Afford Anything - Ask Paula: I’m Worried My Parents Are Getting Ripped Off By Their Financial Advisor … Help!

Episode Date: January 19, 2022

#360: I’m worried my parents are getting ripped off by their financial advisor. What should I do? My wife is trying to qualify for student loan forgiveness … but we might lose a bunch of tax benefits in the process. Is it worth the risk? I’m enrolling in grad school, and I want to optimize how to pay for rent and groceries. Should I use money from a 529 plan? Three callers. Three questions. In today's episode, former financial planner Joe Saul-Sehy and I tackle these tough Q’s. Enjoy! Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it here and we’ll answer them in a future episode. Subscribe to the show notes at https://affordanything.com/shownotes 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 any limited resource you need to manage, like your time, your focus, your energy, your attention. Saying yes to something implicitly means, saying no to all other available options. And that opens up two questions.

First, what matters most? Second, how do you align your decision-making? around that which matters most. Answering these two questions is a lifetime practice, and that's what this podcast is here to explore and facilitate. My name is Paula Pant. I am the host of the Afford Anything podcast. Every other episode, we answer questions from you, the community, and my buddy, former financial planner Joe Saul Seahy joins me to answer these questions. What's up, Joe? Well, you know what? It's just not me joining you. We have to really talk about this, Paula, because it really is that you always, you're so gracious, you introduce me very nicely,

but man, we got Joffrey with us too. I mean, you never introduced Joffrey. And I don't want to be like the fly in the ointment of this thing, but dudes there swimming laps around us. Joffrey is quite literally swimming laps around us. Joffrey is my pet turtle. Born in 2014, I pulled him out of a swimming pool when he was a little baby hatchling. And I'm going to tell a story right now that is a slight Game of Thrones spoiler. So if you want to avoid the spoiler, please plug your ears. All right, here we go. Turtles can't be in swimming pools.

He's a yellow belly slider turtle. When a turtle's in a swimming pool, if they have excessive chlorine exposure, they'll be poison to death. So I pull him as a baby hatchling out of the swimming pool, and I have no idea how long he's been there. So I don't know if he's going to die in the next 24 hours. or not, depending on how much chlorine exposure he's had. So I named him Joffrey after the evil king in Game of Thrones so that in the event

that he ended up being poison to death, it wouldn't be such a tragedy. You're protecting your feelings at the beginning of the relationship. Mm-hmm. Exactly. But then he survived. And so now I have a pet turtle named Joffrey. He's lived with me in three states. dates. Yes. A state of confusion. A state of... But yeah, Joffrey is my turtle. He is the official

mascot for my course, your first rental property. So when people are like, oh my goodness, I'm not keeping pace with the rest of the group. I'm going slowly. I'm like, cool. You're a turtle, just like my turtle. There it is. There's nothing wrong. Go at your own pace. Exactly. What is that? Comparison anyway is the thief of joy. Somebody said. Today, today it was me, but it wasn't me originally. It was somebody. else. Someone said that. Yes, but we got some people saying some stuff today. We've got some great questions today. The first question that we're going to tackle comes from a member of our community who is concerned that her parents may be getting ripped off by their financial

advisor. And what's really interesting about this is that her mom is a financial planner herself. Let's hear the details directly from Anastasia. Hello, Paula and Joe, this is Anastasia. Thank you so much for the detailed guidance you give to help us solve our financial quandaries. I am concerned that my parents are being taken advantage of by their financial advisor, but feel like I don't have the emotional intelligence or right approach to talk to them about this in a productive way that isn't offensive. A little background. One of my mom's career paths led her to become a certified financial planner with Ameriprise.

She never practiced as a CFP, but she did work for one, doing paperwork, scheduling meetings, as well as moving their investments with him, where they stayed after she stopped working there. There were four of us kids and not a lot of money for extras, so I got a job as soon as I could and worked all through high school. At a certain point, I had saved $7,000 and wanted to invest. The advisor's recommendation was to shelter this money from FASFA for college by putting it into my dad's IRA annuity, not a custodial Roth IRA, which would have accomplished the same goal. I got them to withdraw and give me this money at the beginning of the year. The money was invested in 07 or 08.

It grew to 13,500, which strikes me as awfully low given the 10-year bull market we've had. The first red flag is that the advisor didn't suggest a custodial Roth IRA. Another red flag is I remember my mom saying that his clients didn't pay him because he got paid by the products he sold them. I now understand that to be a hallmark of an advisor who's in it for themselves. Red flag number three is money my sister received as a settlement when she was young was also put in an annuity. She got it out last year and it seems that the 20K she received that grew to 50K would have grown to over 200K if invested in a market tracking fund. She shared how difficult the advisor's office was when she wanted to withdraw at the end of 2020.

It was time sensitive since some of the typical rules around withdrawing and, it were suspended due to the pandemic. When I ask my parents how much they pay their advisor to manage their money, they tell me it's just $50 a month. I find that hard to believe and think there are tons of hidden fees that they don't realize they're paying. So my question is, what questions can I ask my parents to, one, figure out if they are being taken advantage of. Two, if they are paying excessive fees, what questions to ask to help them realize this?

And three, how to help them get their money out of this advisor's hands and into somewhere are more secure where they still feel taken care of. They really like the personal interaction and explanations they get from their advisor, and even though my mom got her CFP, as far as I know, she's never actually invested for herself in the last decade. In past conversations about their investments, mainly spurred by getting my money out of my dad's IRA annuity, I have come across as an aggressive know-it-all and put my mom on the defensive,

which doesn't accomplish the goal. I do feel like I know a lot, but I need to figure out how to brooky-it-all-and-all-all-reve-all-all-reve-all. this topic in a way that gets them to open up and understand what they're actually invested in instead of putting them on the defensive. Anastasia, thank you for calling in with that question. Based on what you've told us, that sounds bad. I hear red flag after red flag after red flag.

And to me, the key statement that you made was when you communicated that he gets paid based on the products that he sells. So he's not advising. He's selling products. He's selling products for a commission, regardless of whether or not those products are in the true best interest of your parents. So yeah, I think you're absolutely right to be concerned. I hear nothing but red flags in the entire description of this advisor. I would get away from him as quickly as possible. But that opens up the question, number one, for the sake of the rest of the people who are listening to this, let's elaborate exactly on why so that anyone else who's listening to this understands what's so bad about the situation. And then number two, let's talk about your specific question, which is how do you address this with your parents in a way that they're willing to hear it? How do you speak in a way that they're willing to hear?

Joe, you are a financial advisor. The first red flag I had didn't even make her list. Didn't make her list. And it was she is a young investor with a medium to long timeframe and looking for growth and invested it in her dad's IRA annuity. Let's start off with the idea of an annuity. An annuity is something that you invest. invest in when you're really worried about your downside. And annuities have lots of features that

you will pay for to protect your downside. However, another cool thing about an annuity, Paula, is that is that annuities are also a tech shelter. When you put money into an annuity, you don't pay tax on the gain the annuity makes until you remove the money. And so for that reason, people also will sometimes invest in annuity. None of those things are important at all to her. It's interesting that she does want to protect it from FAFSA and make sure that it's off the board so that she may be able to receive financial aid. I'm not sure if there was even a financial aid conversation that happened. I mean, maybe she was eligible for financial aid. Maybe she wasn't. Usually we'd run a calculation. But when you take money out of annuities, if it's before

X number of years, often there's also surrender charges. The annuities are often through insurance companies, very long term, very much about protecting your downside. And what bothered me most was that Anastasia said that the annuity only grew to X when it could have grown to Y. When you buy an annuity, you're not worried about could have grown to why. You're worried about protecting your downside. And so the fact that it grew and it probably grew consistently is what the perfect person

to buy an annuity is looking for. So the fact that she's comparing this orange that she doesn't want to an apple of what she wants is the first frustration I have. The product does not meet the goal. There's another problem, though. An annuity being a tax shelter vehicle, you have a tax shelter vehicle and where is it? It's inside an IRA. She has a tax shelter inside of a tax shelter. Why on earth do you have a tax shelter inside of a tax shelter?

I don't know the stats the last maybe three years. But before that, annuities were the most prevalent product people had inside their IRA. I will tell you, as a former advisor, that has nothing to do with the client. That has to do with the annuities are some of the highest commission products that an advisor can receive. In this case, the word advisor is a misnomer. We will call this person a salesperson because when you're putting somebody into a tax shelter, that's inside a tax shelter, with the only upside being if you did that, that you're protecting the downside, which is clearly something Anastasia's not worried about.

Right, because she was in high school at the time. Yeah. You're getting ripped off. You're in a product that people grow old with that are hella conservative, and they're okay with paying through the nose and fees to make sure that they protect their downside. That's not, that's not at all what Anastasia wants. So that was my first red flag. When I heard annuity inside Oh, and better yet, the settlement then, where did that go? That also went into an annuity, chaching. Like every dollar this, this frustrating person gets in helping them manage. Where does he put it inside an annuity?

And why? It's because he gets a gigantic commission, gigantic commission. So, yeah, that was problem number one. Behind the scenes, as soon as we heard that part of Anastasia's question, where, Anastasia where you described the IRA annuity. As soon as you said the words IRA annuity behind the scenes, Joe immediately hit pause as we were listening to the audio of your voicemail. He hit paused and noticeably flinched. I did. I just had to process that. I was so angry. I was that was so frustrating. $50 a month. I'm not even sure what that fee is. I'm with Anastasia. There,

There are no advisors charging $50 a month. And if he is, it might be a hiding mechanism so that he might be able to have his client say, oh, yeah, ours charge is a fee too. Ours is a fee advisor. Like, you know what I mean? It's not a big fee, but it's just he gets a little pushback about the stuff that he's selling. So he's going to charge a fee too. So he's getting paid all these fees.

And then on top of that, yeah, I'm going to throw another 600 bucks, which, by the way, goes into his pocket. and the thing that's best about it for him is that it gets rid of some of the problems people have with commission advisors. Like, oh, no, no, no. We pay him a fee every year. Yes, you do. And you pay him commissions on top of that.

So wait for him to make more money, possibly. I don't know. So we'll talk about how to approach mom and dad last because I think that's the hardest part, Paula. Yeah. I want to draw a line here between two things. there are two different services that advisory firms offer and people often get them jumbled when they're talking about advisors. So I want to draw a line between the two of these. The first one is advice, right, where I want to have somebody in my corner who's not emotional about my stuff that can, A, explain how it works.

I like how Anastasia gave the advisor credit and said, hey, my parents like the fact that this person seems to explain everything. Doesn't explain always ripping him off, but he explains everything else. Right. So explaining something and making you more knowledgeable, I think, is what a good advisor does. The other thing I think about advice is, and I love it when people fire their advisors, a good advisor involves you in as much of the processes you want to be involved in. I don't see anybody who runs a company, and I've used this analogy before, Paul, I know, but Mary Barra at GM.

I have a lot of, I just Mary Barra at General Motors, I think, has done so many good things to take this old legacy company and try to keep it relevant at the very least and competitive. And everybody's talking about Tesla. And I look at General Motors and the way that they've turned in, not a perfect company, but man, has she done a great job about keeping them in the game? Mary Barra, when she goes to work, because she has people running all these different departments,

doesn't go, okay, we'll just meet twice a year. You explain to me how the cars run and I'm just going to go do some other stuff. No. Mary knows everything about how a car runs and she has these people around her that make her smarter. And by the way, they are smarter than her about the individual things that they run. But she still goes to all the meetings. She still knows it herself. That's the type of advisory relationship that I'm looking for.

A specialist. Yes. I want somebody who makes me smarter though, too. Right. So mom and dad, mom and dad know how an annuity works and would know the fact that they're being ripped off if somebody introduced it to them because the advisor's job is to make them smarter. That has nothing to do with putting the money in the product. Putting the money in the product is delegation. That's not advice.

You now, once you get the advice of, hey, I think this is a great thing because it doesn't appear on the FAFSA. and here's how the product works. Here's the fees you pay. Here's what you should expect from it. By the way, if she would have known what to expect from an annuity that was boring, like annuities are supposed to be boring, she would have never put the money there. Because she's talking about knocking up with markets. That's not really what annuities do.

I mean, they can, but not well versus other things. So if that was her, Anastasia's primary thing, it wasn't presented well. So it didn't make her smarter. But the second piece of actually putting the money in is delegation. So when she helps mom and dad choose a new advisor, she has to think, what are we really looking for? Are we looking for advice and then we invest on our own separately? Are we looking for advice and delegation, which means asset management, right? Right.

Are we looking for somebody to couple those? And there are people that do both. Right. And it doesn't make asset managers bad, like this person clearly is. But asset managers, when you delegate there, they have a stable of products that they follow, that they're comfortable with. And that's what you're asking them to do is to track it, understand it, know how it works so they can get behind it so you'll refer them to other people or not. But when you ask somebody to delegate, that's not the same thing. So they don't have to have this person do that.

Right. But if they do, because a lot of older people do want that, they want somebody to We'll assume. Yeah. There's the advice. There's the execution. Yeah. Yes.

Sure. Some people want both. Yeah. We'll just assume that they still do. It's what they have now. They just want a better one. Somebody that will give them advice, but we'll also place the investment. If they want that, the new person who they work with will take care of a couple things.

Number one, they can explain all the excessive fees that they're paying and can give them some transparency about the product. Number two is they can also help them move over the assets from the current advisor to the new advisor, if once again that's what they want to have happen. Even if they don't, frankly, they could have the advisor advise them and give them advice. and then the advisor tells them about asset management. The new asset management company can help them move the stuff over. I would not, I would not go to this current advisor and ask them about fees. I wouldn't tip them off at all that you're looking at anything else. And the reason is it's going to become what in the business, and this is a horrible term,

and I apologize at a time, but it's what we always called it. It becomes a pissing match. And you end up with old. advisor on the defensive and knowing the assets because the second you asked me what my fees are and how the stuff is actually invested and daughters involved, I know you're going away. I know you're going by-bye. I want this person to not know anything. I think it's better in this case to just leave them, but to have the new advisor help you move the stuff. And by the way, it's got to be the new advisor who tells you how you're getting how the fees are or tells your parents, because I think

they'll actually believe the new advisor more than they will believe you based on, I love it, because I also can come across as an aggressive, no at all, Anastasia. And that was my thought. You know, when Anastasia was asking about how does she approach this conversation with her mom and dad, they might be more apt to listen if the messenger is not her. They may be more apt to listen if the messenger is a credentialed expert, such as a different advisor. I totally agree. I think, Paula, I think you hit the nail on the head. All she has to do, and this is so much easier, all she has to do is convince them to go interview other people. And if she can...

It's the, I think we should start seeing other people conversation about financial advisors. Yeah. Yeah. I think we should just talk to a few other people. You know, I have the sneaking suspicion that you're paying more than you should. I'm not sure what these fees are. You don't understand it. Why is everything in an annuity? I wouldn't even go into the fact, but why are we using the annuity for everything? And then just say, you know, have you ever talked to anybody else? You don't have to hire them. You can stay with this person. Maybe you should just go talk to other people. And Anastasia, what's cool is you can even have first meetings with some of these people. Right. I think convincing mom and dad to go just look around versus telling them that they're

investing wrong and they're getting ripped off is probably a better approach. Right. And Anastasia, if you do a pre-screening interview, if you are the first person that a new advisor interfaces with before you green light, yeah, I think mom and dad should have a conversation with this person, some of the issues that we've talked about in this answer are issues that you can bring up with that advisor and see what he or she says, like the IRA annuity. And you know, the question, you know, the question that pops into my mind, you mentioned that this money went in in like roughly 2007, 2008. I don't know how long you needed the FAFSA, but I have to assume that you might not have needed to fill out a FAFSA or to apply for student loans beyond a time span of four to eight

years. So why is your money still there? Yeah, at that point, at that point, you can change the strategy. Right. So if your current advisor hasn't noticed that, assuming that you have been in a position in life where you haven't needed to fill out the FAFSA for the past several years, that's the type of thing that an advisor should catch. Well, yes. However, let me be clear. Once again, if we go back to my Mary Barra analogy, that doesn't take Anastasia off of the, off the hot seat with that one. The advisor should be a backup to make sure that she catches it. Right. But it's Anastasia's job. Anastasia is a CEO. In the advisory relationship where you've abdicated the throne and you're just going to meet twice a year and you're expecting your

advisor to call you, I think that type of relationship is destined to fail almost every time. An advisor might have a hundred different clients and if you're going to hold their feet to the fire because they forgot something that was ultimately your responsibility to get while their job is to help you remember. I like help you remember Paula way better than they remember for you. Right. But to your point, if they truly are your agent in your corner, come on, none of this stuff. Yeah.

A great resource. And I know, Paula, you love this resource. When it comes to talking to parents, Cameron Huddleston wrote a fantastic book on this. Mom and Dad, we need to talk. And one of the strategies that I love there is share a little bit about your own situation and ask their opinion. And often if you ask their opinion of your situation, they will then open up to you a little bit about their situation and how they think about it. Right. And then you preserve the daughter-parent relationship.

And you're also able to help them out without seeming nosy. You're just having a chat. Right. sometimes people, you know, there's that expression it's hard to read the label when you're inside the jar. Sometimes people are capable of giving better advice to others than they can give to themselves or recognize within themselves. So that's exactly what I love about Cameron's suggestion, Cameron Hodlton's suggestion, if you go to them in the capacity of a child who is seeking advice and say, hey, here's my situation, and Anastasia, you can make up a situation. Or you can say that, you can say that, you You have a friend who's dealing with this particular problem. Hey, mom, you're a financial planner. I know that you've been experienced in this. My friend is dealing with this situation.

What advice do you have for my friend, right? You go to them, ask them for their advice. And if they give you sound advice, you can then gently reflect that back. Oh, yeah, that is really good advice. Hey, are you doing that? Good. By the way, we also interviewed Cameron Huddleston on this podcast. Cameron was a guest on episode 208.

That's episode 208. You can find that by going to afford anything.com slash episode 208. Thank you for that question, Anastasia. Best of luck as you gently help your parents break off this relationship with their financial advisor and look to better days ahead with better advice. We're going to take a quick break for a word from our sponsors

and when we come back, we are going to talk to an anonymous caller who has a question about student loan forgiveness. Stay tuned. The holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale.

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It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments, a fifth-third better. Our next question comes from an anonymous caller. Joe, we give every anonymous caller a nickname. Are there any names that are inspiring you these days? Over the holidays, one of the things I like to do are watch the absolute cheesiest movies of the season.

There was a neat short series that's a year old. Netflix called Lilian Dash that was really fun. But I don't want to point to that one because I kind of liked it. And while it was cheesy, it just didn't have enough Velvita. So I think we truly need to pour on the cheese. I saw one with Rob Lowe. I mean, I could tell you, everybody that's in it, it's called Holiday in the Wild because it takes place in Africa. And I'll say this, it's so cheesy.

And at the same time, it's beautiful because, I mean, just Africa and the Savannah. And it, oh, it's wonderful. Just the, from a travel standpoint, it was gorgeous and maybe you want to jump on a plane and head to Africa. right now. But what part of Africa was it in? Which countries? Zambia. Oh, Zambia. All right, cool. They're at an elephant nursery in Zambia. And it's Sex in the Cities, Kristen Davis and Rob Lowe. And they're a love affair. Oh. Because this is a man. I think we got to go with Rob. Okay. Well, named after Roblo. Our next question comes from Rob. Hi, Paula and Joe. We heard.

your answer to Anna's question in episode 365 and inspired us to write in about a similar situation. As a bit of background, I make about 110,000 a year and my wife makes about 55,000 a year. We have about 90K in cash and about 200,000 in various retirement accounts. Our goal is to relocate in the next one to four years and purchase a house when we do. Now for the question, my wife and I recently got married and are trying to figure out the best strategy for my wife's loan repayment plan. She owes about 61k at about a 6% interest rate. She currently works for a nonprofit and has the option for forgiveness if she makes the minimum monthly payments for 10 years on an income-based repayment plan. The three options we are

considering is to file our taxes separately, which would result in about a $300 monthly payment for the 10 years, file our taxes jointly, which would result in about an eight-year payment of $900 to result in paying up the loan in full, or paying an initial amount up front of about $10,000 to $20,000 and continuing with the monthly payments while also filing jointly. A few other things to note and consider is to be eligible for the forgiveness. My wife would need to stay in the nonprofit field, which should be doable, but not 100% guaranteed. The other factor is that both of us are 20 plus years away from retiring, and if we were to file our taxes as married and filing separately, would lose our eligibility to contribute into the Roth, which we are both big advocates for. With any extra cash we may have, we would either use that to start funding a taxable brokerage account or buying the series I savings bonds of the fairly high interest rates that were recently offered.

Thanks so much for the time, and we look forward to your thoughts and suggestions. Rob, thank you for the question. The first thing that comes to mind when I hear what you've asked is, and you alluded to this or flagged this yourself within the question, the possibility that your wife may not work in the nonprofit sector for the required duration of time. Either by choice, it might be that she wants to make a career change and this would weigh her down and preclude her from doing the thing that she's really. really called to do or meant to do. I mean, how we feel about our careers today is not necessarily going to be how we feel about our careers in five years. And often, we can overestimate what we can do in a day, but underestimate how much things can change in five years. So that's the first thing that comes to mind. Also, it may be the case that she might want to continue working in the

nonprofit sector, but for external circumstances outside of her control, might be unable to do so, whether it's because of health problems or whether it's for any other reason. Because of that, it's unwise to put too much faith into a student loan forgiveness program coming to fruition. It's fine to pursue it, but I think anyone who's pursuing it needs to simultaneously hold two contradictory ideas in their head. A, that this is something they're pursuing, and B, that this might not work out. Now, where the question becomes a bit more complex is that when you're deciding between married filing jointly versus married filing separately, you are putting actual money on the line to bet that this works out.

And so then, for me, the operative question is, how much are you willing to wager? That was my thought, too, is hopefully, If he uses something like TurboTax, he can look at what the tax cost is going to be filing jointly versus filing separately. And that's not sponsored. We're using TurboTax as a generic term for any type of software. You know, but this is interesting because he mentioned that if he makes minimum payments, they will still be eligible for forgiveness on the rest of it. But we'll still have to make some minimum payments. So here was my thought, Paula.

consider this. If they look at the overall payment, the amount that they would need to have to pay it off in whatever amount of time they want to pay it off, and they take that money and to get rid of the uncertainty that you're talking about, they make the minimum payment out of that and they put it toward the loan. They put the rest in a pot of money based on the amount of time they're talking about to pay the loan, some investment that's made to later on. pay off the loan. If she doesn't make it to 10 years, they can apply that money to the loan. If she does make it to 10 years and she gets the forgiveness, they now have this pot of money that they can use for something else. Trip to Zambia.

With Rob Lowe. But I think that would be my strategy. Because I don't want to, to your point, do I think that she will last 10 years, and get it. The answer is things are probably going to change. And I can't say. I mean, I don't know. I don't know Rob and his spouse,

but just so many things change so often and to bet on 10 years, I would bet on things will change. But I also think that as a legal thank you for doing this work, we shouldn't disqualify her. from the opportunity to take advantage of that. It's like hope for the best plan for the worst.

Yeah. Hope that she gets it, plan that she might not. Yeah. So I would still pay it as if she's going to not make it, but pay it into a different account. Make the payment to yourself. And then transfer the money over. Much like we talked about on a past episode with the car, right?

Right. Somebody was doing that with a car. Exactly. The quote unquote make a car payment to yourself. So if you are in a position where you are not, making car payments, i.e. if your car is paid off free and clear, then what you do is you make a car payment to yourself, meaning every month you make a payment of 200, 300, 400, whatever car payment you want to make, you make that car payment, but you put it into a special savings account

that is earmarked for your next car purchase. And that way, when you're ready to buy your next car, you've got that pot of money and you can chuck a big wad of cash at it and buy it free and clear. What a good strategy. I love it. And I think I love it here too. Yeah. Make a student loan payment to yourself. Yes. And Rob, to the other aspect of your question, married filing jointly versus married filing separately, running the numbers through tax software to see the cost and to see how each of those options impacts your total tax liability, that'll allow you to quickly answer whether or not it's worthwhile. And to what you mentioned, you know, you mentioned that you're a big fan of the Roth IRA account, and if you opt for married filing separately, you won't be able to access

it. That plays a role in the decision, but that in and of itself is not going to be the deciding factor. I think once you run a comparison of the two scenarios and you see how that impacts your tax liability, you can then compare those two results and then add in that Roth consideration for a complete picture of how the two results compare against one another. So thank you for that question, Rob, and best of luck with whichever choice you make. And enjoy the trip to Zambia. With Kristen Stewart. Yeah.

What a fun travel companion. And Zambia. May, if it's anything like this sappy movie was, I'm there. Let's go. Have you been? No, I've never been to sub-Saharan Africa. I've been to Egypt, but I've never been to any other country on the continent. I'm heading to Egypt in May. Oh, I didn't know that. Nice. I'll be going to Jordan and Egypt. Oh, to Petra, yeah? Mm-hmm. Nice. Start at the Dead Sea, visit Petra, and then fly down to Luxor and see some Anteastern.

Nice. Are you going to Cairo? We end in Cairo. Oh, excellent. Are you going to the Seawall Oasis? Did you see? I don't know. We'll talk about it later. And I'll get my itinerary.

But what's funny is I saw a travel hack the other day that showed that in Cairo, there is a phenomenal view, like this excellent view of the pyramids. Yeah. from a Kentucky fried chicken. What? Oh, my. It's so bad. I would do that just for the story.

That's what we were talking about. We're like, you know what? We totally got to sit in this window with this apparent great view of the pyramids. It's awful. Just awful. Well, Joe, on that note, I think we should take one final break for a word from our sponsors. Unfortunately, KFC is not one of our sponsors. I know, right? But stay tuned to find out who they are. And then we're going to hear from Lucia, who's going back to school this fall and is interested in putting some money into a 529 plan.

Our final question today comes from Lucia. Hi, Paul and Joe. My name is Lucia, and I live in Seattle. I would like to first start by thanking you for all you do to help guide many of us on our path to FI. I am 32 years old and I will be entering graduate school in fall 2022 to start my master's degree in computer science. I currently have 20,000 saved up for school in a regular savings account and another 20,000 in a brokerage account invested in BTSAX. I plan to use these monies specifically for school-related costs. I do not have any debt and I max out both my Roth IRA and HSA every year and contribute my company's match of 6% to my 401K. The total cost of my graduate program is $70,000. I do intend to take out some student loans to cover my tuition

and plan to use the $40,000 I have saved up to cover my living expenses for the duration of the program. I do not plan to work for the first year of school, but do plan to work part-time the second year. My question is, I am concerned of leaving the $20,000 in the savings account since I plan to only withdraw little by little as needed for my living expenses starting fall of 2022. My thought is that I move the 20K to a 529 plan

since I can use the funds for room and board since I will be in school at the time. I have heard you all recommend Target retirement funds, Ginny Mays, or even bond indexes for short-term investing if we plan to use the funds in less than five years. But what about a 529 plan since I will be using the short-term funds for educational purposes. Do you see value in that? Thank you so much. Lucia, first of all, congratulations on everything you've done to have set yourself up so well that you've got this money that can help cash flow you through your education.

That is incredibly impressive. So congratulations on building that, on saving that, on going back to school. I'm so excited for this next step and this next phase of your life, and I'm thrilled that you're doing it from a position of financial strength. Lucia, there are a couple of elements of your question that I want to comment on. One is that you mentioned at the end of your question that you've heard on previous podcast episodes. Joe and I have talked about where to put money that you intend on spending in the next three to five years. And some of the things we've talked about include Target Date funds, Ginny Mays, tips, treasury inflation protected securities, and other types of assets like that. And then the

next thing you asked about was a 529 fund. The first comment that I want to make based on the structure of that question, and this is a zoomed out wide lens comment that I'm making for the benefit of everyone who's listening to this, is that there is a distinction between the vessel and the asset inside the vessel. So think of it like. this, imagine that you've got a whole bunch of different glasses. You've got a wine glass, you've got a pint glass, you've got a martini glass, you've got a champagne flute, you've got a coffee mug. These are all various types of vessels. And so the analogy would be that these different vessels are a 529 plan, a 401k, an IRA, an HSA. These are types of

vessels, these are types of accounts, and each vessel can hold assets inside of it. And then when we talk about different types of assets, such as Ginnie Mae's, tips, target date funds, a total stock market index fund, a total bond market index fund, a REIT. When we talk about any of those types of assets, we're talking about the liquid that goes inside of the vessel. And I don't mean liquid in the financial sense. I'm talking about the thing that fills up the wine glass. or the coffee mug or the champagne flute. And so I want to make sure that everyone who's listening understands not to conflate the liquid that goes inside the glass with the glass itself.

And certainly there are some types of liquids that more commonly go inside some types of glasses. If you have a champagne flute, it's common that you might pour champagne into a champagne flute. But if you prefer to drink your champagne out of a coffee mug, you're free to do that, too, and some people choose to. And vice versa. If you want to drink coffee out of a champagne flute, go right ahead. Or if you want to drink coffee out of a wine glass, go right ahead. Even though there are certain types of liquids that are more commonly used in certain types of vessels, that doesn't mean that one necessarily always must go with the other. You can always drink wine out of a pint glass and drink 2% milk out of a martini glass. Now, to your specific question,

should you put your money in a 529 plan? Should you use a champagne flute or a wine glass? Right. Exactly. The answer is no, to be blunt. Come on. What are we heathens? I know, right? The answer is no, and that's because when you put money into a 529 plan, you do not get a tax deduction for putting that money. into the plan. It's not a 401k or a traditional IRA in that regard. So there's no upfront tax deduction for putting the money in. Instead, what you get is tax deductible growth. So while your money is inside of that account, the growth that that money accumulates is tax deductible or tax advantaged. But your money's not going to be in there long enough to grow.

which brings up a piece of the question that she didn't ask, but that I actually am thinking Paula the opposite way that Lucia is thinking. And I understand that inflation right now is high and there's a risk of losing purchasing power. And that's what she's worried about. I'm worried about the fact that with VTSAX, the S&P 500, I haven't in preparation for this. It depends on what day that you look at this. But at the time that we're recording this, the S&P 500 in 2021 was up 25% for the year.

Lucia just had a fantastic year with her invested money. It is now a short-term goal to capture the money that she has made so far there. I would be looking the other way. She's really wondering about investing more to get more returns. I think this is a point where the goal is getting close. I would be thinking about locking in the money. that she's been able to make so far to make sure that the money is available. And maybe then she's looking at at some investments that can beat a savings account.

But I certainly wouldn't be looking at VTSAX with money. She thinks she's going to spend in the next few years. I agree. The timeline to spending this money is very short and it's a fixed timeline. Because this timeline is tied to when she goes to school, it's not a timeline that she can be flexible about. And so it's different from, say, a different caller who might call in and say, we really want to buy a house. And ideally, we would like to buy this house in the fall, right? Great. You've also got, you know, that caller would also have a short-term goal that begins in the

fall. But unless there's some compelling need for them to purchase a home, the time to withdraw is flexible. That's not Lucia's situation. No. True, she will be slowly spending money out of the account, but she's going to be doing so on a rigid timetable. And that makes it even more important to keep it away from volatility. Can we talk about how emotions especially play a part here? And often, I've seen people make the wrong decision now. If Lucia takes the money out, let's say it was a year ago. Let's make this a sure thing. She was calling us a year ago. And we tell her to take the money out of VTSAX. And VTSAX the next year has a huge run-up while it sits in cash because Paul and Joe said it was a huge risk.

Right. I've been on the side of that as an advisor where then my client has come back to me and it said, if I hadn't listened to you, I would have made a lot more money. And the answer is yes. But an advisor and Paula and I are not advisors, we just play them on the radio. We're just doing this for entertainment, giving you some guidance. We're not telling you we have a crystal ball. What we're telling you is risk or war probability. And you and I have both talked to former poker star Annie Duke before.

There is a thing in poker called a bad beat, which means that you did everything that you should have done. You did absolutely everything. And the market does something differently than you thought. And the bad news is that any time you have to make a decision, and I prefer, and I know you prefer, decisions based on reams of data that this was the best decision. Right. And so I don't want Lucia to be upset if the market rocks the following year and we're telling her that she should pull the money off the table. Right. Because there is a distinction between the soundness of the decision and the result that emerges. And we also talk about this with Annie Duke.

And we interviewed Annie Duke on the Afford Anything podcast in episode 281. You can listen to that by going to afford anything.com slash episode 281. And Joe, she's also on Stacking Benjamin's as well. She was, yeah. So if you go to the stacking Benjamin's website and run a search for Annie Duke, you can pull that one up too. Anyway, one of the points that she makes is the distinction between the decision and the result. Sometimes good decisions lead to negative outcomes and vice versa. So for example, if you run a red light while you're driving, but there are no negative consequences.

You don't get into a car accident. You don't get ticketed. And you end up reaching your destination faster. Does that mean that running a red light was a good idea? No. it had a positive outcome in this one specific instance, but that doesn't necessarily make it a good idea. Likewise, if you're a completely safe driver, but you get into an accident for no fault of your own, you've made positive decisions. You wore your seatbelt, you drove the speed limit, but you still had a negative result. And so that same model applies to, deciding whether or not to put your money into investments. Sometimes if you know that there's money that you need to or want to spend in the next two years or three years, you choose to keep

it in cash because you have a short-term goal for this pile of money. But then the market returns 25 percent and you feel as though emotionally you feel as though it's a bad decision because it happened to have a negative outcome, but in fact, it was a good decision with a negative outcome. And the good news here is there really isn't a negative outcome. We're still preserving principle with the decision that we're advocating. Well, the principle is losing purchasing power to inflation. It's losing purchasing power, but you're not losing principle.

Correct. So if that is my biggest downside here, I will take that downside versus the volatility of the total U.S. stock market. And so, Lucia, all of that is to say that given the fact that you need to tap this money so soon, keep it safe, keep it in a form that preserves the principle. And unfortunately, a 529 plan is not structured in a way that you would get any advantage from it because the money is not going to be invested. And so the tax advantage that you would get from a 529 plan isn't applicable in your situation.

Well, Joe, we've done it again. And actually, just in time, because it's storming here. And in Texarkana, when it storms, that means my internet may go out. So I may be leaving in the next few seconds whether I want to or not. Well, before you go, please tell us where can we find you if we want to hear more of your ideas? I have this lightning rod of a podcast called Stacking Bejamas that is every Monday. It's so bad. It's every Monday, Wednesday, Friday, like thunder and lightning.

We have shows Monday, Wednesday, Friday, and one Paula Pant joins us. But I've got something better for people, Paula, which is I am headed around the country. And maybe in some of those near where Paula is, maybe she can join us in a few cities. I know that you'll be in at least one, but maybe three or four. But to find out where I am, head to stacky Benjamin's.com slash stacked. and I'm coming to meet as many people as possible. And you know what, Paula, I'm trying around the country to get as many of our friends. And you and I have a lot of the same friends that do this, people, other people that afford

anything listeners may listen to or they might read. We're going to invite as many of them to come and hang out with us in the cities that they're in. So hopefully you'll meet a lot of other fun people too. Awesome. Well, thank you so much, Joe. Thanks again, guys. That was super fun. That's our show for today.

Thank you so much for tuning in. If you enjoyed today's episode, please do three things. Number one, most importantly, 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 strong financial health. And what greater gift could there be than that? That's the first thing you can do. The second thing is open up whatever app you're using to listen to this show and make sure that you hit the follow button so that you don't miss any of our awesome upcoming episodes. And finally, while you're in that app, leave us a review.

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Computer software. What is this, that 1970s? You're going down to Compuare and purchasing your stuff. I like how I specify computer software. Like there's any other kind. I also love how you went to the 1970s and I was alive then and nobody was buying computer software. that, Fargo.

You could have said like early 90s and you would have been good. I just assume the 1970s had computer software, computerized software. Somebody's buying computer software in the in the 1970s. It was on a big, it was on a big tape. It was a whole different, a whole different ballgame.