Afford Anything - Ask Paula: Should I Take a Higher-Paying Job if I Can’t Save As Much for Retirement?

Episode Date: May 5, 2022

#378: Anonymous is 25. She has a job offer that comes with a substantial raise. Hooray! Buuut … there’s a problem. If she accepts this job offer, her new employer won’t allow her to contribute as much money to her company retirement accounts.  How should she think about the trade-off between increasing income and funding her retirement? Meanwhile, Dan from California is retiring soon and wants to know what he and his wife should do with the loan they took out against their 401(k). Finally, an anonymous caller who goes by “Daughter” has a whole life policy that only costs her less than $50 per month. Since her policy is so cheap, should she keep it? In today's episode, former financial planner Joe Saul-Sehy and I tackle these tough situations. Enjoy! Do you have a question on business, money, trade-offs, financial independence strategies, travel, or investing? Leave it here and we’ll answer them in a future episode. Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to any limited resource you need to manage, like your time, your focus, your energy, your attention. Saying yes to something implicitly carries incredible opportunity cost. And that opens up two questions. First, what matters most?

And second, how do you align your decision-making around that which matters most? answering those two questions is a lifetime practice. And that's what this podcast is here to explore. My name is Paula Pan. I am the host of the Afford Anything podcast. Every other episode, we answer questions from you, our community. And my buddy, former financial planner Joe Sal Sihai, joins me to answer these questions. What's up, Joe?

Paula, I'm so excited. We are looking at some fantastic questions today. And I can't wait to help a few people in the community. Absolutely. So here's what we're going to tackle. First, an anonymous caller who is 25 years old is trying to decide if she should change jobs to increase her income, even if that means that that she couldn't contribute as much to retirement accounts. So how can she think about the trade-off between increasing her income versus funding her retirement accounts? Dan from California is retiring soon.

He and his wife took out a loan against their 401K. What should they do? And another anonymous caller who wants to be referred to as daughter, daughter of generous parents, has a whole life policy. And so she's trying to understand how these types of policies work and what she should do with hers. We're going to answer all of these questions right now, starting with our first anonymous caller, Joe, we give every anonymous caller. nickname. What should we name this one? Oh, you know what? I saw a great movie that stars, a wonderful actress named Michelle Yao. And if you don't know that name, you certainly when you see her, you'll know who she is. She was in the James Bond film, Tomorrow Never Dies, back in the late 90s.

But after that, she was in a movie that I liked a ton called Crouching Tiger, Hidden Dragon, that a lot of people think is a classic. And she's the star of that fantastic movie. And now she's in this film. Everything, everywhere, all at once with Jamie Lee Curtis. And this is a film that starts off with a woman who owns a laundromat with her family. And she lives this very boring life. And she's being audited by the IRS. And you get the feeling she kind of regrets a lot of the decisions she makes. So she gets transported into this other universe where you made slightly different decisions and your life went a whole different way. So she gets to see her life in a different manner. So it's a martial arts movie. It's a philosophical movie. But Michelle Yao is just an

amazing main character that you really feel for. So I think we should call her Michelle. And I love the idea of being able to see these parallel universes and how your life would have changed had you made different choices. Because that's thematically what this show is all about. It totally is. All right. Well, we will refer to this anonymous caller as Michelle. Hey, Paul and Joe. I have a question. I am 20. I'm early in my career and I have been moving jobs a couple times. And the companies that I've moved to only allow me to open up a 401k or a simple IRA after a year or six months. My last job, I was there for a year and three months. I contributed. It was only about $400 by the time I left for a higher paying

job. And I had to pay $100 fee to transfer those funds out of my Roth 401k into my Roth IRA. So a quarter of my contributions was gone. So now part of my compensation package is a 3% match into a simple IRA. I'm already maxing out my Roth IRA. And I don't want to leave that match on the table, but I am also planning to move jobs within the next couple months. For this company, it's not a big deal. I would rather not contribute such a low amount that the fee, to transfer it out would be more than what I contribute. That's just silly. But in my brain, I'm

trying to figure out how I can continue saving for retirement, but also continue growing my income because the best way to grow income is actually to move jobs. So I've gotten a 25% raise and I anticipate another 25 or 30% raise when I move jobs again. And, you know, that is more than made up to the fact that I can't contribute, but at what point is that not true anymore? at what point should I stay for the sake of contributing? Background, I want to retire early, hopefully in my 40s, and obviously I can't withdraw from those retirement accounts until I think that's 67, but I want to get them as beefed up as possible before I do retire so that they're ready to go and I can't draw from them.

So anyway, what am I missing? I feel like after Max and out my Roth IRA, is there anything else that I can, you use that's not employer-sponsored to contributing to my retirement. And how do I go about making the financial decision, like comparing the numbers and figuring out, okay, it's worth staying in this job, even if I could get this percentage raise because I'm able to defer taxation or I'm able to let this money, I'm able to contribute and let it grow tax-free if it's a Roth 401K. Thank you so much for your help and your advice. I feel like these systems are set up from generations ago and I'm trying to make it work for being a millennial. Thanks. Bye.

Michelle, thank you so much for your question. And first of all, congratulations on being at a point in your career where you are such a high-quality candidate. that you are able to get multiple job offers that pay you more than you were previously getting. You're in a position that a lot of people would love to be in where you just keep getting raises. You keep getting job offers, and each offer comes with a significant raise. You've said you got a 25% raise in your last job transition, and you anticipate another 30% raise when you move jobs again. Those are some pretty substantial raises. So congratulations on the skills.

the professionalism, all the attributes that you bring to the table that allow you to receive those job offers with those raises. Now, to respond to your question, the first thing that I would say, zooming out, is that if you're 25 and you want to retire in your 40s, let's just say that you want to retire at 45. So we're talking about a 20-year career ahead of you, even in the context of an early retirement, during that 20-year career, you will find the greatest degree of job satisfaction if you are in a role in which you have mastery, autonomy, and purpose. Those are the three attributes that correlate with job satisfaction. And that comes from research done by an author named Daniel Pink, who wrote a New York Times best-selling book called Drive.

So when you are making a selection of what job or jobs in the future you want to accept, I would beseech you not to think about the immediate income, the income that you're receiving at the time of the transition or in the year of the transition, I would urge you to think about how that particular career move serves as a step in your journey towards developing the type of career you want in which you are doing fulfilling work that is within your unique skill set. It plays to your unique abilities and that does some level of good for the world in whatever form that might look like. The income that you're offered from a job is only one of many factors. And in some cases, I don't want to

say it's the least important factor, but it's arguably short-term thinking in the greater landscape of how are you going to design a career? And within that, how are you going to make decisions about career moves that will lead you towards spending the next 20 years doing what you're good at in a capacity and a work context, a workplace environment that's healthy and fulfilling. Yeah, when I heard this question, Paula, I thought that she is solving for the wrong thing. I love what you're solving for where I feel like she's solving for tax efficiency. Is there ever a time when I should turn on a job because tax efficiency isn't enough? And my goal is never to solve for lower taxes. My goal is always to solve for Jeff Bezos's but trillion dollars.

And Joe, I want to break in here because there might be some listeners who don't understand the relationship between retirement accounts and tax efficiency. So Michelle is free to save as much money for the second half of her life as she wants to. The benefit of a retirement account, such as a simple IRA or a 401k or a Roth IRA, is that those are specific types of accounts that are tax advantaged. But if she, to your point, Joe, and I just want to make that clear for the audience, if there are people listening who haven't drawn a line between the two, just because something is labeled a retirement account doesn't mean that that's the only type of account that you can save money in for retirement. You're welcome to put as much money into a taxable brokerage account as you want. And in the big scheme of things, the amount of money that you'll pay on an index ETF or an index mutual fund really isn't a ton of money. And you can spend it whenever you need to. How many questions have we fielded where people were too locked in because they were very tax-efficient

and the game changed. All of a sudden things were differently. So the fact that she would make more money and have the ability to then fund this flexibility account where maybe she pays a little bit more in taxes, I'm not against that at all. Right. That's definitely fine. I don't think there's ever a job that pays more money overall that you don't take as long as, to your point, the satisfaction is the big thing, right? You have to enjoy the journey and where you're at right today.

But all things being equal, you can make more money doing that, then make more money even if you don't have retirement accounts that are as good. I will say this, though. There are a lot of people that think they're making more money, Paula, but they forget that benefits cost companies money. And sometimes a job appears that it pays more money, but when you factor in the entire benefits package actually may end up costing you money because you may have higher health insurance deductibles. You might have to pay for your own life insurance or disability coverage. All those flexible benefits cost money. And there's a possibility, maybe they even have a pension. All of those things need to be factored in.

I think you need to ask yourself about total compensation versus just what you're being paid. is a salary. And going back to our discussion about the line between retirement accounts and tax efficiency or receiving tax advantages, here is a mental framework that might help. And this is, Michelle, this is not just for you. This is for everyone listening. Don't think of a 401k or an IRA as a quote-unquote retirement account. Think of it as a special type of account in which you and the government make a deal. And the government agrees to give you a tax advantage in exchange for you agreeing to certain limitations around how and when you pull money out of that account. Forget the word retirement because that creates a mental model in which people bucket money

inside of those accounts as for retirement and money outside of those accounts as not for retirement. But if you think about it, logically, that's irrational. There's no reason that money inside of specific tax-advantaged accounts must be for retirement other than the fact that there are certain restrictions around how and when you can pull that money out. But you're welcome to set aside money for retirement in any type of account that you have access to. So, again, the mental model is that these are not retirement accounts. These are not retirement accounts. are deals between you and the government where you agree to certain limitations in exchange for a tax advantage. That's all they are. Joe, to her tactical question around which of these tax

advantaged accounts can she access, once she maxes out her Roth IRA, given that she is an employee who has access to an employer sponsored, well, we're going to call it a tax advantaged account, tax, you know, if we want to avoid the R word here, retirement. Yeah. And, and then, And the reason for people listening, the reason that I make that point is that what's available to you will differ depending on if you are an employee versus if you're self-employed, and it will differ depending on if you're an employee who has access to an employer-sponsored retirement account versus if you're an employee who does not have access to such a type of account through their employer. But given her set of circumstances, beyond the Roth IRA, if she wants to focus on

that deal with the government where she gets more tax advantages, what would you recommend she do? I would recommend she avoids everything that's available. And let me explain that because she wasn't eligible for a Roth IRA and some people aren't because of the fact that the Roth IRA comes with income limitations that vary from year to year. You could do a non-deductible IRA and then do a backdoor Roth change, right, where you change it into a Roth IRA. That's a two-step move. But you could do that. Do not, by the way, do a non-deductible IRA and leave it there. That will create headaches for you tax-wise down the road all over the... I would not do a non-deductible IRA. I would also not save, by the way, and she didn't suggest this after tax into your 401k.

Yeah, absolutely. That's going to be a nightmare. Yeah. It just brings up. We don't have to go down the rabbit hole. Suffice it to say there's going to be a lot of headaches if you try to do that. the other two real opportunities you have are putting money into an annuity because annuities grow tax deferred. Annuities have two big problems that a lot of us have. Number one is annuities generally come with high fees if you're going to put it in the type of annuity where you're going to try to grow it like your 401K. But nearly as bad as that is the way that money comes out of an annuity when you're ready to take it, Paula, which is money comes out in what's called a LIFO manner. So there's LIFO and FIFO.

LIFO is last in first out and FIFO is first in first out. So last in first out means you stick your money in an annuity. It earns interest. The interest appears after the money that you put in there because your money is actually what's growing the interest. That interest has to come out first, which means your principal, which is going to be not taxable because you already paid tax on it, you used after tax dollars to fund the annuity, isn't going to come out until this big tax hit happens. So if your annuity, even after all the fees and garbage that comes with a lot of annuities, ends up making good money. If it does make good money, you're going to have tax hell

later on to avoid some taxes today. And by the way, a lot of people don't spend the money they have accumulated annuities for that very reason. And if you believe that life is an adventure and you want to spend your money to make that adventure go, I would not, I would not get into that tax trap. Another area she can access is cash value life insurance, where you minimize the amount of life insurance that you buy and you stuff as much money as possible into a life insurance policy. It can actually, contrary to a lot of what you hear on the internet, it can be a good thing. It is just Paula, a very, very complicated product and not one that I would get into in unless you know your cash flow is going to be high for a long, long time. And in her 20s,

I don't think that I would go that route. I really don't. I mean, when I would use that type of a policy, I'm thinking the last time I used it as a financial planner, it was with a gentleman who was a radiologist who made $350,000 a year. His wife made another $150,000 a year. So they're making half a million between them. They're spending $250,000 of that. We used every tax shelter imaginable and then we started stuffing money into life insurance, which also, by the way, they had three children as well. So there were multiple reasons to go that route. But I would use that maybe once a year. And this just, it seems overly complicated. I would just use a non-qualified brokerage account and index funds and save as much flexible money as you can.

Exactly. Keep it simple. One of the themes that we talk about often on this podcast is that trade-off between optimization and flexibility. If you are engaging in that deal with the government where you accept limitations around how and when you can withdraw your money in exchange for a tax advantage, which is what an IRA or a 401k is, then you are optimizing for tax efficiency, but you're losing flexibility in the process. particularly given that Michelle's goal is to retire in her 40s, which means she's going to need to bridge the gap between the time when she retires and the time when she turns 59 and a half. And that gap could be, you know, assuming she retires at age 40, that gap could be 19 and a half years. To that goal, there's a lot of additional value in having your assets in an account that give you. you flexibility, even if you have to trade off some tax advantage for it. And particularly in Michelle's case, her motivation to put money into those more flexible accounts is the fact that

she'll be in jobs that pay her more money, which means she will have more money to be able to put into those accounts. And I think we just think so much about taxes and about avoiding taxes because we hear that so often, that when you truly look at the tax friction, you're not in an index fund, in most years, Paula, it's incredibly low. You're not going to have a monster tax burden because you had this outside of a tax shelter. Now, given the choice to have more in the tax shelter, sure, especially if it's after age 60, money. I would definitely do that. But I'll tell you what's really cool about her situation.

When I was in my mid-20s, had I had money that I could access in my money. my 40s to go do some of the nice things I wanted to do well before most tax shelter ages, like 59 and a half, I would have loved to have had more money in those positions. Right, because you sold your business at 40, and that created a lump sum that then allowed you to do all kinds of other things, including you went back to school, you became a teacher for a while, you became a track coach, you became a podcaster, you started, you became like the Detroit money guy on TV, like the television money guy? I was already the Detroit money guy when I was a financial planner. That was earlier. And by the way, also, I did not become a teacher and a track coach.

My goal was to be a teacher and a track coach, but I quit school before that happened because I was making so much money writing financial pieces because I'd done financial PR. But that was my goal, right? And I don't want that to take away from your big point, which is this. It bought me flexibility. But I had to have a business to sell to do that. Most people don't have that ability. and she could build that right now. And think about the choices that a lot of us might make if we have the ability to take a sabbatical. You know, we talk about why save all the fun until retirement?

Why not take a couple years if you can in the middle of your career to go explore? But man, just not only does that recharge the engines, it also gives you a different worldview that you may be able to use to move into whatever your next phase of life is. It could be super exciting. Can't do that as easily. You can do it, but not as easily with money that's in an IRA.

Right. And we have in our archives episodes about how to access money that's locked up in these tax shelters. If you do need to tap money from a retirement account before you reach retirement age. In the show notes, we will link to some of those episodes. You can subscribe to the show notes for free by going to Afford Anything.com slash show notes. So Joe, I think both you and I are coming down on the side of she should choose the job that's going to give her the most long-term job satisfaction and career satisfaction. But all else being equal, since we don't know which of these jobs will do that, if we're looking purely at the financial piece, choose the job in which she earns more money, even if that means that she has reduced access to retirement account contribution. And think of more money in terms of total compensation.

Make sure you add in the value of the benefits package that they're offering you. Thank you, Michelle, for asking that question. We're going to take a break for a word from the sponsors who make this show possible. And when we come back, we're going to hear a question from Dan. He and his wife are going to be retiring at the end of the year, and they just finished building a home in Florida. they took out a loan against Dan's wife's 401K, and they're wondering what they should do regarding their repayment strategy. So we're going to answer that question from Dan,

and then we're also going to talk to a woman who's trying to figure out what to do with her whole life policy. Both of those questions are coming up next. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the FinTech Hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth third better is all about.

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Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-A-I-R dot com. Sale ends December 7th. Our next question comes from Dan. Hello, Paula and Joe. It's Dan from the oil-producing, vegetable-growing, and cattle-rangling part of California. My bride and I will be retiring at the end of the year. We have just finished building a home in Florida, and we'll be calling this home after retirement. We will have a mortgage of about $1,900. I would like to lay out what currently we have in our retirement accounts,

as well as some debt we have. So both you and Joe can give us a bit of direction to what might be the best way to allocate our accounts after we retire. I have been using the website New Retirement to build out scenarios as well as personal capital to track our accounts. and network. We also have an advisor. However, they are only in an assessment position present. I will be looking for a different advisor as they want to charge us 1.2% for managing our wealth after retirement. I have been listening to Afford Anything from the beginning when it was Paula

and Jay Money. It's just amazing as to how the podcast has grown. Joe, you have influenced my thoughts. of understanding money better with all those episodes from your mom's basement. Okay, now let's get into the meat and potatoes of our information. Currently, my wife has, and her 401k, $645,000. She will be contributing for the next $8 to $10 months, $1,500 a month. We did take a loan against the 401K about 10 months ago for about $42,000, and by the time she retires, we'll pay it all off except for $7,000. My question is, should we take this $7,000 as a contribution and pay the taxes at our current tax bracket?

Or should we pay the $7,000 off? Now, she will be 59.5 years young when she retires. My bride has a pension that does not cover the C-O-L-V adjustments. She will be receiving $4,200 monthly of until 62 years old. Once she turns 63, her disbursement will be $3,200 a month from there on. Here are some other accounts that we have. I have a Vanguard IRA Target Day, 2030 brokerage account, and it's got about $36,000. We are not contributing at this time.

We have a Vanguard Star Roth IRA account that's got about $2,000 in it right now, and we're going to contribute about $500 every other month until we retire. We have a high-yield savings account that has about $9,400 in it right now, and by years in, look to have put in $14,000. Standard savings account, our emergency fund, we have about $12,500 in it, and we'll be depositing additional. depending on my commission checks. Our bank account works hard, and we give every dollar a purpose. We bring home about $140,000 a year at this time. Our gross is about $235,000. I like the bucket strategy, however, not sure the best way to set this up.

I have also looked into starting moving the $645,000 for my wife's IRA into the Roth accounts, but not until 2023, where our income drops. Monthly payments to bills and lifestyle items is about $3,162 plus our mortgage payment of 1900. I hope this is enough information to assess this. One thing before the CaliCrop surfing dude gets out of here, I would like to say thank you to both of you for the great content and sharing with the focus. out there, all this information. Keep up to good work, and I always look forward to new episodes. Dan, thank you so much for your kind words. Thank you for being part of this community since the

beginning. I am honored that you've been listening to the Afford Anything podcast since before it was called the Afford Anything podcast since the days of The Money Show with Paula and J. Money. So thank you so much for being part of this community for so long, for sticking with us for so long, you know, being there through the thick and thin. I am more moved, more flattered than I know how to describe in words. That is super nice. When you were with us, Paula, going around the country for my book tour, just the people that you meet that are part of our community that really kind of where we've been able to be their competing. whether it's when they're walking the dog or on a commute if they still commute or while they're washing the dishes, whatever it might be was really neat to know that there's somebody on the

other side because, you know, right now it's just you and me and a couple microphones. Right. And Dan. And that's pretty much it. So it's, yeah, it's amazing. Thank you so much. Yeah. Beautiful connection.

So let's dive into it, Paula. Let's take the easy question first. And I think the easy one is the question around his. wife's 401k loan and there will be $7,000 left and should they try to pay that back and fill in that money or should they let it go? What people need to know about this is the consequences of if they let it go, which is why Dan specified that she will be over 59 and a half. And Dan knows, and I know Dan knows this because he wouldn't have said this otherwise, that the consequences for her are a lot less than if if you take a 401k loan pre 59.5 and you don't pay it back. If you're pre 59 and a half, you will pay a penalty for early withdrawal.

She will have that penalty because she's old enough to be eligible for regular distributions. She's young enough to be eligible for regular distributions, Joe. Young enough. What the hell am I doing? Whoa, easy, Joe. I'm 54 years old and haven't learned that rule yet. Yeah. she is cool enough to be able to take the distributions. You know, I think based on this whole thing, the big question is if he's run some scenarios,

how much of a refund does he get back on his taxes? And he has an emergency fund. $7,000, Paula, is a repayment to deploy when he might just take it right out in the next year to make up his deficit. it. I don't know. If he can come up with another $7,000 that he wouldn't have saved, then I would say yes, do it. But assuming that he is saving every bit as much as he possibly can, Paula, I may pull a frozen in this one. A frozen like the movie with Elsa? And let it go. Paula's look at it be like all that for that. So you're saying that given that she'll be 59 and a half, and therefore the consequences of taking out that 401k loan are mild compared to what

they would be if she were under 59.5. Given that set of circumstances, may as well take the $7,000 as a contribution. There's a couple things that might mitigate my position on that. Number one is if he's in a spot where he prepays his taxes to the point that he has quarterly, because you can get in trouble for underpaying courtlies, and this would add to a problem and he might incur a penalty for underpaying his taxes on an ongoing basis, I would make sure that he isn't running a foul of any of that. But if he's getting a refund now of several hundred dollars, then I would very much just eat into that refund, maybe pay a little bit next year. Yeah, and just let it go. I don't think that messing around with the $7,000 is the core of his issue. Joe, I like the point that you

made about cash flow, because this isn't just a tax slash retirement planning question. And as we discussed in Michelle's question, questions about retirement accounts are fundamentally questions about tax efficiency and tax planning, right? But this isn't just a tax planning slash retirement account question. It's also a question about cash flow, cash flow management. When we look at the cash that he has on hand, he has an emergency fund of 12,500 and a high-yield savings account that will have $14,000 in it. So, sure, they have the savings on hand where they could pull half the money out of that high-yield savings account and use it to make a repayment. But then they've just slashed the value of their savings account in half.

And they're going to have to make that up. So rather than do that, particularly after retirement when their income is compressed, from a cash flow management perspective, keeping the remaining $7,000 balance on the 401k loan as a contribution, in other words, not repaying it, allows them to have more cash on hand. It allows them to have more savings in their savings account. Can we talk for a second about savings in your savings account as well? And I know that this comment's going to be picking up pennies. And I also realize that I'm kind of talking out of both sides of my mouth when I say,

don't worry about the pennies. And then I find them. But if they're obvious, man, they're obvious. I'm not sure, Paula, why he has a standard savings account as his emergency fund with more money in it than the high yield savings account with less money in it. And I know that he said he's saving more into the high yield savings account, but I think maybe Paula, just having two different high yield savings accounts, one that maybe is his emergency fund.

And the other one is an all purpose fund. The bad news about a high yield savings account is you can only access it a few times a month, but assuming that he'd be able to mitigate that by maybe leaving a little bit more money in the checking account, he may be able to. he may be able to make a little more money. I just don't like a standard savings account. Well, the $12,500 that's in his emergency fund is in a standard savings account. If it's truly an emergency fund, you're not going to need to access that a few times a month.

So that should, by definition, be in the high-yield savings account. Right. Yeah, that would be a better place for it just in terms of earning some additional interest. And then his high-year... Yeah, and I know that's pennies, but still. Yeah. And his high-yield savings account, right now it's got $9,400 in it. but by the end of the year, it'll have 14,000.

And so given that they're about to go into retirement and they're going to have moving expenses as they move from California to Florida, it makes sense to me to keep that 14,000 on hand for, you know, unanticipated moving expenses, just for the sake of having a bigger cash position in their first year of retirement. Agreed. There's going to be a lot of variability between what he's, projecting and what reality ends up being. I've never seen it not be so. Expenses not always higher, by the way. A lot of people would assume that you think about it as lockdown spending, but a lot of people are surprised, Paula, just the cost of a commute if they had a commute.

For some people, the cost of their wardrobe, right, that they wore to work and they no longer buying clothes like they were before. There are so many changes and it's very difficult to predict what all of them will be. So I would say during my career, I saw it run kind of 50-50. People would project and they were too high and the other 50% would project and they were too low. So I love the idea of more money in cash just in case they have under-projected what those expenses are, which brings us to the portfolio. I really like this question to Dan's because I feel like too many people get too conservative when they retire too soon. Realize that if Dan is retiring at 50, and a half, well, then you're going to still have hopefully many, many, many years of retirement.

Think about this, Paula. A big issue, as you know, in retirement planning among CFPs is longevity risk, the fact that we'll live for a long time. So the best way to fight longevity risk is to leave money in a spot where it can grow. I just, and I know I say this every time, only in the world of personal finance. is living a long life considered a risk. Like every time I hear the phrase longevity risk, I'm like, are you hearing yourself right now? There's the risk we might live a long and happy and healthy life.

Oh, one star. Horrible. Yeah. And as you know, the issue isn't that. The issue is that you run out of money because you live for so long. So I think that making sure that you leave enough money. money in that growth position, like he's had it already, leaving money in a growth spot is a great idea. And a lot of financial advisors look at a strategy called the three buckets.

You'll keep enough money for the next few years in a first bucket, which is cash or very low-risk bonds, usually a combination of the two, because you can even see today as an example, you and I, Paula, have talked about Ginny Mays and how much I really like Jenny Mays. Ginny Mays are getting smoked right now, right? So one year out of a lot of years, Ginny Mays are not going to have a good year and we're in that condition right now, which is why we don't want all of our money not in cash

and in low-risk bonds like Ginny Mays. We want to have maybe a combination of the two if we're going to use some bonds. I wouldn't go all bonds only. I could make a case for all cash or cash and bonds. But so that would be the first pot. The second pot is maybe that midterm. five years to maybe 10 to 12 years out, any money that Dan's going to need for those years.

Now, Dan's looking at a deficit after his wife's pension. So she's going to be receiving $4,200 a month when she starts collecting her pension. And their current expenses are around $5,000 a month. So the deficit's only $800. $800. Then later on it's going to go to almost $2,000. When she reaches $63. His current mortgage is $1900.

his mortgage, right now they're living in California. But that said, once they move to Florida, their mortgage is going to be ballpark pretty close. And who knows how their utility bills and other ancillary home maintenance and home repair costs will change. Granted, they just finished building the home. It's new construction. So hopefully things aren't going to break. But also, as anyone who's worked in the world of real estate understands, even sometimes especially in new construction, Things can catch you by surprise.

Another reason. Yeah. Another reason to keep cash. Exactly. Yeah. So if we anticipate that their expenses in Florida will continue to be around $5,000 per month ballpark, then, yeah, there's going to be a minor deficit between her pension and their cost of living. But only for the first couple of years, which means he can keep a little less in that cash slash bond position once he gets a feel for what his. budget's going to be, right?

He keeps a little more now so that he knows and then a little less after that. But after 63, that deficit is going to widen. So having then more money in that second bucket when that change occurs. And then in that third bucket, which is your growth bucket, right, but leave most of your money in a long-term spot. I saw way too many people that took the vast majority of what they had and move it into a very low cost position as if they were going to do the. most absurd thing of all, which is below every dollar in the first couple of years.

And by the way, if you're going to do that, I want an invitation because I want to be a part of that party. But people just don't do that, Paula. You kind of parcel out your funds based on what you think your lifespan is going to be. Right. Exactly. If you retire at 60 and you plan on living to 100, then you're investing at least a portion of your money for the next 40 years and another portion of your money for the next 30 years

and another portion for the next 20. So you're still very much a long-term investor even at the age of 60. And let's talk about how critically important this is. You take all that $645,000 and you move it into that first low risk, low return bucket because of the fact that you're retired right now. You have locked in that that's the amount of money you're going to get to work with. But let's say, not even using calculators, and I love the fact that he's using the new retirement calculator and some other calculators to run some scenarios. I feel like the more you play with those ahead of time, the more you dive into them and tweak and run if then scenarios, the more comfortable you're going to be with different

things that are going to come up because we know things are going to come up. But let's say that he leaves 500,000 of that in that growth bucket and it's able to stay there for another eight or nine years. Now, why is that important? The rule of 72 says that if you take the interest rate you think you're going to get divided into 72, divide it by 72, that tells you how many years is going to take to double. So if he gets an 8% rate of return on that long-term money into 72, that's nine years. So let's say half million stays. Paula, that's not $500,000 that state out there, it's now a million dollars. They went from $500,000 in this long-term bucket to a million dollars just by leaving that

money alone, knowing that you have a long retirement. And think about just how much more life that doubling buys. And when we get too conservative too soon, we give up that last double, which is always the most important double. The longer we can leave it in that spot, the better. And on that note, though, I don't want to. to scare people because I know that sometimes people hear the words that they want to leave it in a long-term position and then they do nothing, right? Realize you don't have unlimited time,

though. If there's not enough money to leave there for nine years and not enjoy your life, then please take the money out. There is a well-known author who recently was quoted in a Yahoo piece that really frustrated me that said retirement is the worst thing most people can do because of the fact that it will kill your portfolio. Retirement is supposed to kill your portfolio. That's what it's all about. It drove me nuts that this person said it. And I think there are people that read these words and they take them very seriously and they

say, well, you know what though? I won't retire. And then they miss out on life. And you shouldn't do that. Right, exactly. An analogy that I use often on the show is the tail wagging the dog. For example, I'll sometimes talk about the tax tail wagging the decision dog. Like we just did, the tax tail wagging the...

Michelle, yeah, Michelle's job decision. How much should I save, yeah. Right. But to your point, Joe, what you're discussing is the portfolio balance tail wagging the life dog. Yeah. Don't do that. Don't do that. But what's great is that it sounds like Dan is not.

They're moving from California to Florida. They've just built a new home. It sounds like they've got some amazing adventures ahead. And Dan, I love what you said in your voicemail about how you have given every dollar a job. Every dollar has a purpose. And that is a level of attention, a level of stewardship over your money that has. enabled you to have this beautiful retirement with decades of really fun adventures ahead. So I'm very excited for what comes next for you and your bride.

So congratulations, Dan. We're going to take one final break for a word from our sponsors. And when we come back, we are going to answer a question from a woman whose parents bought a whole life policy for her when she was very young. She's wondering what to do. We're going to tackle that question right after this. This Giving Tuesday, Cam H is counting on your support. Together, we can forge a better path for mental health

by creating a future where Canadians can get the help they need, when they need it, no matter who or where they are. From November 25th to December 2nd, your donation will be doubled. That means every dollar goes twice as far to help build a future where no one's seeking help is left behind. Donate today at camh.ca.ca. We know you love the thought of a vacation to Europe, but this time, why not look a little further?

To Dubai, a city that everyone talks about and has absolutely everything you could want from a vacation destination. From world-class hotels, record-breaking skyscrapers, and epic desert adventures, to museums that showcase the future, not just the past. Choose from 14 flights per week between Canada and Dubai. Book on emirates.ca today. Our final question today comes from an anonymous caller who goes by the nickname, Daughter, Daughter of Generous Parents. Hello, Paula, and possibly Joe, I have a question for you guys. My parents were super, super generous,

and when I was about seven years old, bought a whole life policy for me and one for each of my sisters. they were very young. So my premium is very low. It works out to about $47 a month, which is not unreasonable for me to set aside as part of my savings. But I feel that I don't fully understand how this is an effective savings vehicle. I understand. Nope, I take it back. I don't understand. So my dad, very financially savvy, has worked in banking, bought these policies as a savings vehicle, for us if we chose to use them. And once we became adults and chose to let the policy lapse, he would take it back over and then wouldn't lose what the premiums he had paid into it.

So I took it over and I'm paying the premiums and all as well. But I'm not planning on getting married. I'm not planning on having kits. So and my sisters will be very well provided for from my parents. Like I said, my dad's very financially savvy. So they're going to be fine. They have their own life insurance policy. So I'm not worried about having that policy to protect dependence. I feel that it can be used for my early retirement somehow. I just don't quite understand how that would work. Do we draw against a whole life policy? Do we cash it out? Like, I don't understand. And I know there's a lot of debate in the fire community about whether you should have it, But at this point, because my dad bought it when I was so young, the premium is so low that it doesn't, like it feels worth it.

It doesn't feel like I'm throwing money into something I don't need. And there's also the lovely sunk cost effect where I don't want him to lose it by letting the policy lap. So all this to say, how can I utilize this as someone who did not buy it for the traditional reason of protecting dependence? Is there a way for me to utilize it? Should I just let it lapse? Should I give it back to my dad so that he can, you know, make that part of his plan to protect my mom? Should he pass away? I don't know. I don't understand how it works. I would love some help. Thank you very, very much in advance for helping on what feels like a complex topic. Daughter, thank you so much for your question. I have several thoughts on this. Here we go. First of all, I agree with you that premium is incredibly low for a whole life policy. 47 a month, round up to 50, so it's about $600 per year. And as you said, based on your income, your finances, that's something that you can reasonably handle. I try to make a practice,

and we're going to talk through a decision-making framework in a minute, I try to make a practice of not sharing an opinion on this podcast. I try to make a practice of walking you through the pros and cons of different options so that you can come to your own decision. But I'm just going to go ahead and let my bias show here, you have an opportunity to have a policy that is guaranteed by the fact that its whole life, it is guaranteed to pay a large benefit to whomever your beneficiary is when you die. Be blunt here, unless you are immortal, you will die eventually one day. I always love the if you die, which is what we always say.

Exactly. No, no, no, no. Sorry. There is an end of this movie and none of us get out alive. Exactly. Exactly. Earth, you're not getting out alive. So, when you die, there is a guarantee that your beneficiary, whomever you choose that

to be will get this large payout and you can lock that into place. for less than 50 bucks a month. That's probably less than you pay for your cell phone, your home internet, drinks in a given month. So even though you're not planning on having dependence, if there is a cause that you want to support, homeless puppies, cancer research, environmental causes, the Alzheimer's Association,

whatever it is, if there is some cause that you feel passionate about and you want to leave a legacy for them, why not put aside 50 bucks a month in the form of this whole life policy so that when you die, the charity of your choice can get this incredible payout. That sounds to me like a great use of $47 a month. So that's my opinion, but let's talk through some of your other options. You mentioned that you would be interested in using the policy for your early retirement, but you're not sure exactly how that would work. You've got a couple of options.

You could either withdraw the cash balance that's in that policy. So basically, you could kill the policy and take out the cash value. And then you could stick that cash value into index funds. That would be the strategy for killing the policy and then using the budget. and then using the money that's accumulated in it to support your early retirement. But it sounds like your dad's not going to be pretty happy about that. He wants to take over so that he would pay the premium if you don't want to. So that's the problem with that plan.

The other option would be to see if it's the type of policy where you can convert this into a term life policy and use the cash value that's accumulated inside the policy to pay the premiums on that term policy. So essentially, the cash value of the policy would slowly erode over time as it's being automatically withdrawn to pay the premiums on the term policy, which this whole life policy would convert to. That, I don't think, is a good idea for you because you don't have any dependence. Yeah, there's no insurance need. Right, exactly. So I say keep the policy, pick a charity, pick a cause, pick a, pick a legacy that you want to leave behind. Despite what you read on early retirement forums or on blogs that are written for mass audiences that don't know the nuances of your specific situation, despite what you read on those, don't let it lapse.

I have some questions because we often use the term whole life insurance, Paula. to just mean any permanent type of policy. And she might be able to change things for the better for her, meaning that if there's a significant amount of cash in that policy, and she wants to have it as a legacy policy as an example for some charity or some group that she wants to help out, but she doesn't want to continue to commit much money to it. She doesn't have to change it over to a term policy.

She might be able to just lower the death benefit on this. policy so that the cash really helps it live for a longer period of time. And you can either make a smaller premium, maybe no premium for the rest of her life and still have it be guaranteed to last her entire life. So she could be able to make a gift and not put any more money toward it or very little money toward it if she can reduce that death benefit. Now, that means the charity is going to get less. But if she's just doing this to honor what her parents did and to use this gift to

pay it forward to another group that she really wants to support or somebody or something she wants to support. And the amount of money isn't as important as the fact that she's able to do it without her costing her additional dollars. I like that strategy. So if it is what's called a universal life policy or a variable universal life policy, the only difference between those two are a universal policy rises and falls with interest rates. The cash on the inside is what I'm talking about the savings account portion of it, a variable universal life will look a lot like a 401k in some ways where it has a bunch of funds that look like mutual funds on the inside and you can invest it however you want on the inside. In either of those cases, those policies

are often referred to as unbundled, meaning you can kind of see the guts and you can move stuff around however you want. A whole life policy is a bundled policy where you go, hey, it's guaranteed and you really can't change much. But if it's universal, or variable universal life, you may be able to ask the question, how much can I reduce this death benefit by? And what will that do? What will different numbers do to the amount that I have to pay in to make sure that it lasts the rest of my life? Yeah. So, Joe, what I like about your answer, I'll tell you what I like about it and what I don't like about it. What I like about you, I know, right? What I like about your answer is that she preserves the policy. She does not let it

lapse, she locks it into place so that when she dies, the beneficiary of her choice, and I think you and I both agree this is a great use case for picking a nonprofit, picking a charity that she supports, and setting up this policy such that they can receive the benefit. What I like about your suggestion is that there are multiple options that she has to be able to do that, to be able to keep the policy at different costs out of pocket per month for her. So essentially what you're saying is rather than her having to pay $47 a month in perpetuity, she might be able to lower the death benefit and pay less than that. Maybe she can pay $20 a month or even $0 a month. Zero. Right. Yeah, maybe zero. Maybe it funds itself now. Right. Exactly. So the possibility of

being able to keep the whole life policy while paying a monthly premium that ranges between zero to 47. Cool. I like it because one way or the other, she keeps the policy. There is one thing, however, that I don't like about what you said, Joe. Dun dun dun, fighting words. And it is not mathematical, it's behavioral. And it's that this is so complicated and she reflected that in her voicemail, that she doesn't really understand how this works, and it's kind of overwhelming. If the objective is to figure out if it's variable universal versus universal versus, you know, like if the objective is to get into the nuances of what kind of insurance policy it is and what her various options are and how changing variable X will impact variable Y, that is an activity that has a high level of behavioral friction, meaning it's way less fun than binging on Bridgeton on Netflix, right? And so... Depends on who you are.

And so any time... I've actually never seen Bridgeton. But any time that there is a complicated financial subject matter that has high behavioral friction, people are likely to do nothing. People are likely to bury their head in the sand, avoid the whole thing, and play wordle instead. And so if messing with the policy is so overwhelming or so onerous that it creates more headaches or more anxiety than is worthwhile, then there's an argument to be made for taking the path of least resistance, the lowest friction route, which is the status quo. This is what frustrates me about that, Paula, is that the number of calls you have to make. in any scenario, any of the scenarios we presented,

the number of calls you have to make is still one. It's still one call. You're asking one more question when you make that call. Because no matter what you do, if you decide to change the beneficiary, you have to make a call. You're going to make a call to make that beneficiary. While you're on that call,

asking exactly what type of policy this is, is just one more question. I think the friction, The friction comes from the decision making, not from the logistics of placing a phone call. I agree. Decision fatigue. Yeah. And that's what's frustrating is that it is one more question.

And for me, it's also less about making that decision as it is about just knowing what you have. If you own something, know what you have. Why wouldn't we know what we have? I think that we should know what we have. if your dad has given you something nice, you should know how it works. You should, you should educate yourself on how that thing works. I think that if this is going to be something that propels your goals, no matter what it is, you should know what you own. What do you own? And I think that as you know what you own, you find out that this is, yes, it's complicated, but there's only four or five levers. And once you know those four or five levers, then it's going to be different. questions, same inputs, you know, same decision making, same funnel that you use to make a decision on how this all works. So while I agree with you, I do agree with you that if we, if we make a decision more complex, we're less likely than make a decision, which is funny, by the way,

when I was a financial planner and I first started out, I thought it made sense and I thought I was a better financial advisor if I gave my, if I told my client all the different ideas that were out there, if I told them all kinds of stuff that were out there in all the different ways, all the nuances of how they could do it. I had a great mentor told me that I should give people two options. Just cut it to the top two and give people two options. And then ask them if you want the rest of them. If you want the rest of them, I'm happy to tell you. But I've already done the homework.

These are what I think your two options are. Option A, option B. And by the way, when I did that, when I took this mentor's advice, guess how my, much more quickly my clients made decisions. And 95% of the time, maybe even more than that, I mean, this is not a statistical, I say 95% of the time and I don't even know what the statistical number is, but we know that speed wins the day with most of our decision making. If it's not irrevocable, speed wins. In other words, increasing the velocity of our decisions wins. So if I can make more decisions faster, I'm going to get to my route fast.

And by the way, a decision that is maybe 95% correct but is fast will almost always beat a decision that is 100% correct and slow. There's a researcher named Barry Schwartz who is famous for popularizing what's known as the Paradox of Choice in which he demonstrated through carefully designed studies that if a person is sampling jam, for example, at a farmer's market, and they are choosing between five options, strawberry, apricot, grape, boisenberry, and orange marmalade, right? Those are your choices. People in that situation are likely to pick something. But if you give them 25 choices, they're likely to pick nothing at all. And they walk away without any jam. They walk away without making a purchase. And that's the paradox of choice. The more options you place in front of someone, the more they're overwhelmed by the choices, the more they hit decision fatigue, and the more

they're likely to do nothing. That's why the behavioral friction comes from making a decision. I can tell you my own life how this principal acts, because I've noticed it. I've been on a lot of planes lately, Paula, and I found that when I'm on planes, I really get calm. I get into the quiet space that I have a hard time finding when I'm not on a plane. And you know what I realized? I realized it's because at the end of my day, when I'm at home and I'm trying to relax, my brain is still busy thinking of all the things that maybe I could be doing or I should be doing, right? I've got all of these work-related things that I could do to get ahead for the next day. I have all these other activities that I think might relax me even more than the one that I'm doing

now. And my brain goes crazy because I have so many different decisions. When I get on a plane, because I refuse to buy the Wi-Fi on the plane, because I think it ruins this, I can do nothing. I can, for the next two hours, do absolutely nothing, except watch a movie or watch a TV show. And that's pretty much it. And it's wonderful. It is absolutely wonderful because there's no choices to be made. And I couldn't figure that out for a long time. Like, why do I like flying so much?

And then I realized a few flights ago. It's because of the fact that all the choices are gone. Same. Yeah, exactly. Cal Newport, who is a two-time or perhaps three-time guest on this podcast, in one of the art interviews, he talked about the importance of deep work. One example that he gave was a colleague of his needed to focus on a piece of writing. Cow Newport is a professor at Georgetown, a professor of computer science. So in the world of academia, writing, submitting papers is, of course, incredibly important.

One of his colleagues needed to write, couldn't focus, kept getting distracted by email. And so what he did was fairly extreme. He booked a flight to Japan, a business class ticket, purely so that he could be forced to sit in one seat with no Wi-Fi and do nothing other than right. Fabulous. He flew business class to Japan, landed, drank a cup of tea, and immediately flew home. Maybe 28 hours on planes. Exactly. Yeah.

No other choices. Obviously, most people don't have the funds to do something like that, but that was a memorable example because it was so extreme. And I know people that will do that, writers that will do that in a little bit different way, they'll book themselves into a hotel. And they still have the freedom of maybe some choices or Wi-Fi or whatever it might be, but they could cut themselves off from that as well. And it's not as extreme. But still, I think I'm moving that same direction, right? Get rid of the choice, get rid of the obstacles, put yourself in a position where you're more likely to win. Exactly. J.K. Rowling did that when she was finishing Harry Potter. She checked into a hotel and didn't let herself check out until she was done writing. And eventually she wanted to go home, so she had to finish the book. So we've strayed very far from a whole life question. But this is how we take concepts of behavioral economics, psychology research. This is how we draw from these adjacent multidisciplinary fields to better inform the way.

that we manage our money. I will add one thing, which is that I do not think continuing to put money into this as a retirement vehicle is a phenomenal option. Oh, yeah. In most cases, it isn't. It might be, and we can get into how complicated that is. It maybe could be, but I'm not a fan of that. Yeah.

Yeah. No, I don't see this as a retirement vehicle for her. I see this as an opportunity to leave a legacy for an animal shelter or for children's literacy or for whatever it is that she wants to make a dent in in the universe. So thank you, daughter, for asking that question. Best of luck with whatever you decide. Yeah, fantastic. Joe, thank you for joining us. where can people find you if they want to hear more of you and your ideas?

Paula, you can find me orchestrating what we call the greatest money show on earth because it's a circus over at the Stacky Benjamin Show every Monday, Wednesday, Friday. Our goal is an on-ramp to financial literacy for people and to bring more people along for the ride. So we have a host of amazing guests and different voices from the personal finance and adjacent communities. And that's every Monday, Wednesday, Friday. And includes on most Fridays, Paula Pant, rocking the trivia. Well, thank you, Joe, for joining us. And thank you to everyone who's listening for being part of this community.

If you enjoyed today's episode, please open up whatever app you're using to listen to this show. Hit the follow button so that you don't miss any of our upcoming episodes. And while you're there, please leave us a review. I want to give a shout out to Doug from Massachusetts, who left a review on Apple Podcast, that says, quote, I'm just now getting introduced to this podcast, but have quickly become hooked. The Susie Orman episode was my gateway episode, and I'm diving deeper into the catalog. I have mad respect for how Paula handled herself. And then he goes on to talk a little bit more about that interview and about the show.

And then he ends his comment by saying, quote, listening to this podcast is a very good use of my very limited time. Thank you, Doug. Given that this show is all about how to use the limited time at your disposal, I am honored that this show for you and for everyone who's listening is a great use of your limited time, your limited energy, your limited mental bandwidth. So thank you so much for spending your limited time being part of this community and learning from this show. I hope that these conversations and these guests, these interviews are educational and

inspiring. And I hope that if you are enjoying this, you share it with a friend or a family member to spread the message of financial independence. Thank you again for tuning in. My name is Paula Pant. This is the Afford Anything podcast. And I'll catch you in the next episode. Here is an important disclaimer. There's a distinction between financial media and financial advice. Financial media includes everything that you read on the internet, hear on a podcast, see on social media that relates to finance. All of this is financial media. That includes the Afford Anything podcast, this podcast, as well as everything, Afford Anything produces. And financial media is not a regulated industry. There are no licensure requirements. There are no mandatory credentials.

There's no oversight board or review board. The financial media, including this show, is fundamentally part of the media. And the media is never a substitute for professional. advice. That means anytime you make a financial decision or a tax decision or a business decision, anytime you make any type of decision, you should be consulting with licensed credential experts, including but not limited to attorneys, tax professionals, certified financial planners or certified financial advisors, always, always, always, consult with them before you make any decision. Never use anything in the financial media. And that includes this show, and that includes everything that I say and do, never use the financial media as a substitute

for actual professional advice. All right, there's your disclaimer. Have a great day. It's a f***ed up movie, but it's so good. Oh, cool. It's the weirdest film. Have you ever read the book, The Midnight Library? It's the same concept.

This woman dies. She goes to purgatory, and she is able to, she's in this big library, and every book is the story of her life had she made some slightly different choices. So she gets to see how her life would have changed. Had she stayed on the swim team? Had she married that boyfriend instead of dumping him? Had she, you know, just every, all of these choices that she made throughout her life. I like a movie that's on the same kind of path, but just slightly different.

Midnight in Paris might be my favorite movie at all time. Yes, that's a great one too. That's one I actually have seen. Yeah. you wish that you'd done things differently. And then you realize that the grass isn't greener, right? That everybody, I mean, he goes back to the past and these people in the past like, man, I wish I lived back at this other time. Even further in the past, right.

We have this romantic view of everybody else's life and what they're doing. Exactly. Well, we see the highlight real. We see the picture and not the pixels. Yes. Wow. Did you just make that up? I read it somewhere.

Oh, it's like that is just. I read it on wait, but why? Put a TM. Life is a picture, but each day is a pixel. So even if your life is going great, your day-to-day experience might not feel that interesting or exciting because each day is a pixel in what is overall a much bigger picture. Wow.