Afford Anything - Ask Paula: If I Retire at 50, How Do I Bridge the Gap?

Episode Date: June 18, 2021

#322: Jess wants to reach financial independence by the time she’s 50. But she’s worried that she doesn’t have enough money in cash or taxable brokerage accounts to bridge the gap in her first few years of retirement. What moves should she make, if any? Yisell wants to invest money now. Should she cash out her $70,000 pension in hopes to generate more than the $1,000 per month she’s guaranteed from it? Abbey is 22 and she would like to go back to graduate school for nurse anesthesia. Should she save up and pay for it in cash, or invest her money and take out federal loans? Eliana enjoyed our interview with Paul Merriman on the two-fund portfolio. She’s curious about what growth stocks and value stocks are, and how they fit into a passive index fund investing strategy. Finally, Sneezy wants to know: why aren’t stocks a good hedge against inflation? My friend and former financial planner, Joe Saul-Sehy, joins me to answer these questions on today’s episode. Enjoy! For more information, visit the show notes at https://affordanything.com/episode322 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, anything in your life that is a scarce or limited resource. Saying yes to something implicitly means that you're saying no to all other opportunities, and that opens up two questions. What matters most?

And how do you align your daily decision-making around that which matters most? 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, I answer questions that come from you, the community. And today, former financial planner Joe Saw See-Hai joins me to answer these questions. What's up, Joe? Well, I'm here.

I'm happy to be here. I have a raspberry lime spin drift with me. So great questions, answering them with Paula. and a spin drift altogether, this could get crazy. This is not sponsored, BT-dubs. Not this is like not even, I'm sure there are people who are listening to this who are like, whoa, the product placement. But if you. I am getting precisely $0 and zero cents from this.

However, front of show product placement. Thanks, Joe. Spindrift, if you want to sponsor the show, head to Paula at. No, no, no. At this point, I will refuse on principle. Why? You don't drink spin drift? No, because you just shoehorned it into the intro. And I never put ads in the intro.

So if I were to accept a penny from them, then I would be condoning that behavior. I could have said, well, luckily I didn't say like Miller beer, right? I could have said something like that. I'm here. I've got a nice cold Miller. We're going to answer some questions. It's going to get nuts. But anyway, spin drift questions, Paula, it's going to get crazy.

Here's what we're going to cover in today's episode. Sneezy wants to know why aren't stocks a good hedge against inflation? Jess wants to retire at the age of 50, but doesn't have enough money in cash or in taxable brokerage accounts in order to bridge the gap between when she retires and when she'll be able to access the money in her retirement accounts. What should she do? Yaselle wants to invest more money now. should she cash out her pension in order to invest that money?

Abby is 22 and wants to go to grad school. Should she wait so that she can save up and pay for it in cash? Or should she invest her money right now and take out student loans? Finally, Eliana is curious about what the distinction is between growth stocks and value stocks and how they both fit into a passive index fund investing strategy. We're going to answer all five of those questions right now, starting with Sneezy. Hey, Paula, I've got a simple question. Why are stocks not a good hedge against inflation?

Everybody always talks about, I don't know, commodities, gold, land, houses. Why are stocks not a good hedge against inflation? If the purchasing power of the currency is depreciating, wouldn't you expect companies to request more units of that currency for their products. Therefore, the companies are going to be hedged against inflation. I just, I don't quite understand, and I'm looking for some insight. If you have any, I would greatly appreciate it. Thanks. Sneezy, thank you so much for asking that question. A couple of comments. First of all, when you are evaluating the present day price of a stock, you are assessing the present value of

future dollars. So for example, if Tesla is going to be making dollars in the future through future sales of its cars and other technologies, you make an estimate of what you believe Tesla's future dollars will be, and then you discount it back to the present day. And that's what gives you a value for Tesla in the present day. Now, if you have in particular some high growth companies that aren't making a whole lot today, but you think in the future they're going to make a ton. In an inflationary period, the present value of future dollars is worth less.

Those dollars that they're going to be making in the future will be devalued dollars. And so growth stocks often take a hit when investors anticipate inflation. There are two ways that you can look at that. You can look at it in terms of growth stocks are not a good investment because some investors are going to be spooked out of them. if those investors are anticipating inflation, that's one way to look at it. The other way to look at it is that if investors anticipate inflation, this could be an opportunity to pick up growth stocks at a discount.

So you could have the same set of circumstances, which in this case would be stocks like Tesla, like other tech stocks, like other types of growth stocks. Those stocks, if they were to go down in value, you could see that as either a good thing or a bad thing, depending on your approach to investing. Same underlying facts, different interpretations of those facts. So that's the first comment that I would make.

The second comment that I would make is that stocks that are in sectors in which the inflationary costs are passed to the consumer, such as the consumer discretionary sector, those types of stocks often do better in inflationary environments as opposed to stocks that represent sectors that have high fixed overhead costs. So if you're looking for the type of stock that is unlikely or less likely to fall in a period of inflation, look for the types of sectors and the types of companies that don't

have a ton of high fixed overhead. And the interesting thing here, Paula, is while all of that is correct, that's over the short term. Like right now when you look at tech stocks, tech stocks getting beaten up. a little bit because of exactly what you said in inflationary environment doesn't matter over the long term. Actually, Sneezy, you are right on the two asset classes historically that have most reliably kicked inflations but real estate and stocks. Those are the two reliable go-toes that are going to make sure over the long term that

you're able to negate the effects of inflation. and for the reasons, Paula, that you said, that tech stocks will go down, or growth stocks in general, will go down so much during volatile periods that investors snap those up for a lower price. So if you look at long, long periods of time, value stocks and growth stocks, and we're going to revisit this later, aren't we? We are. Value stocks and growth stocks both kind of get you to the same place. But depending on where you get on, you might greatly overperform with growth. or underperform with growth,

depending on what environment you decide to get on that bus. And obviously, and I know, Paula, you'd say the same. You don't want to play that game. You instead get on the bus and even increments, dollar cost average into the market, forget about trying to decide, is this the right time or is this the wrong time? Because when you need the money,

which if you're doing this right is probably 15 to 20 years from now, it's not really going to matter that much, Paula. I would add a slight nuance to that. I would say the only time that you do want to play the market timing game is when your enthusiasm about market timing leads you to make excess contributions above and beyond what you normally would have invested. So if you are planning on dollar cost averaging some fixed monthly amount and that was your plan for the year, you weren't planning on putting any more money in and then all of a sudden

growth stocks or tech stocks completely tank and you get so excited about the prospect of buying these stocks at a cheaper price that you decide to pull money out of your beer fund or your spin drift fund, it has the case maybe. Well, I was thinking while you were talking and I just took another delicious drink of this. This is not sponsored. Joe is ruining my show. Of this now nameless raspberry live beverage. Where were we going with this? We were talking about if your enthusiasm for buying.

Yes. your beer fund, your spindrift fund. Exactly. You take money out of that fund and you use it to buy more assets than you otherwise would. Then just dump it in. Right. That is when I encourage market timing. When market timing leads to additional contributions that you otherwise would not have made. And how would you time the market, Paula? Well, I would be in an environment in which people are anticipating inflation. And here's, here's, Here's the key. When investors anticipate inflation, they tend to depress the value of assets that don't perform well during periods of inflation, and they tend to pile into and therefore grow the value of assets that do perform well. So whether or not an inflationary period actually occurs, the very anticipation of inflation turns into a self-fulfilling prophecy with regard

to the impact that it has on the prices of different types of assets. So for example, right now, there are many growth stocks and tech stocks that are not performing as well as they were a few months ago because investors are anticipating inflation in the future and have already pulled out of them, which means that if you wanted to buy some growth stocks or some tech stocks at a discount, now would be the time to start watching those. Likewise, if you wanted to put your money into cryptocurrencies, real estate, treasury inflation protected securities, commodities like gold. We've seen a run-up in all of those asset classes. I mean, look at the run-up in gold, crypto, and real estate. I guess there's no real tips run up, but that's, of course,

because it's a treasury. But, I mean, gold, crypto, and real estate have all run up a ton, not because we are currently living in an inflationary environment, but because people think that we soon will be. A stampede. Exactly. Exactly. Yeah. Yeah, I like that too.

I'm not sure when you say start to look at. I would go to those beaten down sectors. I would find the best player. And then not knowing what the market's doing in the future, I would buy it now. But I'll tell you, I don't think that's so much market timing as choosing your purchase, right? choosing what you're going to purchase at a reasonable cost, much more than timing. Because I don't think that looking at the tech sector right now and saying, wow, it's a little beaten up. So I'm going to get in while prices are down is necessarily market timing.

I think it's market timing. If you say prices are down and this stock right now is trading at 18 and I'm going to wait until it gets to 14. That's market timing because then I would ask the question. And you hear this all the time. Well, I'm going to wait till it goes to what? So in other words, if a company is going to go down, companies go down for a reason. Stocks go down for reason. They go down because something in the economy or the sector or that particular stock stinks.

But when it reaches that price that's in your head that's perfect, it's going to go from stinking to great. So if you like it at 18, buy it at 18. Don't wait for. I see people either get into the wrong stock because they're waiting for it to go lower and lower, or they never get in because of the fact that they were waiting for the perfect moment to do it. So that's an interesting point. You're making a distinction between market timing versus setting a price target. Yeah.

Yeah. And if you've set your minimum viable slash maximum viable price target, and the stock falls within that range of what you think is a reasonable purchase. Buy it now. It always amazed me when I was a financial planner. And working in Detroit, I would have clients that would have big concentrations in, let's say, Ford stock. And I would advise them, like any good financial planner would, listen, 80% of your money, Paula, is in Ford stock. Let's make that more reasonable 10%, which means we got to take all this money and diversify it.

It is far more risky. And the answer I got back more often than any was, well, the stock's trading at X now, when it gets to Y, that's when I'll make that move. And you think about the rationale that goes into that decision making. What's the rest of the market going to do during that time? And if a stock moves in relation to its competitors and with the market on the average day, isn't your diversified portfolio going to do the same thing? So you're going to carry this additional risk of it going down. Big, big, big additional risk of it going down against this hope and dream that it's going to reach this thing.

And then I'm going to, and then I'm going to make my move. Make the move now. Make the move today. Don't wait for this criteria in your head. I think that sometimes we don't realize how big the market is and how little we are. And we're not, we're not in some ways, we're not afraid enough of what the market can do to us if we start playing games. And the game we most often play is,

I'm going to buy at this point, and then it's going to go to the moon because I bought it, because I thought of it on a random Tuesday, because I was drinking this lovely raspberry lime thing, and it put this in my head that I need to buy this stock today. Well, just because you thought of it today and you happen to be looking at it,

it's not a reason for a stock to go up. Stock's going to go up, it's going to go down, make the move right now. Do your analysis, look at the part of the market that you like. Let's say that that's tech stock. You think that tech stocks and they have been beaten up lately, but you really like this company fundamentally. Buy it. If you decide today that a market, I said a market, not an individual stock, if you think a market is fairly valued today, buy it today.

People think that it's fairly valued today and it's gone down. It's gone down to, let's say, 18. This is my example before. It goes to 18 and you think that it's fairly valued. And then you start playing these stupid games. You know what? I'm going to wait until it gets to 14. And then when it gets to 14, that's what I'm going to buy it.

What the hell are you talking about? You just went through all of this stuff figuring out that you have the right stock. If it's in your portfolio, it's in a range that you like right now. Why the hell would you start playing games with that? Buy it. Buy it. This is from a book called Trading Rules, which is really interesting. This dude who trades commodities, traded commodities, this is a book from the 90s.

It's so old. And it's a boring book. It's so boring. But it's so dry. And I've accidentally recommended people and they're like, that was dry. I'm like, yeah, it is so dry. But then you think about what this guy's doing. And he's trading something that you and I would never think about trading in a million years.

And he has all of these defense mechanisms in place. And he's always worried about risk. And he's always thinking about game things. theory. And the big problem that people have is we play all these internal games like a stock's going to go down to 14, this price that I've got in my head for whatever reason. And then it's going to bounce off that and immediately become a phenomenal stock that goes to the moon. Really? Really? So you're saying the stock's going to suck until it gets to the point that you put it in your head that it's going to get to. And then all of a sudden it's going to be a rocket ship.

Like who the hell do you think you are? Who do you think you are? That's the point I'm trying to get across. So in my head, the thing that you're looking at is, are tech stocks currently trading at a value that you think is reasonable? Because certainly, you know, remember when Tesla was trading at, what, 1,700 times PE ratio? Right. And that's just an insane, insane earnings multiple.

That's what I would look at. You know, sure, the price of the stock has come down quite a bit. but what's the current earnings multiple? And is it reasonable? And that's also so difficult to do with growth stocks like Tesla. Like seriously, if you use that model, which I use all the time, by the way, which is why I missed out on Amazon, I totally missed Amazon. And it wasn't that I didn't think the stock was going to go up.

It's that I thought that was an unreasonable price to pay for a stock. I'm like, are you kidding me? Remember, for the longest time Amazon made no money. Right. It was losing money hand over fist and the stock's going up and up and up and up, you know? Right. Missed out on that, missed out on Tesla, did not do any of that. Totally, totally missed out an AMC.

Oh, wait a minute. That's not gross stock. It went up 92% the other day as of the time that we're recording this. And then came down. Did you see today? Yeah. Oh, I didn't look at it today. But I know they halted trading after it went up 92%.

they've halted trading i think like three times in the past 24 hours geez so we're recording this for context on Thursday june 3rd right in the middle of the amc drama amc it's all the rage by the time this episode comes out it's going to be some it's going to be like bed bath and beyond or nokia or pick another stonk exactly i thought the amc did something very brilliant which is yesterday as we're recording this they announced that they were setting up up a new shareholder like a response team. And they were going to, I don't remember their exact words, but it was basically this department that was going to think of rewards and ways to interface with all these

investors that now are investing in AMC. Ooh, they should create an NFT and AMC NFT. Which I thought was, was very, very cool that they would do that. And one of the first things they're doing is if you own shares of AMC, free popcorn the first time you go to the movie theater, which I thought was cool. So they do this yesterday. They get all this excitement in the stock, right? I mean, they're helping fuel the excitement.

Then they come out today. So that's the right hook. And then they sneak in the left today with, oh, with our stock price up, we are going to issue a bunch of new shares so we can have more liquidity. Right. Because when you issue shares and make them available for trading, all that money then goes into the company treasure. Brilliant. Brilliant. The CFO of AMC was just absolutely brilliant.

Make the valuation as high as you possibly can. Cash in on it. Hopefully that helped. I mean, we'll see over the long term how it works. But I thought that was just a guy that likes studying how management teams work, coming out with all the PR stuff yesterday to help drive it up even more so that today they can announce the second half of that.

Wow. We've strayed so far from. Sneezy's question, which is... Which is how come stocks are not a bellwether for inflation? The answer is they are. They are. They absolutely 100% are as is real estate. Right.

In the long term. But in the short term, some stocks, in particular, growth stocks and tech stocks might get a little beaten up. And when that happens, could be a good buying opportunity. So thank you, Sneezy, 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.

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Buy yours at go transit.com slash tickets. Our next question comes from Eliana. Hi, Paula. I'm a longtime listener and I love your show. I loved your episode with Paul Merriman. It was the first thing in a long time that really made me think more deeply and, and possibly start to rethink my asset allocation. So since you always say you shouldn't be invested in something you don't understand, I wanted to clarify a core concept you talked about in that episode

that I don't really understand or hear talked about very much, even though I'm a long time index fund investor. It's the idea of growth stocks versus value stocks. So from what I understand, and this is probably wrong so you can correct it, a value stock is a stock that's considered cheap relative to what the company is really worth based on its fundamentals. So what confuses me is doesn't that kind of a judgment about a company contradict the premise of passive index fund investing where we're just investing in the whole market rather than picking winners and losers or predicting what a company quote unquote is really worth? And I realize there's a lot of fundamental analysis that goes into what's growth and what's value. But still, I'd love to hear.

you talk about how that those categories fit into the philosophy of passive investing and how we should think about all that stuff and square these things. This is a whole dimension of passive investing that I didn't really know existed until recently. And also are all stocks, value or growth stocks, or are there other categories? What's the deal with that? Thank you for your help. Eliana, thank you for asking that question. So a value index fund, such as the Vanguard Value Index Fund invests in stocks that are in market sectors that tend to grow at a slower pace than the overall broad market.

And so these stocks might be temporarily undervalued because they're in sectors that grow more slowly. So for example, the Vanguard Value Index Fund is dominantly comprised of stocks in the healthcare sector, the consumer staple sector, the industrial sector, the financial sector, those are some of the biggest sector-specific holdings within that fund. And when you look at something like tech or real estate, those sectors make up a very, very small overall proportion of this particular value index fund.

And so those types of sector-specific bets are a way in which value funds create a composition of sectors that are likely to be under-valued. In the value market, Paula, we look at something like a railroad as an example. They're not building new ones. So it comes down much more to the management of that particular company and how well they do versus their individual competitor. And if a railroad increases its earnings by three or four percent, like that is phenomenal, right? They did pretty well. Well, if a tech company of Cisco grows by three percent, people are selling it.

because that is not at all what that company's designed to do. It needs to fly because a lot of people buying new technology upgrading their technology. So any company in that realm has to grow at a much faster rate. And consequently then, it's less about the individual management. It still is about the individual management of the company, but it's much less than a railroad, my railroad example, because I'll invest in one railroad versus another one because this one's well managed and doing great. This one doesn't seem to be operating.

as well, in technology, you can invest sometimes in almost any of the players in a certain technology. And because the technology is growing, that will lift all ships or sink all ships if that technology goes out of favor. Among those, you clearly want to choose the better company. You want to choose the winner. But in a growth sector, it's far more important to be a growing company versus a smartly managed company like in a value stock. Right. So, So with an actively managed fund or an active management strategy, you are choosing specific companies that you think will be the winners. You are making a decision, you or your fund manager are making the decision to buy Cisco

and have Cisco represent X percentage of the portfolio. And then they're making the decision to buy Facebook stock or Amazon stock and have that compose Y percent or Z percent of the portfolio. Whereas with a passive strategy, no one is making that company-to-company-level decision. As for her question about are all stocks value or growth? The answer is yes, a Morningstar, who has created a really neat style box on this topic where they look at big, medium, small companies, and then value on the left, growth on the right. They have a third, which is blend, which means it's going to grow and it's also growing at a little bit slower pace than most growth stocks, but faster than value stocks. Right.

And to further illustrate the importance of sector, I mean, Joe, I think you hit the nail on the head when you gave the railroad example. You could have five different railroad companies, and one of them might be outperforming the other four, but. as you said, you would never compare the performance of that to Amazon, Facebook, Tesla, to anything within the tech sector or within any other high growth sectors. And so anytime that you're evaluating a given company, you want to evaluate that company in the context of the sector that it's in. A consumer discretionary stock is never going to perform the way a utility stock does. It's just not, they're not designed to do so. And as we talked about in the last answer, it's a

Sneezy's question, different broader economic forces such as inflation or the anticipation of inflation will also cause different sectors to perform differently. Now, if you're an active fund manager, you're going to be selling in and out of different sectors or different underlying companies within that sector based on those changing market forces. So if you're an active fund manager, then you might at this moment be thinking to yourself, geez, I'm anticipating inflation. Therefore, I'm going to load up on consumer discretionary stocks. I'm going to load up on luxury brands in my portfolio because I think that those brands

will be able to weather an inflationary environment. And so that as an active fund manager is an active decision that you might make. Whereas, Eliana, to your question, in a passively managed fund, no one is. making that decision. And the fact that many investors are anticipating inflation in the future does not impact the composition of that portfolio. So that portfolio is going to have whatever composition of consumer discretionary holdings it has, regardless of whether someone thinks there's going to be inflation, someone else thinks there's going to be deflation, someone else thinks there's going to be stagflation, you know, regardless of whatever people are anticipating,

That's not going to change the sectors that are being held in that fund. That doesn't mean, though, that there isn't trading that happens, even in a passive fund, something I find incredibly interesting. Companies do get sold off when they're no longer in, let's take the S&P 500, for example, Paula, when a company is no longer one of the 500 biggest companies in America, it automatically is sold from that. and then they purchase shares of the company that enters the S&P 500 instead of that one. So what's neat is, why do companies fall out of the S&P 500? They're not keeping up.

And so even though you're passive, it still is like a self-cleaning oven. It will take care of the stragglers and make sure that you have, to some degree, a portfolio of 500 companies that are at least robust enough to factor into whatever index you're in. You don't have to go pull out the losers in the portfolio. So specifically to Eliana's wording, there really is no judgment. There's no real active judgment. I suppose, Paula, that to some degree the criteria is a judgment. Setting up the criteria is a judgment decision. But from that point forward, there's no active judgment around the individual stock and whether we buy it or sell it. It's just, does it meet the criteria? Yes, it's in. No, it's out.

Right, right. The decision is made at the systemic level and not at the human level. So thank you, Eliana, for asking that question. Our next question comes from Abby. Hi, Paul and Joe. I love your podcast, and I believe I'm your biggest 22-year-old fan. Right now, I'm just debating whether to save her graduate school in cash or whether to invest my extra money in a brokerage account. Graduate school would be $100 to $150,000 and would be anywhere from $2 to $5,000,000, five years from now, it would be for nurse anesthesia, and I would be able to loan the entire

amount through the federal government. My thought is, if I save the money in a brokerage account, if the market has gone up, then I could sell some of the stocks to help pay for graduate school, or if it has gone down, I can simply loan like most people do through the federal government. Right now, I max out my 457 for 3B, Rath IRA, and HSA. I have a lot. I can simply loan, I have a total net worth around $130,000 and $10,000 of that is in cash. Thanks for your input. I look forward to hearing it. Abby, thank you so much for calling in, and I am so honored to hear that you are a fan.

As to your question, what I love about the strategy that you outlined is the flexibility within that goal. So as you just said, if you put your money in investments, if you put your money in the market, and you give it a chance to grow. If it grows in the next three years, and at the time that you need it, you have money that's worth more than it is now. You can sell it, you can harvest those gains. And in fact, you probably don't even have to do so all in one lump sum.

You can do that over time as that payment schedule permits and cash flow your way through school. But if the market goes down, then rather than converting paper losses into real losses, you have the option of taking out a very low-interest loan. Federal student loans are quite low interest, typically, paying for school with that money, and that also buys some time for those investments to come back up.

So what I appreciate about the plan that you outlined is that there is flexibility with regard to the timeline of the investment. Oftentimes, we'll talk to other people who want to retire at such and such age or at such and such year. And so they're assuming that they don't want to change that retirement date, there isn't flexibility to the date of withdrawal. But if, in your case, there is flexibility to the withdrawal date, then that does allow you to take on more risk within the underlying investment, because you can sell if it's good or continue to hold and pivot your strategy if it's bad.

This is why personal finance, I think, is so personal, Paula, because while I love that strategy, I like the way that you outlined it, I wouldn't do it. I would pay cash and take less debt. I just think of the potential number of things that just go wrong in life when I take the more complicated approach. And the very straightforward approach is get as much cash together as fast as you can, pay for as much of it right now as possible. So you don't want it to play the deck game later at all. Makes your life a bunch easier. Are we leaving maybe potentially some money on the table?

Potentially. But I think for me, I go more conservative. And by the way, and that doesn't say anything. There's nothing against the math that you presented. I would just go for a more conservative approach and pay cash as much as possible. No, I see the value in that. I certainly see the wisdom in an approach like that, but it is a more conservative approach. And so I don't think either answer is wrong. You know, the devil's advocate argument that I would make is if you have the opportunity to invest this money and allow it to grow, and you have the flexibility to hold for as long as you need to hold, then over the long term, the expected value of that, if you probabilistic range of possible outcomes, the expected value of

that decision is EV positive. I mean, I'm seeing the spreadsheet in my head. Exactly. I'm seeing the returns in my head. So I, yeah, I get it. Yeah. But that being said, there is a distinction between the notion of the expected value of a decision, which is probabilistic thinking and which is a mathematical decision, versus the

emotional and psychological benefits of being debt-free. So again, here is where finance layers multiple considerations. There's the math of it, but there's also the emotional and behavioral component of it. And from an emotional-slash-behavioral point of view, I'm with you, Joe, the most emotionally fulfilling thing to do is to not go into debt. Yeah, I really don't think there's a wrong answer. I think there is a right answer, though, and that's this spin drift is fantastic. Oh, dear. Absolutely amazing.

That is the right answer, Abby. Maybe you can get them to sponsor your way through school. Because they're certainly not, they are legitimately not sponsoring. Joe is just doing this to bug me at this point. What I would do that? I am earning precisely zero dollars. Why would I do that? Zero dollars and zero Bitcoin, zero Eath.

I am not going to. getting paid in any form of currency. No Somolians. Exactly. No rupees. Exactly. No government currency. No digital currency.

I am receiving literally nothing. Should be, though. You should be. It's so good. Raspberry lime. And it's unsweetened, too. It's a natural flavoring. Well, I'm Googling Spin Drift competitors.

All right. Spin drift competitive. Ooh, here we go. Spin drift competitors. Oh, Rees is a competitor. I would recommend them. Let's see who else. Vos flavored sparkling water?

Sure, let's go with them. Ooh, Rishi tea, sparkling botanicals. Olipop. I feel like that sounds familiar. Olipop. Ollipop. I've probably drank it before. Lecois?

Is that how you say it? Lecois? Yeah, everybody I know calls it Lecroy. But yes. Yes. But that's because we're American. And we just... Zevia.

Zevia LLC. Is that the name of the... drink or the company. I feel like I've seen Zevia printed on a can somewhere. Hey, look, located in Massachusetts, Spindrift was founded in 2010 and has 75 employees and revenues of $22 million. Wow, they're actually kind of a small company. How about that?

Hey. Well, that makes me feel a little better that you've just given a ton of free airtime. At least you did it for a small company. You're welcome, Spin Drift. Abby's like, hey, back to me. Back to me. We'll return to the show in just a moment. Our next question comes from Jess.

Hi, Paula. This is Jess. I'm a longtime listener, reader, and anti-budget fan. I started reading your blog posts around 2014, so I want to thank you for years of knowledge and positive energy. My question is probably relatable for listeners who are several years into their FI journey, as it centers around reassessing goals when you're midstream. First, a little background. I'm 43, single, no human kids, and I make about $70,000 per year.

I love my current job, but I'm hoping to step away from the full-time grind in about seven years when I hit 50. I estimate I'll need about $1.2 million, not including home equity, to consider myself fully fie. I'm not really interested in moving or house hacking at this point in my life. I'm just making the minimum mortgage payments with 14 years and $100,000 left on a sub-3% loan. that's my only debt, so I'm pretty comfortable with it. As of this recording, I've accumulated about $600,000 in pre-tax retirement accounts split between my current 401k and rollover traditional IRAs. I recently started a Roth IRA, I have about 20,000 there, 10,000 in my HSA, and 30,000 in taxable investments. That whole portfolio is mostly stock indexes with a small percentage of bonds

and public rates for some spice. I also have about $20,000 cash in a high-yield savings account. As you can see from my numbers, my ratios are out of whack. I am really over-indexed in pre-taxed retirement money. I mean, it's a great problem to have. I'm sure it's a common one. But even considering a Roth IRA conversion ladder, I feel like I still need a really significant chunk of cash or taxable investments for those first few retirement years. Currently, with maxing my 401k, I only have about $600 a month for other savings goals, and that doesn't feel like enough. So here's where I want you to hit me with your opinions. Should I stop contributing to my 401k, except for that minimum to get the match, and put that money elsewhere? Where should I focus? The Roth,

the taxable account, or building the cash cushion? And going even deeper, should I start converting some pre-tax money over to Roth now and use some of that former contribution money to cover my taxes? I'm concerned about my ability to pay extra taxes while I'm still working full-time without that contribution money. Or should I hold off on the conversion idea entirely until my income drops? Or should I just pretend this voicemail never happened and stay the course? I've been investing on autopilot for so long that considering this much changed has me feeling really queasy. Thank you for any of your thoughts. I really appreciate your help. Jess, thank you so much for asking that question, and thank you for being

part of this community since 2014. I am always both flattered and a little embarrassed when I learned that someone has been reading me and following my ideas and my advice for seven years. I hope I've gotten better over the span of those seven years. And I think like many creators, I look back on what I was writing about, what I was thinking about in 2014, and it feels a world apart from what I'm writing and thinking about now in 2021. And I'm sure this is going to feel completely different from what I'm writing and thinking about in 20208. So thank you for being on that journey with me and for following my ideas around money, about work, about life, about investing through such a long time span. I'm glad you're into the anti-budget.

It's my favorite. And I'm just very, very honored that you've been part of the ride for so long. So let's answer your question. First, huge congratulations to you for everything that you have saved up and built so far. I think you are in an excellent position. I completely agree with you that making the minimum payments on your mortgage is the way to go. You've got, as you mentioned, a sub 3% loan. So there's no reason to rush to pay that off.

Keep making the minimum payments on that mortgage. by the time you retire at the age of 50, you'll only have seven years on that left anyway, so you're in a great spot there. In terms of the money that you'll need in order to bridge that gap from the age of 50 to the age of 59 and a half, my recommendation would be the first option that you listed, which is stop contributing to your 401k after you get the match and then start investing that money in a taxable brokerage account. and also in a Roth IRA.

The advantage to a Roth IRA, of course, is that you can pull out the principle any time so you can access the contributions to your Roth IRA when you are in that gap from 50 to 59.5 if you want to do so. But that combo of new contributions to a Roth IRA plus contributions to a taxable brokerage account will help build out that tax triangle. I would not convert pre-tax contributions

into a Roth account right now, given that at the moment you're earning an income, and in seven short years, if all goes according to plan, you won't be. And so given that these next seven years are presumed to be the highest tax bracket seven years of your life, if we make the assumption that after these next seven years, you will be, in theory, in a lower tax bracket than you are in right now,

then under that set of assumptions, I would not convert pre-tax money to a Roth right now. The only, and I'll play devil's advocate on what I just said, the only set of circumstances in which it would make sense is if you anticipate the government raising tax rates to such an extent that even though you will have a much lower income in retirement, you would be in a comparable or worse tax bracket. If you think there's a reasonable likelihood that that might happen,

that would be the argument for making that Roth conversion right now. But given that the deadline is so close, I mean, seven years is nothing in financial planning time. And given that tax brackets would have to dramatically change in order for that to happen, I personally feel comfortable saying, let's just make a set of assumptions that assumes that tax brackets seven years from now are fairly similar to what they will be today, maybe a little bit higher, but otherwise reasonably close. and under that set of assumptions, we're going to assume that these next seven years are going to be your highest tax years.

I think of this as a timeline and looking at that 401K, Paula, I completely agree with you because if the number that she, assuming that she's done the math on the number and that she gave us that 1.2 is enough, right? I'm just going to take that as an assumption that that is enough, the number that she gave us. If she's at 600,000 now and can't touch that money without going through loopholes until 59 and a half, we can use the rule of 72 to see that she's already okay. And for people that aren't familiar with the rule of 72, it's this mathematical, magical equation where you take the interest rate you think you're going to get divided into 72 and it tells you how long it takes your money to double. So at eight, if you use 8% as a number, divide that into 72, that money's going to double in nine years. So let's just round 59 and a half to 60, shall we? And right now she's 43. So that money is going to double when she's 52 and then again when she's 61.

So that 600,000 she's already saved for post 60 years is going to double once to 1.2 and then again to 2. So she may have, may have saved for later years in retirement, $2.4 million. Great. So she's clearly over that number, which means anything she can do now to bridge that gap, to fill that gap, is definitely where she wants to be. And obviously, I totally agree. He doesn't want to give up the free money, right? Right.

Take free money whenever you can get it. So that's why you get the 401K match. Yeah. And there's also, there are rules to get that money early if she needs to get it. early some of that 401k money. SEPP rule 72T. It's a little complicated, but you can get money out of your 401k without penalty if you follow some specific rules.

So yeah, I totally agree. I mean, just the way the math breaks down when you timeline this money all out, anything she can do to fill those early years now is specifically what she wants to focus on. Exactly. And if you are interested in learning more about the SCPP 72T rule, we did a previous podcast episode in which we explained that rule in depth. We will link to that episode in the show notes. And you can subscribe to the show notes for free by going to afford anything.com slash show notes. I thought you were going to say, and if you're having trouble sleeping.

Take a melatonin. We will give you the IRS guide to 72T. And you will be asleep in minutes. Ooh, that could be my side hustle. That very calming voice in which I narrate audio book style, the IRS guidelines. Like Drew Ackerman's podcast, the Sleep With Me podcast, where he tells stories in a very boring manner to put people asleep. Incredibly monotonous. For a long time, I listened to one and only one episode of that podcast just to increase the boredom rate, the boredom factor.

What's funny is I've met him at a few podcast. conferences and he's a very charming and entertaining guy and can hold his own in a story. Like I don't feel myself falling asleep when I meet him, which she said, by the way, people crack that joke all the time. Fair enough. Super guy. We'll link to that podcast in the show notes as well. Don't listen to that one while you're driving.

And by the way, that was not a paid endorsement either, Paula. Oh. My spin drift mentioning Drew called me just before this and said, hey, can you make sure you mention my podcast on Paula's show? I'm getting 50 bucks for this, but Paula's getting nothing. Oh, and that's what I should do when I make Stacking Benjamin's appearances. There we go. There it is.

We're going to start naming random products on each other's show. Well, I'll be on stacking Benjamins. You'll ask me some type of a prompt question like, hey, Paula, what did you think about today's financial headlines? And I'll be like, you know, it's funny you should ask, Joe, as I sit here wearing my Rothie shoes in my beta brand pants. I can't help but ponder the financial implications. But it makes it easier to ponder because they're so comfortable. Jess, I feel like we answered that question pretty quickly. Like what you're asking about is so important. How do you plan for a nine and a half year period of your life? I almost feel like there should be a lengthier answer, but it speaks to me that

there isn't one. I guess it speaks to the clarity of the situation, at least, to ask. as Joe and I both see it? I think the reason why we were able to answer it so quickly. You're right, Paula, wasn't that it was an easy question because she, you can tell she's already thought it out. She's already thought through a lot of it and love it. Yeah. Exactly.

And she presented all the information that we need to know. And so from there it became the task of thinking through the different options and then selecting the one that fits with both the circumstances and the goal. both of which are very clearly outlined. So thank you, Jess, for asking that question. And best of luck with your upcoming retirement in seven years. Now, speaking of the rule of 72, we're going to talk about that in our answer to this next question,

which comes from Ticell. Hi, Paula. My name is Tissel. I am 38 years old, and I am an engineer manager in Florida. I recently discovered your podcast, and I am fascinated with the content. It has made me realize how poorly I have managed my income, not something that I'm proud of, but it also has got to be really excited about trying to improve an infrastructure and financial freedom, hopefully at some point. So, I currently have a mortgage

that is pretty high, and my current monthly expenses don't allow me to put much money aside for investing or savings in addition to the money I already put towards my 401k, which is now 8% of my salary. From my previous employer, I have a pension which guarantees me, me $1,000 a month after retirement for life. So trying to think how I could invest money now, it came to mind that it was a possibility to cash out my pension, which would be $70,000 now, and investing that money to hopefully make it generate more than $1,000 I'll have in the future. And this is kind of where you come in.

Do you think this is a viable option? Is it a good idea to cash the pension out? And do you think there are ways that can you need more money? perhaps a rental property or some kind of other investment that you would recommend. I really appreciate your input on the topic, even if you call me totally crazy. I'm okay with that. Thanks a lot and hope to hear from you. To Sell, thank you so much for asking that question.

And first and foremost, most importantly, I think you're doing an amazing job. You are paying attention to your money. You are proactively taking steps every single day to, improve your financial situation. The fact that you have the courage to call a podcast and ask about your pension, about investments that you can make, and you're saying, you know what, think whatever you want of me, I just want to know what the right answer is so that I can make the best decision. Wow. Like, I think the world of you for having that approach and that attitude. Like, I think you're a role model to everyone who's listening to everyone who's

listening, who might be too shy or too embarrassed to talk about their current financial situation, they might be too shy or too embarrassed to ask a question. I think you are a powerful role model for all of those people because you're saying, you know what, this isn't about what happened in the past, and it isn't about any insecurities that I may or may not have. This is about wanting to have information and input so that I can make the decision that is best for my future. And the fact that you have such a commitment to that, the fact that you're willing to put yourself out there, that is tremendously commendable. And it sets you apart from the majority of people who would let those fears hold them back.

I agree. And I also think that this question is one of the, the best questions to ask when you're looking at a pension because there is a chance that you can maybe turn that pile of money instead on your own into something greater than what the company's going to give you every month, that $1,000. And I think what we have to do is apply some math. And to do that, we roll out again, Paula, that rule of 72. So here's here's how. we do it. If she gets $70,000, and again, we take that money and put it in a broad stock-based index fund, and we have an assumption over a long period of time, we're looking

at, and she didn't give us the date that she can take it, but let's say that it's age 62, that she can take the pension. So she's 38 now. That's 24 years. We're looking at. Eight goes into 72, nine times, which means that 70 could not reliably, but historically, could have been 140, right, nine years from now at 47, and then at 56, it would be 280,000. So by the time she's 62, we have, we're just less than half to the next doubling if it's a straight line, but it won't be. Let's just conservatively keep it at the 280 for assumption's sake. Well, okay. Yeah, if we want to go conservative, at 280,000 applying the 4% rule, which is no longer a rule.

But I think if we're using this back of the envelope computation, Rule 72, which is also back of the envelope, 4%. Also, we're looking at a number that is south of $1,000 a month. But it's close, Paula, which means when she gets. that's to 62, it may equal about $1,000 a month if you take it out. And by the way, that's not a mistake. When you do these calculations, you're dealing with a company that does this professionally and knows what they're doing. They are saying that if you leave it with them, that's what they're going to be able to create. Beating that then is a big maybe. So my answer is, I don't know if you can beat it.

I think you'll be in the ballpark. If you don't touch it, which behaviorally, Paula, you know, is things come up. You're like, well, hey, I'm going to do this stuff instead. Maybe, maybe not. You're also going to possibly worry about it. And leaving it in the pension is a freedom from worry.

It's $1,000 a month that you're going to get. You don't have to think about investing at anything. You just got to wait for the mail truck to come. So you've got that. So, and by the way, that right there is the reason why people invest in annuities. And that is the annuity sales pitch right there. Freedom from worry, $1,000 a month. I don't have to figure out the rule of 72.

I'm just going to get the check coming in, right? That is the annuity sales pitch because a pension is an annuity. There's other sides of that equation, which are if your prior employer goes bankrupt, the money, and we talked about this the last time I was here, Paula, if the company goes bankrupt, assets inside a pension fund often are subject to creditors, meaning that creditors may be able to take part of your pension. Now, there's the pension benefit guarantee corporation, which guarantees that she would get part of it, but it might end up being $600 a month instead of $1,000. So it's not complete freedom from worry. There's also the

worry that this company may not stay around and that check may go from $1,000 to $600 or is there something changes with the benefit guarantee corporation. I don't think that's a possibility. However, there are still some things to worry about, but investing isn't something you have to worry about. So I don't know what to advise her to do, but I know that those are the issues. You're going to come out fairly close. Would you prefer to have that in your hands and then you, you're pulling the levers, deciding how to invest it and making that what it is, or is automatic better for you? Do you prefer the $1,000 a month to show up as a check?

I can't, I can't answer that. So, Joe, this is where you and I might be having a little bit of opposite day. What you've just said, you've outlined the pros and cons of both strategies and said, hey, this is what's on the table. Here's the pros and cons of both. Now it's up to you to make the decision. And I, of course, it's me, so I will always ultimately leave the decision in the hands of the listener. But I would strongly advocate keeping that money inside of the pension, not cashing it out, not investing it.

And I agree with all of your stated pro and con reasons. As you outlined mathematically, $70,000 invested today, conservatively, if we expect a long-term annualized average of about an 8% return, then by the time she reaches retirement age, by the time she's around 62, as you outlined, that 70,000 would grow to be about enough money to be able to provide an income of $1,000 per month. And so given the fact that the likely expected returns in both scenario, scenario A and scenario B, are both very similar, I would remove, number one, the inherent returns. risk that comes from managing this money herself and placing it in the market, the risk that

comes from not having it under the protection of a pension. Because when you think about risk-adjusted return, even though both scenario A and scenario B might provide the same return, the risk levels are different. So if she were to manage it herself, she would have additional risk for likely no additional return. So that's one reason that I would recommend that. The second reason, again, as you mentioned, Joe, is behaviorally. We know from behavioral science, behavioral economics, that people are the biggest obstacles to their own portfolio performance. Your behavior as an investor is likely to have a much bigger impact on the performance of your portfolio than any broad macroeconomic circumstance.

And so again, it comes back to that risk-adjusted return. Why not remove the risk? If you can remove the risk and get a similar return, but with significantly less risk, then great. Now your risk-adjusted return is higher, not because your returns are higher, but because your risk is lower. So you do not like the risk premium that investing the money yourself presents. Correct. Which is awesome. I got to say that because usually it's you synthesize.

what I said, and I just got to give that back to you. It is opposite day. But this is what's frustrating me, Paula, is that you know how much our community dislikes the word annuity. And what you just voted in favor of, really is in favor of the annuity option, which brings up a point that I've had for a long time. Annuities by themselves are not bad. if you tell me that I can have freedom from worry in this $1,000 paycheck and I don't have to use the rule of 72 and it's just going to show up in my mailbox, we will all vote for that.

And then we say, oh, yeah, that's an annuity. No, no, no, no, no, no, no, no, no, no. There are huge problems. And this is why we need to solve the way annuities are sold. And I don't want to take this from personal finance to the problem in the industry, but it's a huge problem. There are so many people that are not investment savvy that really need this product. and yet annuities are not purchased because it's so slimy in those waters that people won't go near it. And it drives me crazy because when you pull away all of the pieces and you talk to some of the really good players in that area, a gentleman named Matt Carey comes to mind, who's an innovator there, it could be and should be something that a portion of our population should consider.

but I'm with you. You can't tell people to go look at annuities because of the fact that do you know if somebody's ripping you off or not. Right, exactly. Dr. Wade Fow, who is a retirement expert, one of the nation's leading retirement experts. He's a professor of retirement planning. He came on this show. He's been on the show a few times, but most recently he came on the show. And one of the many things that he mentioned was that he supports certain types of annuities. And we will link to that show. in the show notes, which you can subscribe to at a fortunate anything.com slash show notes. But I remember being very nervous before we released the episode because of the fact that the fire community typically is not friendly to... That word. That word. Yeah, the annuity word.

In fact, I think we even played a sound effect in the very beginning. Like lightning crashes or maybe it was a horror movie scream. We played some sort of sound effect, if my memory is correct, that hammed up and illustrated, like, wow, we know that this is a scary concept. But listen, this discussion is coming from a professor of retirement planning. So let's set aside our preconceived notions and hear what he has to say from an academic perspective. From the perspective of someone who is not trying to sell you annuities, he is a retirement researcher. So many positives. There are so, so many positives. And it is incredibly frustrating. And that business has to get their act together. Yeah. Because it's the best way to fight longevity risk, which I'm sure Dr. Fow talked about.

Exactly. I do think it's funny that only in our field would having a long and healthy life be considered a risk. Right. Sorry, you're going to live too long. Oh, damn. Exactly. So thank you for that question. Best of luck with everything that you're planning in the years to come. Well, Joe, we did it. Already? Already.

We've made it through another episode. That was so fun. I love the questions. I love the questions every week. Who am I kidding? But this was a great week. Absolutely. We talked about inflation.

We talked about growth stocks and value stocks. we talked about how to bridge the gap if you're retiring early. We talked about annuities. We talked annuities. Yeah, we talked Rule of 72. We talked about paying for returning back to school. Good stuff. Great stuff.

But the one thing we didn't talk about is my favorite sparkling drink, Topo Chico. And now the podcast is officially off the rails, ladies and gentlemen. Joe, where can people find you if they would like to hear more of your, um, Inadvisable product placement. My derailment of podcast. Exactly. I derail my own podcast every Monday, Wednesday, and Friday at Stacking Benjamin's The Greatest Money Show on Earth.

And you will find Paula there on Fridays. And something that's neat that we are implementing soon, we're going to be recording those podcast episodes live on an app called Fireside. And so if you want to personally get involved in our conversations, you can now have at it. 5 p.m. Eastern-ish. We're going to have to say ish at first because, you know, it's all technology and it's live. But 5 o'clock Eastern-ish on the fireside app or just follow me on social media and you'll get links. Nice. Yes. And I just did my very first fireside app appearance. The audio's fantastic, isn't it? It is. It is. By the way, this is probably also a relevant time to

announce. So we, for several weeks, we were on an app called Stereo. We were doing a Friday after show there. And we have decided to pull away. We've decided to stop doing that. Stereo was a lot of fun. It's a great app. But to be perfectly honest, the contact that we had there passed away very suddenly. Oh, no. Oh, no. And so a lot of, um, the hopes and plans that we had for our future relationship with the stereo app, kind of, it died with them. I'm sorry to say. Yeah.

Oh, that's horrible. So, but for the listeners, the people in this community who joined stereo and who were with us for the run of Friday after shows that we did, thank you for joining. Thank you for being part of that. We will continue to do after shows and bonus content somewhere, but we haven't decided what app that's going to be on. You know, I've played around with Clubhouse.

I've thought about Instagram Lives. You know, it'll be, well, we will at some point be more regular on one of those, but we're just not sure where yet. You know, we thought it was going to be stereo, and then that very suddenly took a turn. Maybe Fireside. Maybe, but I will at least be on Fireside in the Stacking Benjamin's show. So if nothing else, I'll be involved with that app.

through stacking benjamins. So yes. So to everyone who is who is part of the stereo experience, thank you for being part of that. Wow. That outro just was probably not what... It took a turn.

Yeah, that was probably not what people were going. I mean, how do you lead into that? Well, I know how you get out of it. You take a nice launch of your thin drift. Oh, inadvisable. Oh, ha, ha, ha, ha. And your cares melt up. away. No. If there was ever a reason not to drink it, you have just demonstrated it.

See, now Spin Drift is going to be mad at me because I'm losing themselves. I started off gaining sales. Now my sales future with Spin Drift is going astray. Well, thank you, everyone, for tuning in to a very unusual episode of Ask Paul and Joe. Hopefully you learned something in the midst of all of this madness. If you enjoyed today's episode, please do four things. Normally I say three. Now we're up to four. Number one, subscribe to our show notes. Had to Afford Anything.com slash show notes. And subscribe so that you get a synopsis of every episode delivered directly to you for free. Hot and fresh to your inbox. Time stamps for all the questions. It's beautiful. So Afford Anything.com slash show notes is the place to go. Number two, join our community.

at afford anything.com slash community, where you can talk about any shared interest that you have with other members of the community, whether that's early retirement, index fund investing, hedging against inflation, real estate, cryptocurrencies, making a mid-career change, whatever it is that's on your mind. You can talk about that with other members of the community. We have a book club going on. This month, they're talking about the psychology of money by Morgan Housel. It's a great community. So check it out. out afford anything.com slash community. So that's the number two thing you can do. Number three, of course, is to make sure that you are following this show in whatever app you're using

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All right, there's your disclaimer. Have a great day. Time out, Joe, you're clearly about to make a spin drift joke. I can't help but sit here, Paula, and think that spin drift is made with real squeeze fruit. Did you know that? I did. And by the way, I only bring this up because it clearly bothers you that I mentioned a product at the beginning of the show, which I had no idea was going to bother you. But now that it does, we're going to pour salt in that wound for the whole next hour.

I'm going to pour salt in your spin drift. And then you're going to wonder why your drink is so salty. Like, hey, what happened? I get up from the table for just a second. That's going to happen the next time we're together. Podcast movement, do not leave any drinks unattended around me. Pouring salt. I'm showing up to that conference with just packs of salt in my purse.

I'm taking salty. sea high down. Salt sea high. All right. Take a break. I'm going to grab a Diet Coke. Oh, deal.