Afford Anything - Can I Retire Yet? - with Roger Whitney, the Retirement Answerman

Episode Date: April 3, 2017

#71: Roger Whitney is known as the "retirement answer man." "All I think about, all day long, is how to make that [retirement] transition successfully," he says. But he holds a dirty little secret. "I don't believe in retirement. And the most successful clients that I work with ... technically they're retired, but they're still working." Huh? What does that mean? In today's episode, Whitney and I discuss the nuances of 21st-century modern retirement -- and how this ain't nothin' like the traditional retirement that you've been taught to expect. Enjoy! ______ For the "WTF?" -- Vocabulary guide from this episode - visit http://affordanything.com/episode71   Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything, and that's true not just of your money, but your time, energy, focus, attention, anything in your life that is a scarce or limited resource. And I'm not saying that to scare you or to promote some kind of scarcity mindset. In fact, I believe in abundance. But the truth is every yes is an implicit no. Every door that we walk through means that we're closing off some other options. The choice that's in front of us, the task that's in front of us, is to decide which door's door's walk through, what's most important? What's a priority and what's not? Because I never want to hear you say that you can't afford something. Whether you mean you can't afford the money, you can't afford the time, you can't afford, like, the brain space that it's going to occupy. I never want you to say that you can't afford it. I want you to be clear that you can afford it, but it's just not a priority because something else is a priority. That's what the show is all about. It's all about figuring out what your priorities are, what decisions you're going to make, and then how to align your data. And then how to align your data. day actions with those decisions. My name is Paula Pantam, the host of the Afford Anything podcast,

and today is the first Monday of the month. Normally, if you've been listening to this show for a while, you know that the first Monday of every month I answer questions that y'all, the listeners, the Afford Anything community, have submitted. So because it's the first Monday of the month, I invited this guy named Roger Whitney. He's known as the Retirement Answer Man. He has a podcast by the same name. I invited him to answer some Ask Paula. questions with me. So I brought him on the show initially for that. And we started recording. And in the beginning of the recording, I was like, hey, Roger, introduce yourself. And so he did. And then that kind of spiraled into this conversation about retirement. And we started getting

into it a little bit because he said a couple of things that I had questions about slash disagreed with. So we started like having a little discussion debate about retirement that was really, I thought, to me, it was fun. And I was like, you know what? Let's just. run with this. So, we're not doing an Ask Paula episode today. Instead, we're doing a completely off the cuff, sort of interview, sort of debate, sort of WTF with Roger Whitney, the retirement answer man, and me, as we go, sort of go head to head, talking about our philosophies around retirement. That's what you're in for. So by the way, during our discussion, we threw out a lot of kind of advanced phrases, big words. So we talked about sequence of returns. We talked about

Monte Carlo simulations. We talked about standard deviation. Now, normally, if this were an interview, and I think, I hope my longtime listeners know this, if this were an interview when I was just asking questions and in pure listening mode, I would have paused and defined all of those terms as we were going through it. But because this was more of a conversation slash debate slash completely unplanned, like this was supposed to be an Ask Paula episode that just went off the rails and that's what you're about to hear. We didn't stop and define those terms, not all of them, as we were going through this. So if you want a vocabulary guide or a primer as to what we're talking about, you can get that at the show notes, which are available at afford anything.com slash episode 71. Again, that's afford anything.com slash episode 71. So, we're Without any further delay, here is Roger Whitney, the retirement answer man, on our philosophies around retirement. What does it mean? And, you know, what is it?

And how do you get there? Here we go. Hey, Roger. Hey, Paula. Good to be here. I'm so glad you could join us. Before we get started, tell everyone a little bit about yourself. Well, I am a practicing financial planner in Fort Worth, Texas, and I have a podcast, The Retirement Answer Man.

Keep practicing. I'm practicing. That's what my clients say, podcast, The Retirement Answer Man, where I practice and answer questions, much like we're going to do today. How'd you come up with a retirement answer man? Like, is retirement your jam? That's my jam. I work with clients over 50 that are either contemplating or in the middle or living out

that transition into retirement. So that's my special to. That's all I think about all day long is how do you make that transition successfully. And it's nice to have that one individual jam or on your music because then you don't get confused, right? Yeah, I deal with the same issues all the time, which helps everybody along the way. So does that mean that you deal with traditional retirement rather than, you know, extreme early retirement? Well, whether it's extreme early retirement or quote unquote traditional retirement, the issues are very much the same. I mean, obviously the timeline is different.

And to be honest with you, Paula, I don't believe in retirement. and the most successful clients that I work with, technically they're retired, but they're almost all working. So traditional retirement is like a date, right? It's like a hard date where you stop any useful existence in the world. I look at retirement more as a relationship you ease into. And it's all about gaining more freedom and more control over your time. So it doesn't matter whether you're 32 or 52 or 62. It's not about stopping. It's about, man, I just want to have time to pursue things I'm really jazzed about. So when you say that most people whom you know who are retired are still working, do you mean they're consulting and freelancing and kind of like having little gigs on the side that they enjoy?

Is that what you're talking about? Well, there are so many different ways to think about it. I have some people that have retired from corporate world. I had one gentleman is a great example. He got a buyout from a major corporation. and he worked in a cubicle, and he always wanted to play in the dirt. He loved being outside, so he just started a sprinkler business on the side and ended up growing it into this big business that he is just having a blast with.

And he's 70 years old now, and he's just making more money than he was in the corporate world. Another example is I'm working with someone right now who are working on how can they leave a full-time gig that they hate to take a part-time gig that they love. so they're making adjustments to their lifestyle so he can start doing something at a slower pace that he actually enjoys and have more freedom in his life. So the more you're thinking ahead of time about these things, the more flexibility you have. And I think that doesn't matter how old you are. So wait a minute then. What is the difference under that definition? What's the difference between retirement versus making a career transition into self-employment? Well, how do you define

retirement. So retirement is, the root of the world is to retire, like retire from useful life, right? I deal mainly with baby boomers, and they hitch their wagon into this idea of retirement that was their parents' version of retirement, where they, you know, to work, moved to Florida, went to the Blue Light Special and read books. But what I'm finding is with baby boomers, that's what they were sold. That's what the brochures show. But when I survey my audience, I got thousands of people that listen to my podcast, they say they're not interested in that. They're reviewing retirement is how do we live? It's their chance to live on their own terms. And if it's like their parents where you're just not doing anything, the numbers

don't work. You know, why is there a retirement crisis? Because if it's all about saving and investing, the numbers just don't work. You're going to live too long. You're going to be too active. and health care and inflation and all that of the stuff is going to eat your lunch. So it's not about retirement or working, in my view, it's about creating a life that you don't really want to retire from. Does that answer your question? I yet, no, to be honest, I still don't quite grasp then under that definition what the difference would be between retirement versus creating a career that you love. And I'll tell you where I'm coming from. Like my definition of retirement is when you reach the point of financial independence.

So my definition of retirement is when you reach that point where your assets could produce enough passive income to support your basic cost of living without you having to trade any time for money. And when that happens, you are retired slash you have the ability to retire. And then any work that you do beyond that point is work that you're that you, any work that you may or may not do beyond that point is work that you're choosing to do. But if somebody has to, you know, quote unquote, has to continue working, even if it's work that they love, like, you know, having some awesome business, I still don't quite grasp under that definition the difference between retirement versus a career change.

Well, here's part of the issue with that, I think, where the difference is. I'm dealing with people that are primarily in their mid-50s, right? Uh-huh. And they didn't think as progressively as you do. They were not, they didn't hitch their wagon to that. They hitch their wagon to the old idea of just keep saving and investing in a 401k and then you can live your retirement dream. And the numbers just don't work because there are too many variables in the markets, in inflation, and health care costs and so many things. So it's a little bit too late for them to pivot and try to catch up to what you're talking about.

about. But I would challenge you a little bit. And even if you're in your 30s, it's extremely difficult to build enough financial assets to create the cash flow that you need. Because let's say you're 35, you probably have a 50-50 chance of living almost to 100. I know a 20-year-old's 50-50 past 100. And there are so many variables that could, you know, of the winds of change, whether it's in your life circumstance or in the economy or in the world that we really can't solve for in a math problem. So it's better to be as agile as you can, even if you think you're financially secure. Okay, so Roger, let me challenge you a little bit on that because I disagree. I believe that a middle class American within about 10 to 15 years, we'll say 20 at the most,

could create enough assets to support a reasonable middle-class cost of living in the U.S. Okay, so give me some color to that. I'm not going to disagree with you. Okay. It's not possible, but give me colored to that. Well, so let's say let's take real estate out of the equation completely because I think a lot of my listeners are like, uh-oh, uh-oh, this is the point where Paula starts talking about rental properties. So you know what, let's- Real estate, by the way. Let's remove that from the conversation for the moment.

We're going to assume that a person has zero interest in going down that path. Okay. Even though I believe that that path is much faster, gets you there faster. But we'll take that off the table and let's assume that if somebody is going to do this purely by investing in VTSAX, the Vanguard Total Stock Market Index Fund. Got it. And let's say that they want to support themselves on $60,000 a year. which is a middle-class salary. The average family in America makes, I think, according to the U.S. Census Bureau, $52,000 per year for a family of $2.3. Okay, got it. So $60,000 a year, you need assets of $1.5 million in order to support that at a 4% withdrawal rate.

Correct. How is that not feasible within a, say, between 10 to 20-year time span? A building up $1.5 million? Yeah. Yeah. It takes a lot to build up $1.5 million. I mean, almost nobody does. So it's not possible, but it takes a lot of money to build up $1.5 million. So if you're going to the average, just so you're going to average lifestyle, so let's assume that that's their average earnings.

So if you're making $60,000, let's say you're making $100,000 a year. It's going to take a long time depending on the lifestyle that you're living to even get $1.5 million. Well, okay, hold on. Let's run this through a calculator then. Let's find out. Let's quantify what long time is. Yeah. Okay. So let's say you make $100,000 a year. Okay. And let's just multiply that by point seven to get net taxes, you know, real basic here. And that's $70,000 a year, right? And then how much you think, so let's scrimp and save lifestyle. Let's say you're married with two kids. So what does that cost you think if you're, depending on how you're living, right? I mean, we're talking Mr. Money Must. Stash living here, or are we talking normal life? I think somewhere in between.

You know, I think that on an income of 70,000 a year, again, the average American family earns an income of about $52,000 per year for a family of 2.3. Okay. So we'll say that. Is that number or the 100,000 number I used? You know what, let's use because I know the demographics of this listenership is higher income. Okay. So we'll stick with the 100,000 number.

But my point in saying that is that the average American family is living on about a little less than 50,000. So say the average American family is living on 40 to 45,000, right? So if you're bringing home 70, you know, living on 40, that's $30,000. If you're bringing home 70 after taxes, you can live on 40, invest the other 30,000 per year. All right. So you have 30,000 per year. So if we take $1.5 million, and let's not assume any growth right now. just divide that by 30,000 a year. Oh, we've got to assume growth, though, because it's going to be

like all of the growth is going to compound because you keep that growth in a retirement account. It compounds. And that's where the majority of that growth comes from. Your assets grow and then your money starts making its own money. Your capital works harder for you than your time can. I agree with that. So what's a reasonable growth rate? We'll say 7%. Seven percent. Now, here's where we get to the first issue. Because if we just put this into our HP 12c, which is what an old guy like me uses, and we put in a 7% return. There's a big problem with that. Wait, what's an HP12C? See? I'm dating myself. It's a fancy calculator. It's like a Hewlett-P-P-P-C? We would take college courses on how you use this

sucker. Wow. It's before the internet. Yes. I still have one on my desk. But anyway, so here's what we're running into the first problem. If we assume a 7% return and we just put that into some type of calculator, well, it's going to assume that you get 7% every single year, right? Well, right. No, I'm talking at the long-term aggregate average. So in some years you may get 12%, some years you may decline, but the long-term aggregate average, we can assume 7%.

Conservatively. I mean, I think you could probably assume a little bit higher, but just to make a conservative estimate. Well, actually, I'm going to disagree with you there because you can have long-term averages, but depending on when you're born, you may not actually get that experience. As an example, if we just take the S&P 500 from 1968 to 1983, it was flat. It went up and down a lot, but it was at the exact same level. So if you happen to be investing in 1968, you would have saw lots of up and downs, but at the end, it wouldn't have had any capital growth.

You would have had dividends and things like that. Right, right. So in that experience. The money that you put in in 1968 may not have. grown, but again, your capital works harder for you than you can. So all of the capital gains, the dividends, as they get reinvested, they continue to grow. And in addition, every time the market declines, if you are continually putting in the same amount for your dollar cost averaging, then that 30,000 per year that you put in during the years of decline have their own growth.

You know, like, so it is not the case that a person who invested in 1968 then at the end of that time period had precisely the same amount of money adjusted for inflation. That's just not the case. I wish we would have known we were going to talk about this because then I could actually prepared some numbers to show you if we include the variability of returns because I have some calculators that I do that with. It's very interesting to see what those numbers can come out with. You're right because you're going to be dollar cost averaging throughout. So you'll have money buying at low prices and so forth. So you will do well, but I think the 7% is very optimistic. as a guaranteed.

Okay. So, all right. So I guess I'll take this. I am a interviewer and not a debater. So I will approach this from a spirit of curiosity. Tell me what is your philosophy? What would you assume would be a reasonable rate of return? Let's say we've got a hypothetical 30-year-old person who wants to retire early

and is investing $30,000 per year, every year. I think I'm going to agree more with you in where you don't want to go is investing, saving and investing is part of the solution. But a bigger part of the solution is managing your lifestyle, obviously, and investing in yourself because you're your best wealth creator, not the markets, not anything else. It's you and your knowledge, whether that's starting a business that you can sell, doing investment real estate, saving. and investing in my mind is a very much an old model. And that's just saving and investing and betting on market returns. I think it has to be part of everybody's wealth building equation. But the problem, if you just depend on that, is then you abdicate all your power. You're betting on the whims of whether we go through a particular cycle or not. As an example, in the late 90s, when my children

were very young, I started to invest in 529 plans and put X amount of money in and then started to add money periodically. Fast forward 12 years later, the money was worth about the same amount I put in just because the bigger amount went in right before the tech crash. I invested throughout the early 2000, and then I went through 2007, 2008, and then my kids started to need that money 12, 13 years later, so maybe this is a shorter time frame than we're talking about. And because of the sequence of returns that I got during that period, I ended up not really realizing the returns that the averages showed I should have. Right. But any money, conversely, any money that you invested in 2008, 2009 would have more than tripled by now. So, yes, there was a catastrophic loss in 07. But again,

a dollar invested in 2009 is like more than $3 today, less than 10 years later. A lot of it depends on when you need the money, right? A lot of it depends on when you need. Right. But so I guess the difference between a 529 plan versus a retirement plan is that with a 529 plan, you need, I'm assuming that you would need to withdraw almost all of that within a four-year period versus a retirement plan. It has to exist for a lot longer. So you're only withdrawing 4% a year.

You're not withdrawing 25% of it per year. And that's a massive difference. Let me approach this from a different angle and how I help people make decisions on when they can be financially dependent. Okay. Let me see if this helps. So what I do is we look at what they want to spend, sort of like what we did. And then we look at what financial resources they have, in this case, their portfolio of whatever it is. We take a reasonable rate of return using historical data, just like you did.

Okay. What rate is that that you use? Okay. Let me switch screens and I'll tell you exactly what it is. Sorry, I didn't mean for the boxing gloves to come on. But this is, I think this is fascinating. I'm just thinking through this with you. So I don't think I'm trying to debate. Although, yeah, that's what I did in high school is debate, so I do get into that. But I'm just trying to think creatively with you on this.

So we're just discussing it. So hold on a second here. I want to get you the numbers so I can be more accurate. because we're talking about this. So let's assume like a 60-40 portfolio. Oh, we can even be more aggressive than that. Oh, God. Yeah, why would you assume that?

Okay, we'll go more. I forget I'm dealing with younger people. Okay, let's get more aggressive. So let's say we're looking at, say, a 90-10, 90% in equities, nine percent in bonds. Perfect. Okay. Like it. Since 1970, the average rate of return for that allocation would be 9.92%.

Okay. That seemed really high, but I'm cool with that. And then if you take the real return, meaning you back out inflation during that period of time, it's like 5.85. So I would use that number. So we take what we need for income, what we have in resources and what we're contributing? And then we say, okay, what are we going to invest this money in? And in this case, it's a 90% stock portfolio. And then we'll look at the average return, but we also look at the other side, something called standard deviation, right? Because we have an average, but then you have this distribution around the average. Exactly. And then what we run is something called Monte Carlo simulations. I love these things. I freaking love Monty Carly. Yeah.

It's a cast bodily, which basically does. So for people that don't know what that is, what it will do is it'll take that person and it'll run a thousand simulations of their life of the money they're contributing when they're going to need or when they're going to start spending the money. everything will be constant except the investment experience. So the only variable we allow is what kind of investment experience might we have. And by doing that, we can model, okay, what if based on this portfolio, we have a chance of having this really crappy portfolio return, and then

we have the chance of having an amazing return and everything in between. And then we get to our confidence level, which is what percentage of the time, what percentage of those thousand simulated lives, were they able to achieve the goals as we define them? Right. And just for the sake of the listeners, the rule of thumb, the 4% rule of thumb that says that a person can generally safely withdraw about 4% of their portfolio per year in retirement, that came about through some researchers who several decades ago ran Monte Carlo simulations and found that some high percentage of the time with a a reasonable level of confidence, a 4% withdrawal rate would be sufficient such that a person did not have undue risk of outliving their portfolio.

So that's where that came about. I guess the broader point that I'm making is that like Monte Carlo simulations are used in determining all of these rules of thumb that we tend to throw around. Very good point. Very good point. But here is so that's the, there's a lot of value. Hashtag fun fact for the day. Hashtake fun fact. But what's interesting is, in my experience, anyway, is that the result of running a simulation like that for a client or for someone

is that that particular result, the value of it diminishes as everything changes, right? A year later, what was ran a year ago is almost worthless because you either got better or worse performance. We either spent over or below. We either saved over and below. So where the value is in my mind is, so let's say you do everything right, you run these and it says you got an 85, 90% confidence ratio. You can't just leave it there because what will happen is life will happen.

And we don't know what's going to happen. It could be good or bad. And the real value with these type of simulations is running them over and over again. So if you start to get less than expected returns in instance one, you can monitor when you need to worry about it so you don't keep driving. along with it and you can take little actions, whether it's in your investing portfolio or in your life, to mitigate the damage to keep everything okay. A real quick example is, because I went through this with clients, was they were quote unquote financially independent and we were using this approach, this agile approach. We had an 85% confidence ratio roughly. And then we started

to go through 08, right? Right. So as we're going through 0.8, right? So as we're going through 2008, we're getting, you know, lower, much lower than expected return. We're getting negative returns as we went through that very stressful period. And that 85% confidence ratio started decrease and got well into the 70s and would have gone a lot farther down. But what we were able to do is by having little conversations with the client make little adjustments to mitigate the damage and ride it out a lot smoothly. Because if you don't make any adjustments, that 85% confidence ratio pre-08 at the bottom probably would have been in the 50s or 60s. Well, yeah, yeah, exactly.

I mean, you know, and again, that goes back to why retirement planning is different than college planning. I mean, you can, for example, if 2008 hits in the year that you plan to retire, you can delay retirement by one or two years and take advantage of the fact that all stocks are on sale. to pump even more money into the market since it's, you know, since you're getting great deals and that money that, you know, so that's something that you can do in retirement that you can't necessarily do in college. You can, instead of withdrawing 4%, you can withdraw 3% and adjust your lifestyle a little bit, you know, not by. I think we're talking to the same thing. We're just talking a little bit from different angles. Yeah, yeah. And I guess so the perspective that I'm coming from. from is like that flexibility is your true security or your ability to respond to to external stimuli is the thing that gives you the ability to retire and the freedom to do so without undue

compromise. And so I guess pulling back a bit from that, I don't quite understand the position that you hold that it's just not possible to retire in 20 years. I didn't say it wasn't possible. Or unlikely. I think it's not as simple as maybe it was as stated. And it's not a sure thing that if you do A, B, and C, that, okay, you're going to get there. Part of that perspective comes from, and maybe I'm jaded by this, and maybe this is a built-in bias on my part, is when I talk about these things, I have to be there for the whole journey.

So if it doesn't work out, I'm still around to take the blame. So I'm very cautious at saying, okay, this is going to work. It's, we think it's going to work here. So maybe this will help. I don't know if it will or not. But I always tell the story to clients when we get to the action part. And I tell them this, and this is not derogatory to trailers. It's just meant to make a point.

I tell them my trailer story because most of the clients I work with, and you are fairly well off. And I say, you know, you realize Bob and Betty that we can do everything right. You still may have to live in a trailer. they look at me because they live in not a trailer. It's a very nice house and not that there's anything wrong trailers. And what I mean by that is, look, the markets can go so bad. The world economy can go so bad.

Life events, whether it's health care, major health care expenses, unexpected, whatever, you could have the perfect storm. And there's not much you're going to be able to do about it. And so ultimately, you may have to live in a trailer, But if we're agile enough and we're having the right little conversations to do what we're talking about, mitigate and take, you know, look for risks and opportunities and act quickly. If we do everything right, you're going to be adjusting so many times along the way that it's not going to be that big of adjustment. And because we're doing that, you'll probably be the last one there. Because there's so much unknown that we can't control that, you know, it can happen.

And I've seen things like that happen. So I guess that that informs my decision or. or makes me a little bit more biased about feeling super comfortable. I like to keep my options open. So are you talking about like black swan events? Whether it's black swan events or major health care events, Alzheimer's, there are so many things that can come out of left field. I mean, we have so little control over our life.

We think we don't have control over the markets or the economy, but we have just as little control over our lives and what is in store for us over a 20, 30, 40, 50 year period of time, that the best I think we can do is stop trying to figure it all out and just keep making lots of really smart little decisions and remaining agile and adjust along the way. That's how you make the most of it. Okay, so walk me through some examples of these smart little decisions that a person would adjust along the way. And again, let's start with a hypothetical 30-year-old who is investing $30,000 per year

in 90% in a Vanguard total stock market index fund and 10% in Vanguard total bond market index fund. Well, so some of the little decisions you make is in three major areas. One is obviously what you're trying to accomplish. Okay. Where you want to go long term, but then setting some short term sprints so you can actually have actionable things to deal with. Because what I found is when whether you're 30 years old or whether you're 60 years old, what is important to you today, probably isn't going to be important to you five years from now.

So the first little conversation adjustments you need to make is, is this still what we care about? Because it's easy to set a plan and never revisit. Is this still what we want? And most of the time, it's not. And I see that happen a lot. So number one is look for the adjustments of this is what we're working towards. This is everything that we're making decisions based on. Do we even care about this anymore? So what would be some examples of that? I'll use myself. I was 29 and my wife and I, she worked full time. I worked full time and we lived in this beautiful home.

And we came home one day with two children young. And we came home one day. We had no previous discussions and we just sort of looked at each other and like, why are we doing this? And that started in motion, her leaving her work, selling our home, buying a home near her family that was half the cost. and me moving from an expensive city to a less expensive city because we realized what we were marching towards,

we didn't care about anymore, so we were able to make that adjustment. So that's number one is build a life you want because I see a lot of people think they want something and they never revisit it and they just keep going that direction. The second area where you can make lots of little adjustments is in your cash flow and cash flow is king. I know you're a new estate lady.

Yep, I totally agree with that. Cash flow is king. You can be worth $10 million and not have a pot to piss in in terms of cash flow. And I worked with on the periphery with the gentleman who was a billionaire who he was scrambling to figure out how to pay his tax bill. I mean, bending himself into a pretzel because he had no money. He had a lot of assets. He had no money. He had no cash flow. So the other little adjustment you can make is in your cash flow. Now, obviously we can talk about, you know, the spending side of it. But as one of my favorite, lady says there's only so much frugling you can do. Remember that is, Paula?

I think I have a clue. That is my favorite quote, and you said it on my show. So there's only so much frugling you can do. But you want to make lots of little adjustments on the other side of the equation, which is increasing your cash flow, which is by far the biggest opportunity we have in our life. Right. Obviously, real estate, things that throw off income, that has a good,

inflation hedge and things like that. But even beyond that, what I do with a lot of clients is we look for ways for them to increase their income through investing in themselves. And that could be networking within their company. That could be networking in their industry, networking in the industry that they really want to be in. It could be education, all sorts of things. Those are a lot of little adjustments. That's where you want to spend a lot of time. And then the last place is that balance sheet, that net worth statement. And, making sure that's allocated in alignment with where you think you want to go as a family. And that's where you make lots of little adjustments.

Does that make sense? Yes, that makes sense. The thing that you said about investing in yourself, it's funny that you bring that up because we just did an interview with Michael Kitsis that we ran a few weeks ago. I like Michael. And he really emphasized the same thing, which actually caught me by surprise because, you know, he's generally known for being a nerd and running lots of numbers. So when he came on the show, I was expecting us to get into some extremely nerdy conversations about standard deviation in Monte Carlo simulations.

But no, the crux of his talk was make more, earn more. It solves a lot of problems. Yeah. Yeah, absolutely. It definitely, it does certainly accelerate your ability to save. The way that I write about it on my blog is there is a. gap between your income and your spending. And your job is to grow that gap as much as possible. And you can grow that. There are only two ways to grow that. You can either earn more or spend less or

both. But there's only so much frugling that you can do. So, you know, that frugling, that is the low-hanging fruit for some people. It's the easy win. It's something you can do today. And it's not as scary because there's no fear of failure involved. So it doesn't have as many psychological roadblocks to it. So sure, do that first, get the easy win. But then, you know, if you're comfortable with facing your fear of failure and facing also your fear of success and leaning into that discomfort, earning more is the thing that really grows that gap. And once you grow that gap, you can then invest that into income producing assets. And not to pick this scab, but one thing I think is, and I believe through what I've seen, and I mean, I've been doing this 25 years and just walking life with clients, is the happiest people are generally doing something where they're earning an income.

It's not about, you know, yeah, be financially independent. I agree with that. But what I find is the people that are financially independent, they end up still earning money, right? Because that's just true. they are because it gives them intellectual stimulation. It gives them a social network. It gives them a purpose in life. Oh, yeah. Absolutely. I think the key is just to be doing it. There's a certain psychological freedom that you get when you know that you're doing it because you want to and not because you have to keep the lights on. Yes. So when I'm dealing with clients, and maybe this is where we were off a little bit, is my clients, they're running away from a day job they hate typically. So they're trying to figure out how to do it as quickly as possible. So doing whether the side hustle or part-time is a bridge to allow them to get out of that day job a lot quicker.

But I get your point. I think the key is that we just need to, you know, our parents, the people I deal with the, you know, the baby boomers, they hitched their wagon to kill yourself and then you get to have fun when you retire. I remember my mom was that way. And she, She died when she was 48. And she missed a lot of her life living what we're told by a lot of people in my industry is save and invest, save and invest, scrimp and save. Well, you can do that. And it's prudent to do that, but don't miss your life while you're doing it. I see what you're saying.

So, like, the old model is this extremely binary model where you're either working or you're not. Yeah, I mean, if you use a popular retirement calculator, I love this because it's just so silly. And this is, if you use a popular retirement calculator and you take a couple that's, you know, 55 and they'll say they earned a million dollars and they want to retire when they're 62 and spend $80,000 a year, you put that into a retirement calculator, one of the most popular ones online, it'll say, hey, buddy, you can't do it. You're going to have to work, you know, six more years. You're going to have to spend a lot less or you're going to have to save more right now. Well, those are all crappy options. and that's because their life is reduced to a math problem all based on saving and investing. And there's so much more to life than saving and investing.

And unfortunately, if you go to a financial planner, the secret is their calculators are pretty much the same. It's a math problem. I suspected that. There's things like what you talk about and a lot of your cohorts where there's a lot of other things outside of just simply throwing money in the market that you have control over. And I think we speak the same message on that. Yeah. Yeah, I would certainly agree with that. We're going to come back to this conversation with Roger Whitney in just a second. But first, let's take a break to talk about food, because food is awesome.

So one of the sponsors of this podcast is a company called Blue Apron. Their mission is to make home cooking easier and more accessible to everyone. And the way that they do this is they mail you a box with all of the ingredients that you need to make fresh, home-cooked meals, plus the recipe for said meal so that you're not like looking at the ingredients going, do what, so they send you exactly what you need, exactly the right portions so that you're not wasting any food. Basically, they take care of the shopping, like the meal planning and the shopping for you. They partner with more than 150 local farms and fisheries and ranchers, so their seafood is sourced sustainably under standards that they've developed with the Monterey

Bay Aquarium Seafood Watch. The beef and chicken and pork come from responsibly raised animals. They also have a vegetarian option. They got something for everyone. If you want to give them a try for free, that's right. F-R-E spells free. You can, I don't know where that came from. If you want to try them for free, check them out at blue apron.com slash afford.

That's blue apron. F-F-F-O-R-D. And if you use that link, you'll get three free meals, including free shipping. And by the way, when I say three-free meals, I mean meals for two. So you'll get like six free meals, because I can do math. So again, that's blue apron.com slash afford, A-F-F-O-R-D. Okay, so Roger, taking it back to something that you said previously, you know, when we talked about our hypothetical 30-year-old who's investing 30,000 a year, there were three-point.

that you made. Number one is that this person, as he or she proceeds throughout life, should, number one, figure out what they want and continually revisit that because the thing that you want when you're 30 may not be the thing that you want when you're 33 or 35 or 37. And you used herself as an example. You know, you and your wife had the beautiful house and then you decided later that wasn't what you wanted and you adjusted your lifestyle accordingly. So that was thing number one. thing number two was investing in yourself. And that's where we started talking about the power of earning more. And I referenced to the previous podcast episode with Michael Kitsis as well, you know, how that allows you to grow the gap.

And then thing number three that you mentioned was then turning your attention to your balance sheet. Can you elaborate on that? How would a person do that? So the network statement is the dashboard for a lot of what I do. Because I think that is it tells you in one spot how you're really. resources that you have are allocated to work towards what you care about. It's, you know, cash flow, creating free cash flow is basically how you create wealth, right? Well, the balance sheet of the net worth statement is how you decide to allocate that wealth to work for you, right? And so you have

a few things you can do. You can give it away, be charitable, you can spend it on lifestyle, you can save it as cash, you can pay down debt, or you can invest it. So that's the hierarchy of the decision you have to do with all this free cash flow that you create. And so with your net worth, you want to constantly go through that checklist as you build wealth from your free cash level. Okay, what do I do with this money to work towards what I care about? So there's a lot of little decisions to be made there. The big mistake I see most people make is they value tax deferral too much.

Oh, M.G. Yes. Yeah. Yeah, yeah, yeah. Go on. Go, brother. Now, that is another mantra of my industry, right? You know, defer, defer, defer, and put it into 401ks and to IRAs and all those other things. There's nothing wrong with that. But the problem is there is a tax bill due. And I could go into how that whole thing got structured, but it's not worth it here. And I have dealt with clients in their 70s who all they have are tax deferred

assets. And they have very little flexibility in their financial life to manage their tax rate, to access income. They have less options in how they invest the money because it didn't really have to be public assets. So you want to manage it between obviously tax deferral. You want tax free assets, but you want post-tax assets. And whether that's investing in normal things like indexes, investing in real estate or investing in businesses, that's your dashboard where you try to make all those decisions.

Yes. Yeah. You know, the thing that came to mind when you said people prioritizing tax deferrals or tax advantages a little bit too much are the sheer number of questions that I get, both from podcast listeners and just by blog readers who email me, who will ask about various investments and they'll say which investment will give me the best tax benefits. And it pains me, like, it hurts because I'm like, why isn't your question which investment gives me the best returns relative to my risk profile? You know, like, that's the question. Which

investment gives me the best risk-adjusted returns that suit me. But that's not what a lot of people are asking. A lot of people are like, oh, you know, which of these gives me the best tag? Oh, man, dude, don't let the tail wag the dog. Exactly. And tax deferral gives you an immediate rush, right? It's like a, it's like a Coke that way. But it doesn't mean you don't pay taxes. If it, let's say you're successful and it grows outrageously well, well, well, then great. You're 70, you're going to pay income taxes on all that growth. Tax deferral is just like cocaine. Kids, that's the takeaway lesson for today.

So you want to balance, you know, we talk about diversification. You want to diversify your tax buckets as well. You know, my word is agile. You want to have flexibility. You always want to value flexibility, whether it's from a tax perspective and an investment perspective or, you know, pretty much anything else in life. How would you model that? How would you structure that?

Again, we're just using like a hypothetical 30-year-old for our imaginary person. As far as, what do you mean, as far as their balance sheet? Yeah, yeah, exactly. Okay. And many people disagree with me. I value liquidity. Uh-huh. So pay off bad debt, obviously, which is high interest rate.

How do you define high interest? What credit cards? Like, is there a given interest rate that you say anything above that rate is? No. No? No, I'm not a fan of them. I mean, I don't mind debt as long as it's on productive assets. Yeah, I agree. So as long as it's on productive assets, then you can actually calculate, okay, and what I pay in an interest, you know, is it offset by this expected return on my business or on whatever it is. Right.

So that's how I look at good or bad debt. Right. You're arbitraging interest rates, basically. Or you're arbitraging the spread. Right. So if I'm using it for a productive asset or, you know, what I view to be productive, then I feel a little bit more comfortable about it. Cash reserves, pay off bad debt. And then I do agree with tax deferral. There's nothing wrong with that. I do agree with Roth.

But then I think you also need to build up your taxable assets. And the other end of it is for somebody in their 30s, I go back to investing in themselves, whether it's learning how to do real estate on your own, learning how to start a side business that will free you from your nine to five, if that's what you're looking to get out of, you know, constantly noodle on building these new cars that are going to get you to where you want to get later on in life. Don't just assume it's the car that you're driving now because most of us have a hot rod we want to work on from a business or a life perspective and you want to keep working on what's next. So how would you divide up, like you've named multiple priorities,

right? One of the themes of this podcast is making decisions about, what you're going to say yes to because every yes in one direction is an implicit no in another. So of all the things that you've mentioned, investing in yourself, investing in tax deferred accounts, investing in Roth accounts, paying off high interest consumer debt, how do you prioritize among those? Because these are all good things to do. How do you decide? The correct answer, which isn't very sexy, is it depends, right? So let me go back to my 30-year-old self. Okay. I'll just say what I did because I might just use what I did. You used an HP12.

Yeah, we won't go that far back. We won't go that far back. We'll say I'm 30 years old. When I was roughly 30 years old, actually a little older, we left my partners and I left a major financial firm and started our own business. At the time, my wife didn't work, but I had two young children. My income peaked to trough went down by about 80%. I'm not going to say I did that right. But during that period when we were making the transition, I bet on myself. I stopped 529 investments.

I stopped all retirement investments. And we lived off of our savings and I scrimped and saved betting that our business would work. Now, am I going to recommend that to people? I can't do that. But the way you prioritize is based on the options that you have before you. And for me, I have enough confidence and enough visibility that. that this was going to work, that it helped me make that decision set for me. But on the flip side, I see a lot of people saying they're going to bet on themselves,

but they don't invest in themselves, and it's more like gambling because they don't really do the work to educate themselves on their business venture. They just sort of threw it all in. And, you know, that entrepreneurial dream usually fails because they didn't do enough research to really know what they were doing. Okay. So how would a person do that? One step at a time.

You know, a lot of the way I approach things is I start off with like, I don't know anything. I don't know what's going to happen tomorrow hardly. So I'm not going to spend a ton of time figuring it out. I'm just going to try to make lots of little smart decisions and be very agile and adjust as I get more information. I think that's the best we have because I've, you know, we talk about investing in real estate. And I was telling you before that, you know, I have personal money in, you know, large office buildings and things like that directly. And every performer that says, here's the investment, here are the projections, here's how it looks. I don't even look at those. Yeah.

I've seen one. Pro forma. I've never seen though. Oh my God. I'm sorry to interrupt. Pro forma for anybody who's listening who is in the world of real estate, pro forma is just another word for bullshit. I'm glad you said that rather than me. Yeah. So, but everything looks good on the front end when we're optimistic and we're excited and we're happy about things. So I'm a very cautious person. I like to keep my flexibility. So when it comes to real estate is more about the people and their track record and whether you can trust them. So the important point here, Paula, is rather than how should you allocate is you got to go through each of these little conversations. And if you know, if you start with the first one and you work your way down, I allow the process to lead me to the decision.

decisions I should make based on the circumstances. So I have, you know, in my practice, I have the same conversations. I'm about to have one here in five minutes. The same conversation over and over again with clients, the decisions that end up coming from the checklist or those little conversations end up being totally different based on where they're at and what they're trying to accomplish. That's not sexy. It doesn't give you a clear answer, but that's how I do it. Here, I have a great example of that. Can I use this for a quick? Yeah, absolutely.

So this is back in the late 90s. I worked with two clients. On paper, their net worth was about, say, 200,000 each. They both were married. They both had two kids. On paper, they were identical. Okay? They both worked for the same technology company.

And in the matter of about 13 months, their net worth went from 200 to about 30 million. Stock options. and, you know, it was the heyday of technology. So I'm having separate conversations with each of them. Okay, we have all these stock options. You talk about tax wagging the dog. A lot of those people got killed because of it.

We have this, you know, God send, you're worth $200,000 here. Now you're worth $20 million on paper. Let's back into what you need. One gentleman wanted to be a corporate titan. He wanted to own his private jet, wanted to be the private equity guru. So he let it rock. because he was a risk taker and he wanted more because that was his ticket out. So based on the decision set for him and his priorities, he let it ride.

The other guy who looked identical on paper for the most part, he was like, we got to his financial independence never, what he needs to secure for his family. And then we work through exercising options and paying the taxes to get to that number. Both guys on paper looked identical. and they both had very different outcomes based on really what they cared about and where they wanted to go. So I guess the takeaway of all of this is that there is no best investment because all of it is contextual to the why. Yeah, all of it's contextual. I like that word.

I'm going to use that as soon as I can learn how to pronounce it. Yes. And it's to your why and to your individual circumstance. That's why whether anybody promoting something, there is no great investment. there is nothing that is great or perfect. It's all depending on you and whether it's a tool that you need to use in your situation. So focus more on not trying to find the latest and greatest and on having the right little conversations so you can let that lead you to what's best for you.

Awesome. Well, we will. I know you've got to go. You've got a client meeting coming up. So we will leave it there. Roger, where can people find you if they want to learn more? retirement answer man podcast where I noodle on this stuff all the time. And then rogerwittney.com is my blog and home on the internet. So you can find me there. Awesome. We'll link to both of those in the show notes. That was awesome. That was totally fun. What are some of the key takeaways that we got from today's conversation? Well, here's what I took from it. Number one, modern retirement is nothing like what it once was. This ain't your grandpa's retirement anymore. Back in the day, retirement used to be this thing that happened. Initially, it was something that happened when you were. too old or sick to physically be able to work. Later, retirement evolved into some concept that

people strove for, you know, some period of recreation, optional period of recreation. And now the line between retirement and working life is, for many people, increasingly blurry. Retirement doesn't necessarily mean that you stop working. It means that you transition out of something that you despise or something that you feel kind of meh mediocre about and transition into something new. And I think that as modern society continues to evolve as we go more towards the sharing economy and people can find ways to make money on the side, renting out a room on Airbnb, for example, or renting out your car, renting out your clothes, your lawnmower, you know, as all of sharing economy-related things start to continue to grow, I mean the line

between whether you're working and whether you're not, I think is just going to increasingly blur. So not that we discuss that on the show. Now I'm just making things up in the outro. But my point is pulling back a little bit. My point is just that the definition of retirement itself is something that has evolved and is continuing to evolve. And also that we all, you know, we all have our own definitions of retirement. I mean, you heard Rogers and you heard mine. My definition of retirement is financial independence. Rogers, who, and he's someone. somebody who talks about retirement all day every day, he has a different definition. And that's okay. I was discussing this with a friend the other day, the definition of rich, because my

definition of rich is different than many other people. So that's a whole different conversation for a different day. But again, zooming out, the broader point is that these words that we throw around and that we use are not only ambiguous, but they are dynamic. They constantly evolve. And so part of knowing yourself and deciding what you want, deciding your goals, you know, that doesn't just stop it setting a goal of I want a $2 million net worth or I want to retire at $40 or I want a second home that I can pay for in cash. Those goals are great if that's what you want. But it doesn't stop there. Like part of figuring out what you want is figuring out what your definition of the word retirement means, what your definition of the word wealth means. because there is no agreed upon definition. These are terms that, you know, our understanding of money includes thinking critically about what that is.

So that is probably the biggest takeaway that I got from this conversation. I would love to know what you think. Hit me up on Twitter at Afford Anything. Speaking of which, I want to thank my listener, Evan Jones, on Twitter at FI. Evan Jones for OMG. Okay. Okay. So do you remember, Remember in episode 63 when I said that I was looking for some more interesting way to express the idea that just because you live close to a given property, that doesn't necessarily mean that that property is a good investment. You know, like don't necessarily don't just look in your own neighborhood when you're looking for investment properties. Like I was looking for some catchy, sticky, interesting, funny way to say like proximity to a house does not necessarily make that house a good investment. investment. Okay. This is this listener, and thank you so much because this totally made my night. This is the most hilarious thing ever sent me this awesome document. Okay. All right. Funny ways to say this. Proximity can be nice, but it won't get you that ice.

A property close by does not mean a good bye. Or how about this one? Say goodbye if it's not a Goodbye, even if it's close by. Oh, I love it. Okay, okay, but here's my favorite. Before you turn off this podcast, because you're like, I can't believe what you say. Okay, here's my favorite. Here's my favorite.

Ready? If the numbers don't align, you must decline. Even if you live close to it, still poo-poo it. Oh, I'm a dork. I love it. Okay, so thank you so much because that was awesome. It totally made my night. Yeah, that was great.

So yeah, if you have any funny, cheesy, ridiculous jokes or anything that you want to share, tweet it to me at Afford Anything. Leave it in the show notes, which you can find for this episode that's Affordanything.com slash episode 71. Thank you to everybody who left a review on iTunes. Those iTunes reviews are amazing, super helpful for helping me book more guests on show and just reach more people. And finally, two more notes. Number one is, and I've got a big favor to ask you, you guys ready? You ready? Because this favor is actually kind of important for us to stay on the air. I've been reaching out to sponsors and can you believe it? The sponsors actually want information about who's listening. Shocking, I know. So I have information on our download

numbers. I have that through our fancy internet hosting system thingy. But, uh, I would like more information about who you are. Like, are you male or female? Do you have an age range? Do you, you know, certain things like that. What's your favorite flavor ice cream? That sort of a thing. So we have a little survey that's available at afford anything.com slash who are you?

That's afford anything.com slash who are you? Affordanything.com slash who are you? Who are you? Who are you? Okay, I could get lost all night saying that, so I'm going to cut myself off here. But please visit afford anything.com slash who are you to let me know who you are. And finally, coming up on the show, remember that time that I promised that AJ Jacobs was going to come on the show? Well, that's still going to happen, but he's not coming on until November. So you can pencil that on your calendars. Lesson learned, don't tell people that guests are coming on. on the show until after the interview is recorded. Hashtag, oops. But yeah, he will be on in November, and I've already got all of the interview questions prepared.

So I'm going to be like, AJ, who do you think will, how do you think the spring weather will be? So that's happening. You can look forward to that. Also, and I can say this because the interview has been recorded, number one New York Times bestselling author, Jen Sincereo, is coming on the show.

She will be, that interview. is going to air towards the end of April. So you can look forward to that. She previously wrote a book called You Are, I think, Steve, sorry you're going to have to bleep this, because there's profanity in the title. Her book is called You Are a Bad B-I-Bad. And her new book is called You Are a Bad B at Making Money. That's coming up at the end of April. Thank you so much for listening. I really appreciate you. My name is Paula Pant. I'm the host of The Afford Anything Podcast. Catch you next week.