Afford Anything - Ask Paula: Should I Buy a House or Catch Up on Retirement Savings?

Episode Date: February 11, 2019

#177: Imagine that your job is extremely well-paying, but you don’t enjoy it. You’d like to switch employers, even though this will probably require a paycut. But before you make the switch, you want to accomplish two goals: buy a home and catch up on retirement savings. Should you pursue both goals? Or should you defer the home purchase, given the potential future paycut? If you decide to pursue both goals, which one should come first? This is one of the five questions that former financial planner Joe Saul-Sehy and I answer in this week’s podcast episode. We also answer a question from a listener who’s self-employed and wants to contribute more to his retirement accounts. We talk to another listener who’s living on $600 monthly paychecks while maxing out his Mega Backdoor Roth contributions. We talk to a 22-year-old with an $80,000 salary who’s debating between paying off her student loans vs. investing. And we answer a question from a listener who’s wondering what she should do with 401k accounts from previous employers. For more information, visit the show notes at https://affordanything.com/episode177  Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else. And that doesn't just apply to your money. It applies to your time, your focus, your energy, your attention. It applies to anything in your life that's a scarce or limited resource. You need to manage your resources. And so the question becomes twofold. Number one, what matters most to you?

Number two, how do you align your daily decisions in accordance? Answering these two questions is a lifetime practice. and that is what this podcast is here to explore. My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other week, we answer questions that come in from you, the community. And today, my buddy Joe Saul Seahy, a former financial advisor, is on the show to help me answer these questions. Hey, Joe.

Hey, I'm so excited that we're back. We're back. We're doing it. We're rolling again. It's so exciting. Joe, speaking of people coming back, our first question is from Haley, and you might recognize her. from a previous episode. Here she is. Hey, Paula. It's Haley. I called in a few months ago asking a question about how to deal with not

deserving the money that I make. Well, it's been a few months, and I have taken y'all's advice, and I really took the answer that you guys gave me to heart. I have been listening to a lot of FI podcasts and reading blogs and all that kind of stuff since I graduated, and I finally decided that FI is something that I really do want to pursue and it's something that I genuinely think would be great for the lifestyle that I want. I don't know where to start. A little bit of background. So I'm 22. I am currently making $80,000 a year before taxes. And I also have $54,000 in student loan debt. And the loan debt is what really is kind of creating this psychological block for me. Right now, I live on a lot less that I make. I'm very frugal. I live on like $2,400 a month. So I have a lot of money left over to put towards my net worth. But I don't know if I should aggressively pay off my debt because one of the loans or half the loans are at a little bit of a higher interest rate, like six or seven percent or six and seven percent.

So I am kind of confused. Like, I don't know if I should pay it off aggressively or if I should start saving aggressively and put my student loans on the back burner or if I should moderately do both. With any of the options, I feel like I am missing out on something. And I guess I just can't get over like that psychological hump of feeling like I'm not doing enough or like I'm not doing it in the right way. I guess I just want to know what your take on it is. And if you have any advice for me in this situation, I really appreciated the advice you gave me last time. And I would love to hear what you think about my situation and how I should move forward with FI. Haley, first of all, I'm really happy to hear that the answer that we gave you on the last

episode when you called in was helpful. Now, for people who are listening, who are wondering what that conversation was about, Haley called in several months ago to say that she worked very, very hard as a college student and struggled a lot as a college student to make it through. You know, your college years are difficult. You've got to pay your bills and you've got to study and money's super tight. And Haley had been through that. And now she's out on the other side making $80,000 a year. but she sees friends who haven't done as well.

And it can be very emotionally jarring to go through the struggle and then succeed and see other people who are also going through that struggle who have not yet reached success. And so the last time that Haley called in, that was what we talked about. And so Haley, I'm really happy to hear that you have found peace with that and you've embraced the situation that you're in, which is a fantastic situation to be in. And I'm really happy to hear that you're starting to build towards fire, the financial independence retire early movement. With regard to your student loans, you mentioned that you make $80,000 per year. Now, let's just say for the sake of example, that 25% of that goes to federal, state, and local taxes.

I'm just using that as a hypothetical rounded ballpark figure. So with that $80,000, assuming roughly that ballpark, a quarter of it goes to taxes, leaves you with $60,000 per year. If you were to put 20% of your after-tax income into paying off your student loans, you would have those wiped out in five years. And I don't know exactly what your cost of living is, but based on what you've said, I get the impression that. that if you were to put 20% of that $60,000 per year towards your student loans, you would still have enough money left over that you could invest in other ways as well, whether that might be retirement accounts or rental properties or taxable brokerage accounts, whatever it is that you choose.

It seems as though there would be ample money to do both. You know, I was thinking the same thing, Paula, except for the fact that, and this was a big part of financial planning, when I was practicing was the fact that she said that the student loans give her a psychological block. And the second that I heard that, I was glad that she then included the interest rate on the student debt because when we start looking at doing the most efficient thing using math versus using the thing that behaviorally will work, I generally have then a choice.

no matter what we do, the one that we can sustain is the best one. But in this case, the interest rates are between 6 and 7 percent, and those are worthy of paying down. Absolutely. And so I think that we can start off by saying the half of the student loan debt that's at 6 or 7 percent, you can safely pay down because it'll help you remove that psychological block, and it's a high enough interest rate that it's in your way. And the chance that you'll get a higher return on that in an investment. There's a chance that can happen, but this is a guaranteed six or seven percent, which is a great interest rate to get paid off. I like the idea of paying that down as long as, and I want to add this caveat that Haley being out of college that you already

have an emergency fund in place. If you don't have an emergency fund in place, then I might split between paying more toward the student loan debt that's at six or seven percent and part toward the emergency fund until you get the emergency fund where you want it, which obviously won't be at a very high rate. I want to address one other thing that I think might interest everybody else. It doesn't matter how much Haley's doing. I worked with multi, multi, multi, multi millionaires. They felt like they weren't doing enough.

They felt like they should be doing more. And they also felt like they weren't doing it the right way. The key is to not second guess yourself, have a strategy, commit to that strategy. and work the strategy and continue to learn. Like obviously Haley said that she has, but don't use the learning. I feel like sometimes if you're listening to 57 different podcasts and books and all, that can be awesome,

but it can also make you doubt yourself. You shouldn't doubt your strategy once you put it in place. I'm glad you brought up the fact that this feeling that you're not doing enough never goes away because all of us, no matter where we are, see the gap between where we are and where we could be, or we see the gap between what we're currently doing and what we could be doing. Regardless of whether you frame it as a result gap or as an action gap,

every single human being sees that differential. And so it's very easy for anyone, regardless of their age, their net worth, to think, I'm not doing enough. Look at all of these balls that I'm dropping. And so, Haley, I think for you and for everybody listening, it's important to celebrate your wins and important to recognize how much you are doing, how much you are already accomplishing, and for you to know that regardless of what you choose, we're talking about two fantastic options. Should I pay off my student loans or should I invest?

you can't go wrong with either option. I mean, they're both moves that will have a fantastic impact on your net worth and bring you closer to financial independence. I often tell people, assuming that a person doesn't have some crazy double-digit credit card interest rate, I often tell people when they're choosing between multiple good options to choose the one that excites them the most. And the reason for that is, Joe, as you said, behavior trumps mathematics when it comes to the financial decisions that we make. And so doing the thing that gets you excited is, by definition, the thing that you are more likely to sustain over the long term. And long term sustainability is key to success.

The second thing is, if there's something that you're very excited about, you're more likely to save a greater percentage of your income. so that you can do that thing. For example, hypothetically, if it's a choice between option A and option B and option A is the thing that you're more excited about, that excitement might cause you to boost your savings rate, which means that you put more money towards option A. And because your contributions are the single biggest determinant of your success, that means that option A is the right choice for you. so it can make strategic sense to go in the direction of the financial move that gets you the most excited. Paul, did I ever tell you about the deli analogy? A fantastic mentor mine is a financial planner told me about. The deli analogy? No, I haven't heard this.

He said that he would act like the person that works at the deli counter. You go up to the deli counter and the person at the counter, you say, yeah, I want some potato salad. And they fill your thing with potato salad. And then they hand it to you. What do they say then? The person at the deli counter, what do they say? Connor, what do they say? Is there anything else that you'd like? Exactly. You'd give them the next order. They'd do that. And they'd ask the same question again. And he said as a financial planner, you would often get what he would call these, he would jokingly refer to him as the Puritan ethic goals, meaning they're the ones that we feel like we should have because everybody else has them. And so we think we should be doing that. So when it comes to retirement, well, I think I should have, you know, not the financial independence right now, but I should be saving for my retirement someday.

and then that for average person doesn't get them as excited as they do a lot of people in our community. But they say that first because they know that's what the financial planner wants to hear. And that's what society tells them they should do. Then the second thing, well, I want to put my kids through college. And he would continually go, and what else? And what else? And what else? And he would finally get to, I want to take that vacation I've been putting off for the last 10 years where I go to X place that I've always dreamed about,

but I never feel like I have enough money for. And he would say, that's the one. He would just keep doing the deli counter analogy. And you don't need a financial planner to do that. You can do that to yourself with your goals. And it makes it so much more exciting. That was the first thing I thought of when you said, do the thing that excite you.

So Haley, I'll throw that question to you. What excites you? Does the idea of being completely debt-free and having no student loans, does that excite you? Because if so, then put every single penny towards that until it's done. Does the idea of investing excite you? If so, then keep making progress on your student loans, but also put a significant amount of your savings towards that as well.

I'm going to bet because she said the word psychological block, it's paying student loans. That she gets geeked about that. I'm betting. I don't know. Very curious, Haley. Well, congratulations on all your success and all your forward motion, Haley. Call back and let us know, what you ultimately decide to do and share some of that success with us. We love celebrating successes here. Our next question is from Tree. Hi, Paula. This is Tree from Washington, D.C. I am 30 years old, and here is my financial situation. I am self-employed. I am debt-free. My net worth is $128,000. I maxed out my Roth IRA, Simple IRA, and HSA yearly. My monthly expense is $1,270. It's pretty low for my area because I live simply and in a tiny house. I have two questions. First question,

I would love to contribute more than the 12,500 allowed in my simple IRA. I'm thinking about opening a SEP IRA or an individual 401k, which one would you recommend? Second question, I currently have 44,000 stocked away in my savings account. I'm looking to keep 20,000 in the savings account as my emergency fund and invest the rest. Since I have maxed out all my tax advantage retirement accounts, I am looking into a taxable brokerage account. How often do I have, to pay taxes on this account. Do I pay only on the earnings? If the earnings are reinvested, do I still have to pay taxes on it? Basically, I would love a quick and dirty overview of taxable brokerage accounts. I plan to contribute $50,000 yearly across all my investment accounts. My goal is to

reach FI at $35 with $460,000. Thanks for all the good you do in the world. I look forward to hearing from you and stalking you on Instagram. Remember to double tap. Tree, thank you so much for calling in. Thanks for that question. And thank you for following me on Instagram. For everyone listening, that's at Paula P-A-U-L-A, P-A-N-T. I'm a little bit obsessed with Instagram. I have to admit. To answer your question, first of all, with regard to your retirement accounts, you have the option of having either a simple IRA, a CEP IRA, or a solo 401K, given that you're self-employed. Unfortunately, you cannot have more than one account unless you have two businesses. But assuming that you only have one business, that one business needs to choose if it's going to have the simple, the sep, or the solo. Now, I totally understand that you want to contribute more than the $12,000 contribution limit that the Simple IRA allows. Oh, and by the way, in 2019, the Simple IRA lets you contribute $13,000. as an employee contribution.

So, you know, a little extra. And it also lets you make additional contributions as the employer of yourself. So all of these plans, the SEP, the Simple and the Solo, these all let you make contributions both as the employee and as the employer of you. You're the employer of yourself and you're also the employee of yourself. So you can contribute from both pockets. And that's the good news. But the bad news with regard to the simple IRA is that the employer side of the equation and the employee side still has pretty low contribution limits. The simple IRA is just not the vehicle for allowing you to contribute buckets of money.

But the good news is that you can switch out of it. So you do have the option of deciding that, hey, the simple IRA was what I used in 2017 and 2018. but this year in 2019, my business is not going to offer me a simple IRA anymore. This year, my business will officially offer me either a SEP IRA or a Solo 401k. In other words, in order to transition to either the SEP or the solo, you have to get rid of the simple. Now, which one should you choose between the SEP or the solo? Well, if you open a solo 401k, as the employee, you can contribute $19,000 per year into your solo 401k. And by the way, for anybody who's listening to this, who happens to be ages 50 or older,

for those of you 50 or older, you can contribute $25,000 per year into your solo 401k. But tree for you, because of your age, the limit that you can contribute is 19,000. So already it's a better option than the simple I. You can also contribute 25% of your compensation as the employer. Okay, so calculating your compensation is a little complicated because the IRS considers your compensation in this context as your earned income, which is defined as net savings from self-employment after deducting both one half of your self-employment tax and also contributions for yourself. What that means, basically, is that figuring out that number is super complicated and you're probably going to need a tax advisor or CPA. But at least you'll have the opportunity to shovel more money into your retirement accounts.

And if you're under 50, which you are, then in the year 2019, you can contribute a total maximum amount of $56,000 into your solo 401k. That's combined between both the employer and the employee side. Now, that maximum of 56,000 depends on how much you make. So it's not like you just get 56,000, no matter how much you make. It's got to be proportionate to your earned income based on that really complex calculation. But that's where you max out. And, and this is super cool, when you make the employer contribution, that's going to be a pre-tax contribution. But as the employee, you can choose to make either a traditional or a raw.

contribution. So, for example, if you open a solo 401k at Vanguard, you can open a Roth solo 401k, make your employee contributions with a Roth designation, and then make your employer contributions with the pre-tax designation. So that way you get a mix of both. Yeah, a little bit of both of what we call the two sides of the tax triangle, of which Tree talks about the third side, which is the non-qualified. So then you really have all three. Yeah. Speaking of that then, Joe, do you want to jump into, should I talk SEP IRA or do you want to jump into that third side of the triangle? Well, while you're on retirement plans, why don't you go there? Because I'm fascinated. I've got the popcorn out. With a SEP IRA, you can contribute 25% of your compensation up to a maximum of $56,000. So that contribution limit has increased for the year 2019.

So as of 2019, $56,000 is the max that you can put in. And so the advantage of a SEP IRA is that that's a really high contribution limit, which means you can potentially shovel a lot of money in there. The drawback to it is that if you're self-employed, calculating the amount of money that you can put into a SEP gets a little onerous. Because technically, if you're self-employed, you can only put it. 25% of your net self-employment income, which means that you have to calculate this amount after you account for the reduction in income from the SEP contribution as well as self-employment

taxes. Basically, the long and short of it is calculating the amount that you can put into your SEP IRA can be a little bit complicated, whereas with a solo 401k, it's straightforward. You can put in $19,000 as the employee plus additional money as the employer. And so the straightforwardness of the solo 401k in terms of you know what that raw dollar amount is, is the advantage. What's interesting here, Paula, though, is that both of those options are better than the simple. Than the simple IRA, yeah. Because if Tree's goal is to put in more, that's the worst one of the three. So unfortunately can't have two unless you want to have tree, unless you want to have two different businesses, then you can have two, one for each business. But I think it's probably

easier to have to have one, unless you already do have two different businesses. Let's talk about the other part of this thing, though, Paula, which is how do taxes in your regular brokerage account happen? So if you have dividends or interest, you're going to pay a tax on that every year. Also, So if you have a mutual fund that declares capital gains, you're going to pay a tax on that during the year as well. So every year, you're going to have maybe dividends, maybe interest, depending on how the particular investment declares money that's being paid out to you as the investor. And then any capital gain that a mutual fund has will also be distributed to you. Let me explain why that is. even if you don't sell the mutual fund, if you have a mutual fund, even if it's a passive fund,

maybe a fund was expelled from the S&P 500. So let's say that you own an S&P 500 mutual fund, not an exchange traded fund because that's going to work a little differently, but a mutual fund. You mean an index fund, an S&P 500 index fund? Thank you. Yes. Or a total market index fund, whatever it might be. But let's say that a position there is no longer going to be in the,

index. So they take it out. When they take it out, they have to sell all the shares of stock, and then they purchase shares of the new thing. If those shares had a gain during the time that the mutual fund own those, they split that gain among the different investors, and they call that a capital gains tax, even though you didn't sell personally the fund that you invested in sold. And if you don't hold that inside of a retirement account, whether it be one of the one's trees talking about or a regular Roth IRA or traditional IRA, whatever it might be, if it's just in a brokerage account without any tax shelter around it, you're going to be liable for a portion of that tax. So, Joe, then, as an example, if you owned an index fund

that invested in the Dow, and there's some particular company that starts failing and gets kicked out of the Dow, that means that when they got kicked out, that would have triggered a capital gains tax based on the activity inside the fund, despite the fact that you as an individual personally did not do anything. Yeah, and people like, whoa, I didn't sell. I didn't do anything. I held on. Yes, but your fund didn't hold on. So in a mutual fund, that's the way it works.

And by the way, that was one of the most commonly asked questions when people would get their tax documents at the beginning of the year. You go, Joe, I've held this the whole time. And then the second biggest question tree was exactly what you said about reinvesting dividends. people say, well, I check that box that said that I reinvested dividends and yet I got this 1099 saying that I owe this money. You do. Because the whole point of that checkbox that says that you want to reinvest dividends is for your convenience so you don't have to receive the dividend and send it back.

The tax law is still the tax law. They gave you a dividend and you decided on your own by checking that box that whenever I get one of those, I want to reinvest it automatically for convenience. So the bad news, even if you reinvest dividends, those dividends are all still taxable unless they're inside a tax shelter. So so far, Paula, this sounds like a big fat mess I don't want to get involved in. Right? Exactly. Why don't I just put it in the tax shelter and get rid of it? Because when you look at these taxes, they're never, I won't say never. Let's say rarely. They're rarely very big. And the thing that you get by paying those taxes is supreme flexibility. Each type of account in the tax triangle has a tradeoff.

A Roth IRA has some tradeoffs. There are a set of rules to be able to get at some of your money. There are rules around how much money you can put in when you can take the money out. Same thing with money that goes in pre-tax. Again, rules around when you can take it out and put it in. The rule about the third side is there ain't no rule, but you're going to pay the heaviest load taxes, but it really isn't that the taxes, generally speaking, are not that onerous. You can look up, by the way, what the taxes historically have been on any position that you're going to buy. If you go to a site called Morning Star, they'll show you the year-by-year distributions of the funds that you are about to purchase, so you can get a handle on how this

is. And you'll see that it's generally not going to be a lot. I can relate to that. I occasionally get paperwork in the mail where I'm like, ha, 1099 dividend for. $11. And then the only annoying thing about it is that now I have this piece of paper to keep track of and to scan and upload into Dropbox and send to my CPA for $11. Right. Not very big, but annoying. Yeah. It's just annoying to have to track it or worse to forget about it and then get a letter from the IRS being like, hey, you didn't pay taxes on this. And that happened fairly often where I would meet people for the first time and their question to me was their very first question out of the gate was, I'm coming here because I clearly don't understand what's going on because I'm reinvesting all these dividends and the IRS sent me a letter saying I have to claim it. What's that all about? I don't have to claim it because I reinvested. Yes, you do.

Speaking of Roth accounts and speaking of that tax triangle, our next question comes from Wren. But before we get to that question, we're going to take a quick break for this word from our sponsors. You know what's a little bit ironic about running your own businesses that you are hustling so hard to get clients and get work and not just find the clients but then actually do the work and keep up with the demand? You're working so hard that ironically, sometimes it's hard to find the time to send in. invoices, right? Check out FreshBooks. FreshBooks makes invoicing and accounting easy, especially for small business owners. You can create and send professional-looking invoices in 30 seconds, and you can get them paid

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No catch and no credit card required. Just go to FreshBooks.com slash Paula. And when they ask, how did you hear about us? Type in Afford Anything. That's Fresh Books. F-R-E-S-H-Books.com slash Paula, P-A-U-L-A. When they ask, how did you hear about us, mention afford anything.

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Hey, Paula. My name is Wren, and I am 27 years old, and I work as an engineer. So this is the first year that I started contributing towards the after-tax portion of my 401k plan. Pretty soon I'm about to do a rollover to roll that money, the extra money that I put in this year, to a Roth IRA plan. So I've been doing that for the past six, seven months or so. It hasn't been easy. Obviously, I've been contributing towards the pre-tax portion as well. So in addition to that, I'm also putting a lot of money into the after tax. So I think my paycheck has been about $300 per every two weeks or so. I was running pretty low on cash, but still enough to be in a safe threshold.

And I was probably in about a couple months, I would have to think about liquidating my existing funds in my brokerage account. and I was thinking whether I should sell the funds at about zero loss, right? So no capital gain, no loss, because I bought them at different prices. So I was thinking about picking and choosing the ones that would minimize the least amount of tax liability. Is this a sound plan to continue to fund my mega backdoor conversion, right? So funding, continue to fund my exotax portion because I think my logic is that I'm essentially just moving money around. Instead of that, getting that money in my paycheck, I'm paying myself through selling my funds

and essentially moving the funds from brokerage account and eventually to the Roth IRA account. Is there any holes in my logic? Thank you. Wren, first of all, how on earth are you living on $600 a month in your paycheck? I have to assume that you have cash savings in a savings account. that you're living on, because I can't imagine any other way in which you could get your cost of living down to $600 a month or less, even if you had no housing payment. Let's say you're a rental property investor and your house hacking, so you have no housing payment, or you're

living at home with your parents and you don't have a housing payment, even in those circumstances with no housing payment and let's assume no utilities payment either. And let's just assume that you ride your bike everywhere so you don't have... any car-related expenses, even in that scenario, you still have to buy groceries and toothpaste and toilet paper and pay health insurance premiums and have a cell phone and all of those things are going to add up to more than 600 a month. So I applaud you for living so frugally, but I wonder how you're doing it and I wonder how sustainable it is. Now, before I answer your question, the first thing that I want to do is explain the notion of a mega backdoor Roth for the sake of everybody who's listening who might be wondering what on earth that is.

My good friend the mad scientist has an excellent article about this. We're going to link to that article in the show notes at afford anything.com slash episode 177. But at a high level, here's the idea behind it. When you make contributions into a 401k, you can make pre-tax contributions, after-tax contributions, or a combination of both. Now, if you make after-tax contributions into a 401k, you can then flip that money over to a Roth IRA. And by virtue of doing so, you essentially are using a loophole that allows you to put more money into a Roth IRA than the standard. $6,000 annual Roth IRA contribution limit would have otherwise allowed you to do so.

So essentially, this is a strategy that allows people to put more money into their Roth IRA. And that's why it's referred to as the mega backdoor Roth IRA. And then with regard of what lots to sell, I'll take that question first and then kind of of Paula, my perception of another question or something as a former financial planner that that I wonder about. But when it comes to lots to sell, the idea of selling lots right now that have no capital gain or no loss taking ones that are closest to zero as possible, works really well now in terms of the ones that sit there. I worry about the lots that are still around after you sell for this year and you have lots for next year. So I worry about deferring a bigger tax

load next year than you're going to have today. So for me, it isn't about looking at which ones are the ones that will give you the smallest tax hit as having a balanced plan based on years in the future. I would kind of rather, if your tax situation is going to stay the same year after year, you think you're going to be in the same relative tax bracket, then I'd rather peel off some high gains and some no gain every year so that you moderate your taxes this year and later in the future. But it all depends on how long you're going to do this, which goes back to a comment that Paula made that I agree with. If you're moving money from your right hand to your left to do this, and you have to sell money that's in the non-IRA brokerage account, I go back to what we were

discussing earlier with Tree, which was this idea of the tax triangle. You're taking money that's flexible money and you're selling it into the Roth IRA. So you're packing more money into one third of the triangle using the results of another third. So I would caution you if your goal is financial independence, you're making it more difficult to execute that on the other side by having less money in a flexible position. So I would just caution you that way. All of us like paying less money in taxes. I think that's awesome, right? I always want to pay less money today. And I feel like it sounds like the perfect strategy today that when you say, I want the RE half of fire and I now want to live off of some of that money,

if you're not in an age yet where it's easy to get at a lot of this cash, you might regret not having so much money in the flexible spot. So it's a little bit, Paula, what you need for today. And it's also a little bit about thinking about your needs on the other end of this. You know, Stephen Covey in the great book, Seven Habits of Highly Effective. to people always talked about picking up a stick. And he said, whenever you pick up one end of the stick, you also pick up the other end. Most people just think about the end of the stick that's closest to us when it comes to a situation that we're in in the moment. But we always want to think

about the other end of that stick. And especially when it comes to tax treatment, I want to make sure that I give myself good tax treatment today and good tax treatment in the future and flexibility today and some flexibility in the future. So those are the only questions that I would have about the strategy overall. I also said there was something that bothers me a little bit from Wren's question, which, by the way, I think what Wren's doing is awesome and so aspirational to be able to live on that little money today. But I worry about something.

While I love the idea of saving aggressively, and I think that's absolutely admirable, I think we also need to remember that the future isn't ever a guarantee. And if you're saving so much money for a future that might not arrive, that you're depriving yourself to the point that you have zero enjoyment today. Don't get me wrong, if you're enjoying this and this is a fun challenge, and it is exactly what you would rather be doing nothing else today than you should do it. but if it's a huge sacrifice and you're going without thinking that someday it's going to be great in the future, there's just no guarantee. And I think about that specifically, Paul, I should tell everybody why I mentioned that today.

My dad's, my dad's best friend is probably going to pass away in the next 24 hours. And it just makes me think about life and how things never happen the way that you think they're going to happen. We go to watch a movie and it all wraps up neatly at the end of the show. but none of us goes at the end of the show, right? We always have, you hear about these people on their deathbeds. You and I have a mutual friend, Adam Baker, who did a whole documentary several years ago, maybe seven years ago about people on their deathbed.

And he said, they were interviewing people who were probably going to die in the next 24 hours, and they were worried about who was going to feed the cat after they left and how this bill next month was going to get paid. And just the realization that I'm, still in the middle of my story is still there. And that's when that happened. So I would say, you know, to everybody out there, just, if this is fun, you should be doing this. If it isn't fun, but you're reading about other people that are doing things super fast and you want to get there

too and you really want to catch up so bad that you're really suffering a lot today, I think that's a strategy I might reconsider. Thank you for sharing that, Joe. I think it's important to pull back and look at the bigger picture and ask not just what to do, but why are we doing this? Yeah, I didn't mean to get too heavy there, Paula, but, but, but I think it's important for you and I to talk about that. I mean, this whole podcast, this is all aspirational stuff that really is a good time. And it's so exciting to hear what people are doing. And I just don't want anybody who's listening to get the wrong, you know, oh, I, I guess what

Haley said earlier in the thing saying, I feel like I'm not doing enough. Everybody kind of feels that way to some degree, no matter what it is. I'm not running enough, and I've run 12 marathons. So it never, never goes away. But nice job, Ren, by the way, on being able to do the Megabak Doroth IRA. One fantastic quote that I heard was, plan for the future, don't live in it. Oh, I like that.

I'm going to steal that from you and not quote you. Do it. Thanks, Ren, for that question. We'll return to the show in just a moment. Do you want to wear shoes that are environmentally friendly, sustainable, comfortable, and look good? Check out Rothies. They make great flats for women and girls that are made out of recycled plastic water bottles. In fact, they've diverted more than 35 million water bottles from landfills.

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One of the major themes of this show is lifelong learning, because everything that we talk about, whether it's investing, entrepreneurship, side hustles, even time management, there's a big lifelong learning component to all of this, and that's why I'm proud to have Skillshare as a sponsor of this show. Skillshare has thousands of classes

in everything from photography to creative writing, to design, to productivity. So regardless of whether you want to start a side hustle or just get involved in a passion project, Skillshare is a great resource that can help you develop those skills and learn what you need. Mike Vardy, who is also a previous guest on this show, teaches a class on Skillshare called Productivity Habits that Stick.

And one class that I think would be very useful is Emily Simcox teaches one called Bookkeeping for Freelancers, how to handle your finances. So if you want to check out these classes and many more, you can get two months free when you sign. up at Skillshare.com slash Paula. That's two months of unlimited access to thousands of classes for free. You can get that at Skillshare.com slash Paula. Again, two months free at skillshare. Our next question comes from Julie. Hi, Paula. This is Julie from Washington State. I have a question

about all of my past employer 401K accounts. So I always get set up wherever I work, and when I leave that employer, they're just there. And I'm not really sure what they're doing and anything about them. So I have a couple of past employer, 401Ks, and some IRAs. What do I do now? What steps do I take to find this information and what do I do with them? Do I collaborate them, put them together? where do I put them? So I just need your help and some steps on what to do with all of my past

employer 401K contributions. Thank you. Julie, I love this question. So Paula, I'm just going to jump in here. Do it. Another mentor mine told me a long time ago that said when you take your dream road trip vacation, you don't have six different dashboards you look at. You have one. And it's impossible to look at six different dashboard. So even though all of those old 401ks, Julie, might be great where they are. You might have fantastic investment choices. It's not about the investment choices. It's about what you do with it. And it's so much easier to keep those in just a couple places. So what I would do is pick what's called an IRA custodian. That investment house is going to hold your IRA. Vanguard. I was going to say Paula prefers one over some other.

Not that I'm naming names here, but Vanguard. Yes. So pick one. Roll your money over to that one for all the money that is in retirement accounts outside of the place you work. And then you'll always have two accounts. And it's so much easier to manage that money and to know where to go next and to keep your thumb on it than it is to have 57 different places.

So I prefer the keep it simple method. It really makes life a lot easier, but it also makes it a lot more. more fun to manage your retirement money when you can track just a couple dashboards. One important thing to remember is that when you roll over your 401k into a roll over IRA, you do not want to withdraw that money. In other words, you do not want to take a 401k distribution because that can unintentionally trigger some pretty significant consequences. So you want to execute what's called a custodian to custodian transfer in which the company that is holding your 401k directly sends that money to Vanguard, which will hold your IRA. And so as long as they're not

cutting you a check, as long as it's those two companies that are transferring the money between accounts with one another, then you won't have to worry about unintended consequences. Good point. If you get a check, if you happen to accidentally get a check, I would send it back to the original custodian, tell them you accidentally filled out the form incorrectly, rescind, rescind that, and start over. Don't, don't mess with the check. Don't deposit it. Don't do anything with it. Send it back and start over so it goes directly to your new custodian and you don't have your hand in it. There's another thing I want to caution people on, which is there are also rules about getting at 401 money's versus getting at IRA monies.

It's important for a short time frame from age 55 to age 59 and a half. And part of this depends on your own 401k's paperwork. But generally speaking, a lot of 401Ks you can get at your money at 55 if you separated from service from that place of employment. And it's not in an IRA. It's in a 401k. So I've seen people that are 57 years old. They want to retire right now.

They roll the money over to their. IRA because some idiot financial advisor told them to so they could cha-ching on a commission. And now you had to sit around and wait till 59 and half or use what's called IRS Rule 72T, the SCPP rules, which is, SCPP is short for pain in the butt. I don't know if you know that, Paula. Don't do that. Just leave the money at the 401K. And you can-

So, Joe, to clarify, you're talking about the 401K with your current employer at the time that you retire. That's right. Yes. do not roll that money over to an IRA unless you know you're not going to need that money until after 59 and a half. Or roll over a portion of it. I've seen people do this.

They'll take three quarters of it and move it over to whatever part they're sure they're not going to use till after 59 and a half because they like the investments better at, you know, their custodian of choice, whichever one that may be, Paula. Begins with a V and rhymes with Angard.

Not sure which one she's referring to. but if it but take three quarters of it let's say and move it over and then leave the money that you think you're going to need at 59 until 59 and a half at that spot so it doesn't have to be all or nothing it can be a partial rollover and people don't think that way i should state for the record since we've been joking about my love for vanguard so much charles schwab is also awesome and if you have an account at fidelity i wouldn't like scramble to move it i wouldn't open one there but I wouldn't be in a hurry to close one if I had it. Paula isn't going to kick you out of the party.

But Vanguard Schwab and Fidelity are the three low-cost brokerages. You can't go wrong with any of the three. And if you currently have accounts at any of those three, you're fine. But if you're going to open a new one, go with Vanguard. And the reason for that is because it is member-owned, which means that every account holder is partially an owner. There's no conflict between the owners and the clients because the clients are the owners. Well, thank you so much, Julie, for asking that question.

Our last question comes from Jane. Hi, Paula. I'm 30 years old and I make 150,000 plus an annual bonus of over 20,000, while my husband makes 80,000 with no benefits. He has a large student loan debt, so he plans on doing public student loans. loan forgiveness requiring us to file taxes separately. I only started making this salary a year ago after grad school, and I do not know if I will be able to maintain it because I'm not too happy in my current position. I've been saving over half my salary, which we used to pay off a student loan

that was not eligible for forgiveness and for our wedding. We have $65,000 left in a savings account earning just over 2% interest. At our current savings rate, we'll have almost $120,000,000,000, thousand by October if I stay in a job that makes equivalent to what I make now. We are trying to reach that amount of savings because we want to buy a $600 to $675,000 home, a modest two-bedroom in our high cost of living city. Ideally around next October, but we could probably wait another year. At the same time, graduating in the recession, taking $30,000 per year jobs, then going back to grad school has led us to be behind in retirement savings. Right now he has 25,000 in an old Roth 401k that he will roll over to a Roth IRA. I have 23,000 split between a traditional

and Roth IRA and 10,000 fully vested in a traditional 401K. I've started to contribute monthly what would amount to the maximum towards my traditional 401k by the end of the year and think that since he has no work benefits, he should put a maximum of 5,500 towards a backdoor Roth. I don't think I should do Roth, as I believe my future jobs may have lower salaries. However, contributing to retirement would further reduce our down payment and put us in a position of paying PMI for longer. So my question is, how should we think about the competing priorities of saving for a down payment versus retirement? And does Roth for him and traditional for me make sense?

First of all, congratulations on all of your success. Congratulations on finishing grad school and getting a well-paying job and saving 50% of that income and aggressively building your savings rate. You're in a very strong financial position. So big congratulations on getting yourself there. I totally agree that given that you are married filing separately and give you. Given that you currently have a high income, but you think that your income will be lower in the future. And given that your husband has a lower income, the strategy that you're taking of traditional for you and Roth for him makes a lot of sense. And you're also absolutely correct in that if he were to contribute to a Roth IRA, he would have to make it a backdoor contribution.

And the reason for that is because if you are married filing separately and he is not eligible for a workplace retirement plan, but you are. And even though you're married filing separately, you still live together, he is not going to be, based on his income, he's not going to be eligible for any type of traditional IRA deduction. So he is going to have to make a contribution into what's called a non-deductible traditional IRA deduction. IRA. And then once that money is in the non-deductible traditional IRA, he can then backdoor it into a Roth. And I think that for him is a fantastic option. And also for you, given that you're currently in a high tax bracket and you think your tax bracket's going to be lower in the future, putting as much money as you can into pre-tax accounts now while you are temporarily in a higher tax bracket is a very smart strategy.

So I think you're completely on the right track in terms of what you're thinking. When it comes to the push and pull of the house versus retirement, Paula, I go back to Haley's question where she says that it's difficult to decide which to do. And I can hear it, I think, in Jane's voice. I don't want to put questions in her head. But saving for this fairly short-term goal versus the long-term goal and then saying that I'm going to, I might be able to push this back. The obvious answer that financial people, if they're only dealing with, have more money

will give you, is to push back that house and to get caught up for retirement. But I think what a good financial planner would ask you is, how do those two options make you feel? Let's say that you put the house off and you're able to catch up kind of using, the terminology that you talked about about being behind. So whatever your definition is of catch up, you're able to use that money to catch up for your retirement, but you don't get the house when you want it.

On the other side, if you get the house now, but then you put yourself in a position of having to do more later, but you're more comfortable today. I don't know how you'd answer that. What I do know is that every person I asked that question of when I was a financial planner would begin, and I guess that's kind of hyperbole, but it wasn't every single answer, but it certainly felt like it. Most people would answer me by first saying,

well, that's obvious. And then they'd split about 50-50 between those two options. So it certainly is obvious to you, which one is better. But I would look at both of those. So in terms of buy a house but be behind on retirement versus be in a great spot within your retirement planning, but just delay that purchase of the house. One of those two is going to have a significant emotional impact on you. And part of it has to do with where you're living today, what the conditions are like where you're living today. For a while, I had some family members living with my mother-in-law. I love my mother-in-law. I couldn't imagine living in that house at all.

And I would say the house is super important. And I love you, mother-in-law, you're fantastic. But that house would be right now. But if things are very comfortable now, and I'm perfectly happy where I'm at, and the FI part of fire is the most important thing to me right now, well, then certainly that house can wait. Even if you weren't happy with where you were currently living and you wanted to catch up on retirement, you could rent a place that would cost more money

and be nicer than the place that you are renting right now, but would still be significantly cheaper than buying a house, particularly when you factor for the opportunity cost of being behind on your retirement. I don't like that move, though. How come? I don't like that move. I was going to make that move once in my career and my coach. you, I thought was a brilliant coach said, so you're not happy where you're at now. Are you saying

that you would kind of window dress that you're not happy by making it better, but not ultimately what you really want? Like, it just feels like too much of a compromise. What about this one? What if I bought the house, but then I rented out some of the rooms. I brought on roommates. Yeah, that would be fine. That would be absolutely fine. See, I like that way better than going halfway. See, the reason that I propose the stepping stone rental. So if you're not happy with where you are right now, get into a rental that you can live with for the next few years until you're ready to buy a home. The reason that I proposed that is because, in part, because you mentioned that you live in a high cost of living area. In high cost of living areas, renting often makes more sense than buying. So buying a home,

while it often has many non-financial benefits, it has plenty of emotional and cycle. benefits, it is not necessarily a financially sound choice. Now, that doesn't mean that you should never do it, but it's not going to be the decision that's at the very top of your financial priority list. And so if you can, particularly in a high cost of living area, if you can rent a place that you enjoy and spend the next five years there while you're aggressively catching up on your retirement planning, then when you are ready to buy a home, you can do so from a position of strength. I will tell Jane this, and every financial planner listening will nod their head. If you buy the $600-something thousand-dollar house without renters

or without going halfway, the game will change. The game will change significantly for you. And it's not the financial game, the game changes around your priorities. You have this nice house in this, in this high cost area. You're going to want to fix up the house. You're going to all of a sudden have a lot more short-term goals than you had before. And by the way, I can't say that categorically, but I can say once again working with large numbers of people, it just usually happen. It's also what happens when you see a person or people with no children that decide to have or adopt a child. the game completely changes. It completely, all the sudden, money, especially with kids, money all of a sudden is just gone.

You've no idea where it was. You used to have oodles of money. Now you have no idea where the heck your money went. And your life becomes a lot more immediate day-to-day concerns and some of these very aggressive goals that you have also change, much more than people realize ahead of time. So I do think, Jane, that if you purchase the house, it will change things. And the thing that I try to predict that I can't, but that I also want to think about is Jane talks about not being particularly happy at her high compensation job, juxtaposing a high mortgage with threat of maybe vacating that position makes a financial planner worry. Right. Absolutely. Yeah, I agree with you on both of those points. When you buy a house, The classic headline that many people write about is, oh, you buy a house and then you want furniture.

Well, sure, furniture is a discretionary thing. You can fill your house with used floor cushions from Craigslist. That's absolutely an option. But even still, that doesn't change the fact that you're going to need tools and money to maintain that home. When you buy your first home, all of a sudden, for the first time in your life, you realize, I need a lawnmower. I need a way to clean my gutters. I'm on a first name basis right now with my Home Depot people. When I bought my Triplex, I just felt like every single paycheck went directly to Home Depot. I was like, why do you even bother passing it through me as an intermediary? Yeah, I walk in. I say, hey, Larry. He says, hey, profit margin. I know, right? And it wasn't even discretion.

It was just all of these little things associated with home maintenance that a first-time home buyer doesn't necessarily know to expect. Light bulbs. I had light bulbs out all over my house. We had really old single-paying windows and we didn't want to pay the money yet to replace them. We wanted to wait for a few years and save up because we just didn't have the money to replace all of those. windows, but even going to Home Depot, buying that plastic film that you can put over your windows, and then getting, I didn't own a hair dryer, so then buying a hairdryer to point at that film so you could put it around the windows, I mean, even that was like a hundred bucks. And multiply that 100 bucks by 10.

Right, exactly, because that's just one small example of thing after thing after thing that just hits you. It's so funny and it's not funny at all. On that note, that is our show for today. Joe, other than your new home that's costing you lots of Home Depot money, where else can people find you if they would like to hear more of you? You can find me just down the street at my mom's basement where we record the Stacky Benjamin show every Monday, Wednesday, and Friday. And you'll meet Paula Panther on most Fridays going over her love of. of Super Bowl football teams and vintage movies and current cultural references that have nothing to do with the role family. You'll find all of that and more at stackagements.com.

Fantastic. Thank you so much for tuning in. This is the Afford Anything podcast. If you enjoy today's show, please do three things. Number one, hit the subscribe button in whatever app you're using to listen to this show. That way you won't miss any of our upcoming episodes. Number two, share this episode with a friend or family member who could benefit from listening to what we've talked about today. And number three, please head to Afford Anything.com slash iTunes to leave us a review. Thank you again for tuning in. My name is Paula Pant. You can find me on Instagram at Paula Pant.

I'll catch you next week. Fun fact. The founder of Vanguard, John Bogle, is also the guy who invented the index fund. Nobody else finds that to be a fun fact except me. All right. Super fun. Most fun fact. You underestimate your audience, Paula.

I'm sure everybody listening pulled their car over on the side of the road just then. Maybe started crying with joy, I mean. Texting their grandma. Yes. They're standing at the water cooler at work and Bob comes up. And they say, guess what, Bob? Fun fact. This army of nerds

Fantastic. Our people. Mm-hmm.