Afford Anything - Ask Paula: The stock market is down - Can I still retire?

Episode Date: August 31, 2022

#399: Bella is SO CLOSE to reaching F.I.R.E and is worried about her withdrawal rate if the stock market drops. If the stock market does drop, can she withdraw as much as she had originally planned? Sam has been investing for several decades and thinks that he should stay invested in his portfolio, despite the recent drop in value…but he is still wondering if there’s a chance that he should sell. Meisha is making more money at her new job but can’t contribute to her 401(k) for the first six months - what should she do with her extra money in this interim?? Kyria is a young investor with multiple goals: she’s wondering how to best save for a downpayment without it being eroded by inflation and also whether her investment choices should take on more risk, since time is on her side. Former financial planner Joe Saul-Sehy and I tackle these four questions in today’s episode. Enjoy! P.S. Got a question? Leave it here. For more information, visit the show notes at https://affordanything.com/episode399 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a tradeoff against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, any limited resource that you need to manage. Saying yes to something implicitly means you are accepting the tradeoffs. And that opens up two questions. First, what matters most?

Second, how do you align your decision making around that which matters most? Answering these two questions is a lifetime practice. And that's what this podcast is here to explore and facilitate. My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other episode, we answer questions that come from you, the community. And my buddy, former financial planner, Joe Saul-Ci, joins me to answer these questions. What's up, Joe?

Paula, I know these are going to be some good questions, and I just wanted to make sure that we brought it today. so I've stretched out. I've got my athletic gear on. I'm ready to do my part. Well, you know, the physiological affects the mental. So focus. Yeah, absolutely. Mind body.

Mind body. We got it. Let's go. Mind and body. Focus. Four. We have four amazing afforders. Do we call them afforders?

We don't really have a name for the people in this community. They're not afforders or anything. Like your podcast stacking Benjamins, they're the stackers. That works. Which, which you're the one at a breakfast told me you should call them Stackers. Yes. In a breakfast, one of us remembers really well. Yes.

I do not recall that breakfast. I may or may not have been up all night. Might have. In my defense, we were in New Orleans and it was 8 a.m. Do you think I went to bed? Heck no. But it was that morning. It was that morning at breakfast.

Having stayed up all night that I came up with the name Stackers, for the community who listens to the stacking Benjamin's podcast. I keep trying, by the way, Paula, to do my part back to say thank you. But I think, okay, we'll call them AA members. And I'm like, nope. Nope. Nope. Not going to do that.

Right? Yeah, it doesn't. I don't know. Afforders? Somebody's got to have one. Somebody's got to have one. Yeah, for a while back in like 2014, 2015, I called my community rebels. Yes.

But I don't know. That's a little generic. Ironically, it's a little generic. The money guys, Brian and Bo, called their community mutants. I like that one. Speaking of rebels, they're mutants. Because they're not like everybody else. That's kind of like the afford anything community. They're not like everybody else. Yeah. Yeah. We need, if anyone has any ideas, hit me up on Instagram. Let me know. Yes. Bring it. Bring it. All right. Speaking of bringing it. Here are the four questions. Wow. Yeah, right? What a segue. Ninja. Yeah, exactly.

Didn't see that coming. Here are the four questions we are going to answer today. Bella is so close to reaching fire and worried about her withdrawal rate if the stock market drops. She plans on leaving her job in the summer of 2023 a year from now. But she's worried about what might happen if the market tanks, 50% between now and then. If that happens, can she withdraw what she had planned? Can she live on what she's budgeted?

We're going to answer her question first. Misha is making more money at her new job, but can't contribute to her 401K for the first six months. What should she do with her extra money in this interim period? Sam has been investing for several decades and thinks that he should stay invested in his portfolio despite the recent drop in value. But he's also wondering if maybe he should sell. Kira is a young investor with multiple goals.

She's wondering how to best save for a down payment without seeing that money eroded by inflation. And she's also wondering whether her investment choices should take on more risk since time is on her side. We're going to tackle all four of these questions right now, starting with Bella. Dear Palo and Joe, hi, my name is Bella and I'm 50. single. I've been listening to your podcast for years and I'm just so grateful for everything that you do educating us about personal finance because it's in no small part thanks to you and others like you in the fire community that I think I can safely say I'm in great shape financially. So thank you, thank you from the bottom of my heart. So here's my situation. I have about 2.4 million net worth right now

with $1 million in brokerage, $1 million in tax-deferred $4.3B in IRA accounts, and $400,000 in cash or cash equivalent, which is a lot I know, and I'll explain why I have that much. So I'd like to fire next summer of 2023, and I anticipate spending about $90,000 per year, which right now is slightly under 4%. My question is as follows. So I work for a non-profit, specifically a college. I have a pretty unique job and it just would be a nice thing for me to tell them with at least six months of Matt's notice that I'm leaving because they're going to have a hard time replacing me. I plan to tell them in January and then I would leave, let's say, in June, 2023, basically.

Now, what happens if during that interval, the stock market drops, let's say, 50%. So now, as I'm about to fire, I no longer have $2.4 million. I have $1.4 million. And the 90K annual expense is definitely no longer 4%. Right. Now, the reason I have 400K is because I want to do like the, I think it's called the bucket method, where since the average stock market, a stock market crash lasts, you know, 3.5, 4 years, I have about 4 to 5 years in cash, right, to basically cover me until the stock market recovers.

So my question is, if something like that happens and there is a massive crash, is 90K per year still okay or no? I listened to the Bill Banging episode really intently and I just loved it and he sort of mentions how people I think at the depth of the Great Recession

who fired let's say March 2009 at the bottom of the market could have actually spent 6% and not 4% and still be safe in retirement and I think my question is related to this but I'd like more clarification basically

So anyway, thank you so much for any advice you can give me on this. And again, thank you, thank you, thank you, really for everything that you do. I hope you both have a great day. Bye. Bella, thank you so much for calling in with that question. Thank you for being part of the Afford Anything community. And congratulations on your upcoming retirement. Congratulations on being ready to walk away from this job and start the next chapter in a year from now.

That's amazing. in your question, what you are essentially asking about is something called sequence of returns risk. And this is the risk that you shoulder when you first into retirement. A drop in your portfolio at the beginning of your retirement can be significantly worse than a drop in your portfolio, say, 15 or 20 years into your retirement. And that's because at the beginning of your retirement, if you have to convert paper losses into real losses at the outset, it has a compounding effect that impacts the rest of your retirement. And so the risk of a portfolio decline in the year that you retire or at the beginning of your retirement, that's referred to a sequence of returns risk. And in order to manage that risk, what many retirees do is de-risk and then re-risk. As you're approaching retirement, you would want to move your portfolio allocation towards lower volatility, lower risk investments, such as bond funds.

Hold it in more conservative investments just for the first year or two of retirement and then gradually start to re-risk, start to build up more equities as you are deeper into your retirement. it sounds on its face counterintuitive because we often think of timeline and risk as having a linear relationship. As timeline shortens, risk should also shorten. And so it sounds counterintuitive to say, hey, ratchet down the risk so drastically that you end up pumping it back up in the future when necessarily your timeline is more compressed, right? You make an assumption as to how long you're going to live.

And so it makes on its face seemingly no sense to increase your level of risk five years after retirement than you would on retirement day. But the reason that many investors choose that strategy is to manage sequence of returns risk. Essentially, you are artificially depressing the level of risk in your portfolio for the years right around when you leave your job so that that way you can manage risks like these. If you want a more lengthy explanation about this, there are two episodes that I would recommend, and both are interviews with Dr. Wade Fow. He is a professor of retirement income at the American College of Financial Services. He holds a PhD in economics from Princeton. He has won multiple awards from the Journal of Financial Planning and from the Academy of Financial Services.

And he is the person who came on this podcast and first, talked about this very counterintuitive strategy of managing sequence of returns risk. So you can listen to two episodes in which we interviewed him, episode 119, and episode 271. You can go to both of those at afford anything.com slash episode 119 or slash episode 271. You know, I think Paula, though, with all that money sitting in cash, she's far more de-leveraged already than most people are, and I'm not that worried. In fact, when she talked about a 50-percent downturn, my very first thought was she is so much money sitting in cash right now that there is no way that is going to happen to her. She won't experience the 50-percent downturn because

she's already de-leverage to decent degree. The other good news, and we certainly don't have a crystal ball and we don't know where things are going, but just based on a few things that we've seen, a lot of people think that this hyperinflationary period was going to come to an end fairly soon because of the Fed notching up interest rates so aggressively. And as we record this, we just got a number that shows that inflation this last month was still a very high number for the last 12 months, but lower than it had been the month before. meaning that while we still have some pretty bad inflation numbers, this Venezuela condition where inflation just continues to go and go and go and crazy hyperinflation, that we probably

won't see that and the Fed has done its job, which also means that if down markets reflect recessionary periods, that we may be closer to the bottom of a down market than we are to the top. And I don't want to call that. I don't want to say we're closer to the bottom. But I certainly think that a lot of the worry happening in people's portfolio now reflects people finally hearing the message that the last six months kind of sucked. You know, and by the way, when I was a financial planner, that's what usually would happen. When the worst was already upon us and we had gone through this absolutely horrible period, I got. more questions after the damage was already done than midway down or a quarter of the way down.

It was usually the damage was over and then I get calls going, hey, I heard the market's really bad. Well, it was, but now we're kind of moving up. And as you hear today and actually in questions you and I have had just the last couple episodes, I feel like that's what we're getting now, even from the very smart afford anything community, which is, hey, things look bad. So I don't think I'm going to put money in equities. Well, as we record this again, I don't know what's going to happen to the market in the next few weeks. market's actually done pretty well the last few days. It's done very well as these economic

indicators show what I was just talking about that maybe this recessionary period is starting to wane. We are recording this on Thursday, August 11th. Yeah. So who knows about the future? But everything that we've seen from people that have been through this before and people that follow these things way closer than I do are kind of proving out. That's true. And there's, you know, The conversations that I hear people having are very much along the lines of, is this the bottom, or are we at the first trough of a W where, you know, we're going to see a couple of bounces along the bottom, a few hops along the bottom in a W-shaped recession? Those are the kinds of forecasting conversations that we all enjoy having,

but that few of us can call with any degree of certainty. Which is why, Paula, I think her idea of using a bucket approach where she has that money that's very conservative first is a great idea. And then she's going to deplete that first. And then she has the middle bucket, which she'll then dump into the cash bucket to replenish the money that she takes and then leaving most of her money in the growth bucket during this, then she doesn't have to play a lot of these forecasting games. I think she's doing a lot of good things there. Right. You know, Joe, in reference to her enormous cash reserves, the fact that she has

so much money, $400,000 in cash and cash equivalence, tells me that she's not going to have to convert paper losses into real losses. But simultaneously, what you and I both know is that personal finances largely behavioral, more so than it is mathematical. And typically the type of people who would keep such a large cash allocation are the type of people who would feel a fairly significant sense of anxiety or panic when that cash bucket gets depleted even down to the halfway point. So if she were to need to live on that money, if we were to have a big downturn in 2023 and she were to live on that money, let's say, for the next two years from 2023 to 2025. I can imagine that in 2025, she'll still have $200,000 in cash, but I think she would be

sweating bullets at that point. This is the danger of retiring, really, when you are close to the number. And a lot of financial experts worry that some people get to a number that seems, man, close enough, and they cheat because they want to get out. because they want to get out and out. They're like, well, I can probably eat red beans and rice every day. You know, I think I'd be okay on that. But they do these little things. Well, maybe I won't take vacations more often. But when you do that and then bad things happen, it becomes very, very difficult to go back. What I really like that I heard on my tour around the country this year was people

that were in Bella's situation, but they had kind of a middle ground. They had another place where they might be able to bring in a stream of income during the early years that they could go to when they wanted to, when they felt like it, didn't have to show up at the nine to five every day, but certainly on a random Tuesday, if they wanted to make a few dollars, they could go do it. And I think that for somebody that worries having that access to an income stream so that you don't feel like you're at the whims of the financial markets and your future is going to be based on what the S&P 500 or the total stock market decides to do or the U.S. economy, the world economy decides to do is a lot more reassuring to you.

So my question to Bella would still be, are there some streams of income, whether it's consulting? If she's hard to replace, first thing I wondered is if there's a possible consulting gig in her future if she wants there to be. Because in those hard to replace jobs, I mean, when you're hard to replace jobs, I mean, when you're hard to replace, it's easy to say, hey, I'll do this next project for you for X amount of money. And if there's scarcity, she may have a lot of takers for that. Exactly.

What scarce is valuable? Bella, for the most part, I am not worried about your retirement. You have a lot of cash that you can tap. You have a very solid portfolio. And you've given yourself ample time to be able to adapt to the unexpected and weight out. non-ideal market conditions. So my biggest concern is largely that you won't get in your own head about it in the event that we do have a big market decline. Because facing that sequence of returns risk can be very, very scary. Like coming head to head with that is frightening for a lot of people.

The people who retired in 2008 had a bad year. She's talking about a 50% downturn again. I don't think that's going to happen to her. Right. But let's make this more realistic, Paula, a 10% downturn could, a 15% downturn could. And for a lot of people, when we say 10% downturn, 15% downturn, they used to look me in the eyes when I was a financial planner. Oh, yeah, I can do that. But if we're talking about $2.5 million. Right.

We're talking about $250,000. $250,000 is 10%. When you put it into numbers versus percentages, people think a lot differently. And I can tell you, people with portfolios the size of Bellas, when they lose $250,000, the pit in their stomach, even though that level of loss is standard operating procedure for the S&P 500, it's within one standard deviation, meaning it's going to happen. It does happen. It will happen. It has happened, but it is so painful. So, Bella, I hope that gives you some guidance on how to proceed. And I hope it also gives you some reassurance. You are in a great spot. You're well positioned for retirement. And the worst case scenarios that you are imagining, a 50% downturn, that type of experience is extremely unlikely.

And even if it is, you're safeguarded for it. So be cautious of the risk of inventing monsters under the bed because the reality that you've built for yourself is far more secure than you may realize. So thank you, Bella, for asking that question. And congrats on your upcoming retirement. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner,

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That's your commercial payments of fifth-third better. Our next question comes from Misha. Hi, Paula. I recently switched jobs, which gave me nearly a 20% salary increase. However, my current job will not allow 401K contributions for the first six months. months. What should I do with the money that I would have been contributing to my 401K? I've considered putting it into ETFs, but with the market the way it is, I'm not sure this is the best idea. I also have $17,000 left in federal student loans and $120,000 in private student loans that I could

use this money to make extra payments on. What are your thoughts? Thank you so much for your time. Misha, thank you so much for your question and congratulations on your new job and your 20% salary increase. That's incredible. I have lots of thoughts on this. Essentially, what I hear when I hear your question are two different topics. Number one, I hear the topic or the question of should I invest in the market at this current time, at this current point in history, given the market. What you said was that you've thought about putting this into ETFs, but given the market, you're not sure this is a good idea. I'm going to put a pin in that because there's a lot to unpack in that statement because that statement is imbued with market timing.

So we're going to unpack that. But before we do, I'm going to also note the second thing that I hear in your question, which is a comparison between making broad market in the market in the question. investments versus paying off student loans. So there are two questions happening here. One is, should I pay off student loans or should I invest in the stock market? That's one question. And then the second question is, should I invest in the market given the current timing? So let's tackle both to the first question, should I invest in the market or pay off student loans, the way that I would answer that would be heavily dependent on the interest rate on those student loans. You mentioned $120,000 come from private student loans. I'm going to assume that

they have a somewhat higher interest rate, but I don't know how high. If we're talking about an 8% rate, I would start paying those down. Well, I would see if you can consolidate, see if you can lower that interest rate, do all of that first. But if that's as low as you can get the interest rate, then I would start paying those down because at that point, at 7, 8%, that interest rate is so high that you can't reasonably expect to invest in a broad market ETF or a broad market index fund and arbitrage the difference. Now, the reason that I'm saying that I would prioritize paying off student loans rather than investing in the market is because we are specifically talking about only a six-month period

after which you will start to make retirement contributions. And I'm saying that for the benefit of anyone who's listening, who might mistakenly interpret what I've just said to mean that you shouldn't invest in a retirement account while you've got student loans. I want to be clear, I'm not saying that at all. I fully support investing in your 401k while you have student loans. It's just that for the six-month period,

when you're making the decision about taxable brokerage versus student loans, that would be an interest rate-based decision. I think there's another factor here, Paula, as well, which is I like the interest rate discussion, but one people also forget about is cash flow. If we can make her cash flow significantly better so that she can max fund the 401K or invest even heavier, this is a move that can potentially make her financial position overall much better, less debt on the balance sheet, lower interest rates, but more cash flow. And in fact, in some cases, even where a debt didn't have a high interest rate, if it swallowed up huge cash flow and we could pay it off in a fairly quick period, I would pay off that debt very quickly just so that we could then invest reams of money into the market.

Just get rid of it as soon as we possibly could. Ah, so you're talking Dave Ramsey's Snowball Method here because she's got $17,000 in federal student loans. I don't know how much she's going to be able to pay off in the next six months, but if she could wipe that one out, then the monthly payment that she would otherwise be making to those federal student loans would then be freed up. And that same monthly payment amount could be thrown towards her private student loans or towards investments. Well, and often those student loans are on different payment schedules. And when you dive into your payment, your payment's going X amount to these different ones. And if you can do a principal repayment on just one of those to knock it down so that it frees up cash flow to either make your monthly amount that you have to put every month toward the student loans lower. And then you can decide later on to apply it more to student loans in your snowball or to invest that money.

In other words, that $17,000 could be $5,000 on this loan, $6,000 on this loan, $3,000 on another loan. So if she could potentially make some good cash flow moves. Now to the second part of your question. This is where I wanted to start. Yeah. Just to be clear, you're like, I'm going to do this later. I'm like, no, let's do this now. All right.

Well, all right. Take it away, Joe, because you're brimming with some thoughts on this. Well, this is the time to invest. Yep. When your gut says, oh, man, is dangerous. That is usually the time of greatest opportunity. When you're high-fiving yourself because you're brilliant and the market's been up and you're making money hand over fist, that's usually the time of.

biggest risk. So you have to think along an opposite continuum. Man, if I'm you, I am thinking that if I have a long time until I need this money, this is a great time to be stuffing money into the market. Just like we said earlier, I don't know when this is going to end. I don't know where the economy's going to go long term. I certainly already said, I think it's closer to the bottom than the top. I don't know that though. You don't know. But even without those things, Paula, it's gone down so much that without having to call our shot or think we're going to make big money in the next six months, these are the times when 10 years from now, you look back and go, man, I'm glad I did that.

Right. Exactly. Exactly. I remember investing aggressively in 2011, 2012, back when everyone still thought that investing Back when everyone still thought that investing was dangerous. And man, that has quite literally changed my life. I would not be where I am today. Hosting this podcast, teaching an online course, running afford anything, living in New York, attending Columbia.

Probably none of this would have happened had I not very, very aggressively invested immediately after the Great Recession. Can I tell you something I'm doing right now that is that I'm in the middle of? We don't know how it's going to go, but it's exactly what I'm talking about. Well, not exactly. This is even riskier because I'm using play money to invest in this. But if you go look at a chart of cryptos and you look at April, cryptos really went off a cliff in April, totally went off a cliff. Two things happened there, Paula. Number one was I had been doing a bunch of research on cryptos.

And I was at the point that I was much more comfortable than I had been before. but I also knew that my social media feeds were full of people I call crypto bros who were telling me just how awesome crypto was. And seemingly overnight, like in two weeks, they were gone. And it wasn't an algorithmic change? Look, all I can say, one time like a year and a half ago on this podcast, I said the word Robin Hood bros. And some dude left this long comment being very, very mad at me because I said the word, Robin Hood bro and he thought I said crypto bro and then he got super angry. So I just want to stay for the record to the listening public, Joe said it, not me. All right? Well, let me defend this too. I'm not

talking about the average guy and there's a lot of women and men who have invested in crypto. That is fine. Yeah. I'm talking about the person making tip-tock videos telling me that they're a crypto expert and how I need to back the truck up and put every dime I have in crypto and take it out of every other type of investment. Those are the bros. Not talking about ordinary men and women investing in cryptocurrencies, fine people. But the people that were telling me all this ridiculousness are all of a sudden gone because Paul, as you know, they got their asses wiped out.

Right. They got wiped out. Right, right. Yeah, we're talking about the people who are doing Coke on stage in Miami at the Bitcoin conference. Right. So April, it's through the floor based on my experience and people have different experience than me. But because of the utility of Ethereum, I have been buying Ethereum in bigger and bigger chunks since then.

And you know what? For the first time this week as we record this, I'm actually up. I didn't know if I was going to be up yet or not, but I knew two conditions. I knew it had come way off the top. I knew it might still be volatile. In fact, I expected to be volatile, which is why I didn't go, quote, back the truck up, used diamond hands, put everything in it. I'd started dollar cost averaging in and greater and greater degrees as I felt more comfortable and still play money, Paula,

but I'm finally up in my crypto investment. I was very comfortable though all the way down with, you know what? I think this is a pretty good move. We'll see. Time will tell. But certainly, to the point we're trying to make to Misha, I was buying because of the fact that it went through the floor. That's why I began buying. Right. When something goes on sale, that's when you buy it. When clothing goes on sale, you buy more clothes typically. When makeup goes on sale, you buy more makeup. I do. I can see that, Joe. Your eyebrows look amazing. Thank you. And when stocks or any asset goes on sale, that's the time to buy. There are people who ask, how do you square this with the message of not timing the market? You know, on one hand, the messages don't time the market. On the other

hand, the message is buy the dip. How do you square the circle? The way that I embrace both philosophies is I decide exactly how much money I want to invest over the span of a year. And that can be either a percentage of your income or it can be a raw dollar amount. Make that decision, how much do you want to invest this year? And then, if there is a market decline, any money that you invest above and beyond your normal contributions, that's the money that you use to buy the dip, which means that when you're buying the dip, which is, by definition, market timing, you are making additional contributions that you otherwise would not have made. That's how you simultaneously avoid market timing with your regular contributions and also buy the dip with money

that you divert from your beer fund and put into additional contributions that you weren't planning on making in the first place. And it's also, I think it needs to be said that with the money going toward my long-term goals, I don't play any of those games. I look at the number I need to invest toward that goals and I just chug away. No dip buying. No acceleration. I accelerate when I have more money. I don't pay any attention to the market. I accelerate when I think that I want to upgrade my fire time when I decide that what my goal was. I want to put more money toward it. I do it then. I don't look at the market at all. I'll play games, Paula, around the dip with my play account. So, Misha, the message is don't let the current market scare you away from investing. In fact, to the contrary, be a contrarian. To the contrary, the current market. Yeah, nerd humor, nerd humor, it was subtle, but there's at least, there are at least like 50 people in the audience who are laughing right now. Maybe five. Order of magnitude the other way, 500. We up 500. I think there's 500 people laughing at the fact that it wasn't that great. We're debating between 50 and five.

At any rate, be a contrarian, buy when it's cheap, and right now you've got a buying opportunity. So the current market is an invitation to buy, not a reason to sit on the sidelines. That said, in your personal circumstances, whether you ought to invest in the market in a taxable brokerage account versus pay down those student loans, that is a cash flow and interest rate. decision. So thank you, Misha, for asking that question. We'll come back to the show in just a second, but first, our next question comes from Kira. Hi, Paula and Joe. I found your podcast about six months ago and have been listening religiously ever since. Thank you for all that you do when it comes to helping others navigate through their personal finances. So I need a little help in regards to my financial planning. I want to buy my first home in five years' time, as well as making

sure that I'm planning diligently for retirement and investing my money the smartest way possible. For some backgrounds, I just graduated high school and work as a claims administrator at a personal injury law firm. I have been financially independent since I moved out from my parents' house in Florida to New York City two years ago. In those two years, I have jumped two tax brackets making me want to take my finances more seriously. I currently make a salary of $80,000 and have a side hustle making me about $15,000. I also have a 401k with a 6.5 contribution for my employer. I currently do not have any investments,

but I am thinking of opening up a Roth IRA. I know that if I save $1,500 a month, I will have $100,000 by the time I graduate college for a down payment on a home. Unfortunately, after accounting for inflation, it would only be about $72,000. Where should I put the initial $1,500 monthly so that my savings won't be eroded due to inflation. Also, due to my youth, I know that compound interest is in my favor,

but should I also be a little bit more risky and invest in more lucrative and volatile stock options? Think of me as a blink page with no financial ties or serious financial commitments as of yet. What advice would you give that person? Once again, thank you so much for the help. Kira, first of all, wow, you just graduated from high school, and you're making $95,000 a year, you are a recent high school graduate making almost six figures? I've literally never heard of that. Wow, I'm seriously, seriously, seriously impressed.

Can we get a round of applause here? Hats off to you, Kira, for being fresh out of high school and moving to New York City, which is a hard place to start your life, and making $95,000 plus a 401k contribution. So really, your total comp, your total comp is in the six figures. And you haven't even gone to college yet. That's incredible.

Even more than that, just the fact that she's just out of high school and she's listening to financial podcasts. Right. Exactly. Is incredible to me. It's so great. I think every afford anything er. We got to come up with that name still, Paula.

See, because we need it. I reach for it, the afford anything person. I think we all need to. We all need to find somebody who's that age and go, listen to cure. Like listen to this person calling in. This person is 18 years old. Not to hold it over them, but to just show them. She might be 20.

She said she's been financially independent since she moved out of her parents' house two years ago. if she graduated from high school at 18, she might be 20 right now. I think she did better than that. She graduated at 16 because she's clearly brilliant. She graduated at 12. You know why? Because she couldn't graduate when she was nine. That's why.

Yes. But it's just so awesome to see somebody who's doing. Because all the heavy, you and I know, all the heavy lifting she's doing now means a hell of a lot less work later on. Exactly. Exactly. Kira, I'm so impressed. I'm besides myself impressed. So do we want to launch into her question? Rather than just like glowing over her, yes, I suppose we should answer her question.

Us being so excited about the fact that we actually know you, Kira. Right? Yes, yes. And we want to be associated with people like this. We might as well answer to the question. I know. I'm fan-girling over Kira right now. Me too. So, Kira, as you mentioned, if you save $1,500 per month, you'll have $100,000 by the time you graduate college. So doing the math, if you save $1,500 per month in 66 months, which is five and a half years, you'll have $100,000. So I'm taking that statement to mean that you plan on graduating from college in about five and a half years.

And that squares with what you said at the beginning of your question when you mentioned that you want to buy your first home in about, five years from now. I'm going to answer your question in two different ways. First, I will answer the direct overt question that you asked. And then after that, I'll kick it to Joe, who is going to question the premise of your question. You're calling your shot? I know what you're going to do. I can see it. I can read your brain. I'm not going to question the premise. I'm going to question the framework. Okay. All right. Fair off. Okay. Okay. I know we're going to. you're going there, and yes, I will. But if we're foreshadowing, I'm also going to talk about the framework. He's going to question the premise and the framework. But first, I'm going to answer your question

directly, which is, where do you park that money such that your savings won't be eroded due to inflation? Essentially, you have a goal with a five-year timeline. You want to protect the money from inflation, but you also need it to be in a relatively low volatility asset because of the fact that you have a five-year timeline. There are two approaches to this. One is, and this is a question that I'll ask back to you, how flexible are you with this timeline? If you're flexible, if five years from now, if the market has tanked, you're willing to defer that home purchasing goal until the market recovers. If that is the situation, then it's fine to put this money into a a broad market index fund, if, and I'm going to really underscore the word if, if there is

flexibility to that timeline, if you would be okay with buying your first home eight or nine years from now rather than five years from now in the event that in the year 2027, you've suffered loss of principle and we're waiting for a market recovery. If you're okay with that and you have that flexibility, put it in an index fund. If you're not okay with that, if you are really committed to buying this home in five years or maybe six years at the most, but you don't really want to go outside of that relatively narrow band, in that case, you do want to keep this money in some type of asset where you're not going to be exposing it to major risk of loss of principle, in which case

tips, treasury inflation protected securities, are a decent. bet. Those are protected by the full faith of the U.S. Treasury. They are, as the name implies, inflation protected. It achieves the goal of not eroding the savings to inflation. You're not going to experience growth, but you will be able to hold to your five-year timeline. I think if you're going to go tips, I don't see a reason why not with that type of timeline, five or six years to go right to Ginnie Mays. Because I think Jenny Mays over a five-year, six-year time frame and 90% of markets will outperform tips. The problem is, is that we are currently at the end of one of those time frames where tips would have been a better idea. So five years ago,

you put money in Tips versus Ginny Mays, tips would have won. Once again, going back, Paula, to your point about risk versus reward, but still that five or six year time frame, the fact that bonds have also been beaten up to, to a degree that they are rarely beaten up, the risk of them being beaten up a lot more in a five-year time frame. And I know we said this about stocks earlier. And I don't want to call my shot, but there's plenty less risk. That is not a good sentence, but I think you know what I mean. There is a lot less risk in the bond market overall than there is in the stock market. And even if the stock market doesn't come back, because of the Fed action right now, the faster the Fed acts, the better the bond market's going to do over a shorter amount of time,

just because of the way interest rates work. I think Ginny Mays are probably as far as you can go. But that makes a good point, Paula, which is that she's worried about inflation. And when you look at inflation right now over the last year, there is no investment that gets you there. And this is where I said I wanted to question the framework, which is how do I put my money in a place where it's available in five years and I make sure that I beat inflation. If the next five years is like the inflation we have right now, the quick answer is you can't.

You can't. There is no investment that's a safe five year investment that beats this huge inflation that we've had. Now, if inflation returns to normal, then I think the tips recommendation and the Ginny May's recommendation, which is a little more volatile, but still along the same curve. we're still talking about government-backed securities with both of those recommendations. One is explicit. That's tips.

One is implicit. That's Ginny Mays, which is why Ginny Mays get a higher rate of return over time because of the fact that it's not explicit. That's about as far as you can go, but they will get crushed. If this inflation continues, you're going to get crushed by inflation. And there's nothing you can do about it. So. On that happy note. I know, right?

Hey, what a fiesta. Yes. But over long periods of time, I think here is right on. That is, Paula, the number one thing you want to think with longer term money is how do I beat inflation, which is why I get frustrated when I see the inverse of this, which is people that don't need the money for 20 years and is sitting in cash. Why? Because cash is safe. Cash is the most risky place to be with long term money. because in cash you will very safely lose purchasing power.

Guaranteed, those guarantees, they should list that your principal's guaranteed. And if you leave you here for 10 years, it's guaranteed to lose purchasing power. They should put that right on the bank account. You are guaranteed to lose your ability to buy bread. So that's what I meant when I said I was going to question the framework. All right. You have questioned the framework. And we've concluded that if inflation continues as it has, you're screwed.

and buying a house, not a bad goal. And for people that don't know my story, I became for several months back in 2020, a nomad. And I thought that this, Paula, was going to be my life forever at the time. I was very excited about it. I learned that I wanted a house. I didn't want to rent a house.

I wanted to own a house. But a house is not the great investment that a lot of people were brought up to believe. And especially if you've only been in this community, Kira, for six months, you may not have heard this. Buying a house is not a goal that increases your net worth. You may have heard that buying a car is not a great investment because that is a depreciating asset, right? But with a house, we often hear that renting is throwing money away. And it absolutely is not. In fact, I wrote a very, very long blog post that explains why renting is not throwing money away. We will link to it in show notes. You can subscribe to the show notes for free at afford anything.com slash show notes. Fantastic because people need to read that. Renting is probably a better idea. And in fact, Paula, you own rental properties. So think about this, Paula owns properties, owns a bunch of properties, does a phenomenal, really.

estate course every year, yet you live in a place that you rent. Correct. Correct. I rent my personal residence and I owned seven rental properties. My seven rental properties, I own free and clear. I collect rent from all the tenants. So I am simultaneously a landlord and a renter. Paula, for me, you've been in my house. I love my house. I think my house is beautiful. I love working here. it's a great place, but I realize it's not a great investment. This is not a great investment. This is Joe is 54 and a little bougie and likes to live in a certain place, but it's not a great investment. It's not just you and it's not just me.

There are more and more increasingly, there are different financial professionals saying this. In fact, one guy that I'm not a fan of, I want to be clear, got him Grant Cardone, said this recently on comedian Tom Segura's podcast that, well, let's just, If you don't mind, Paul, I'll just play this clip. The first voice you're going to hear is Tom Segura asking the question and Grant Cardone talking about renting versus buying your primary residence. Below people's minds, like, that you are a wealthy guy and you rent where you live. I rent where I live. Wow. I would never have equity in something that doesn't produce cash.

Your house doesn't pay you. That makes it a bad investment. My jet makes me more money than a house will because it can get me places. Nobody goes to your house to do a deal. You guys have more equity in your house than you do in your brand, your business. Expansion. Right. And who's really making the money on that?

The bank. They made 6% when you bought it. The seller paid for that. That was passed on to you. 6% when you sell it. That's 12%. 2.3% every year to the state. So if you own the house, 20 years, that's 44%.

The bank made 5% every year. So 20 years times 5%. That's 100%. So you'd have to make like 160% to break even for 20 years. So you're getting it. Now, that's a little bit of fuzzy math, which is Grant Cardone's specialty. I don't agree with the math, but I agree with the point. Yeah.

The point is still there that renting your house not that great an idea. And I will add the caveat that largely it depends on where you live. There's what's known as the price to rent ratio. And if you live in an area where the price to rent ratio favors owners, then it makes sense to own a house. And typically you're going to find those areas in places where homes are cheap. So if you're in an area where you can buy. a home for $100,000 and that same home would rent for $1,200 a month, you're better off buying. But, Kira, you live in New York City.

And I don't know if that's where you're going to go to college. I don't know if that's where you plan on buying a home. But as a broad rule, the more expensive of a city you live in, the more high cost of a city you live in, the more it makes sense to rent. I'm in New York City right now. I'm about to start a business journalism fellowship at Columbia University. I am renting, and I plan on renting for a long time because it does not make sense to own in a place like Manhattan. But I want to reiterate this point that doesn't make, Kira, your goal of homeownership a bad goal.

If that is your goal, I realized that I had that goal, right? When I was a nomad and I'm living in these rental properties, no thank you, not for me. get it for other people, not for me at all. I needed my house. So for me, it's a great goal. It's just financially, it's not this phenomenal thing that we've been told over and over and over and over. And that most people, I would say Paula, it's got to be close to 98% of people, believe that owning a primary residence is at least a good investment, right? Right. Yeah, people have really been fed this this lie that comes from the mortgage industry yeah the mortgage industry the real estate agent cabal um i sound like a conspiracy theorist when i say that the the illuminati that is real

estate agents i was a licensed real estate agent in the state of georgia so i can i can say that about myself here's what here's what happens real estate agents and mortgage brokers meet in a dark alley. Oh my goodness. And they decide how they're going to get the messaging right. Okay. We're going to back off of that, Joe, because now we're really starting to sound like we drank some Kool-Aid right before we started recording. But to add an air of intellectualism to this, let me quickly describe and knock down three popular arguments that defend the myth that rent is throwing money away. So when people say that rent is throwing money away, what they argue in order to back up that claim, is that, number one, rent is an expense while mortgages build equity. Number two, rent is forever

while mortgages end. And number three, renters don't benefit from rising home values, whereas homeowners do, right? Those are the arguments that support the myth that renting is throwing money away. So let's knock those down. First of all, to the argument that rent is an expense but mortgages build equity, first, when you pay a mortgage, your mortgage consists of four parts. principal interest taxes and insurance, P-I-T-I. The P is the equity. The ITI is an expense. The interest taxes and insurance is an expense. So that is also money that you are quote-unquote throwing away. Now, I'm putting throwing away in air quotes because we never use the phrase throwing away money when we refer to any other consumable good. We never say you're throwing away money on socks

or hairspray or chicken pot pie. For some reason, we really reserve that language for housing and only housing and not for any other consumer purchase. But that being said, that to directly address the notion that rent is an expense but mortgages build equity, we have to ask ourselves, what is the opportunity cost? What is the next best alternative? Historically, homes keep pace with inflation. According to the K-Shilller price index, a house in 1897 costs the same as a house in 1997 adjusted for inflation. That's data that comes from Nobel Prize winning Yale economist Robert Schiller. We know that historically, the total U.S. stock market as an appreciation tool has

dramatically outperformed home price appreciation. And so, sure, homes build equity, but it comes at the opportunity cost of putting that same money into the market. Now, to that second argument that people make, they say, rent is forever, but mortgages end. Their reasoning presupposes that your mortgage is your only payment. That is plain wrong. Even once you own your home free and clear, and I say this as somebody who owns seven homes free and clear, you still have to pay a substantial amount of money on things like maintenance, repairs, renovations, property taxes, homeowners insurance, utility bills, municipal usage fees such as water sewer trash, HOA dues if applicable, transaction fees, commissions,

closing costs, and opportunity costs of not putting that money elsewhere. You will spend your life paying for housing in one form or another. And so the question is not, how do I escape this perpetual payment? the question is, which of these two perpetual payments is more desirable? Would I rather pay rent in perpetuity or would I rather pay homeownership costs in perpetuity? And in order to answer that question, you need to see the price to rent ratio in the area in which you live. Because if you live in a high-cost area, it may be cheaper to pay rent than it would be to own when comparing comparable property. properties. That knocks down the second of the two arguments. And then to the third argument

that people make to support the myth that rent is throwing money away, they say renters don't benefit from rising home values, but owners do. Equity comes from three forms. One is principal reduction. The second is forced appreciation, which is when you make upgrades to a home that result in appreciation that is greater than the cost of the upgrades. And the third, our market-based equity gains, market appreciation. So, given that rising home values come from those three sources, principal reduction, forced appreciation, and market appreciation. Let's unpack them.

Principle reduction comes at the opportunity cost of not investing your money in a broad market index fund. Forced appreciation, which are those renovations, that requires, that's a second job that requires sweat equity and skill. And then market appreciation is outside of your control and historically keeps pace with inflation. That is my knockdown of the myth that renting is throwing money away. And again, I want to emphasize we are discussing your personal residence, which is very, very different than discussing an income property.

I just wish you'd thought about this a little. So, Kira, that was probably way more of an answer than you were looking for. But Joe and I are both really excited. about everything that you're doing and want to give you as much to think about as we can. Congrats on the life that you have just launched. It's incredible. I know that there are big things in store for you. So thanks, Kira, for asking that question. Our final question today comes from Sam. Hello, Paula. I'm really a big fan. As a retiree at 62 and engineering background. I find the way you drill and ask your interviewees.

What's on? You get to the points quickly. I like your method. But my question, it's an easy one. Does one sell in this sort of down draft? I'm down about 25% in net worth liquidity. Or just stay the course. And I've been through this since 1987. I'll listen for your answer, but my answer is that stay the course, mostly in growth, which has taken the largest shawl. lacking, but these things rotate back around, but I don't need the money, most importantly. It's not monies that have to be spent. Thank you very much and keep up the good work. Sam, I'm so happy you're enjoying the podcast. Thank you for calling in. And I agree with your answer. Stay the course. As you said, you've been through this, these market pullbacks, these recessions. You've been

through them since 1987. So you know that this is all cyclical. And that the worst thing you can do is convert paper losses to real losses. You don't need the money. So let it sit because we're playing the long game. During a downturn, when you think that you need to change your asset allocation or the level of your risk, especially now, I think it's definitely dangerous to lower the expected risk, which also then, Paula, make. the expected return less, because then you do exactly what you're talking about. So even if you're going to just downshift, you're not going to get completely out of the market, you're going to downshift so that your portfolio is a little tighter. I think during downturns especially,

it's dangerous to do that because you lost it fairly quickly. And if you downshift is something that has lower standard deviation, and then the market comes back, you're going to gain it back over slower, longer period of time. Right. Which is always the counter to you are going to lose money slower. Right. Like there isn't one without the other. The idea that I can get high returns and less risk, it doesn't exist.

When you want to have higher returns, you have to notch up the standard deviation, which is the risk level. So there's danger there. You can do it and you especially want to do it if you, need the money soon because that's the most important thing is to be able to do what you're going to do and in money's a fuel but the other way is exciting paula so when he says stay the course if you're somebody that's been thinking that you know what i know that i'm not taking enough risk that that i need my portfolio to zip and zoom more than it does today there's less risk

in doing it in a down market than there is in an up market. There was a lot more risk in the middle of last year to doing that than there is today. By far, by far. During downturns, it was often when finally in some cases get through to them that this thing I've been advocating, which was taking a little more risk, we could get excited about. because now that the market's gone down, let's go ahead and notch it up to a place where it should be. I'm not saying take unnecessary risk and just jack up your risk level. I'm saying if you think you need to already, I think there's a lot less risk in doing that than notching it down.

So when he says stay the course, yes. But if you need to notch it up, great. If you need to notch it down, I'd worry about that. Yeah, I agree. I think we're all in agreement. I think Sam also has come to that conclusion on his own where there's no reason to lock in his losses and there's no reason to change his strategy. This is a normal downturn just like any other. These things happen periodically.

And the only people who long term get hurt by such downturns are the ones who either had concentrated bets in a specific company that went under, or if you're a broad market investor, Then the people who get hurt are the ones who convert their paper losses to real losses. If you can avoid doing those two things, you're riding smooth. So, thank you, Sam, for the question. Joe, we did it. We did it. I can't believe it. Right?

So many great questions. So many people doing such cool things. Sam seems like he's in a great spot. Bella getting ready to turn the corner on a big life event. Misha getting ready to start a 401k and with a big salary increase and Kira starting out on the right foot, big stuff happening. Yeah, I'm excited for all of our callers. If anyone's listening and you want to call and leave your question, head to afford anything.com slash voicemail. And Joe and I would be happy to tackle whatever question you have.

Joe, what are you up to these days? Well, I don't know if you know this, Paula, but I thought to myself, if there was only a, a place where we could encapsulate all of this goodness that I give to people on the Afford Anything Show every week, how great would that be? And so I created a book that people can buy. I was wondering where you were going with that. I tried to make it sound very infomercially, and I think I largely failed. But I have a book called Stacked, Your Super Serious Guide to Modern Money Management. It's available in stores everywhere. Our idea was to take the Hardy Boys Detected manual and combine it with the Cubscott Wolf Guide. So you do the easy achievements at the beginning,

the tough financial achievements at the end, and it's a lot of fun. And Paula Pant is on page 13, the best page in the book. There it is. Went on book tour with Joe. I went to, what, six or seven cities with you? Yes. People kept asking me to sign the book, which honestly surprised me because I was like, but I didn't write the book. And they were like, yeah, but we want you to sign it anyway. And so I kept signing page 13, and naturally I signed the words, congratulations on finding the best page in the book. There it is. It's so fun.

So stacked from Avery, our editor was the same editor that James Clear had at Atomic Habits, which I'm very proud of. And I'm proud of the book. It's done very well. And we've gotten great feedback on it. Oh, Atomic Habits is the book that we're reading in our book club right now. So if you go to fable. dot CO slash afford anything. We are just wrapping up atomic habits. We've had a great discussion.

James Clear was a former guest on this podcast. He was a guest on episode 156. And your editor, Joe, was also his editor. So, hey, small world. Which is fun to brag about except when you're in meetings with them. And you feel like the younger brother, whose older brother was like the valedictorian. Right. And you're maybe second or third in your class. And everyone's like, why can't you be more like James? If I could be more like James, things would be good. But great book, available everywhere, stacked.

Awesome. It is a great book. Thank you. And thanks to all of you for tuning in. If you enjoyed today's episode, please share it with a friend or a family member. That's the most important thing you can do to spread the message of having a great financial life. Please open up whatever app you're using to listen to this show and leave a a review. And while you're there, make sure that you hit the follow button so that you don't miss any of our amazing upcoming shows. If you want to chat with other members of the Afford Anything

community, head to Afford Anything.com slash community, where our community members break out into different groups based on shared characteristics or interests. So if you want to talk to people in the Northeast or the Southeast or the Southwest or the Midwest, you can find your people there. If you want to talk to people in their 20s or 30s or 40s or 50s, you can find them there. If you want to talk to people about debt payoff or budgeting or index funds or early retirement, you can find these breakout villages there. So afford anything.com slash community to find like-minded people and talk to them about whatever is on your mind. Totally free. Totally? Totally.

Are you sitting down? I know, right? Well, thank you so much, again, for being part of the Afford- Anything-N-thinger. We'll come up with a name at some point, Afforders, anythingers. We'll come up with a group identity name. Again, hit me up on Instagram if you can think of something. Thanks for being part of this. My name is Paula Pant, and I will catch you in the next episode.

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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. So, Steve, caught my laugh. That was an inappropriate place to laugh. I was laughing at Joe's grammar class. It does happen. It has happened. It will happen. It should happen. It could happen. Right. I'm conjugating the happen. I'm conjugating the happen.