrowing the number of people that qualify for that.So I think we'll have clarity in the next six months where that's headed.So maybe for a six month period, either put it toward the private loan or use it to startbuilding your house fund just in case and then put down one big payment maybe six monthsfrom now.I think I would give myself a due date though, Paula, because I found that as people wait for
17:18clarity and it just doesn't come, doesn't come, doesn't come, this waiting becomes hopeand hoping that something's going to happen versus a strategy around it, I think, is a worseproposition. So maybe give yourself till July 1st. And then, you know what, we're going as ifnothing's happening or something has happened. Yeah. So the most recent time that I saw somethinglike this was when Congress gave an $8,000 first-time home buyer tax credit during the GreatRecession in order to encourage more home purchases. This was right after.after the housing market fell out. And once that window of time was over, once that opportunityhad passed, there were a lot of people who were hoping that the government would do something
18:02like that again. And so people, at the time in which interest rates, similar as they areright now, interest rates were low and home prices were rock bottom low. At that time,there were a lot of people who, first-time home buyers, who were delaying the purchase of a homebecause they were waiting for the government to reissue a first-time home buyer tax credit.They were waiting for that opportunity to open up again.And it did not open up a second time.And so you had these people who delayed a home purchase right after the Great Recessionwhen housing prices were at bottom.
18:38They were delaying a home purchase at that time.And once they eventually did go into buy a house, they were buying houses at a more expensive rate.I say that as an example of a time when people,changed their strategy based on a hope of government action that ultimately never came. That being said,that's inherently a different example. You know, not going into the purchase of an asset is inherentlydifferent than paying off an existing debt. Let's talk about that. So as Joe said, there are federalstudent loans and there are private student loans. And the government does not have the authority currently to cancelprivate student loans, can only cancel or forgive government-issued loans, federal loans.
19:25And under current law, there's no mechanism to convert a purely private student loan into a federalstudent loan.So theoretically, I mean, there are some people who argue, you know, under current law,private loans can't be canceled, but of course, Congress, by definition, has the ability to change laws.And so even though President Biden can't use an executive action to simply cancel private student loans,it is possible that Congress could pass legislation that could cancel or forgive some private student loans or a portion of those loans.Last year, there was an amendment to the National Defense Authorization Act,which would have provided up to $10,000 in assistance to borrowers to pay down private student loans.
20:16And that amendment passed the House in July of last year, but was not taken up by the Senate.Could that legislation go through again now that Democrats control both chambers?Possibly.But if it went through, would it pass?You know, would it get the 60 votes in Senate that would be required to overcome a filibuster?That's, again, that's where we get into the world of speculation.So I think the likelihood of something happening, some level of forgiveness happening with federal student loans based on the amount of chatter.that we're seeing in the news, that likelihood is significantly higher than the likelihood of
20:51the cancellation of private student loans. However, like Joe started his answer by saying,let's talk about probability. Essentially, my statement is, there is a higher probability offorgiveness for federal student loans. There is a lower probability of forgiveness for privatestudent loans, but a lower probability is not the same thing as no chance at all. So to quoteJim Carrey from dumb and dumber. So you're saying there's a chance, right? So my strategy, as I thinkthrough this, there are two approaches that you could take. You could either just make the minimumpayments only for, you know, the next six months and then we'll see where we are at that time.or you could concentrate your paydown on your private loans, knowing that there is a lower
21:44probability that those private loans would be forgiven, given the fact that there are so manymore hurdles that would have to be overcome in order for Congress to be able to pass legislationthat would eliminate private debt. But if you're looking for a short and direct answer,If I were in your shoes, I would probably make the minimum payments for the next, at least the next three, four, five months, maybe the next six months at the most.And if nothing has happened within six months, then, you know, I mean, reevaluate in six months time.But if nothing's happened in the next six months, then I would probably assume that nothing will happen.But for the next few months, I don't see any harm in making only the minimum payments.and waiting to see how student loan forgiveness shakes out.
22:37If nothing else, you will have a gigantic lump sum of savings six months from nowthat you can then use to make a big payment towards your debtif it turns out that your private debt is not forgiven.Thank you, Jess, for asking that question.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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24:44That's W-A-F-A-I-R.com.Sale ends December 7th.Our next question comes from Ziggy.Hi, Paula.Big fan of your show.Had a quick question.So I purchased a property in San Mateo near San Francisco in.2016 for approximately 980,000. Unfortunately, I wasn't able to live there and had to move out in 2017
25:20due to work. So at that time, I tried to rent it out. And unfortunately, for the last two years,the average monthly cash outflow has been about $600 net negative. This includes a monthly rentalincome, which is about 3,100 income average, taken into account vacancy, minus 9%property management fee, which is about $700, and then additional $641 from HOA property tax and mortgage.I've tried to list a property for a higher rent, but that has not been successful.It is a luxury condo with an amazing view and a nice community.Also has a pool.So my question was, would it make sense to hold onto the property for hope of possible
26:06appreciation and possibly a higher rent in the future?or would it make more sense to sell and try to buy other properties that would possibly cash flow, you know, easier?And is there any way to maybe maximize the income from this property to a point where it would cash flow?Thanks again, and I appreciate your time.Ziggy, thank you for asking that question.So I have a handful of thoughts on this.First of all, you mentioned the hope for future appreciation as the reason for holding on to this.I have a saying in the course that I teach that I reinforced to my students all the time, which is
26:47appreciation is speculation. When you are relying solely on market-based appreciation alone,then you are relying on broad macroeconomic factors that are outside of your control.Now, market appreciation is very different from forced appreciation.Forced appreciation is inside of your locus of control.that's the type of value that you add to a property when you purchase something that needsrenovations and that you can add value to through your own efforts or through the effortsof the contractors that you hire. And that's how professionals, people who work in real estatefull time, you know, that's how they are able to make good returns on their property.
27:28They spend a lot of time upfront doing due diligence on buying a good investment property.They buy an undervalued property.They add value to it through forced depreciation, which comes from a rehabilitating the property.And then they rent it out, enjoy the cash flow, and repeat the process.What you are suggesting is very different from that.What you're suggesting is a strategy in which you purchase something as a retail homebuyer.You don't add any value to it through forced appreciation.and then you hold it, even in a cash flow negative situation, because you have the hope that market factors that are outside of your control may lead to an increase in property value.
28:13So my first question to you is how confident are you about market appreciation in your particular area?How much research have you done?Do you know the number of new housing starts in your area?Do you know how that compares to the population growth in that area?Do you know how many renovation permits have been pulled in that area?You know, what is population inflow and outflow?What's new construction like?How do all of those factors compare?
28:43What is the actual likelihood in a data-driven sense of the supply and demand equationtilting towards the side of home values in that particular area increasing at above the rate ofinflation, significantly above the rate of inflation, and enough to justify holding onto thisproperty. That's one question that I have for you. The second question is how much of your ownmoney is tied up in this property and what opportunity costs are you facing? If you have100,000, 150,000 tied up into this property and you were toinstead sell this property and reinvest that money either into real estate that has a better cap rateor into index funds, could you earn better returns elsewhere? The third question that I have for you
29:36is, all right, if you do feel that this is a winning strategy, going cash flow negative on a propertyin the hopes of market-based appreciation, is it replicable? Is this the only property that you could dothis on? I'm guessing the answer is probably yes. You know, if you do decide to hold this,your hands are going to be fairly tied given that not only is some of your cash tied up in thisdeal, but also for any new savings that you might accumulate, you couldn't replicate thisdeal, which is a sign that it's not the type of deal that is sustainable. So I think you cansee where I'm leading with all of these questions. You know, they are questions, but they'resort of driving towards the idea that this may not, from a investor perspective, this may not be
30:26something that you would want to hold. Now, I say that again, with a caveat that if you've doneyour due diligence and you have data-driven reasons for being very bullish on this particularmarket, then I trust your judgment on it. You know, if you have spent the time doing that andyou really strongly believe that this is a growth play, an appreciation play, I mean, it is notmy place to tell you not to speculate. So I will tell you appreciation is speculation, and I willemphasize that point so that we can make a distinction between a speculative investmentversus a income producing investment, but I will not tell you never to speculate, simply to doyour due diligence prior to engaging in any level of speculation, particularly if that
31:16speculation is going to be cash flow negative?Yeah, my thought, a process, and I love all that, Paul.It was just simply that if this is cash flow negative, the very first thing we have to do islook at ways to make it cash flow positive.Is there a way to either refinance the loan on the house to make it so that at the veryleast it's break-even cash-flow-wise and you can just enjoy the appreciation?Or is there something you can do with either the management of the property?I don't know.
31:43I don't know what the answer is.I do know, though, that that's the very first thing that I would look at is how do we stop this $600 a month bleed?I mean, the easiest way to do that would be for Ziggy to manage it himself because he's paying $700 a month in property management fees.Yeah.Yeah, there it is right there.Right.So the question is, are you prepared to do that?Can you do that?
32:03But strategically, I think that's the first thing.Then I really don't have anything to add over what Paula said.I think it's about opportunity cost of that money at that point.Right.Exactly. Now, the one other caveat that I would make is, Ziggy, do you ever plan to live in this property again? If the answer is yes, then that's where this changes from being purely an investment question and turns into a personal residence, personal preference question. If there's a chance that you might move back to the area and you strongly want to live in this property again, maybe you have some emotional ties to it, you know, this is a property that you would hate today live in San Mateo and not be in this particular property. If that's the case, then the questionchanges, and it no longer is an investing question, it's a question of supporting your personalpreferences. But I don't hear that construction in the way that you've asked your question.
33:02Yeah. And I say that really, Ziggy, not just for you, but for the benefit of anybody else who'slistening to this, there may be some people who are listening to this who are holding on to theirgrandma's home that is cash flow negative, but it's their grandma's home and they spent theirchildhood summers there. They just really want to hold on to it so that they can pass it onto their own grandkids. First thing to do there is charge grandma more rent. Oh, that's not whatyou meant? If that's the case, if you've got a strong personal tie to a given property,then it's totally okay to make no returns on it and just monetize a property for the sake of breaking even on your own costs or even going slightly negative on your own costs if what you want to do is hold that property for emotional reasons.I totally, totally endorse monetizing personal property and offsetting your own personal costs as an emotional decision.
34:06I wholeheartedly endorse that, but I want to distinguish between that versus an investment.Those are two very separate things.Ziggi, I have one other question for you as well.Is this property cash flow negative on a 15-year loan or is it on a 30-year loan?That's also going to change my answer.Because if this kind of sort of alludes to something that you said, Joe, if it's the case that this is cash flow negative on a 15-year mortgage, then it can easily become cash-fellon.cash flow positive by refinancing the mortgage.Yeah.
34:38And it might be the case that once you recognize that, you make the decision that you don'twant to refi the mortgage.You're happy to hold on to the current 15-year loan so long as you can afford to continuedoing so.You might consciously make that decision so as to avoid restarting the amortizationperiod, so as to avoid paying the cost of a refi.But you can sleep easier at night knowing that the reason it's cash flow negative,is because so much more of your money is getting applied towards principal, which means that
35:12the way that this property is building wealth for you is by converting what otherwise would havebeen cash flow into principal paydown. If that is the situation on this property and you havethe money to float that for a while, cool. One of my favorite analogies is to think of yourself as aCFO of a company. And one of the most important things the CFO does is creates a debt strategy.So instead of having debt, most people have debt. Most companies have a debt strategy. And it oftenshocks people when they hear, you know, the banks that I had to pay off my loan in 15 years or 30years. No, they didn't say that. They said that they would offer you a term of 15 years, but you canstill pay it off whenever you want, or 30 years and you can pay it off whenever you want. Which
36:05one is better for you. And there may be more options, right? I mean, maybe in this environment,usually an arm doesn't make a lot of sense, but maybe an adjustable rate market. But there's allkinds of different things. We generally take out those debts without thinking of what's our repaymentstrategy. So I may take out a 30, but I may have a plan to pay it off in 10. Right. Or take out a 30 andpay it like it's a 15. Yeah, exactly. And obviously, the longer you take that loan out for,you're going to have to give up a little bit more interest. And the reason for that is,while none of us know it's going to happen 15 years from now, we certainly have no idea about 30years from now. So banks will charge you a little more for a 30-year loan than they will for a 15.
36:48So there will be a little give-back to the bank if you decide to have more flexibility with a longer loan.But if that $600 is really hurting Ziggy, that might be the best strategy.And frankly, and if he bought this in 2016, it's now 2021.if he did buy this on a 15 year mortgage, he's five years into a 15.Frankly, I would not refi when I'm a third of the way through if I had the money to be able to float that.Well, it depends for me.I go back to your point about opportunity cost.What else is on the table?
37:21What are the other goals that are conflicting?It all depends on the other goals.But you're right, in the absence of other goals, man, you did the expensive years.Your effective interest rate is much less now for the rest of the rest of the cost.of the loan than it was at the beginning. So I would, yeah, I'd be reticent to reset that clock.Exactly. Ziggy, the good news is it sounds as though you don't have much in the way of repairs,maintenance, and capital expenditures. And I'm guessing that this is a fairly new property, which meansthat you will most likely be free of repairs maintenance CAPEX for a while, and your HOA will cover
37:57exterior maintenance. That's the good news here. Your ongoing operating costs arerelatively low for what that's worth. So thank you Ziggy for asking that question. We'll return to the showin just a moment. Our final question today comes from Vivek. Hey Paula, I'm a new listener to your podcast,was looking for guidance on a future situation. I'm a 36-year-old man, purchased a starter house backin 2015 for 156K. Its current value is 243K, and we paid it off last year and planning to livein this house for a few more years and then make it a rental property.Now, capital gain tax law states we do not have to pay taxes on capital gains receivedin primary house when sold, up to 500k when merit filing jointly.
39:00But what if we rent for years before we sell?And would I have to pay capital gain taxes on the appraised value from purchased year2015 or the rental value which might be 2021 or 2022 when we did?decide to rent it. Also, once a rental, depreciation would be of the purchase price of 156K or would it beof the future value, whatever the house is worth in 2021 or 2022 when we decide to rent it.What would be the best way to avoid capital gain taxes on the years when it was a primaryresidence and also get depreciation on the value from the year it's rented out instead ofthe year that we purchased. I hope you can guide and continue with the good work.
39:49Please keep up the good work, Vivek here. Thank you. Thank you for that question, Vivek.You know, there are a lot of pieces to your question. I'll begin by saying I would definitelyconsult with a tax advisor on this. I am not one. I just play a dude on a podcast talking aboutmoney. I just play one on the radio. That's right. So here is.is one way to do it. I'm sure that a tax expert can come up with much better ways to get this done.But if you change the ownership from you personally over to an LLC which owns that property at the time thatyou're changing it over to a rental property, that does a couple of things. Number one, you should do thatanyway, right? Treat us a business, separate it from your personal assets. So that should
40:43happen. What that also does, though, is shows the IRS a change from personal ownership over tonow it's a business, which means at that point, then your depreciation can begin from that point.You also then are able to lock in your capital gains exemption for living there for that beingyour personal residence. But I think you have to show a complete transfer of the propertytoward the LLC.I think that's one way to do it,but I know a tax expert should be in your corneras you walk through this to find the optimal way
41:19to get that done.But to basically answer your question,the answer is, yes, all those things can happenat the date that you make the change,assuming that you show the IRSthat I've now changed this over to be a rental property.Yeah, so what happens is when you change it overto being a rental property,
41:37you know, at that time of conversion,there will be an adjusted,basis of the property. And when you go to sell the property, then from a tax perspective,the taxing authorities will be determining a gain or a loss as compared to the adjustedbasis of the property. Now, at the time of conversion and at the time of sale, because inbetween conversion and sale, there can be additional adjustments to your basis on that property,right? If you make a major renovation, if you convert this property from a primary residenceinto a rental, and then afterwards you make renovations on the property and those renovations
42:15are depreciable rather than deducted in the year that they were made, then that furtheradjusts your basis, right? So you've got kind of multiple bases that we're talking about,right? There's your purchase price of the property, there's the adjusted basis at the time ofconversion, there are any improvements that you've made on the property after it has been convertedto a rental. And then, of course, there is thesales price of the property at the time that you sell it. So I agree with Joe, definitely workwith a tax professional because there's a lot of complexity going on there. The tax implicationsto renting out something that was once your primary residence is something that you want to
42:54work with a professional on. That being said, my two, personally, two favorite ways ofsimplifying this and getting around these issues, one method is before you say,sell the property, if you are able to do so, move back into the property. If you have the abilityto do so and you can move back into the property and use it as your primary residence forthe required duration of time, then you could simplify some of these considerations. You wouldstill want to be working with a professional to make sure that you fully understand all of theimplications of that. That's one approach. The other approach is to use a 1031 exchange. And that is perhapsamongst real estate investors, one of the most popular approaches for avoiding capital gains tax on
43:47an investment property. So if you use a 1031 exchange, then you can use the gains from the sale ofthat property to purchase another investment property and indefinitely defer the capital gains tax.the long and short of it is there are very complex tax guidelines as to determining whether or not any portion of a gain that you enjoy at the time of sale would qualify for the personal residence exclusion.And so you will want to make sure that you're working with a CPA, ideally one who has experience specifically working with real estate investors, buy and hold real estate investors, to help guide you through all of the tax implications of this problem.One other thing to mention is another component of how this is all going to shake out for you is the length of time that you hold the property and the time at which you sell it.So one factor that's going to play a role in this is was this property used as a primary residence for two of the five years prior to the sale?And given that, you know, you mentioned in your voicemail that you plan on living in this property for a few years and then holding on to it for a few years, it sounds as though you don't yet have a clear idea of precisely how many years you plan to hold it as a rental.And so without knowing what those dates are, without that information, all of this is sort of early speculation, which is another way of saying.
45:26that as you think about when you sell the property, and of course never let the tax tail wag the decision dog,but the questions around the ideal date for selling the property, that conversation will have to necessarily involve these tax planning conversations as well.I don't know how long you plan on holding this as a rental property, but that is something to consider.Are we talking about you holding this as a rental for just a year or two?Or are we talking about you holding this as a rental for 10 years?That's going to affect the outcome.I do like, though, Paula, getting the answers to some of these technical questions answered early.Because really, this is one little thing.
46:11And just to get this out of the way, I think it's still a great idea.Do that now.I just saw a question somebody had on a forum online saying, getting to ready to retirein six months and I thought it's probably a good time for me to start checking out some of thisstuff. And while I think that's great and I think that there's no time like the present,if you have the ability to get some of your questions answered and get the runway builtlong before that if possible, you should try to do that. Absolutely. So thank you Vivek forasking that question. We also have a success story that we are excited to share. So
46:51So this success story comes from Almost Out of the Woods.Hi, Paula.I couldn't end 2020 without writing this thank you letter.I'll keep my name anonymous,but you and Joe can nickname me Almost Out of the Woods.Yesterday, I made my final payment towards a total of 20,000,311, and 96 cents of consumer debt.I had been struggling to pay this for a while,
47:20and honestly, I'd given up hope.I was drowning in credit card interest and felt completely overwhelmed.When COVID hit, it really sunk in that I had to do something.It was now or never.I work in health care, and I saw firsthand the effect COVID was taking on my community.I felt scared knowing that I'd been living paycheck to paycheck with little emergency fund in a mountain of debt.I finally faced the music by calculating all the debt I had accrued and seeing the total balance for the first time.I felt defeated at first, but for a moment I was able to put my emotions aside and develop a debt payoff strategy.
48:00I finally felt like I could see the light.I started my debt payoff in April 2020, and as of yesterday, I have zero dollars in consumer debt.If you had told me earlier this year that I would pay off 20K of debt in nine months, I would never believe you.I cannot thank you, Paula.for not teaching me the answers, but for teaching me how to think about making smart money choicesand decisions that are right for me in my life. And most of all, for instilling in me the hopeand confidence I needed to realize that I was not powerless, despite the numerous money mistakesI made in my 20s. I'm working now to build up my emergency fund so that I have eight to 12 months
48:47of expenses saved. I still have a mountain of student loan debt totaling $175,000, yish, and I'm workingtowards public student loan forgiveness in September 2024, some about six years in. I still have a longway to go, but I felt compelled to share this with you and the afford anything community, becausethere was a time when I didn't think it would be possible for me to be empowered by money instead ofpowerless over it. I hope that those are listening can also feel emboldened to take action.Since I started listening to your show, I've paid off all of my consumer debt. I've created aretirement plan and automated my savings. I've taught myself about investing and I feel confidentthat one day I'll retire and I'll also be able to take care of myself and my family. So thank you,
49:40Paula. You've made a deeper impact than you may ever know. Just keep.up the amazing work. Thanks.Congratulations. That is amazing. That is so awesome. I just, I don't know, you and I, Paula,we sit here with the microphones on, talking to ourselves and to hear somebody having successand to be almost out of the woods is just that is fantastic. What I appreciate about her story,first, the degree to which she knows her numbers, the specificity.Like, she's aware of her numbers, like she knows what's going on.COVID impacted a lot of us, the pandemic, and she was able to channel the experiences of 2020
50:28into a positive direction that helped her improve her life.And, you know, the other thing, Joe, is you and I can sit here.We can record a podcast.We can give people information.and encouragement, but we cannot take action on anyone's behalf.Ultimately, any improvement that somebody makes to their own life is 100% completely thanksto them.Like the congratulations, the credit all goes to the person because all we can do is provide
51:01perspective, provide information, provide knowledge, provide motivation.We can't actually do the thing for them.It's like, I have this terrible habit of watching workout videos on Instagram while sitting on my couch.You know, I truly do.I sit there on the couch and I watch people lift weights and I'm like, huh, maybe I'll just grow some muscle if I just watch enough videos of people lifting weights, right?Asmosis.Exactly.Exactly.
51:34Like, other people can give me like instructions on how to deadlift, but nobody can actually.do the deadlift on my behalf. I can't outsource that, unfortunately.And it's so hard during a time she mentioned COVID during a year like last year when just,you know, emotionally you're all over the place. The routines are not the same. Your life is not thesame. A lot of people had big time job changes to have all of that stuff happen and to still makeprogress, I think is fantastic. Because for most of it, for most people, I think last year was a,let's hit pause on progress and go in to just get through it mode, right?Right.
52:12Exactly.Exactly.And that's fine.Like for anyone who's listening who's like, no, I really did spend this last yearjust trying to survive.That is commendable.No judgment here at all.It is a hallmark of wisdom to know when you are in a season of your life where you just
52:30need to slow down and focus on maintaining.And when you are in a season of your life, where you're ready.to focus on growth and progress and improvement.And for everybody's life, there are different seasons that are appropriate for one or the other,and it is wise to know which season you're in and to act accordingly.So for everyone who's listening, regardless of what you've done in the last year,if you've maintained, awesome.Great.
53:00I'm proud of you for maintaining.And if you've improved, awesome.I'm proud of you for doing that.And no matter what you've done, please call and share your story with us.I love hearing success stories.Let's hear some more of these.Go to our website.That's where you can leave us a voicemail and share your success story with us.
53:18I would love to share it on upcoming episodes.Speaking of upcoming podcast episodes, Joe, what's happening on the Stacking Benjamin's podcast?Oh, we have some fun coming up.We have Tiffany Aliche, the Budget Nista, who is, uh,just one of my favorite people.And she's always, it's so interesting to talk to her.And I've talked to her a number of times,but I'd never heard the story of her parents coming from Nigeria to the U.S.
53:46I never heard her first money story before, which also involves ice cream.And I don't know, she's just such a force of nature.So the budget nista is coming up.Nice.Excellent.And you can listen to that on the Stacking Benjamin's podcast, available.wherever finer podcasts are downloaded.Well, thank you so much for tuning in.
54:11This is the Afford Anything podcast.My name is Paula Pant.If you enjoyed today's episode, please do three things.Number one, leave us a review in whatever app you're using to listen to this show.Number two, hit subscribe or follow in that app so that you don't miss any of our awesome upcoming episodes.And number three, share this with a friend or a family member.That's the single most important thing that you can do to spread the message of,financial independence and personal financial improvement and life improvement.
54:40Also, subscribe to our show notes, afford anything.com slash show notes.So you can get a summary of all of these episodes, plus our resources mentioned, sent directly to your inbox.If you are interested in rental property investing, our course, your first rental property,is going to be available for enrollment the week of April 12th through April 19th,So if you want to learn more about it, head to Afford Anything.com slash VIP list.You'll get a sneak peek of what's inside the course.You'll get tons of updates.You'll learn a lot about it.
55:19Again, that's Affordanithing.com slash VIP list to get all the info.Thanks again for tuning in.My name is Paula Pant.This is the Afford Anything podcast.And I will catch you in the next episode.Here is an important disclaimer.There's a distinction between financial media and financial advice.Financial media includes everything that you read on the internet, hear on a podcast, see on social media that relates to finance.
55:50All of this is financial media.That includes the Afford Anything podcast, this podcast, as well as everything Afford Anything produces.And financial media is not a regulated industry.There are no licensure requirements.There are no mandatory credentials.There's no oversight board or review board.the financial media, including this show, is fundamentally part of the media.And the media is never a substitute for professional advice.
56:18That means anytime you make a financial decision or a tax decision or a business decision,anytime you make any type of decision, you should be consulting with licensed credential experts,including but not limited to attorneys, tax professionals, certified financial planners,or certified financial advisors, always, always, always consult with them before you make any decision.Never use anything in the financial media, and that includes this show, and that includes everythingthat I say and do, never use the financial media as a substitute for actual professional advice.All right, there's your disclaimer.Have a great day.
57:07Hey, just a reminder that every Friday we are doing bonus interviews, and you can listen to those bonus interviews on stereo.So if you had to stereo.com slash Paula Pant, download the app.Make sure that you're following me.And on Fridays, we're doing these live bonus interviews.Some people that we've talked to in the past, we talked to J.D. Roth.We did a bonus, a supplemental interview with him.In addition to the one that we did on the podcast, we did a live interview with him a couple of weeks ago about the seven stages of financial independence.We've talked to Rich Carey.
57:39He's a real estate investor who owns 30 properties, 30 units.in Montgomery, Alabama, 20 of which he bought from outside of the country.He was stationed in the military in South Korea, and so he bought those properties from overseas.Those are the types of interviews that we've been doing on the stereo app on Fridays,and we hold these live, they're unedited, it's just a, it's essentially a live conversation.So if you'd like to listen, head to stereo.com slash Paula Pant.That's stereo.com slash Paula Pant.and I will see you in next Friday's live interview.
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