Afford Anything - Ask Paula: No Spouse, No Family - How Do I Financially Prepare For Care Later In Life?

Episode Date: February 9, 2022

#364: Our first caller is curious about whether he should keep his 30 year term life insurance policy or let it lapse with 12 years left on the policy? Anonymous is wondering which financial products would work best for to cover her older age care and expenses? Max is thinking through real estate and stock market returns as they relate to future population trends. Ramon asks us about the details behind infinite banking. Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it at https://affordanything.com/voicemail and we’ll answer them in a future episode. Enjoy! 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 that you need to manage. Like your time, your focus, your energy, your attention, saying yes to something, implicitly means turning away all other options. And that opens up two questions. First, what matters most?

What are your priorities? What are your values? And second, how do you align those with your decision? making, how do you execute choices on a daily, weekly, monthly, yearly basis that reflect 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'm the host of the Afford Anything podcast. Every other episode, we answer questions that come from you, the community. And my buddy, Joe Sall-Chi, former financial planner, is with me to answer these questions. What's up, Joe? How are you, Paula Pant? That's a loaded question. Can I plead the fifth? Did you and I, before you hit record, have a half hour long discussion about how we're doing?

I can neither confirm nor deny. Yeah. But you know what? It's going to be great. We've listened to these questions. And except for one caller, it's going to be great. We won't name who that caller is, though. But people won't have to be Sherlock Holmes to figure out which color I'm referring.

I'm referring to. Oh, there was a particular caller who roasted Joe and who loves me. And we're going to start with his question. By the way, this caller has a total future in podcasting. He refers to himself as hypothetical from Hampton Inn. Here's his question. Hello, the great and wonderful Paula Pant and the extraordinarily awesome cast and crew of the Afford Anything podcast. and hi Joe.

Hi, Joe. Oh, I'm just kidding. We all love Joe Sal C. Hi. And who doesn't love Joe? Only the devil. Only the devil hates Joe. Everyone loves Joe.

Anyway, for my question. This is hypothetical, calling in from the Hampton Inn just off the highway in Houston. If I had a 30-year million-dollar term life insurance policy for about $100 a month, and I got it like 18 years ago so that $100 a month is locked in for another 12 years and I'm in pretty good health. Once I have a net worth of $1 million, should I just let the policy lapse and just invest

that $100 a month? Or is it wiser to keep the policy until the 30 years is up no matter what my net worth is? Thank you so much for your valuable wisdom and insight. The world is so much of a brighter place because of Paula Pant and Joe. Hey, thank you guys. Appreciate it. So what did I do? What did I do?

So hypothetical from Hampton, then the first thing I would say is if you want a gig on the Afford Anything podcast, you've got one. She's booting me to the curb. Well, you won't be the question answerer like Joe is, but I would totally bring you on to do random spots, transitions, lead-ins, stuff to make the audio a little bit more exciting. But only if they're all from the Hampton Inn. But how about his life insurance question? That's a good question. So my immediate thought, who are the beneficiaries of this policy? How much would they receive if he kicked the bucket in the next 12 years, assuming he stays with

the policy? And how important is that money to them in the span of the next 12 years? Fundamentally, the question is the trade-off between certainty versus potential greater returns. That's the root of the question. So if he is going to give up the potential for greater returns in exchange for certainty over a 12-year duration, how important is that certainty? And conversely, if it's not important, how much greater are the potential returns? I think there's a couple assumptions that he makes. If we assume two things. Number one, that a million dollars was truly the need that he had when he bought the policy, that he figured that correctly.

Because a lot of times, Paula, people can't, you know, they buy what they can afford. They don't base it on any data. There are two types of analyses that we did when I was a financial planner. One was called a capital needs analysis where we added up all the things that would be missing if his paycheck wasn't coming in. And then we would do like you would do with a retirement. retirement analysis, we'd figure out how much money that represented and then how much of it he could cover with other resources and then what was the gap? And that was a capital needs analysis.

And the frustrating thing about that analysis, by the way, is so much of that blows in the win. You know, the inflation number, the return on that money. Will expenses stay the same? In other words, will lifestyles change now and in the future? When are your beneficiaries going to retire? There's just so many things that you don't know about. But that gives you kind of one goalpost. And then the other goalpost is something called a human life analysis, which is this. This is much more like a courtroom. If Paula Pant gets hit by a truck, what happens is your lawyers sue whoever the trucking company was, the truck driver, they sue them and they sue them for all the money you would have made in your career had you had you not been. Yeah. Yeah. Yeah.

had you lived, they will do that analysis. Now, that analysis will come up with a, they'll come up with a really big number. By the way, a funny part of this, as an aside, is that Paula, your lawyers will be fighting for

the fact that you're the dumbest person on earth with money. And the reason is, the battle isn't whether the truck driver hit you. The battle is over, what's the rate of return that you would have gotten on your money if you had lived? So they're going to base it on,

human life value and what you would have what you would have done with the money. Well, if your lawyers can prove that you can't figure your way out of a bag with money, it's going to be a really low rate of return, which means you're going to get a monster. Your beneficiaries will get a monster check. Why would my beneficiaries get a monster check if I had a low rate of return on my investments? Because they take the amount of money that you would have brought in. They're trying to present value all that money to today. to create that stream of income. Got it.

Yes. Got it. So if you're good with money, they can assume that Paula would get a fairly high rate of return. If you're horrible with money, they will assume that you get a very low rate of return, and that creates a huge check because Paula doesn't understand how to manage money that will earn a high return. So the present value of future dollars is greater. Yes. So in this weird twist, your family goes on the stand and argues that you don't know what the hell you're talking about.

just so that they can get a big check. Anyway, enough with the trivia, Hampton. I know that you're waiting for the real answer here. So that's the other goalpost, which generally is a huge paycheck. So there's these two analyses. Well, assuming that he picked a number that was based on one of those two analyses, and a million dollars was the number that he needed, the second assumption is things haven't changed for him and his family.

He hasn't changed his lifestyle. The need has remained constant. And now he's filled that need with the million dollars. He no longer needs the policy. So the first questions to ask are, has your lifestyle changed? Is there still a need? What is the need today? Is it really a million dollars?

And so I don't even know that I would look at the million that he has now. I would just redo the analysis and say, if I die today, what are my beneficiaries need? And do I have enough to cover it? And if the assumption that we're working from that everything remained the same and a million dollars was right and nothing has changed, the analysis is going to show that he no longer needs life insurance and he can cancel it and he can begin investing that money and hope like heck that he lives for a long time. What if his wants are fluid?

So for example, let's just state hypothetically that we know he has a net worth of a million We'll say the policy is worth another million. His beneficiaries will state hypothetically need a million. We'll just use that as an assumption. But he likes the idea that because he has a policy that costs relatively little out of pocket, $100 a month, he likes the idea that there is a chance that if he does kick the bucket in the next 12 years, an extra million could go towards some additional beneficiary, maybe a charity that he really likes. What I love is the discussion we're having now because the discussion we're having now is what do you value? And once you know that that analysis is fine and the family will be fine, then you ask these questions. Obviously, he's paying very little because he's had the policy for a long time. He was smart to buy it when he was young. People buy life insurance when you're young, lock in that low price and then buy a 30-year term policy. That was brilliant in hindsight.

but now would he rather have certainty for his family or for his beneficiaries or would he rather have more money to invest when he's alive? In other words, we're talking about what's the best of use of $100? Right. I mean, there's a major part of me that upon hearing his question thinks $100 is such a small amount of money that if you really wanted to do both, if he wanted to also invest an additional $100, he could claw that back from his spending just by picking some low-hanging fruit. For many people, there's enough waste in a monthly budget that if you want to save an additional $100, it's not insurmountable. I agree. And I too like airing on the side of being conservative, right? Hope for the best plan for the worst. And I think that by keeping the life

insurance policy, you're doing that. But I would love for him to have that internal discussion. Is this my best use of $100? Or is there? or something else that I'd rather use this $100 on. And even if he frees up, money elsewhere is, what does he value? I think it's a great, it's a great discussion. Well, for most people, maybe not for him. Hampton. I do love his willingness to so jubilantly discuss his death.

Let's say I die. You know what? And hypothetical from Hampton in, here's another way that you can have the best of both worlds. I'll pay you $100 if you do spots on the Afford Anything podcast. So I'm a 100% series. I'll pay you $100 a month to do. I don't even know what we would use you for, but with a voice like that, by the way, people who are listening who are entrepreneurs or who have side hustles, notice this is how you pick

up gigs. It's not the routine, send a resume. Here's my email with an MP3 clip attached. It's like, catch the attention. Show me what you got. Yeah. I mean, that talent. that voice. That's so good.

We were saying he kind of sounds like my mom's neighbor Doug on stacking Benchamins. You know, when I first heard the question, I was like, is this Doug? And I played it for Joe. You know, we listened to it before we started taping. And Joe was like, no, it's not Doug. And I'm pretty sure it's Doug. Joe's like, no, I'm, I've been friends with Doug for a long time. And while Doug would say all those things about me, he totally would.

That's not his voice. It's close, but it's not his voice. It also sounds like, you know, Eric Brotman. it kind of sounds like Eric Brotman as well. The guy from the Graduate Don't Retire podcast. Wow. Yeah, sounds like him too. He's got that same vocal quality.

Well, it's a fantastic voice. Nice job. Way to make our day. I love the surprise there. And by the way, if you've got a question for Paula, don't feel like you have to do that. No, because I know at one point that on stacking Benjamin's, we got a couple calls like that and intimidated the heck out of people.

And I started hearing from people. They're like, well, I want to ask you. question, but I just, I don't have that creativity. Yeah. Don't worry about it. Just ask. But that was still funny as I'll get out. Yeah, absolutely.

So thank you very much, hypothetical from Hampton. Our next question comes from Ramon. Hi, Paula, and possibly Joe. This is Ramon from Atlanta. I wanted to see if you guys can touch on infinite or infinity banking. Apparently, this is a process by which an individual will take out a whole life policy. insurance policy, take out a loan against that policy in order to fund their lifestyle and therefore becoming their own banker, eliminating the need to go to any bank in order to get, well, money.

Is that all there is to it, or is there more to the story here? There's so many resources dedicated to this topic, and I wanted to see if there was something that I was missing there. Would really love to get you guys' take on it. I know whole life policy isn't for everybody, but, you know, figured I'd check anyway. Thank you for everything you guys do for the community, and I'm looking forward to hearing your answer. See you. Ramon, thank you for that question. And I have to tell you that as I flip through Instagram reels when I'm on TikTok, every time I get somebody telling me about how the rich people work and it's infinite baking is what the rich people do that the rest of us do not do.

The financial advice on TikTok, by the way, might be the worst of all social media platforms. The frustrating thing is proponents of infinite banking who are listening to this podcast are now going to tell me that I don't understand it and I don't get it. And I should be much more on board. So I'll start with this. Infinite banking can work. It can work. It is complicated.

I don't think we need to go into how infinite banking work. Why, you're being far more diplomatic than I would be, BT-dubs. Here is the problem. The problem is, without going into the machinations of how an insurance policy works, as long as you have fantastic cash flow, infinite banking can work. But you have to take out these loans and pay them back and keep the insurance cost to a minimum. Otherwise, you just bought an insurance policy. that's the way every strategy on earth around using life insurance as an investment vehicle works. As long as you can continue to keep that cash level high, you're going to do a great job.

Now, infinite banking proponents will tell you, but Joe, you can take out a loan where you're only paying yourself back the interest. I can even debate whether that makes sense or not, even with 401K loans, whether that makes sense. proponents of 401k loans drive me crazy as well. There still is somebody being paid back. And even though the interest is only payable, quote, to you, and it doesn't cost you, if you don't continue to get those loans repaid, you end up with a life insurance policy. It's going to cost you money that you wouldn't have had to spend if you just used a bank. If you just did it the right way.

what I see from wealthy people and a great financial planner and media person in Atlanta, Wes Moss, just put out a book called What the Happiest Retirees know. And what was interesting, Paula, was the happiest retirees know that even though they can hold debt in retirement, they pay it off. They generally have a large amount of money for retirement. Happy retirees have more. Shocker. but then they also have a healthy aversion to debt. Now,

people that have amassed a fortune are not people that don't understand leverage. Of course they understand leverage. And they also understand that they could earn a higher rate of return on their money and pay less. But I think there's a game going on here, which involves a lot of salespeople who get a really nice commission when you buy a product, life insurance that isn't made to be your bank and you turn into bank. I mean, think about why life insurance was created. When the first people came out with life insurance, did they think, hey, here's what we're

going to do. We're going to create a policy that allows you to be your own bank. No, they said, you know what? If you pass away and your beneficiaries need some money, we want to make sure that this isn't a huge burden on them. So we're going to create a way where you pay a little bit at a time. And then we will pay this big death benefit out so that you have this freedom from worry that we've been talking about earlier in the show.

So I don't think this is what policies were initially intended to do. I think it can work, but you have to bet that you're going to continue to have great cash flow for a long period of time. Now, what's cool is, is that for most people in their experience, they can say to themselves, hey, I've always had great cash flow. I can't see anything bad happening. I'll tell you the cool place that I sit where a lot of people don't sit, I got to work with about 150 families at one time.

And I got to see 150 isn't a large number, Paula, but it certainly is larger than one family, which is what most people listening to the show, 99% of the people listening to the show experience, their own experience. When you look at 150 families, you know what you find out? In my practice, weird stuff happened all the time.

It happened all the time. It came out of the blue. Oh, we never knew that so-and-so was going to lose their job. It was amazing. I was crossing the road and something bad happened. This tree fell on her house. Weird stuff happened all the time. Now, for my average client, things happen very rarely.

But at 150 families, at 1,000 families, at 10,000 families, weird stuff is going on all the time. And so to think that in the future you're always going to have great cash flow, maybe for a couple people listening. But I'd say for the vast majority people, just do it the straightforward way. Forget infinite baking. So, Joe, essentially what you're saying is that by virtue of choosing the strategy, a person would necessarily have to make a large bet on something that has an uncertain outcome with a great risk of ruin in the event that that doesn't work out. Yes, because infinite banking goes really, really well until it doesn't. And when it doesn't, it unravels in a hurry. And it unravels more expensively than if you had just done it the way.

Most people do things. And here comes the hate mail. Probably will be getting hate mail in both directions from people who are pro-infant banking who send us hate mail because we don't recommend it. As well as from people who are anti-Infinite banking who are probably going to send us hate mail because we didn't... We were too judicious. We were too diplomatic. And even as I was hearing you answer, Joe, I was like, wow, Joe's being way more diplomatic than I would be. I would have just said no.

Well, that's because I think it can work. And I don't want to discount the fact that you can't have this many people talk about something on the internet and have it not work. Well, I wouldn't be so sure of that. Maybe that is a stretch. Have you been on the internet lately, Joe? Good point. I think you're right. I think some of those pointing and dancing videos don't work.

And yet so many people do it. So thank you, Ramon, for asking that question. question. To summarize, I'll just give the answer in one word. No, avoid it. That's three. That is three words. Yeah. Well, no was the one word and avoid it is the encore. We'll come back to this episode in just a minute. But first, 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

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Joe, our next question comes from an anonymous caller, and we give every anonymous caller a nickname. Any particular favorites at this moment? I have been watching a show that gets a lot of criticism from people. I've enjoyed it, but it is a divisive show. It's called Emily and Paris, and I just watched Season 2. It is a dumb show. I will agree with all the reviews that say,

is not a smart show. There are far too many stereotypes about far too many different types of people. The French really get it in season one. But in season two, they get their comeuppance. But instead, now in season two, there are a lot of stereotypes about Americans, people from the Ukraine and other places. But still, despite all that, I thought it was really fun. So anyway, Emily and Paris. So why don't we say this is Emily? All right. Well, then our next question comes from Emily. Hi, Paula and Joe. Thank you for taking the time to answer my question. I'd like to hear your thoughts on if and when to start integrating financial products like annuities, umbrella insurance, and long-term care insurance into my financial plans. So here's some background. I'm 42 years old,

and I have no plans to marry or have kids. Not that there's anything wrong with marriage or kids. They're great. They're just not for me. Financial security, however, is a a huge priority for me, and I know that I have to put systems in place that will provide the kind of security other people might get from having a spouse or kids, especially as they go into older age. To me, it seems like an annuity would guarantee that basic expenses are covered in retirement, even if the stock market goes down. Long-term care insurance would cover the costs of in-home or nursing home care, especially since I won't have family around to take on any of the burden of that care as I get older. An umbrella insurance would be useful in protecting my savings up until I retire. And maybe

afterwards? Based on my current savings rate and investment performance, I estimate I'll be able to retire around age 65, maybe a little sooner, with about $2 million in investments. My yearly spending is typically pretty low, and I don't think it will exceed much more than $50,000 per year in retirement, and this takes into account inflation and more spending on health care. Also, some of that will be covered by Social Security, maybe really conservatively 15,000 a year in Social Security. Really essential costs that I would want covered by an annuity would probably be in the $20,000 per year range.

I'm just not sure when to actually purchase these different financial products. I think I should get umbrella insurance within the next year or so, especially as my savings and retirement account balances are growing. But I was thinking I'd wait to buy long-term care insurance and the annuity until I'm maybe in my 50s. One reason I'd like to wait at least a few years is that right now I'm really focused on paying off all remaining student loan debt and reaching a coastfire level. I think I can do that within the next five years. After that point, I still plan to contribute to my retirement accounts, but not as much. And without the student loan payments, I'll have a lot more money in my budget. I'd like to hear your thoughts on a timeline if you think these financial products

are worth it to someone in my situation. And if you have any other suggestions on how a single person could build a successful retirement plan, thank you so much. Emily, thank you so much for the question. What I love about this question is, number one, that it is the first question I've ever heard that asks about specific financial products like annuities in a context that has a lot of humanity and a lot of life. That was actually, we write comments about the questions as we are queuing up the questions for each episode. And the comment that I wrote on your question was, this is a question about annuities that's filled with humanity. That was literally what I wrote. Joe can attest to it. The fact that, yes, we can have a conversation about product.

and how those products fit into an overarching strategy, but inherent within your question was a reflection of the life, the future, the vision, the values, that all of this ties into. I like that you led with that. And I like that necessarily this discussion on products and tactics, which is a very specific discussion, is going to be framed in that context, the context of you're 42, you're single, you plan to be single for the rest of your life. How do you build a good retirement?

That's the broad overarching question under which these subsequent product conversations follow. Well, and I love also, Paula, that these are around risk management and a conversation that you and I have had a lot is we shouldn't ask which insurances to buy. We should ask which risks are coming up. And I love the fact that she's examining the risk and saying, do I buy these products to cover these risks or are there, is there a different way? Right. Like that is the perfect way to think about it in church. Don't think about long-term care insurance. Think about what do I do if I don't have family around to take care of me because I know I'm going to be single and I need help.

What am I going to do? Like that is fantastic. Love it. Right. And by the way, this discussion is applicable also to, you know, to everyone who's listening. You don't, I'm sorry to be so blunt when I say this, but spouses die at different ages. That's a fact of life. Well, death is not an if.

I just remember all the times during my financial planning career. I'm like, well, if you die. I'm like, well, wait a minute. If, what do you know that I don't? If is pretty awesome. I prefer if to when, but it really is when. Right. And similarly to anyone who's listening who is a parent,

your kids are not a substitute for an aging plan. So to everyone who's listening, it's critical to have a plan in place for how to retire, how to age, regardless of your family status, because of the fact that you don't know, when you're in your 70s or your 80s or your 90s, you don't know who's going to be around. And of the people who are around,

you don't know what their circumstances will be, what type of health will they be in, what physical condition will they be in? What city, state, or country will they live in? What other family obligations will they have? You know, what are the limitations of their capacity, not even just their willingness, but their capacity to be able to help? An over-reliance on plan A with no plan B, C, D, E, F, I mean, that's just unwise planning.

But, Emily, to get to your question. So let's talk about the three products that you mentioned. Number one, umbrella insurance. Umbrella insurance policies are so cheap that I don't see any reason not to have one. That being said, I think that assuming you are not a rental property investor and assuming you do not own your own small business, you may not need one. The likelihood of you getting sued when you are in a position in which you don't own rental properties, you don't own a business, you're not putting yourself out there in those

capacities, the likelihood of you getting sued is probably fairly low. But that said, these policies are so cheap anyway that when it comes to the cost-benefit analysis, the cost is so low and the benefit is a low probability but high-magnitude event. So given that, you may as well get one. I'm with you. I think that of all of these questions, the umbrella a liability policy is a no-brainer. Right. As far as both annuities and long-term care insurance goes, I think that her idea of looking at those policies when she's in her 50s, roughly her mid-50s, is a good starting point. Dr. Wade Fow, who has been a guest on this podcast on multiple episodes, He's a big proponent of annuities.

And if you listen to our episodes with Dr. Fowl, he can explain more about why he likes them as part of comprehensive retirement planning. But he says something similar to what Emily expressed that it's when you're in your 50s, that it's a good time to start looking at these. Yeah, I've heard some proponents of long-term care talk about the statistics of you needing long-term care before your 50s. And sometimes they're compelling. Partially, they're compelling because if you insure it early, your total lifetime cost is going to be much lower than if you wait until you're later. So when you wait until a later date, they look at your life expectancy and because they know they have fewer years to get back that money and they're going to earn a return on that money, they will charge you more. So every year that you wait, there is a penalty on waiting with long-term care. You know, long-term care is the frustrating piece of this entire equation for me because it is so expensive.

It's so incredibly expensive. It's impossible not to have sticker shock. Right. Yet, when you think about why it's expensive, the first thing that you may think and that I may think is that these companies are just ripping people off because this is incredibly expensive. Sadly, while there are some companies that are more competitive than others, they are all regulated by the individual states. So their ability to rip you off, maybe you can sneak one by a regulator for a year or two years or five years, but you're not going to sneak one by them forever. And frankly, you're not going to be competitive.

You're not going to stay in business. If it were one company with high rates, I would think maybe there's something shady going on. But when every company has this ginormous amount that they're charging for long-term care, you know that's not the problem. The problem is when an insurance type costs a lot of money, that means the actuaries have done the math. And they know that the probability of this happening to you is pretty good. It's going to cost them a lot of money. So while, yes, they need to make a profit, they also need to. to make sure they cover their exposure to this risk.

So this turns insurance on its head. I always like not buying the insurance, but looking most at the issues where the insurance is priced high. And I ignore issues where it's price low, except for a few little exceptions like umbrella liability. Like umbrella liability is that, and I think you used the perfect phrase, low chance of it happening to you,

but when it does, it's horrible. Low probability, high magnitude. Absolutely. So that's fantastic. But as an example, I can go either way on pet insurance. And it depends on your experience with your vet bill and with your pet. I definitely am not a proponent for most people of accidental death and dismemberment insurance, which people, when I was a financial planner, people loaded up on that through their workplace benefit package.

Because, wow, it's only five bucks a month or ten bucks a month. Well, if you're sitting at a desk typing on a keyboard all day, what's the chance that you're going to lose an eye or lose an arm? Now, if you're in heavy machinery all the time, accidental death and dismemberment insurance, absolutely, we want to get that. And I actually put my two thumbs up and then I realize it's an audio podcast. Nobody can see that. But you have to look at what type of job you have and then buy it. But generally, for most people out there, accidental death and dismemberment is something that we can forego. So in the case of long-term care, it's important to look at the issue, but I'm still, Paula, I'm still torn on long-term care insurance.

And this is the one area of financial planning that I think every financial planner will tell you is the bane of a financial planner's existence. Like, what do we do with long-term care? But I do agree. I do agree with Dr. Fow. I agree with your assessment. that full well knowing that there will be a small penalty every year that you don't buy it, evaluating this in your mid-50s is plenty of time. I would definitely have this done by the time you're 60. If you're going to buy insurance, buy it before you're 60, if possible.

Joe, since you and I have both mentioned Dr. Wade Fowl within our answers, I want to mention which episodes people can go to if they want more in-depth information about this. So Dr. Wade Fowl has been on our show twice, episode 1119, 111.9. You can go to that at afford anything.com slash episode 119. He was also on episode 271, Affordanything.com episode 271. And there's one other episode that you may enjoy. The title of the episode is what the fuck are annuities. And that episode is episode number 137. So afford anything.com slash episode 137. Do you want to talk about annuities, Paula? Yeah, absolutely. The annuity part of this question, speaking of what are annuities. I don't have the knee-jerk negative reaction to annuities that I see online a lot. I've seen so many people that say, oh, if they say annuity, run.

I don't think that's right. I do think that the annuity industry has not done themselves any favors in the way that they market annuities and some of the sales practices they have used with annuities. However, the basic concept of an annuity in the way Emily is suggesting that she wants to use it is spot on, right? If I've got something where I want a guaranteed income stream for X number of years that I can't outlive, aka like a pension, then yeah, this is a self-made pension plan that will continue to fund these bills for X amount of time. And she gets complete freedom from worry from that. What I just described, by the way, is a pension. We don't have the negative reaction

to a pension that we do to an annuity, Paula, yet they're the same thing. They are the same thing. Some people may say, well, I have to put my own money toward an annuity. I would suggest that you are paid less by your company so that they could fund your annuity when you have a pension. So the concept doesn't bother me. However, study after study shows that you have, if you have some investment savvy, that you could set up your own income stream to equal or beat a pension, would it be difficult? I don't know, but I think that it is beatable, and I also think that the fees that you pay for outsourcing that will be less. And because of the fact that Emily's looking at a long period of time, it's easier to suggest that a diversified

collection of index funds can do the same thing. And historically, have done it very well to create an income stream that she also will not outlive. Now, that said, with the collection of index funds, she's always going to worry about it, no matter what statistics she reads or back testing she looks at, any financial planner telling her it's going to be okay, she will still worry about it. I don't know, but it does it. If you have the annuity, that worry is gone. So the question is, is the fee worth, the freedom from worry? And I think for a lot of people, Paula, that answer is, heck yeah. Absolutely. It's worth it. So I think that Emily first, for me, I think, should look inward and say, do I want to have this fund that I manage

separately that creates my own annuity? And I'd be all for that. But I'm also for finding a very low cost annuity. Specifically, I like annuities through Fidelity and Vanguard that have very, very low fees. I would watch out for some of the big names and insurance. Some of those big insurance names have all kinds of bells and whistles on their annuities that you just don't need. So what I would do is I would look at the annuity, find out how much money it creates per month, do the math herself, if she's able to or do it with her financial advisor or hire somebody maybe for an hour to go and look at what type of return would she need from a well-managed index fund collection to create that on her own. and compare the two and then make the decision about the annuity. I agree with everything you said. The additional second order consideration that I would add to that is, you know,

Joe, you mentioned freedom from worry that comes from knowing that you have this guaranteed stream of income. A second order effect of that could be that Emily might be more likely to take wise, well-managed risks in other elements of her portfolio by virtue of the fact that she has the security of this annuity. So if you look comprehensively at all of her assets, and I'm using assets in the broadest word possible, if you look comprehensively at all of her assets and regard the annuity as the more conservative, safe portion of that basket of assets, the fact that she has that safety anchored down could allow her to take bigger risks in other arenas.

So, for example, she might tilt her retirement portfolio a little heavier towards equities. Or she might take a risk and start a small business on the side. Or she might build out a reasonable, small, reasonable crypto allocation. Any number of risks that she might want to take, reasonable managed risks, those may feel more approachable once she knows that she has some security locked down on the other end. I love this, by the way. This is the same discussion when people tell you you don't need emergency fund. And they're just looking at the ROI of the emergency fund itself, right?

Money in a bank pays you nothing, Paula. It isn't about that money in the bank. It's all the other things that you can max out because of it. You can buy less insurance because of the. fact that you have an emergency fund. You can raise your deductibles because you have the emergency fund. You can take risk in your portfolio because you have the emergency fund. So you have this huge freedom from worry that people that rely on lines of credit and credit cards don't have that freedom from worry. The second that something goes bad and they don't want to touch their investments,

they have to go to debt. So because of that, I feel like they don't, they don't maximize their potential with the rest of their portfolio. So it's the same argument. I love it. Right. Exactly. And that same argument also applies to the classic question of, should you pay off your mortgage or invest that money? And if you own rental properties, that same question applies to, should you pay down your rental properties with the goal of owning them free and clear as quickly as possible? Or should you keep them as maximally leveraged for as long as possible? A lot of people who are in the pro-maximum leverage camp will create a spreadsheet, point to the numbers and say, look, here's how you can arbitrage. the difference between your fixed rate mortgage and the returns that you're making on this property. But what that fails to consider is exactly what we're just talking about, that if you have risk, and debt is certainly a risk, if you have risk in one element of your portfolio, that may influence the way that you handle other aspects of your portfolio. And again, I use the word portfolio in the broadest sense of the word possible to include

not just your market investments, but also your sources of your resources. income, how likely are you to quit a job or look for another job or make a lateral move within your industry or transition to a different industry if you know you have a lot of arbitrage risk happening in some element of your portfolio? And if you don't make that midlife career change, what downstream consequences might that have for your future earnings potential? There is a downside that we should talk about with annuities that you don't have by keeping your money in a portfolio, which is that with a regular generic vanilla annuity, which is the type I think most people should consider if they're considering an annuity, when you pass away, you forfeit

the money. So the income stream ends. Now, you can have what are called period certain annuities, and she may want to look at that, which it'll be her lifetime or at least 20 years, whichever is longer. So if she passes away five years from now, it'll still pay out for 15 years. These all impact the amount of money that she'll get per month if she put some of these riders on the annuity. But she may want that to make sure that somebody gets money if she passes away early. And that's the thing about annuities that everybody who buys an annuity.

On one hand, you get freedom from worry. On the other hand, there is a lot of great talk about building multi-generational wealth and transferring wealth your next generation, keeping wealth in your family. I'm loving seeing some of the discussions about this in the black community that I've seen lately and families that for a long time of struggle with intergenerational wealth trying to build a wealth foundation. And it's super. Annuities will never build intergenerational wealth. So if you're worried about passing on money and giving your heirs any type of a head start, that's not possible. Now, some people might be saying into their device right now,

like, well, Joe, Warren Buffett said, you know, he's only giving his kids a couple hundred thousand dollars. And then you kind of laugh because a couple hundred thousand dollars can mean the world to somebody to give them a nice start. So, well, yes, giving a child millions and millions of dollars may not be the best thing. Giving them enough so that they have a little freedom from worry to begin to build upon what you built can be a powerful thing. So, you know, Emily said that she's going to be single, but I don't know if she's worried about. intergenerational wealth with nieces, nephews, whatever. But if she is, that's another potential downside of the annuity. Warren Buffett has a beautiful quote in which he says that he wants to

give his kids enough money that they could do anything, but not so much that they could do nothing. That guy has so many great quotes. I seriously wonder if he's got some brilliant writer on the side. Give me another one. You know, I think he hangs out with Charlie Munger and the wisdom of Charlie Munger, I was thinking about this earlier today, actually. This gives you some insight into my brain. This is what I think about. What I think of influential financial figures of the 20th century, the wisdom of Charlie Munger and the actions of Jack Bogle, I cannot think of two people who, one in their word and one in their deed, made more positive contributions to the world of finance in the United States than those two. And when I say they were the greatest, I don't mean in terms of the returns that they earned for themselves. I'm talking about the contributions they made to the field, specifically to how individual investors, mom and pop, you and me type people are impacted. Charlie Munger, who is a Warren Buffett's business partner, has some of the most amazing insights I've ever read. And Jack Bogle created Vanguard and popularized the index fund. and by virtue of doing so, the concept of passive investing as opposed to actively managed funds. You know, every few years, a compendium of great investors comes out where they study a bunch of different phenomenal investors. And we've had a couple of them on stacking Benjamins over the years.

And what's interesting is, and I can think of two different interviews that I've done, they include Jack Bogle. And in both cases, they say it's not that Jack Bogle was a phenomenal investor like these, other people. He wasn't a Peter Lynch or, uh, Benjamin Graham or. Yeah, yeah. Philip Fisher. Yeah. Yeah. But what he did, his contribution was he made so many people competent investors that you had to include him in the book because while Benjamin Graham was able to invest very wisely, T. Rowell Price invest very wisely for themselves and for their shareholders. They weren't in the zeitgeist of making so many people decent investors like Jack Bogle did. Right. Exactly. Jack Bogle has a quote. I'm going to paraphrase it. I don't remember the

exact words, but he said something to the effect that his objective was not to try to make people the average investor, the average individual investor wealthy. His objective was to give them a really solid chance of having enough. While we're talking about quotes, my favorite quote is from Abraham Lincoln. And it's don't believe everything you see on the internet. And on that note, I think we're done here. That one's for my friend Hampton. And you wonder why Hampton roasts you. So thank you, Emily, for asking that question. I'd say in terms of both the products and the timelines that you suggested, you're on the right track. So congratulations. We'll come back to this episode after this word from our sponsors. Our final question today,

comes from Max. Hi, Paul and Joe. I'm Max from Madison, Wisconsin, and thanks for taking my question. I've been listening to your podcast for a long time and in making sure that there wasn't already an answer for my question on Afford Anything. I just joined the Afford Anything Community and I'm really excited to dive into it. As background, my partner and I are comfortable in our early 30s with fulfilling jobs, hoping to buy our first home soon and about to welcome our first child.

I really appreciate the way that you often focus on thinking about how to think. As I think about investing in the market, market and real estate. One trend that I read about is the forthcoming population deceleration. I've heard about South Korea closing schools and colleges because they don't have enough young people to need them and about Germany raising homes to create parks for similar reasons. From May of this year, there's a New York Times article called Long Slide Looms for World Population with sweeping ramifications that says more about this trend. When we talk about historical stock market and real estate returns, it's a lot of the

in the context of the U.S. growing from a population of 76 million people in 1900 to 282 million people in 2000 or nearly quadrupling. By comparison from 2000s population to an estimated population determined by averaging a couple of reliable sources of around 500 million and 2100, that population doesn't even double over the same time span. This coupled with the fact that the population pyramid is going to skew towards retirees has me worried that historical data in these areas may not be likely to, hold in the remainder of this century, and we may be heading into uncharted waters. For me, the math adds up to a relatively lower demand, generating lower returns for real estate over the next 80 years, and a shifting of the balance towards more retirees, withdrawing from their retirement accounts and fewer young people adding to them, which could depress investment

returns. It'd be really beneficial to hear about how you both think about these issues, and thanks so much for lending your and your team's experience and resources to think about my question. Max, welcome to the Afford Anything community. I'm thrilled that you're here. Congratulations on everything that you've built. Congratulations on welcoming your baby into the world sometime in 2022. And speaking of babies, let's discuss population growth.

And the maybe lack of babies. Right. So your question was specifically about the demand for real estate in the context of population growth. A few things that I'll say right off the bat. Number one, consumer demand tends to be elastic based on environmental circumstances. So, for example, when prices are high, i.e. when home prices are high, people may live at home with their parents for a longer period of time. They may live with roommates for a longer period of time. They may form alternative housing structures such as housing co-ops. People respond to market

cues by adjusting their demand. And so if home prices are high, that often curtails demand for new housing, at least among the segments of the population who are shut out by those high prices, young people being an obvious example. Similarly, in an environment in which home prices decline, often demand, which is elastic, adjusts in order to stabilize prices. So if home prices decline, more people who are able to do so by second homes, vacation homes. People move out of mom and dad's house at a younger age. People don't have roommates for as long. Families who have lived as multi-generational households, which you see in a lot of immigrant communities, I know that I'm Nepalese and it's very common in the Nepalese community to have a multi-generational household.

Grandma, mom and dad, the kids, and then the kids' kids, all living under the same roof. We don't blink at that. We find that completely normal. But in an environment in which home prices are accessible and mortgages are available and mortgage rates are reasonable, in that type of environment in which there is low friction to getting a house, there's a higher likelihood that someone in that multi-generational household is going to branch out and form a household that has a nuclear family structure rather than a multi-generational family structure. If you think about it, the concept of household formation with a nuclear family structure is, I don't want to say uniquely American, because it exists in other nations as well, but it is certainly nowhere near global.

That's funny because I look at this, I look at, I think, arrive at the same spot you're at, but from a completely different standpoint. While he's worried about population, I worry about at the same time the number of people who have most of the money in the world. And we've gone from a place where lots of people had money to increasingly every year, there's a smaller pie of people controlling more and more of the assets.

And if that's the case, Paula, there is always going to be a need for rental property. And I think that we're going to create more and more renters every year as fewer people have wealth. So your take is that the demand for properties will be consistent, but the volume of buyers will be more concentrated as a result of wealth inequality. We'll be more concentrated. I won't say that I then, because of that, believe that prices will continue to go up the way they have the past six or seven years. I think there's something completely different driving that.

I do think, though, that looking at real estate as an asset class that will continue to outpace inflation as diversified real estate has, the demand for real estate will continue to be high enough that it can support that being a long-term a long-term investment. I think there's something else important here to Paula to recognize, which is that a lot of Max's conviction is in the fact that the past will not equal the future. And I will say that it never has. The past has never equal the future. It always comes back.

The past does come back. I think it's a danger not to learn from the past. But things are always evolving and they are always changing. I also think that the things that Max is worried about are evolving over hell a long periods of time. And for Max's lifetime, while he may need to worry about those things later in life, I think that when we look at the next 20 years, 25 years. I don't think these are 25-year worries.

Yeah, exactly. There is specifically in the context of a question about demand for real estate and for physical assets in the U.S. Sure, the U.S. population may not be growing as quickly as it was, but it is still growing every year, as is the world population. And remember, population growth in a given nation comes from two sources. One is live birth. The other is immigration. And yes, the pandemic certainly caused immigration numbers to drop in 2020, as would be expected. But in non-pandemic times, particularly, there is far more demand to immigrate to the U.S. than supply of visas that we award, which is a long way of saying, if the U.S. wanted to increase its population, it would have no problem doing so.

plenty of people want to move here. There are ways for Max to invest in ways that acknowledge his fear and still do what an average portfolio needs to do, which is beat inflation and reach your goals, make reaching your goals easier. Because if you don't beat inflation, you're going to have to save dollar for dollar toward your end goals. But the cool thing about real estate, if Max feels strongly that the demand for real estate, is going to change more significantly, Paula, than you and I do. There are other investments

that historically have beaten inflation on a regular basis. Equities. Yeah. The U.S. stock market, yeah. Yeah. And this is really cool. You know, last year, ESG investing beat the S&P 500. So if you invested in the S&P 500, I believe you got 27. If you invested in ESG, I believe you got 30. And for people who don't know what ESG is, it's environmental and social. governance and it's a fancy way of saying sustainable funds. Yeah, it's a great way for people who want to not invest in certain things like Max is talking about, right? Not invest in certain things.

They can buy a fund that doesn't invest in tobacco products or doesn't invest in alcohol companies or doesn't invest in companies that have women in the senior ranks. They can invest that way. I think the cool thing is is Max still has recourse. So he doesn't have to invest in real estate if he feels strongly. So if he's hearing you and I, and he's like, yeah, I still don't believe it. It's okay. He can still find ways to get the job done.

Yeah, absolutely. And so two things I want to say. One is if you want a deeper discussion on ESG funds, episode 250 with Dr. John Hale. I don't even have to look that up. I remember the episode number off the top of my head. Episode 250 with Dr. John Hale. afford anything.com slash episode 250. We have a robust, well-researched, very intellectually rigorous conversation about this topic.

Dr. John Hill is a true expert in this arena. The second thing that I would say is, and this applies to everybody, don't invest in real estate if you don't want to. I never want to give the impression that investing in real estate is a requirement to building a strong portfolio or having a great life. You can have a wonderful life by filling your portfolio with market investments, equities and bonds. And the only reason to invest in real estate is because you want to do so. And you like the characteristics that real estate investing offers. You like the fact that it's a hybrid between running a small business and having an investment.

You like the fact that you have direct control over the decisions that are made within how this property is managed and run. You get to decide to what degree you will renovate this property. You get to decide if and how you're going to use this investment for good in terms of the choices that you make and the way that you run it and your commitment to being the landlord that you want to see in the world. Joe, you mentioned earlier, wealth concentration, the worst thing that can happen, in my view, one of the worst things that can happen is if all of the rental properties end up being owned by Wall Street.

Imagine a future in which Wall Street and the hedge funds own rental properties and individual investors, you and me, do not. That is going to be a terrible future, not just for you and me, but more importantly, for the tenants, because you and I can conduct our landlording activities with heart, right? We can lead with heart and with wisdom and with integrity, and a renter is not going to get that from a gigantic hedge fund that owns a bunch of single family homes. And that's exactly what's happening in a lot of cities. I'm looking at you, Atlanta, Atlanta has been bought up by these Wall Street hedge funds, and it's bad for everyone.

So the more that I can get people, individual investors, to one house at a time, be the people who hold the supply so that Wall Street can't get to it, the more that I can encourage that, the more I feel like I will have fulfilled a big part of my legacy in my time on this planet. But again, that being said, you either feel the calling or you don't. So if you don't feel the calling, go forth in your own truth. And by the way, for anyone who's listening who does want to join the movement, who does want to encourage more individual investors, mom and pop investors, you and me,

to own the rental housing supply so that Wall Street and hedge funds and the big banks can't buy them all up the way they have in Atlanta, join our VIP list. It's free. Afford Anything.com. VIP list. Again, that's afford anything.com slash VIP list. On that note, I have one other super important thing for Max, which I think would really be amazing for him. And that is, if he came to my event in Madison, because I'm headed, I've headed his way.

And Max, I'd love to meet you. I will be in Madison on April 25th doing a book signing. People can find out more at stackybedgements.com slash stacked because I'm going to 40 different cities. And hopefully in some cities you'll see Paula. But my co-author, Emily Guy Burkin and I will be in Madison on April 25th. So, Max, I hope you could come and hang out. That's right. Max from Madison. And Joe, the reason that you'll be in Madison at the end of April rather than next week is because you decided to postpone your book tour.

I did with Omnacron raging and it hit very close to home for me. My brother passed away from COVID over the holidays. At the time we made the decision, we saw sports leagues that were canceling events. And friends of mine who are in healthcare are talking about longer and longer and longer lines of people catching Omnacron. And while I certainly want to meet as many people. that are on the financial literacy bandwagon like you and I are, Paula, or hopefully convert some new people to the bandwagon. I don't want to get people sick.

So that's why we decided that we would start March 1st in Dallas and then head around the nation. And we'd also elongate the tour. Instead of making it over two and a half months, now it's over four and a half months. So I'm taken a little bit slower and hopefully that by the time we hit the road, March 1st, that will, will be ready to get together, at least on some level again. I'm sorry about your brother, Joe. He was a good man. Thank you. On a lighter note, I'm so happy to be seeing people.

We kick it off, as I mentioned, on Dallas and the first. I'll be in Austin on the second. Houston on the third, then I fly to the West Coast. We'll do San Diego, or excuse me, San Francisco, San Diego, Los Angeles, Portland, Seattle, before I go to the southeast. and then I'll be in Miami, actually, Fort Lauderdale, Tampa, Atlanta, Charlotte, Raleigh, Durham, and Norfolk, Virginia Beach. And then we go to the Northeast where hopefully Paula, you'll join us. And then the Midwest.

And then after the Midwest, we're going to hit some of my favorite smaller cities in America's heartland, Kansas City, Omaha. Speaking of Warren Buffett. Charlie Munger. Charlie and Warren probably going to watch my book. So I had to come to Omaha. We will be in Des Moines. I don't think I've ever been to Des Moines. Can't wait for that.

And then we'll mop up with some cities out west that are individually tough for me to get to. But we put together on a final surge, which is Denver, Salt Lake, Phoenix, and we're going to end in Vegas. Like, all good tours should end in Vegas. We will end in Vegas. And actually, I have to say this. This is really cool. I was invited while we're in Denver. We're going to actually do two things.

We're going to do one in Denver and another one. in Longmont because I got invited to give a talk at Mr. Money Mustache headquarters, which is going to be a lot of fun. That'll be fun. Hanging out with Pete and Carl and Mindy Jensen and all the gang in Longmont is going to be a lot of fun. And hopefully, I can't confirm yet, but hopefully I will be at your Vegas event. Awesome. Which, as you said, is maybe the best city to end a four and a half month.

book tour. This is how Vegas is going to go. We're going to have an event the first night, and then I'm staying two more days. And it won't be to sign books. It will be to celebrate the fact that we just went to 40 cities and hopefully saw a lot of people. So it's going to be fun. Speaking of events, we are hosting our own event. Afford Anything is throwing a birthday party for Afford Anything. We are turning 11. We're throwing a birthday party in New York City on 2222, February 22nd, 22. That's our 11 year anniversary. It's our palindrome anniversary. We have lowered the ticket price. We've decided to price the tickets at $11, $11 to celebrate our 11th birthday, and that includes two hours of open bar. So if you're in the New York City area, go to afford

anything.com slash birthday. That's afford anything.com slash birthday to grab your tickets $11 gets you two hours of open bar on 2222, Tuesday for our palindrome anniversary. Thank you so much for tuning in. This is the Afford Anything podcast. My name is Paula Pant. 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 you can do to spread the message of financial independence. Number two, open up whatever app you're using to listen to this show and make sure you hit the follow button so that you don't miss any of our awesome upcoming episodes. And number three, while you are in that app, please leave us a review.

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