Afford Anything - How Can We Downsize from Two Incomes to One?

Starting point is 00:00:00 You can afford anything but not everything. Every decision that you make is a trade-off against something else. And that's true, not just of your money, but also your time, focus, energy, attention, anything in your life that's a scarce or limited resource. And so the questions become twofold. Number one, what matters most? What do you value more than anything else? And number two, how do you align your day-to-day behaviors to reflect that? Answering these two questions is not simple.

Starting point is 00:00:35 It's a lifetime practice. and that's what this podcast is here to explore. My name is Paula Pant. I'm the founder of Afford Anything.com and the host of the Afford Anything podcast. Every other week, we answer questions from you, the community. And today, with me to answer these questions is former financial advisor, Joe Saul Seahy.

Starting point is 00:00:55 Today, we're going to answer a question from a listener who wants to shift from two incomes down to one while still pursuing financial independence. We're going to talk to a 55-year-old couple with $2 million saved who wants to know if they're ready to retire. We are going to talk to parents who have excess money left over in a 529 plan. We're going to talk to somebody who does not have access to a high deductible HSA, and we're going to help a father figure out where to put his daughter's $5,000 that she got for her bat mitzvah.

Starting point is 00:01:27 Let's begin. Our first question comes from Tyler. Hey, Paula, this is Tyler from Detroit, Michigan. And first off, love the show. For the past year, I've been kind of nerding out on the FI movement and the philosophies around it. I've been a little obsessed, hopefully in a good way, so much so that really these philosophies and general principles have begun to define the way our family is headed over the next years. And that's been really cool. It's been a great experience.

Starting point is 00:01:54 So thank you for all the insight on your podcast, specifically, and what I love your thoughts on is the idea of shifting to a single income family. My wife and I both work nine to five jobs. I'm in sales and she's an elementary school teacher. So 17 months ago, we welcomed our firstborn boy, Henry, into the world. And we have another one on the way in November. So we're super excited. Our family's growing. And because of the recent family additions, my wife, both of us really, we realize this is a special time before, you know, when they're at home and the kids are at home and before they really go off to school.

Starting point is 00:02:28 So we know it's going to go by quick. To be home with them, at least before they head off to school, is super. super important, and from my perspective, I can't think of anyone I'd rather have home with them than their mom. Needless to say, it's become a financial and a family goal for us to be able to transition down to one income from two and have my wife stay home with the kids, at least for three or five years before they head to school full time. So my question is this. Have you seen the transition go, this transition go well amongst your listeners? I'm sure you've seen, you know, this from all angles. Is there any sort of advice you might be able to give us as considerations?

Starting point is 00:03:03 as we look to make this a reality for our family. A little bit of financial context on our family. We've been pretty good at saving for the future, maxing out my Roth IRA and 401K, as well as funding a pension through my wife's work and partially funding a Roth IRA for her on top of it, as well as some 529 investments for Henry, no credit card debt or any other high interest,

Starting point is 00:03:25 quote-unquote high-interest consumer debt. We do have a mortgage, one car loan, and a student loan for my wife's graduate work. The approach we've come up with to prepare for this so far is gradually phasing out her income. We do this by 25% increments really every month now as we're really trying to fast track this. And taking that money from her check and then applying it to the debt to free up some cash flow. So for example, the car loan. We take whatever we save from her check and apply it directly to those debts.

Starting point is 00:03:56 So we wanted that money anyway down the line. So we might as well prepare for what it feels like not to have that. that money and let's allow that money to kind of work for us and, you know, free up that cash flow. So that's our approach so far. And we hope to have the Carvalone paid off as well as a good dent of that student loan paid off by the time baby number two is here. So love the show. And thank you for the thoughts and insight. Can't wait to hear from you. Tyler, that's a fantastic question. First of all, I think that you're doing everything right. The fact that you, a big picture here, you are pretending to live on one income while you still have two.

Starting point is 00:04:36 And you're doing this in phases by gradually stepping down in 25% increments. Your overall strategy is live on two incomes while pretending to live on one. And that does two things for you. Number one, it gives you the experience of living on one income. It lets you do a practice run, a dress rehearsal, if you will. And number two, it allows you to save all of that supplemental income in the meantime, which, as you said, you're using a repay debt. So I think your strategy is perfect.

Starting point is 00:05:04 And so the number one piece of advice that I would give you is keep on, keep it on, because that is spot on exactly what you should be doing. You're doing it right. I think there's lesson here, Paula, for everybody because I used to actually, Tyler, use your strategy with clients when they would come to me and they'd say, listen, we're wondering if we can afford more house. The very first thing I would say is what Tyler's doing. I'd say, hey, let's figure out what the mortgage payment's going to be.

Starting point is 00:05:27 let's add in your escrow cost, your homeowners insurance and your tax cost. Let's figure out that payment. And then we'll save the difference between your current payment and what your new payment's going to be. And then put that money away into a savings account that we can use later. Because we also know, Paula, that if you buy a bigger house, there's a decent chance that you're probably going to need a bunch of money to furnish it that you didn't expect, to make improvements that you didn't expect. And all that money sitting there in savings, no harm, no foul if it didn't work. And if it did work, you've got a bunch of extra money saved. I absolutely love Tyler's approach.

Starting point is 00:06:02 Right. So basically, if you want to put yourself, the broader lesson is if you want to put yourself into a tighter or more stressful financial position in any format, whether that means transitioning from two incomes down to one, or whether that means entering into a new financial obligation, such as a new mortgage or a more expensive mortgage, before you do so, do a dry run. Yeah, great idea. Yeah. Yeah, yeah. So that's absolutely the right approach, Tyler. And really, there's nothing that I would tell you to change. Everything that you've said tells me that you're doing it right. So congratulations.

Starting point is 00:06:37 I think we can, though, help Tyler save some money to kind of nip and tuck his budget a little bit because that's really what he was asking for, too, Paula. And there's a few places there. Number one, if Tyler's getting a decent size refund, a lot of the time with interest rates being low, we don't worry that much about a refund. When interest rates were higher, we worry to be worried about. about it more. But in Tyler's case, he needs as much monthly cash flow as he can get. So checking out with the tax law change next year, either with his tax professional or in his tax program, doing projections to see how much money he thinks he'll get back and then changing his withholding at work, he might be able to have some more cash flow that way. Second, if he is saving money into an emergency fund, realize that three to six months expenses is based on the money he needs. And because he's paying off debt, his monthly outlay he needs is going to be less. So he might have a little extra money sitting there, which means he could probably raise the deductibles

Starting point is 00:07:32 on his homeowner's insurance and maybe on his auto insurance. Now, obviously, it's more money he's going to pay if there's a problem. But if he doesn't have a problem, that's what that money's there for, right? Or actually, even if they does have a problem, that's what that money's there for and it's going to save him some premium money. Once again, not a lot. These are little tiny things that you can do. Might also be able to raise the deductible on his health insurance too.

Starting point is 00:07:52 Yeah, could do that. Very good. Yeah. The next place that I think I might look is at work. You know, a lot of people don't look at maybe asking the boss for a raise. And even though the boss doesn't really care about your personal situation, letting them know a little bit. Now, here's what I would do. I would give them statistics as to why you're worth more. The Bureau Labor Statistics is a great place to look glass door. Paul, I'm sure you know a bunch more. Salary.com is another one. Yep, great. Look at all these different places. And once you do that, if you find out that you're worth more money, go to your boss. Studies show people can make more money at work and never ask for a raise. So I think that he might be able to get more money that way.

Starting point is 00:08:32 The last thing I had is if he's saving for a goal, and I'll bring up a goal like college, as an example, maybe Tyler, based on the fact that he's very worried about financial independence, he might be saving a lot of money toward college, which is a great idea because of how expensive it is, he might be able to back that down. Not because we want to, but if we know the primary goal is for Tyler and his spouse to help her stay at home, I'll tell you what happened with me. My kids are both athletic. My son was the captain of the swim team in high school.

Starting point is 00:09:04 My daughter ran for the University of Arkansas. They were athletes. You can imagine, Paula, how much my grocery budget was. It was out the roof. And I actually saved money when they went away because the way that they ate in the dorm was like an all-you-can-eat-deal. And the dorm lost money. But that cost, I was paying for them to eat at home. I was paying cost for them to stay at home.

Starting point is 00:09:28 And when they went away, all those costs were just a cost transfer. It was still going out. But I really didn't have that my budget anymore, which meant that I could have saved less money toward a goal like that. Oh, I see. So when you were planning for them to go to college, you kind of had the assumption that all of your ordinary costs would stay the same. And then also you would have this additional cost. Not thinking that my grocery budget would go down because their budget, their groceries are going to be the same there. And I was factoring groceries into the money I was saving for their college.

Starting point is 00:09:59 Oh, right, right, right. Okay. So, yeah, so that makes sense. And, you know, in the same is true, Tyler, when this transition happens from two incomes down to one, there are other ways in which your household income after your wife stops working will probably go down because your wife will be able to do certain money-saving things that require time that neither of you can do when you're both working full-time. It might be growing herbs in the kitchen rather than buying them at the store. It might be mending your own clothes. It might just be something as simple as not needing an expensive.

Starting point is 00:10:35 professional wardrobe because you don't have to go get dry cleaning as much. Yeah, and you might be careful about your clothing choices, look for deals more, maybe eat at home more, right? Instead of eating at restaurants, all those things. Plus, her commuting costs are going to go through the floor. And then maybe wardrobe cost, depending on what the work wardrobe is for her. Right, exactly. Yeah, she's a teacher, so she needs nice clothes to go teach. And so that expense is going to go away when she stops working. So in all of those ways, some of your ancillary household costs will go down. Now, that being said, your two biggest costs are housing and transportation. So the more that you can make cuts there, that's the 80-20 of the game. And in that regard, Tyler, I don't know

Starting point is 00:11:21 the specifics of your situation, but if it is possible for you to downsize from two cars to one, that would be a huge cost savings. And I Now, again, that might not be possible because a lot of it's going to depend on where you live, the public transportation system in your area. It's going to depend on a lot of personal factors. But I'm saying this, I guess also for the sake of anybody else who's listening who might be considering the same thing, if you can go from two cars to one, you can then save all of the expenses of having that second car, such as gas, insurance, repairs, maintenance, plus you get that lump sum amount that comes from selling that second car. And when you don't have two people who are commuting, it might be more feasible for both of you to share a car. And even if not, one thing that I did, and I know our mutual friend, Jeremy at Go Curry Cracker, did when he was working as an engineer.

Starting point is 00:12:18 And also Scott Trench over at Bigger Pockets did. Biking to work, Paula. And I don't know how far if that's even an option. But for me, it was fantastic, except when there was a lightning storm, that that made it interesting. I was very lucky because I had a gym right next to my gym was right next to the place I worked and I had to wear a suit and tie when I was a financial planner. But I would bike to work. I'd shower at the gym. I felt great all day because I was getting good cardio and then would bike home and have this nice relaxing 45 minute bike ride home instead of the car commute where I'm upset because I'm in rush hour traffic.

Starting point is 00:12:56 None of that had this nice buffer, got home, felt great and saved a bunch of money doing it at the same time. When I was a little kid, my mom was a stay-at-home mom, and so my parents shared a car. When I was little, the way that they did that was my dad rode the bus to work. He rode the public bus. And this is Cincinnati, Ohio, which is not a very public transportation-friendly city at all. But he still took the bus to work every day. It took him, I think, somewhere around 45 minutes to an hour of commute time. But it was sitting on the bus commute time as opposed to driving time.

Starting point is 00:13:27 So he could probably read or I don't know what he did. but, you know, he wasn't driving. He wasn't behind the wheel. So he rode the bus to work and gave the car to my mom so that she could, I don't know, take me to the park or whatever it was that she did with me, run errands at the grocery store. Yeah, and the cost of the bus was probably less for him and the cost of the car sitting in the driveway a decent percentage of the time versus back and forth to work every day. Right. And now these days there's even more options with Uber and Lyft and car share programs, car to go. You know, you can rent a car for one day a week or do it. So you've got plenty of options with that regard. I don't mean to be talking about transportation too much, but I guess the broader point is that housing and transportation are your two biggest expenses. So the more that you can figure out ways to cut back on those costs, the better. That's the big picture.

Starting point is 00:14:15 When we look at cutting, those are the first two things. Yeah, exactly. Thank you so much, Tyler. And congratulations. And like I said, you're doing it right. Doing that practice run is exactly the way to go. So keep doing that dress rehearsal so that you will experience what it feels like to live on one income before you actually do. That's the single best way to prepare for this transition.

Starting point is 00:14:38 The next question comes from Heidi. Hi, Paula. My name is Heidi Praslitschka. Thank you for your podcast and for everything you do. I have a question about student loans. I think I've heard you can't use 529 money to pay for student loans. My story is that I have $529 money for our daughter, but we had her takeout student loans, her first and second year of college. We were going to use her $529 money in her junior and senior year, but then a wonderful thing happened, and she received $20,000 in scholarship money for each year her junior and senior year. Now she has $13,000 in student loans and $13,000 in $529 money.

Starting point is 00:15:22 but I don't think you can use that money to pay off the loans. Am I wrong? In hindsight, I would have used the 529 money first, but whoops, do you know anything about this? Thank you for your time. Heidi, unfortunately, I have bad news. There was a bill in Congress early last year to address your specific situation. It went nowhere. And the bad news is even though it's indirectly paying for college, it is not a college expense. So any interest that the money's earned, any gains that it's had, you're going to pay a 10% penalty if you take that money out for other things. Now, there are two things that you can do. Number one, if there are other people in the family that will use it for education, leave the money there and the funds you are going to use to do the other thing.

Starting point is 00:16:11 Use that to pay off the student loans. Sometimes we get this idea, Paula, that I've got this bucket for college and this buckets for the other thing. Reverse the buckets. And you're you're maybe better off. So in other words, if she has any other children or nieces or nephews or anybody else who might use that money for college, use the 529 funds for that person. And then whatever money was allocated to that person's clothing or gasoline or buying a car, use that money to pay off the 13,000 in student loans for her daughter. That's interesting. Exactly. Yes. Yes. And by the way, this isn't just in this case to widen this question and a place where I see this all the time. A lot of people love dividend stocks, dividend paying investments, and they have those investments outside of

Starting point is 00:16:57 an IRA or a Roth IRA, a tax shelter, and they're not going to use the money until after age 60. And often they'll have more tax-efficient investments inside their IRA. And if we're not using the money until after age 60, why wouldn't we put the dividend payers they're going to throw off a tax every year, whether we use it or not, inside the IRA so we don't get hit with those taxes, have the more tax-efficient stuff outside the IRA. So a lot of the time it's just switching the buckets around, whether it's for retirement or in this case, for college. So in other words, money is money. And sometimes you have to put it in an account that isn't mentally where you would put it just based on the structure of the account. Yes. A lot of my job when I was a financial planner was just reexamining the buckets from outside the family.

Starting point is 00:17:41 Here's the thing. A lot of times people overestimate what that penalty is going to be, Paula. I don't know how long that money sat there. If it sat there for a long time, there certainly could be a large penalty on it. But I'd find out how much money really was a gain because in many cases, when I meet people that were in a similar situation as yours, I'd find that the 10% tax was minimal and we'd blown it up in our head. So first find out what the tax liability is going to be. If it's not a big deal, then no harm, no foul. Now to clarify, just for the sake of everybody who's listening, if Heidi were to remove these excess

Starting point is 00:18:15 funds from the 529 plan, she would be paying taxes on the gains from those investments, as well as an additional 10% penalty. Right, but only on the gain. Right. The 10% penalty is only on the gain. Right. And you know, and you're correct. I mean, let's say the gain is, what, $5,000 maybe?

Starting point is 00:18:35 Then a 10% of that is $500. That's not the end of the world. Yeah, that's a tax because things didn't go the way you wanted. Yeah, exactly. That's the way I look at it. That's a $500 fee. I mean, yeah, I've probably spent more money than that over the course of my lifetime on overdue library books. But I'm thinking for a lot of people, it might not even be that much, Paula. I mean, it might not be a $5,000 gain. I mean, if it's a $500 gain, you're looking at $50 extra. No, no problem. Right. Well, let's put that another way. A problem, but not the end of the world by far.

Starting point is 00:19:08 You know, the bottom line, Heidi, is that you've got an excellent problem to have. The problem of, wow, we ended up having more money saved for college than we needed is a fantastic issue to have. So congratulations on having that problem. And another great problem. I've got a kid through college. It's fantastic. That was the amazing thing, Paul, about having twins was I got that doubly, right? I went from two colleges at once to, oh, my goodness, we're done. Right. Yes. I skip to work every day with a big smile on my face. Wait a minute. Don't you work from home? I do.

Starting point is 00:19:45 You just skip around your living room. It's exactly two skips. But who's counting? Well, thank you, Heidi, for asking that question. And congratulations again. We'll come back to this episode after this word from our sponsors. So a few months ago, I became a Grove collaborative VIP member and started getting all of my household staples delivered right.

Starting point is 00:20:07 to my door, things I absolutely need like my dish soap and towels or my window cleaner. In the beginning, I was all about using Grove to replace the big items on my monthly shopping list, since they're all about the best prices right to your door. But then, Grove started introducing

Starting point is 00:20:23 me to their own in-house line of flagship products. And let me tell you, their things are amazing. I've been using Grove's own peppermint soap and I'm hooked on the scent. And not to mention, my hands feel great. Unlike other companies that just rebrand products from white label manufacturers, Grove designs and develops their own flagship products

Starting point is 00:20:43 from the ground up, so they are the safest and most effective products available while remaining affordable and beautiful. So the reason why I love being a VIP member, outside of the Grove guides that help me find new products, is that I get free shipping, a price matching guarantee, and an awesome gift every few weeks. And it's all for 1999 a year, so it more than pays for it I'm a member, and if you haven't already, you just have to get online to try Grove. So head to grove.com slash Paula. And as long as you place a minimum $20 order, you'll receive an awesome deal. A free Mrs. Myers kit worth $30, a two-month VIP membership for free, plus a bonus gift.

Starting point is 00:21:32 Again, head to grove.com slash Paula. That's G-R-O-V-E dot-C-O-S-P-O-S-Pala. Remember, it's not a dot-com. It's a dot-co, grove. C-O-O-S-P-Pala. Grove, for a happy, healthy home. I have a handful of friends who have small businesses or side hustles in which they ship physical items that people order online. For example, a good friend of mine has an Etsy store where she hand-makes jewelry and then she ships it to,

Starting point is 00:22:08 customers who order it. And so I know that shipping orders can be hard. And that's why I think that ShipStation is a really great concept. It strikes me as very cost effective and very efficient. So ShipStation is a platform in which you can manage and ship your orders all from one place. So whether you're using Shopify or Squarespace or Etsy or Big Commerce or over 75 other popular selling channels, ShipStation brings your orders into one simple interface that you can. can manage from any device, and you can use them to create shipping labels for all the top carriers like UPS, FedEx, the Postal Service. So you'll ship more in less time with the best rates available. Right now, try ShipStation free for 30 days and get an additional month free,

Starting point is 00:22:55 only if you use my promo code, Paula. Don't wait, go to ShipStation.com. Before you do anything else, click on the microphone at the top of the homepage and type in Paula. That's Shipstation.com, enter Paula. Ship station, make ship happen. Our next question comes from Andrew. Hello, Paula. Andrew Chase calling from Los Angeles, California. My question is about my 13-year-old daughter who just got her, I just had her bot mitzvah and has about $5,000 sitting in a Schwab custodial account and wanted to find out what advice you'd have for where I can put it to both preserve the capital because she's most likely going to want to use it within the next five years. Maybe not all of it, but little bits and pieces for travel or something like that.

Starting point is 00:23:53 Right now I have it sitting in a Schwab money market account earning a little bit over a percent. But I was thinking about putting it into the Vanguard, the V-F-T-S-X, and wondering if that makes sense from everything I've heard that's more of a long-term play. But if it would make sense to put her money in that, I think you have to have $3,000 minimum in order to be able to go into that fund. So look forward to hearing some feedback on that. Thanks. Bye.

Starting point is 00:24:27 Andrew, thanks for asking that question. I think it's fantastic that you are looking out for how to properly steward this $5,000 for your daughter. because your daughter wants to access these funds within the next five years, growth is not the objective. Because she needs it so soon, the objective is capital preservation rather than capital growth. And so for that reason,

Starting point is 00:24:55 I would not put it into any type of equities index fund because you're going to have to tap it pretty soon. And over the course of 10 or 15 years, you can ride out that volatility, but if you need to access this money within the next five years, who knows what kind of volatility we're going to see in the next five years? You're going to want to put it somewhere safe so that she can access it, regardless of what is happening with the overall broad market. That way she's not at risk of realizing a loss. I'm a kid who grew up in the country, Paula, and I think of it the way that a farmer thinks about planting fields. There's a certain time that certain investments get planted, and there are other times when they get harvested.

Starting point is 00:25:32 And if I said, hey, let's plant corn and like six weeks from now, let's pull it all up, a farmer would tell me I'm crazy, right? You wait until the end of the summer when it's fully grown. And that's stocks, real estate, longer term investments. They're beautiful. They're fantastic and they're ready for harvest after 10 years. But before 10 years, it's really difficult. So a combination fund of stocks and bonds between five years and 10 years historically is a decent

Starting point is 00:25:57 place to be for that time frame. Five years and less, Paul, to your point, you want to find. the way to maybe ring as much money out of that as possible, meaning earn as much money as you can, but without risking much in the way of principle. Exactly. So some options that you would have include a high-yield savings account, a money market account, treasury inflation protected securities, perhaps a conservative bond fund. Those would be the options that I would be looking at.

Starting point is 00:26:25 I would not be looking at any type of stock or equities related options. Yeah, the most aggressive I would go on the bond fund, which is going to be. be to your point, Paula, the highest risk you'd take. I wouldn't go any further than a Ginny Mae fund. Ginny May funds are where you're putting money into government-sponsored housing projects. And so these loans are backed by the full faith and credit of the government. They do go up and down and we're in a rising interest rate environment, but they pay a decent dividend in over a five-year period. Historically, you've nearly always had at least a return of your principal. in most markets and in a market like we're in right now, I'd feel very comfortable telling most people

Starting point is 00:27:07 that a Ginnie Mae fund is okay on the top end. Realize if you put money in a Ginny Mae, there still is a chance you might lose it. I like between that high yield savings account, you know, you can look at many different ones paying in the 1.7, 1.85, maybe 2% range. There is a fund that's not insured, is not FDIC insured because of the type of business that they are. But the, the fund, funds they invest in are insured type investments is a company called C-note. I really like what C-note does. You can check them out. Oh, that's funny. C-note is actually a sponsor of the show. Yeah, yeah. I love C-note. I think they're great. By the way, you guys, that was not planned. I did not tell Joe to say that. That was totally spontaneous. Seriously. I just interviewed Kat over there. On Stacking Benjamin's, we do a Friday

Starting point is 00:27:52 FinTech segment when Paul is on to break up the show. And Kat and I just recorded a C-note thing for her because I really like, I like pointing out to our listeners, products I think are cool. We don't endorse any of them. I just want to point out things that maybe you haven't heard of. A lot of people haven't heard of C-Note. Beam, I like also, but that's not available yet. If you go to Meet Beam, you can get on their wait list for when Beam does open up to everybody, and that will probably pay a higher interest rate than C-now also is insured. So those are two things I really like. Cool. Well, I guess since we've mentioned C-note, I may as well just throw the URL out. It's myc-c-cnote.com slash paula.

Starting point is 00:28:30 Good stuff. But yeah, but that's not a paid endorsement. He just said it. Yeah, and by the way, Kat, if you want to sponsor stacking Benjamins too, it's good. Let's see. Any other advice that we would give to Andrew? I think that's it. That's where I would go with my money. If he wants to take a little risk, if it might be longer than five years, I would go Ginnie Mae. If I'm looking at five years, maybe six, maybe seven, Ginny Mays get safer, the longer out he goes. I love that option. Not for less than four years. If you think there's a chance, she's going to touch it in less than four years or four years or less. If there's any chance there, I would look at C-No or Beam if it becomes available fairly soon. says it's in a Schwab money market account right now, there's nothing wrong with that. We're talking about $5,000. So it's not a massive amount of money. I mean, I don't mean to sound like a money snob here, but when we talk about the difference between making 1% versus 1.25% on a balance of $5,000, we're not really talking about a whole lot. So there does come a point where you just kind of leave good enough alone. And the Schwab money market account that it's in right now is

Starting point is 00:29:41 good. You know, it's perfectly acceptable. So I would have zero objection to it staying there. Well, thank you, Andrew, for asking that question. Our next question comes from Anonymous. Hi, Paula. My husband recently started a new job, and his new employer only offers low deductible health insurance. I know that using a high deductible with the HSA to save her retirement is a really good strategy. So I'm wondering if there's any way for him to continue to contribute to the HSA from his previous job while still utilizing the health insurance that's offered through his new employer for free. I look forward to hearing your remarks. Thank you. Anonymous, my answer is probably not. I highly doubt that the former employer will allow your husband to stay enrolled in that former employer's health insurance plan. I mean, a health insurance plan is a benefit for the employees. And so if someone's not an employee, they're not going to be able to access it.

Starting point is 00:30:52 Even with COBRA, the added expenses that are usually tacked on with a COBRA plan make it worse than the current plan. So I- It's incredibly expensive, yeah. And it's only temporary. Yeah, I don't think that's going to work. Exactly. Unless your former employer has some sort of offering that I'm not aware of, the chances that

Starting point is 00:31:13 they will allow your husband to stay in their system is probably zero. There's a silver lining here, though, Paula. I know that HSAs are what I will term the hotness right now, and we're all talking about it. And how do I get one and can I save one and all the cool kids have one? There's something really, really cool about having a plan with a low deductible, and I don't have to worry about going to the doctor. I feel like there are some people out there now that are so intent on saving for the long term that they won't go to the doctor as much over the short term. They'll take advantage of their health and say, I'm reasonably healthy. I'd rather leave that money save because I know that long term, I can make a killing on that money.

Starting point is 00:31:52 And I really like the fact that with a lower deductible plan that I don't have to make that. bet. Maybe I'm still making some of a bet, but not as much. So I'm not at all unhappy with the fact that it sounds like she has a low deductible plan and will be able to take care of her health needs when she has them. Wait, Joe, so what you're saying is that having a low deductible plan might motivate you to go to the doctor more often? Yes. You know, of my clients, when the economy went down, people that were hurt that I didn't think were hurt ahead of time. And before I knew these people were veterinarians. Veterinarians said that, you know, Fido is a great member of the family until the economy gets bad. And then Fido is the first member of the family voted off the island.

Starting point is 00:32:38 Oh, that's so sad. It is absolutely horrible. I would have a veterinarian clients that would struggle during the 2006, 2007, 2008, because people would stop taking their pet to the vet. And I think not the same analogy, but I think we kind of do the same with our personal health. If we've got a high deductible plan, we go, well, you know what? If it's going to cost me money, I probably, things are going to be tight. I'm going to cut back here. Not a great idea. Yeah, I don't know if there are any studies that back this. So to be clear, this is purely anecdotal speculation. It's a theory on my part could be a bad one. Yeah. But my bigger point is just to anonymous, which is, this isn't all, there's a silver lining here. Don't forget the silver lining.

Starting point is 00:33:27 Absolutely. And remember, HSAs are one of many vehicles in which you can save for the long term. So if you are not, at this point, if you are not maxing out all of your other available tax shelters, whether that's a 401K, 403B, IRA, any other available tax shelters that you can access, then rather than trying to finagle something funny with which health insurance plan you're enrolled in, focus on maxing out those other. tax shelters. Because if you're not taking full advantage of the accounts that you are already eligible to take part in, then there's no point really, or a limited point in opening a new account. Right. We'll come back to the show in just a second. But first, got a question for you. What kind of interest are you getting from your checking account? If you're like most people, the answer is probably not that much. Because according to the FDIC, as of February 2018, the national average interest rate is 0.04% APY. But what if I told you that there's a bank that pays 17 times the national average?

Starting point is 00:34:34 They're called Radius Bank, and they offer an account that's called the Radius Hybrid Checking account. And this is a free, high-interest checking account. Here's how well it pays. You can earn 0.85% API on balances over $2,500. That is 17 times greater than the national average. average. And you can earn 1.2% APY on balances of $100,000 and up. And that is 24 times the national average. Now, these rates don't expire. It's not some sort of flashy introductory rate that's going to expire after 6 to 12 months, like some other banks offer. This rate does not expire,

Starting point is 00:35:14 and there's no cap or limit on the balance that can earn this awesome APY. Also, they don't clobber you with fees. There are no monthly maintenance fees. Your first order of checks is free. You don't have any minimum balance requirement. Your mobile banking is free. You can access free ATMs worldwide, so this is not a bank that's going to nickel and dime you. You can open an account with them by going to radiusbank.com slash Paula. That's R-A-D-I-U-S-Bank.com slash Paula. Radiusbank.com, R-A-D-I-U-S-Bank.com. R-A-D-I-D-S-A-R-D-I-E-E-I-S-E-E-E-I-S-E-E-E-S-A. It's U.S.bank.com slash Paula, P-A-U-L-A. It's summer, so if you're playing soccer or football or if you're outdoors, contact lenses are a lot more convenient than glasses. I used to wear either glasses or contacts for 18 years, so I know that contacts are better for being outside, but I also know they're more expensive.

Starting point is 00:36:16 Check out simple contacts, which is a convenient way to renew your prescription and reorder your contacts from anywhere in minutes. And we had a member of our team do this. She went to their website, uploaded her current prescription, and then they sent her a six-month supply of her favorite brand to her doorstep, so she saved a bunch of money and a couple of hours compared to an office visit. The Vision Test is only $20, which compared to an appointment, that appointment without insurance could cost up to $200. Now, this is not a replacement for your periodic full eye health exam, but if you need to renew your prescription or reorder more contacts, they're a great option. get $20 off your contacts at simplecontacts.com slash Paula 20 or enter code Paula 20 at checkout. Again, get $20 off your contacts at simplecontacts.com slash Paula 20 or intercode Paula 20 at checkout. Our final question today comes from Laura and Laura actually has two questions.

Starting point is 00:37:23 We're going to play the first portion of her question first. Hi, Paula. My question is if my husband is, if my husband is, my husband is, and I are ready to retire. We're worth about $2 million and we're both 55. The question is, how do you make a decision based on a number or reaching a number when that number is not a given? The market will eventually go down and our $2 million could be $1 million or $1.5 million in a month or a year or two years. Mathematically, how do you recover when you are no longer adding to your investments on a monthly basis? I understand and appreciate that historically,

Starting point is 00:37:59 that works because you are constantly buying and constantly buying at the low point, which becomes high, obviously, later. Laura, 55 years old with $2 million. That is fantastic. Congratulations on being in such a strong position. Why do I always want to do the Austin Powers thing? $2 million with like my finger right on the hedge of my mind. I have no idea why every single time.

Starting point is 00:38:24 I thought the line was $1 million. It is, but she is two. It doesn't matter how many million it is. I do it every time. Six billion dollars. Not good. You know, a lot of what we don't know, Laura, controls our answer, which is withdrawal rate for you is everything. Because if you're withdrawing a lot of money, certainly it's going to be very difficult to keep your principal intact.

Starting point is 00:38:51 And frankly, unless you have legacy concerns, your goal is not to, keep your principal intact. Your goal, and frankly, for a lot of people, keeping your principal intact is something they can't even, they can't achieve because they don't have enough money. And it's funny because you look at $2 million and people think, well, $2 million is a ton of money. And I would answer, yes, it is. However, if we use the 4% withdrawal rate, which is wrong and not something that I would use, but if we frame it that way, we're looking at withdrawing $80,000, And if it's all in a pre-tax position, like a lot of people's money is, we have to pay tax on that money then. So we're living a nice lifestyle, Paula, but we're not, you know, living the rich and famous that we think we're living when we hear $2 million, right?

Starting point is 00:39:40 So I'm going to do a quick time out here for the sake of anybody who's not familiar with the 4% withdrawal rate. And I'll just give a very, very fast primer on what that is. 4% withdrawal rate is the notion that you can withdraw 4% of your portfolio in year one of retirement and 4% adjusted for inflation. every subsequent year. So with a $2 million portfolio, 4% of $2 million is $80,000. So according to the 4% withdrawal rate, you would be able to withdraw 80,000 in year one of retirement and 80,000 adjusted for inflation every subsequent year. Now, there are many people who are critics of the 4% withdrawal rate, and we did a podcast interview with Dr. Wade Fow, a professor of retirement planning, who is probably one of the most outspoken critics of that. So we'll link in the show.

Starting point is 00:40:27 show notes, which are available at afford anything.com slash episode 142. We will link in the show notes to that episode, and you can listen to a more in-depth conversation about the 4% withdrawal rate. But Joe, continue. Yeah, Laura, a place where I really worry with you is there is a, another concept called sequence of return risk, which means that if initially, if you decide to retire tomorrow and the market gets hammered initially, you're in big, big, big, big, big trouble. and your ability to withdraw money is going to be a lot less than it was before. Now, talking to a lot of CFPs, the way that they get through that is they leave a certain percentage of the portfolio on cash.

Starting point is 00:41:09 Some people I've interviewed have said as many as eight years and maybe not just cash, but we might even go as far. Paul, as we said, is that Ginnie Mae, very low-risk bonds, but leave eight years out of the market. The problem with doing that, obviously, is, and we talked about this earlier, that money's not really earning anything, which means we need to leave the rest of money in stocks. But the way we protect that is with this reserve moat that we're taking money from. So we always have this moat for the next several years that we can withdraw from safely

Starting point is 00:41:40 and let the stock market do whatever it's going to do. And we know that because the stock markets is what drives the economy, stock market returns are not magic. And I think a lot of people think that they are. For the economy to continue, we're going to have to get somewhere in the seven to 10% return rate over long periods of time. If it doesn't do seven to 10% we're all in big, big, big trouble. And I could do the math on that, Paula, but that's going to take a whole another episode. You mean, for the sake of our nation, the economy just has to perform about

Starting point is 00:42:13 ish as well as it has. Otherwise, we're going to see contraction. Yeah, yeah. Well, and even worse the contraction, I mean, the stock market would collapse. We'd see some huge, huge problems. If over long periods of time. We can endure that for a few years, not getting seven to ten, but over long periods of time, if we don't get seven to ten, companies won't be able to continue to pay their debt. We'll see shareholders and companies not get paid, and they'll only put up with that so long before they begin selling their stock. We'll see this long, ugly collapse of the economy. Now, I don't believe that's going to happen. I can't imagine where that's going to happen. So staying diversified and staying in stocks with most of your portfolio, as long as you have that

Starting point is 00:42:55 moat to get you through the short term and you're careful about your withdrawal rate, you're going to be okay. If you really want to get technical about it, Laura, here's what I do. I might find a fee-only financial planner and ask them to run what's called a Monte Carlo simulation. And a Monte Carlo simulation will look at all the different possible economies that we might have. And depending on how things go, it will give you a percentage of this number of lifetimes you

Starting point is 00:43:22 would have been safe, or this percentage of possible scenarios, would you have been safe? If you get somewhere into the mid-70s, meaning 70%, 75% of the time you were safe, you're probably okay to retire. If you get into the 80s, then I think you're looking really, really nice. Personal capital also allows their account holders to run Monte Carlo simulations, and you can open a free account with them. So in the show notes, which are available at afford anything.com slash episode 142, we will link to that as well. That's where you can run your own money carless simulation. Good stuff. That being said, Joe, I want to elaborate a little bit on one point that you made, which is that the goal is not preservation of principle. The goal is to not outlive your money. And those are very different concepts. Can you

Starting point is 00:44:08 explain a little bit about the difference between the two? Well, it takes a lot of time. I mean, maybe $80,000 is enough money for her to live on right now. If she has health concerns, if she needs to buy a car. If she needs any capital beside that, besides her current living situation, she's not going to be able to get at that money and still preserve her withdrawal rate. The thing is, is that preserving capital, if you're not worried about what happens to your money after you pass away, why did we accumulate that much money? I mean, there's so many things that we might want to do in our life. And I see a lot of people that save a good amount of money and their goal is to preserve all that capital, but for what? I mean, if we start with the end in mind and we say,

Starting point is 00:44:52 I want to live X lifestyle, I wouldn't let preservation of capital get in your way. My goal would be to put the last quarter in the Coke machine just as I clutch my chest. And knowing that we can't do that, we probably have to have some preservation of capital. But I would never get afraid as a financial planner when I saw people starting at age 85, 90 years old when we did a simulation, that their capital would begin to dwindle. It wouldn't bother me for two reasons. A, you're much less healthy at 85, 90 than you were at 60 when you could travel. You could do some of the things that you wanted to do that maybe cost more money.

Starting point is 00:45:31 And number two is, is because if it starts to dwindle that late in life, depending on how much money you have, the chance of you actually getting to that scenario where you're putting your last quarter in the Coke machine and you're not clutching your chest, the potential of you running out of your money becomes a lot less at that point. And one way to think about it is the difference between a human versus an endowment fund. If you are a foundation or a university, you want to create an endowment fund that is going to last for hundreds of years that will last theoretically indefinitely. And in those cases, yes, you want preservation of capital.

Starting point is 00:46:11 because that money is supposed to last for generations upon generations upon generations. But if you're concerned as a human being about the money in your own retirement account, then your goal is to not outlive your money. That is a very different goal. If you're retiring at 55, let's say that you live for another 50 years, so you die at the age of 105. That doesn't mean that your money needs to last for generations upon generations. that means your money needs to last for 50 years. Or if you want to build in a buffer, 60 years or 70 years.

Starting point is 00:46:46 I did meet people who had some goals that were endowment-type goals. And that's fine. There's nothing wrong with that. I would say for the vast majority of people, though, they didn't have that goal. And even if that is your goal, it probably isn't your goal with the entire $2 million of your portfolio. Great point. Linda also has a second question, which we will play now. second question is regarding real estate i love the idea of diversity but i must be missing something if the average stock return rate is approximately eight percent and real estate is similar why would you put up with all the extra hassle and work that's involved in owning property is the actual value of the property in that average return rate any insight you would have would be most appreciated thank you you know paula

Starting point is 00:47:30 i'd like to answer this question because i'm the one that brought up the interest rates on stocks and real estate are the same. I think I'm the one that brought that up on the show. I've also used that in many examples. And I have my own answer to this question. So I'll let you go first and then we'll see how we both answer this. Because I have a feeling our answers are going to be different. My answer is that the opportunity, just like it is in any individual stock, if you're purchasing a single house, your opportunities are far, far, far, far greater than the average if you know what you're doing in real estate. There are people who are real estate investors who do a great job of picking the right property at the beginning and then maintaining it the right way, picking the right tenant,

Starting point is 00:48:08 charging the right amount. I mean, all of those things factor in where you can beat the heck out of that average. The average is when it comes to real estate is for lots and lots and lots of properties. And plus, the tax savings that can be built into a real estate-based return can also make it a nice investment choice for many people. I wouldn't take that return average as that's what I'm going to get when I buy a single rental house. The standard deviation on that number is very high depending on how well you know what you're doing. That's similar to but not exactly the answer that I would give.

Starting point is 00:48:47 Yours is far better. I'm sure. Here's a thing. Any asset, regardless of what it is, earns returns in two ways. One is capital appreciation and the other is the dividend or income stream that comes from it. Now, in the case of a rental property, that dividend or income stream, if you buy at the 1% rule, which means that your gross monthly rent is 1% of the purchase price, a minimum, and if you run your operations such that your operating overhead is 50% of the total rent,

Starting point is 00:49:22 then you would, in that scenario, be earning a cap rate of approximately 6%. And what that means is that your dividend or income stream would be 6%. That is the minimum requirement that I would demand from any rental property that I would ever buy or that I would encourage anyone else to buy, right? A minimum cap rate of 6%. So you're looking at an asset that has what is analogous to a dividend of 6%. And if that asset does nothing more than keep pace with inflation, which historically has been around 3%, then the total return is 9%. And so conservatively, you know, very, very conservatively, you could say that that is what you would imagine your rental property returns to be, but that is the most conservative possible estimate. It assumes that you're buying something that just meets the 1% standard and does no better.

Starting point is 00:50:13 It assumes that all of your operating overhead is 50% and that you have done nothing to reduce that to 45 or 40 or 35%. And so it means that the cap rate that you are getting on that property is the bare minimum cap rate that you would accept, which is 6%. Right. So that's the first set of assumptions right there. The second thing is that when I say that you could expect a property to keep pace with inflation but no better, I'm using the most conservative possible projection. Historically, real estate has nationwide has appreciated at around 5%. Now, all real estate is local. So you should take nationwide statistics with a massive grain of salt because in some markets it's done better, significantly better. Seattle and Las Vegas in the last year have had double-digit growth. But, you know, you can't always rely on that. Some markets have done worse. But overall, historically nationwide, real estate has appreciated at a 5% rate. I don't like advertising that fact because I don't want to put people in the mindset of relying on appreciation. I think one of the biggest misconceptions around real estate investing is that it is an appreciation-based game. And I specifically try to downplay appreciation when I

Starting point is 00:51:22 talk about it because I want to break people of that mindset. But if you improve your processes and or buy something that does slightly better than the 1% rule of thumb, such that your cap rate is, we'll say 7%, and if your property performs at historic national averages, which is 5%, then your overall return would be 12%, which is significantly better than what you would be able to get in an index fund. Now, do I run? Do I run? around saying, oh yeah, you can expect to get 12% from a rental property. No, I don't run around saying that because I don't want to hype rental properties. And I think that one big mistake that a lot of real estate gurus make is they hype things too much. They make it sound like

Starting point is 00:52:08 you're going to be making money hand over fist and hear these 12% returns and blah, blah, blah. And I don't want to set people's expectations like that because stuff happens and sometimes things don't do as well as you hope that they would. Sometimes things blow up in your face. And so I prefer to use a very conservative set of assumptions. And that's why when I talk about rental properties, I talk about them in a way that uses a pretty conservative set of assumptions in all regards. I'm making conservative assumptions about the type of house that you're making. I'm making conservative assumptions about your operating overhead. Making conservative assumptions about your dividend. And I'm making conservative assumptions about the capital

Starting point is 00:52:45 appreciation on that property. And I am not. factoring for the use of leverage. I'm assuming that this is an all-cash-buy, so I'm not factoring for any cash-on-cash returns formula, and I'm also not factoring for tax savings or any other tax advantages. So I'm making the absolute most conservative, reasonable projection possible. That's where that 9% is coming from. I think also Laura asks about the hassle of investing in real estate. And I think, Paula, some of this comes down to control. You know, a lot of investors like feeling the control of, I know the property, I know the problems, I know the pitfalls, I know what my Achilles heel is, I can do the math myself, I can figure out this

Starting point is 00:53:29 equation. That same investor doesn't like the stock market because I'm not in control. There's 500 different CEOs in the S&P 500 that any day can make a decision that you didn't approve of. And they really don't like not being in the driver's seat. And other people are more like what Laura sounds like, which is for the quote hassle, why wouldn't I just diversify into stocks? And so part of it also depends on you. Yeah, I absolutely don't think that you need to have real estate. That's just purely optional. If you don't want it, then don't get it. Simple as that. I had clients on both sides of that fence. Some could not stand stocks. We would use stocks as a diversifier to make sure they didn't have all their eggs in one basket, right? Like mom says. And on the other side, some clients

Starting point is 00:54:16 that didn't like the, quote, hassle of real estate, we would put reits in their portfolio. So we had some real estate exposure still, but we were going to get the, quote, average. We weren't going to be in control. So, Laura, I hope those answer your questions. And congratulations again on that two million portfolio. Well, that's our show for today. Joe, where can people find you if they would like to know more about you. Are we done already? It's happened, Joe. It's that time. It's so sad. I don't want to leave. You can find me at stacking benjamins.com. We have this crazy podcast that Paula Pant is on nearly every Friday on our roundtable episodes. And as I mentioned, every Friday, we also talk about cool, new fintech that I find exciting, like C-Note. And on Mondays and Wednesdays, we talk about

Starting point is 00:55:04 financial headlines. We interview cool people like you hear here. It's very much a magazine. style podcast live from my mom's half-finished basement. It's a good-looking half-finished basement, I've got to say. Why, thank you. You like this color blue. I do, yeah. I love the baby blue on the balls and that display of flowers on the coffee table with all the coffee table books. It's very nice. They almost look real. For those of you who are wondering, so we're doing this by Skype. And so I can see into

Starting point is 00:55:29 the room that Joe is in. And it's a very nice-looking room. I keep telling people, like, basement. Really? That's kind of creepy. It's not creepy at all. Yeah, it's a good-looking basement. Yes, thanks. All right. Well, thank you so much for tuning in. My name is Paula Pan. I am the host of the Afford Anything podcast.

Starting point is 00:55:45 If you enjoyed today's show, please do three things. Number one, tell a friend. Number two, leave us a review in whatever app you're using to listen to podcasts. These reviews are incredibly helpful for allowing us to book awesome guests and develop out a better show. If you want to, you can go to afford anything.com slash iTunes. That will take you to the page on Apple's website where you can. leave a review there. While you're there, please upvote any other reviews that you find helpful. Finally, number three, please subscribe to this show in whatever app you use to listen to podcasts.

Starting point is 00:56:21 When you subscribe to the show, you make sure that you are not going to miss any upcoming episodes. We've got some great interviews, great guests lined up in the coming weeks. So please make sure you subscribe to the show so that you don't miss any of that. If you have a question that you would like answered on an upcoming episode, head to Afford Anything.com. com slash questions. Again, that's affordanything.com slash questions. There you will find a link to the voicemail service that we use where you can leave your question. My name is Paula Pant.

Starting point is 00:56:53 You can follow me on Instagram at Paula P-A-U-L-A, P-A-N-T, where I post at least once a day, often twice, sharing financial tips and tidbits and ideas about money in life. Thank you again for tuning in, and I'll catch you next week.

Afford Anything - How Can We Downsize from Two Incomes to One?

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.