Afford Anything - Joe Says Life Insurance Won’t Make the Headline. But it Did.

Episode Date: June 5, 2017

#80: Chris, age 30, makes $200,000 per year and saves 50 percent of his income. What accounts should he use in order to maximize his tax benefits? Dee, age 39, is getting tired of apartment living. She found a great neighborhood in which she'd like to own a home, and she's saving for a 20 percent downpayment. But she's nervous about the high cost of home maintenance. How can she deal with this? Chelsea just moved into a new house with her husband. He purchased the house outright, in cash, and she wants to pay him so that she can share in the home's ownership and equity. But she also has student loan and credit card debt. Should she make progress towards all three of these goals (build equity, pay off  student loans, pay off credit cards) at the same time? Or should she prioritize one -- and if so, which one? Charlene is curious: what's so great about Vanguard? Why do Joe and I like the Vanguard Target Date funds so much, as compared to funds from another brokerage? (Note: neither of us have any financial relationship with Vanguard, other than being an ordinary, run-of-the-mill customer.) Alma is looking for a term life insurance policy that'll protect her if she passes away outside of the United States. Where and how can she find this? My friend Joe Saul-Sehy, a former financial planner and host of the award-winning Stacking Benjamins podcast, joins me today while we tackle these 5 questions ... and somehow, also we go on a tangent about Burger King. It's a whopper of an episode. :-) Enjoy! For more information, visit the show notes at https://affordanything.com/80-life-insurance-vanguard-home-costs-goals-more/ Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else. My name is Paula Pant, host of this show. And today I am answering questions that you, the listeners, have submitted. And I'm doing it with my buddy, Joe Saul-Chi, host of the stacking Benjamin's podcast. So let's get started. Hey, Joe, do you know people actually ask us for advice? Isn't that crazy? That's just crazy. I know, right? So I guess let's try to see if we can not completely ruin their lives. We set the bar high. It's only ruined their life a little. And then maybe we can baby steps, right? Exactly. Ooh. And you know what? Baby steps is a perfect segue for what we are eventually going to tell to how do you like the segue? What we're eventually going to tell this first caller, Chelsea, who has a question about paying off her debt. Hi, Paula. I just moved in. into a new house with my husband who was able to buy the house outright in cash. Because of this,

I don't have rent to pay anymore. And I'm considering what debts I should pay down versus paying him directly to gain equity in the house myself. I have about $10,000 in credit card debt and another $24,000 in student loan debt. Should I split the income I'm not spending on rent between the three? that is paying down my student loan debt, credit card debt, and paying my husband for equity in the house simultaneously, or should I knock them each out individually? I don't have a ton of spare income to do all three on top of what I was paying for rent. So I'm kind of on a shoestring. Thanks, Paula. Chelsea, I say pay off your credit cards first, because I'm assuming that those have the highest interest rate. Are you just going to jump in and steal all the thunder? All of it. Can you?

Can you steal thunder? Is that a thing? Where did that expression come from? I don't know because all these other expressions, like I know that there's some background, that one. I don't know anybody who's ever stolen thunder. Right. Well, there are times living in Texas as loud as it's amazing. I moved from Michigan to Texas eight years ago. As loud as the thunder is sometimes here versus in Michigan, I would like somebody to steal my thunder. So feel free to just take that away. 3 a.m., big thunderstorm. I get woken up. Somebody steal it. All right, well, Joe, I've stolen your thunder, and yeah, that's exactly what I'd tell Chelsea.

Pay off your credit cards first because, A, those probably have the highest interest rate. If you happen to have some sort of teaser 0% interest rate right now, it's just going to go up to a ridiculously high number later when that teaser period expires. So get rid of that one first and foremost. Also, the second reason why it is often preferable to pay off one debt at a time, rather than making incremental progress on all of them is for the psychological win. If you're making incremental progress on many different goals, you can sometimes feel like you're not getting anywhere. You feel like you're a hamster in a cage spinning its wheels. Spinning its wheel? Spinning the wheel? What do hamsters do?

They spin its wheel. Just one wheel. Its wheel? Is that the expression? Yeah, spinning its wheel. It has four legs, one wheel. Huh. Hamster in a cage spinning its wheel. Wow, hashtag learn something new every day. You don't own a hamster. You never have? No, I've never had a hamster.

This whole show is starting to feel like we're hamsters on a wheel. But I totally agree with you. I totally agree with you. Here's the deal is the, you know, you look at interest rates, right? The deal with relatives and with spouses can often change and is the easiest to negotiate. So the equity portion of with husband, not really sure about that. And we need to know, I think, more about that. So I'm not sure there are student loans, usually at a lower interest rate than credit cards.

And if they're not at a lower interest rate, it's easier to move them to a lower interest rate. So I think, yeah, you're right on, credit card for the win. Yeah, exactly. Oh, and Joe, you raise a good point. The thing about moving them to a different interest rate is that's the other thing that I would recommend is see if you can negotiate or change the interest rates on any of those existing debts that you have. With credit card companies, you can often call the credit card issuer, just call the number on the back of your card and say, hey, you know, I've been a customer of yours for X number of years. My accounts are all in good standing. I was wondering if just as an act of good service, you would be willing to lower the interest rate on my credit cards so that I can continue to be a loyal customer. And if the person that you talk to says no, thank them, hang up and then call back and get a different representative and just kind of keep doing that until you get a representative who says yes. We've had this argument before, but you can also go to these comparison sites that are out there.

But why not go with your current card? Because then you don't have to replace the thing in your wallet, which is just a pain in the butt, especially if you've got bills tied to that account. So good stuff. Have we talked about Debitized before? No, we haven't. I have no relationship with them. But, you know, there's some people listening that have trouble with credit cards because of the fact that they don't want to run into credit card debt, like in this case.

So this company called Debitize is one of these little fintech companies where, if you hook your credit card up to debitize, you actually get debit card treatment where you swipe your credit card and it treats it like a debit card automatically takes money out of your account, your banking account, and pays that bill like it's a debit card. So now you can get the rewards that you get with a credit card that people worry about, you know, the rewards get funded by people that don't pay their bill all at once. You pay your bill automatically not worry about it. So for those people that aren't as diligent as Paula Pant at paying off their stuff every month, debatized cool thing. Oh, that's really interesting. I've never heard of them before. And yeah, and I have your relationship with them.

Same with you, Joe. Okay. Great. Yep, none. Well, thank you, Chelsea for that question. Our next question comes from Charlene. Hi, Paula, this is Charlene. Thank you to you and Joe for answering my question earlier this year about using an independent financial advisor.

Question for you concerning the Vanguard Target Fund. I know you've mentioned that a couple of times in some of your podcast. And I was curious if there's a particular reason why you like a prefer the Vanguard target fund versus, let's say, a Fidelity Target Fund. I appreciate you answering my questions and I appreciate everything you do with the podcast. Thank you so much. All right. Why do I love Vanguard so much? Number one, Van Gogh.

Let me count the ways. I'm literally counting the ways. So number one, Vanguard is a co-op. which means that it's member-owned. It's not owned by a group of investors or a board of directors. It's owned by its members, just as, for example, just as some farmers markets are co-ops or just as there's an outdoor gear clothing store called REI that's a co-op. Vanguard is the same thing. It is the REI of brokerages.

And what I like about that is that because it's member-owned, there is never a conflict of interest between its members, you and me and Joe and the average Joe's out there. There's never a conflict of interest between the average Joe versus the owners because all of us clients, all of us average Joe's, are the owners. So that's one of the two reasons that I like it. The other reason that I like it is because the founder of Vanguard, John Bogle, is the guy who invented index funds, which totally blows my mind. Like, it just kind of, it stuns me that index funds are so new that the guy who invented them

is still alive. Right, right. Different than podcasting, which has been around forever. I know, right? I'm not used to all this newfangled technology. Exactly. You know what I like is that when people talk about target date funds, usually target date funds are horrible because they're fees on top of fees.

What will happen is a company will put their own cooking, their own funds inside of a target date fund, and they get paid a management fee for all those funds. Then they get paid another management fee on top of it. And Vanguard doesn't play that game. So it's funny. when I talk about target date funds, I generally hate them because they're super expensive and diversifying it yourself is not that difficult. But Vanguard definitely is the exception to that rule. Yeah, I totally agree. For a while, I was anti-target date funds for exactly that reason.

And then I looked at Vanguard's pricing structure and I was like, oh, finally, someplace where it's reasonable. Somebody gets it. Yeah, yeah, exactly. And also, just for the sake of disclosure, neither Joe nor I have any financial relationship with Vanguard other than just being general members of the public who are customers of theirs. So we don't get paid by them. They actually, they don't have, we've tried because we love them so much and we give them all this free advertising. But they actually, because their fees are so low, they don't really have an ad budget, which is why. That's the funny thing. I've talked to people with major investment houses about why don't you guys recommend Vanguard.

Why don't you have Vanguard on your platform? And they said because Vanguard won't pay to be on the platform. Like every one of these investment house platforms charge a fee to the brokerage services. And Vanguard's fees are so low and they have enough name recognition that they don't need to be on the XYZ platform. You know, they can do it without it. So yeah. Yeah. But Vanguard, if you want to sponsor us still, we're here.

Yeah, yeah. Exactly. It's the company that I believe in that I know will never be a sponsor because they just don't have the money for it, which is exactly why I believe in them so much. So, wow, if that was not like a stunning recommendation, I don't know what is. Holy cow. I love you, man. I know.

I also recommend double stuff Oreos. Yes. And what else do I recommend? But they have a little profit margin built in. They could send our way. Yeah. Oreo cookies. If you want us.

How would this podcast be if we were all sugared up? That would be, it'd be so much worse than it already is. Oh, dude. Paul and Joe talking at the speed of light. So anyway, we don't take our fun since the reason why I feel like I need to nap. Hey, everybody, pay up for credit card debt. All right, well, speaking of being sugared up, we're making some good progress through these questions. Up with this.

I know, right? Yeah. Keep coming. Come on. All right. Let's move on to the next question. Hey, Paula. I have a question about buying a home as a primary residence.

I'm 39, single, and living in the Midwest, in an apartment that's $675 a month. My apartment is okay, but not in an area I want to live long term. To rent in the area I'd like to buy would be at least $1,000 per month, maybe more. I could buy a house for around $100,000 to $150,000, depending on the area and type of home. I'm considering buying a home in the next two to four years and have started saving for a down payment, and I'm shooting for 20% down. My main focus about home ownership is the maintenance involved, but I'm getting tired of not having any control over my place,

and I'm getting tired of apartment life in general. I've looked into buying a condo or townhouse, but I've heard that while they have lower maintenance responsibility, that could come with a hefty price tag with HOA fees and special assessments. Plus, they wouldn't get me out of the apartment living atmosphere and sharing walls with neighbors. So now I'm opening up to the idea of a very small, single-family house, something in the neighborhood of a thousand square feet with a small yard to cut down on upkeep. My questions are, how can I overcome my fear of home maintenance so that I can have a nicer place to live

in an area that I'm really excited to live in. Before I rule out a condo completely, what are your thoughts on buying a condo and the extra costs associated with them? I do plan to have a healthy emergency fund in addition to my down payment. As a single woman, I'm just scared to deal with everything by myself.

I'd love to hear your thoughts on this. Thanks so much for all you do. Dee. Well, Dee, thank you for asking that question. First of all, I think you're making a great decision. I mean, the numbers that you've outlined that, you can purchase a property for between 100 to 150,000 in an area where that same type of property would rent for about $1,000 a month. That's fantastic. Those numbers to me signal that that is a great place to be an owner. That's a great place to buy. So that sounds awesome. And, you know, the type of property, that you're talking about, you know, you're not talking about anything that's too extravagant or too outlandish. It sounds to me like you're very much staying within your means. You're aiming for a 20% down payment. You're starting to save several years in advance. So everything that you have outlined in terms of your financial position and your preparation for this property, you sound very much

like you're on the right track. That being said, the next thing that I'll say is in terms of overcoming your fear of home maintenance. I like the way that you phrased that because unless you buy a complete fixer-upper, a complete fucking shi-show of a house, assuming that you're not buying some piece of crap like that, your home maintenance costs will most likely be reasonable. And that being said, I'm going to sound like I'm contradicting myself here, your maintenance costs will probably be fairly reasonable. And it is all. also true that many first-time homeowners are shocked by the maintenance costs that they encounter because they haven't adequately anticipated those costs. Many first-time homeowners

are used to being renters. They've never really had to perform home maintenance before. And so all little little things like, now I have to own a garden hose, now I have to own a lawnmower, now I have to figure out how to clean the gutters and clean the siding and all of these tiny, tiny things that they've never thought about before all kind of come to light. So the fact that you're thinking about this is fantastic. And the reason that I like the fact that you expressed the question as how do I overcome my fear of hope maintenance is that it sounds to me implicitly like you understand that the maintenance itself doesn't throw off the numbers to such a degree that home ownership would be a bad idea. The maintenance itself is just a psychological hurdle

or a fear that you need to overcome. And so how do you do that? I'd I say by estimating what those costs are going to be and then budgeting for it. And what you could even do is start kind of pretending that you have those costs right now and start saving money, you know, start quote unquote paying those costs right now in the form of saving money. So let's say that you calculate, for example, that your maintenance costs will run you $200 a month or $300 a month, pretend that you're already paying those costs today and then open a special savings account, like a unique savings account that's separate from all of your other ones, in which you quote unquote pay your maintenance bill starting today.

And all of that's going to go into savings. I even do that, Paula, with the difference between the rent and the mortgage, even if that go in there too. So you can play test your mortgage to see if you can really afford it. I like that as well. Yeah, that's an excellent idea because, yeah, your mortgage is going to be higher than the rent you're paying. So start paying those bills right now. You know, the things that bother me, there's a couple.

Number one, you know, she talks about how she's tired of living in, you like how I do air quotes, even though this is a podcast. I still put my fingers in the air, do the air quotes. Nobody saw it, but you would be. But apartment living. And that's something clearly to get tired of. But the issue for me is before you buy a house, there's a certain amount of time that you need to own the house before there's a benefit. So you may want to make sure that before you buy a house, you're really going to live there. I don't know, let's say six or seven years.

Because if you're going to live there less than that, the cost of buying the house, a lot of those short-term costs might be difficult to recoup. And obviously, if the real estate market goes down, that could make it even worse. Yeah. So that's number one. And number two, you know, she said she clearly can't afford. it now, but man, I could hear in her voice that she really wants to try to do it now. I had a coach when I was a renter early in my career. I really, really wanted to buy a house.

Excuse me, I wanted to rent a house in a more expensive neighborhood because it would make me feel more like the shooter I thought I was. And my coach told me something very cool. She said, so do you want to have the awesome lifestyle that you know is a complete fake? or would you rather have one that reminds you every day that you're not where you want to be and you really need to make some changes? Wow. And I thought how powerful was that to say, you know what?

I got to make sure that I'm putting the money away for the house, that I'm doing the right thing. And so every time I come home to this apartment that I don't love, I'm going to put tons of money away. And it was. It was very motivational to think about it that way. I'm not in the spot I want to be. So I would caution against being so tired of apartment living that you do the wrong thing. I really like waiting and making sure that you've got the financial house in order. Like she, like, you know, and that's not criticism as much as it sounds like she's on that path.

I just don't want her to, there's so many people in the real estate market that will tell you, oh, no, you can afford it. It's almost like buying a car, right? When you buy a car, like, oh, yeah, you can afford this car. We'll just stretch those payments over 26 years for your new Hyundai. Yeah. Yeah, that's a great point. When you talk to, especially when you talk to people in the mortgage industry, the

implicit assumption that they make is that if you can qualify for certain financing, that means that you should take it. Yeah. Oh, you qualify for this. Therefore, go ahead and take it. Why not? Everybody's doing it. Exactly. Exactly. Like, the assumption is that you're going to borrow or that you are, it's fine for you to borrow the maximum amount that you qualify for. I think that that industry would work a hell of a lot better if those people lost the commission they got a few foreclosed on the house. Oh, whoa. Like if you foreclosed and the bank that paid them the commission to get you into that loan in the first place got taken back from you, I think we'd see a lot of different changes in the lending atmosphere. Yeah, exactly, exactly, because that's part of the

problem is right now, we're totally going off on a tangent about the real estate industry, but I mean, yeah, you know, the people who sell you stuff are the people who don't have any stake in the game after the deal is closed. So the real estate agents, for example, who tell you like, oh, yeah, this area is really on the rise, this home is totally going to go up in value. You know, agents aren't allowed to make predictive statements about the market. And yet, you hear that stuff all the time, or I do at least. I've heard many, many agents say things like that. The problem is they don't have any skin in the game. Once that house is sold, once they collect their commission check, what if it doesn't go up in value as they, as they,

like fond and claimed and, you know, promised. And a good agent knows that because they want you to keep coming back to the table, but there's so many that aren't thinking long term and not so obvious. They're all thinking short term and obvious, right? Yeah. Short term and obvious is let's take Paula for a ride right now or take D for a ride right now, get the money, bird in the hand. It's ugly.

Yeah. Yeah, I don't mean that to be a criticism against all agents. I myself am a licensed real estate agent. I wouldn't trust you. Yeah, dude. I totally wouldn't trust you. But, you know, part of the reason that I got that license is because I just got frustrated by, by, you know, the. Smoke of mirrors.

Yeah, exactly. The dogs and ponies. Exactly. Any other analogy I can make? Stolen thunder. I'm telling you, steal it. Steal my Texas thunder. Yes.

Finally, before we move on, I want to answer the second part of your question, which is, which relates to the appreciation on condos and townhouses. Yeah. historically, here's the issue with condos and townhouses. They're always building new ones. I mean, and so the appreciation on an older condo complex is not high because if I'm somebody with the wherewithal to buy in a brand new, the newest, hottest area versus buy your older one, because the problem with condos, in my estimation, is that you're dealing with an association that's taking care of a lot of the landscaping, the stuff around it. And if they decide to go cheap, you're along for the ride no matter what. So a condo can be a good investment. I don't think that you have the

complete ability to make it or break it yourself that you have with a standalone house. Historically, condos tend to be the first to fall during a recession and the last to rise. That's what we've seen across the board throughout the last many, many housing pullbacks. Yeah, the bigger problem I have, though, than that is that we always talk in financial planning about your values and your goals. and Dee clearly said she wants to get away from apartment-style living. And, you know, condos and townhouses is not that far removed from apartment-style living, depending on the type of condo or townhouse. Yeah, that's true.

Like, from what I hear within the way that you ask that question, Dee, and you can correct me if I'm wrong, but yeah, it does sound like you would be more excited about a single-family residence. And the last thing that you want to do is spend every day sitting in your home thinking about how you would have preferred to have bought. this other home, assuming, of course, that both homes are within your financial capabilities, et cetera, et cetera, you know. Yeah. Yeah. Correct. Ta-da. Awesome. Thank you for asking that question, Dee.

Hey, we'll be back to the show in just a second, but first I want to say something. So I'm recording this thing right now, this ad spot. I'm recording it after dinner. And for dinner tonight, I had an asparagus and summer squash curry. It was like a Thai-style curry, a yellow curry. with coconut milk, but made vegetarian with a bunch of seasonal ingredients. And I've never had anything like it before. And the thing is, I never would have made it because, number one, it's a little bit of an unusual dish. And number two, getting all of those ingredients together would have been way too much of a pain in the butt because I would have to, you know, I would have to get like a whole big tub of yellow curry paste,

which realistically I'm probably only going to use a little bit of it. and then the rest of it's going to spoil and I'd have to throw it away, and I hate creating food waste. I'd have to get all of that, and I would have to figure out what all the ingredients are. So realistically, I never would have made it. And because of that, if I wanted Thai food, I would just be like, hey, let's go out to dinner. Hey, let's go to that new Thai place. That's how I would get Thai food. But Blue Apron makes it easy and accessible for me to be able to cook that meal in my own home.

And last night, I actually had a salad. that also included summer squash in it. You know what? I've never liked squash before, but like, that was because I didn't know how to prepare it. And Blue Apron, because they ship all of the ingredients and the recipe to you, my experience of it has been very much like it's a cooking class because I've got everything in front of me, the exact ingredients in the exact portion size that I need. So I'm learning how to cook with squash. Like, I'm learning how to make yellow curries, which I've never made before.

I'm learning how to make all of these things and use different ingredients and use different vegetables that I've never properly done. And I'm going to restaurants less, eating healthier, and doing it for a price that's pretty comparable to what I would be paying. It's less than $10, like, for a meal per person. And, you know, if you think about the cost of buying an entire tub of curry and buying an entire tub of coconut cream, even though you only have to use a little bit in the recipe, Like, you know, if you think about what that would actually cost if I went to the store and had to collect all of the ingredients, it would actually come to pretty close to that. Blue Apron is, it's affordable, it's easy, it's flexible, it gives you a lot of variety. They work with local farmers and ranchers and the seafood is sustainably sourced. So it's, I think, just a really good way to not be wasteful, like not create a bunch of food waste, eat healthy, and not use up a whole bunch of your time trying to.

to plan meals and get ingredients and, you know, it just brings home cooking to you. If you want to give them a try, you'll get three free meals, including free shipping. That's, okay, can we emphasize that? Three free meals. That's a big deal. By going to blue apron.com slash afford. Again, that's blue apron.com slash a ff, o'Rd, three free meals, including free shipping and everything. So give them a try, blue apron.com slash afford.

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Let's move on to our next question which comes from Chris. Hi, Paula. I've been listening to your show for a couple of months now, and you use such a great job with advice and interviewing interesting people. My question is about Roth 401K plans. I'm 30 years old and have only recently got out of my training program. I'm a fairly high earner who makes about $200,000 pre-tax annually. As soon as I started working for my new employer, I signed up to fully fund my traditional 401k plan and contribute the full $18,000 a year. I've been talking to a financial advisor who recommended an overfunded life insurance policy for post-tax dollars at retirement. I've been went so far as to get the physical, apply, and be approved for the policy, but after listening to you and Joe from Stockney-Benzhens, I decided not to purchase the policy. My question is this. My employer offers both a traditional 401k plan as well as a Roth 401k plan.

I'm interested in hearing your opinion on if I should fund the traditional 401k or the Roth 401k. My current plan was to fund the traditional and then start investing in an IRA, which I could consider converting in the future. I'm really not sure how to best invest the money I have for retirement. I save about 50% of my income, so I have a good sum of money to put away. And I would love to hear your advice on the traditional versus Roth 401k and where to go from there. Thanks. Chris, awesome job on not purchasing the life insurance policy. I think that it could work.

And I understand the advisor. so I don't think your advisor is a complete moron for recommending that. But as Paul and I said on the earlier show that you, I think the one that you listen to, lots and lots of other things you can do before you get to that step. So I'm not quite sure you're there. So good call. I'm letting the life insurance policy go. Wait, a quick time out.

For anybody who's listening, I don't want to go too far off the rails, but for anybody else who's listening who's wondering why? Why? Oh, why is it a good idea or why was it a bad idea? Both. Okay. life insurance for people that have tons of discretionary income has this cool thing that's like a Roth IRA where if you stuff it full of money and you continue to stuff it full of money, the most that the IRS will actually let you put in it.

You end up minimizing the cost of the insurance and if the policy is structured correctly, you can take the money out very similar to the Roth IRA. And if you pass away and you have a family, the family still gets the death benefit. So the cost ends up being low. The money ends up being in a tax shelter. It ends up being a way, way, way, way better way than an annuity. And for people in a very high tax bracket can also be a nice shelter. But as I said on the past show, you've got to be in a really high tax bracket.

You've got to make a lot of money. And you have to have done pretty much everything else first, right? You've stocked money every other place. And so Chris is already max funding the 401K, so that's number one, probably putting some money into non-qualified flexible accounts, well, okay, then what's the next thing? And if he's going to try to use any other tax shelters, he can put money real estate's tax advantage. That might be a nice place.

Or he's got to go into something like an annuity. But when I compare an annuity with the type of thing Chris is talking about, the life insurance generally is a better option for somebody in a very high tax bracket. So that's that's that 1% of people that we talked about on that show where the shoe might, might fit. but I see those strategies used way, way, way more than the 1% of the time that they're actually used. It's not a good idea because of the fact that you have to continue to fund the life insurance at a huge, you got to stuff the money away or it becomes suboptimal in a hurry. It has to be a special type of life insurance that has the ability to take the money out without getting too technically.

You've got to be able to take it out easily and a lot of policies are very restrictive. And then the third thing is, once again, just the restrictions, the handcuffs. Because of the fact that you started this when you're fairly young. He's 30. Yeah. Yeah, your handcuffs the strategy for the rest of your life. And if you change the strategy, you end up wasting a bunch of money because of all the life insurance rules that are out there. So I'm glad he didn't do it.

So that takes off the rails a little bit. But let's talk about pre-tax versus Roth, which is, this is cool. He is, as he mentioned, a highway earner, which generally the financial planner circuit in my brain goes pre-tax, right? But then I hear that he's age 30. And the younger you are, the more that money in the Roth portion can expand and multiply. And as those babies multiply, all of this compounding interest multiplies, you get to take all that out tax-free. So if he were 50 in this case, I'd say making the right move pre-tax, might want to put a little bit away Roth. What I like for Chris is tax flexibility, where he'd get.

It's some of the bird in the hand now by getting a tax break now because he's a fairly high wage earner. But then he also gives himself the ability to have flexibility later. And let's walk through that for a second. Let's say that he continues to only use the pre-tax 401K, where he gets the tax break now. And his only option in retirement is to pull the money out and pay the tax. Well, let's say he retires all his money's in this pre-tax 401K. if he wants to take some money out to go to Burger King, I don't know, which is always why I make withdrawals from my accounts.

That's the first thing I thought of. Right. And I'm sure, that's what Chris is thinking. What if I want to go to Burger King? He's got two choices, Paula. He can either eat and pay the tax or not eat because he has no money in any other place than the pre-tax. But if he's got money in the raw and in the pre-tax, now what he can do is he can

take money out of the tax. the pre-tax up to the tax bracket line. And then beyond that, take money out of the Roth so that he's living comfortably in a higher tax bracket, but the government's taxing him as if he's at a lower tax bracket. So having both to me is better than having one or the other. Exactly. And that being said, because having both is better than having just one or the other, I'm going to throw in another variable here. Chris, if your employer is making a contribution to that 401K, if your employer is making some type of matching contribution, the employer is making some type of matching contribution, the employer's contribution most likely will be a pre-tax, a traditional contribution, which means that

the employee contribution that you make could be Roth, and the employer match that you get could be pre-taxed traditional. Such a great point. Yes. So that's how you can have your Burger King and eat it too. I might still have, to throw this whopper a little further, I might still have a little bit that's pre-tax because of the amount of money he's earning. you know, let's take advantage of some tax breaks today because as an example, what we saw

out of Washington maybe a month ago was this rumbling, right? And by the way, don't make moves because of what's happening in Washington, D.C., never, never. However, financial planners and CPAs have been predicting the government might not let that Roth not ever be taxed forever, right? And so I might want to get some of my Whopper with Cheese now by getting the pre-tax now. So I don't know the exact formula, but maybe Paula like a 20, 2575, 75, 35 pre-tech, 75 Roth, and then he gets the rest up to the, you know, through the match to make it more even. I don't know. I mostly agree with you, Joe, except I'm leaning a little bit more towards having Chris put all of his money into, all of his employee contribution into the Roth 401.

A horrible idea. Because he can only put a maximum, at the age of 30, you can only put a maximum of $18,000 per year into, as the employee contribution into, to a 401k, regardless of whether it's a Roth or a Trad. So what that means is, number one, if you are putting in $18,000, like let's assume that you put in $18,000 regardless of whether it's Roth or Trad, by virtue of putting in $18,000 and also paying the taxes on it now, you are in essence making a bigger contribution than you would be if you were putting in $18,000 of pre-tax income. Does that make sense? Like, if the if the numbers are the same, if that number of 18,000 is held as a constant, 18,000 plus the taxes that you're paying on it now is a larger overall chunk of what you're making than $18,000 of pre-tax income today. I hope I expressed that in a way that made sense. I talked, we chatted about this in the earlier, I think it was the interview with, was it Joshua Sheets? Was it, these interviews are all starting to blend together. We talked about this in an earlier. We talked about this in an earlier.

your interview as well. Joe, did I just say that in a way that made sense? Yeah, I think so. I've been worried here about the alternative minimum tax and depending on how much he's subject to the AMT, I mean, that's a much fatter tax. Yeah. And so pre-tax is in my favor there. Winner, winner chicken dinner. Well, so the other reason, okay, so the other reason, besides the fact that And I totally agree with you. AMT is something that you definitely want to avoid. And that is a conversation to have with your CPA. Because when it gets to AMT, it gets extremely complicated and hard to predict.

But assuming that you won't be paying AMT, then the reason that I would lean towards you putting all of your money in a Roth account is, number one, Joe, like you said, Chris, you're young. You're 30 years old. So you've got a lot of time for dividends and capital gains to grow. And when you reach retirement age, all of that can get pulled out. tax-free. The fact that you have so many additional decades to allow that growth to happen is a huge plus one for the Roth. Number two, the fact that you can make a larger, a larger contribution of a chunk of your paycheck. Number three, the fact that you should be able to find non-Roth ways to make retirement contributions outside of your 401K. So for example,

I don't know what your health insurance situation is, but if you have an HSA-compatible plan, the money that you save inside of your HSA will be a pre-tax contribution. So you can get a little bit of that pre-tax benefit by putting money in your HSA. Similarly, if you have an employer match to your 401K, that's more of a pre-tax benefit. If you make a non-deductible contribution into an IRA because you're over the income limits to make a deductible contribution. But you can make a non-deductible contribution into an IRA. And while that's not expressly pre-tax, it, you know, it's some additional thing that you can do. Break it up, Chris.

Yeah. Basically what I'm saying is I think that Chris can break it up, but he can do so in ways that are outside of his 401K. Break up the 401K, Chris. Don't listen to Paula. Listen to Joe. But you and I, Joe, you and I are close. Like, Joe, you're saying he should basically put 75% of it into a Roth. And I'm saying he should put 100% of it into a Roth.

So you and I are not that. far apart. We're talking like... Like wopper and wopper with cheese. Exactly. Exactly. Right. To stretch that analogy further than it needed to go. So you, I guess, Joe, you and I are in agreement, like, within a given range, within a rounding error. Conceptually. Yeah. Yeah. Yeah. Which is good enough. Cool. I think we've answered that question. Like, within a reasonable range, that's the answer.

I'm feeling good. I'm good. Chris, I mean, what a great problem to have, by the way. Yeah, exactly. And congratulations on the fact that you're saving 50% of your income. You're in a great situation to be able to do that, and your future self will absolutely thank you. If Chris gets bored wants to say 50% of my income, that'd be even better. I can see Joe's face via Skype right now, and I just saw the face he made. Joe, this is not a video podcast. I know. Sorry. That's great. I don't know how to describe that look. Anyway, moving on.

Moving on. So our next question, thank you, Chris, for asking that. Our next question comes from Alma. Hi, Paula. This is Alma. I have a question about life insurance. I'm looking into getting a term plan for my husband and myself. I just have a question of, we move around a lot. For example, we're now currently finishing a stint in the UAE and we're relocating to the U.S. but we have no idea for how long.

So I just wanted to know your recommendation when looking for a policy that covers you outside of the U.S. While I feel we will mostly be based in the U.S., I was wondering if there was any specific company that you would recommend considering that we may be living out for months at a time, for business, travel, et cetera.

Any help or enlightenment you have on the topic is much appreciated. Thanks. Man, insurance today, Paula. It's not a clickable headliner. You know, it's not like 12 sexy things about insurance that will... You're going to L-O-L-L it. Yeah, exactly. Right.

Joe says the life insurance won't make the headline. And it did. Yes. Yes. You know, Alma, to directly answer your question, because as a financial planner, I dealt with this, helping people find insurance for the 16 years I worked in that business, financial planning, not insurance, but insurance is certainly, actually, risk management is the way I'd like to look at it. Because, Paul, if we can cover it without insurance, we try to do that first, which is why I like thinking about risk management first over insurance.

Like, how can we protect it? And then insurance is obviously one option. But a good solid insurer doesn't care where you die. They don't. So that's where insurer ratings come into play. And by the way, that is a question. question, if you're going to live outside the United States, you need to ask as you're applying for the policy. And I'll give you an example. On my podcast, Dacking Benjamin's, we have a great sponsor, Haven Life. In fact, they were just Paula on Jill Schlesinger's show about maybe a month ago because they're innovating so much. Everything's completely online. So if you're searching insurances, check them out because I really like how innovative they are. They don't care where you die. And full disclosure, they are a sponsor of your show, yes.

Yeah, didn't I just say that? Yeah, yeah, yeah. I'm just repeating it for emphasis. Yes. Well, and they're clearly not the only company I would look at. But using them as an example as a high-rated insurer, Haven Life isn't going to, you know, isn't going to not send a check to the right people

if you pass away someplace outside the United States. But you need to ask that question. And number two, whenever you get your policy, you have what's called a 10-day free look period where you get the policy in your hand, read the policy and make sure. And by the way, Most of the policies I've seen, they're not that hard to read. So go through and look and read and make sure you understand it. And if you don't understand it, you still have 10 days at the end to give it back.

There are ratings, aren't there, four different types of insurers, AM best ratings and several, a couple of different types of ratings. Yeah. And I would make sure that you have a top rated insurer because you're not going to need this money for a long time or you're not going to hopefully die for a long time. And you want to make sure it's a company that's going to be around. 20, 25, 30 years from now, which is why a lot of the time the costs are going to be different between companies. You'll have $100,000 or a million dollars of insurance from two different companies, and one will be a little bit higher than the other, and it's usually because one company is probably going to be in business a long time from now, and the other one might not be. So they're trying to undercut the price to make up for the fact that they don't have

as high of a rating. And I would tell you what those ratings are, but what I would do is I would just, I would Google it after you are looking at the specific insurers because, as an example, with one rating agency, and A is a great rating, with another agency A++ is a great rating, and A is actually their crappy rating. So you just need to look at the ratings. And if you've got Google open at the same time, you're looking at the rating, rather than me do it now and you have to remember, a much easier way to look and see how the company's rate. So in the show notes, which are going to be available at afford anything.com slash episode 80.

I will link to, so AM Best, which is a company that traditionally focuses on ratings for the insurance marketplace. I'm going to link to them, and I will link to information about what their ratings mean. So A++, in their lingo, A++ is the best. But, you know, again, I don't want you to have to remember all of this via audio. So I'm going to link to that. Afford Anything.com slash episode 80. And not that you're going to need Alma, all three. three rating agencies, but the other two are Moody's and Duff and Phelps that are known for doing

insurance ratings. So you can compare, generally they're all going to come out the same. It's like your credit score from Transgenian to Experian to Equifax. Equifax is not going to be that different. Yeah, exactly. Except that, you know, with your credit rating, those all coalesce into one FICO score. With insurance ratings, those don't all come together as one. The Trinity doesn't unite as one. Don't cross the credit ratings. So, yeah, so with insurance ratings, there is no one single number that you can look at. There are three different agencies. Pick one.

I like the AM best rating. Yeah, I like that one too. That one's the only one that I really pay any attention to. And then just ask the question. Ask the question. Do you care where I die? Joe, I don't care where you die. You can die right now, pal.

I said where, not when. If you disagree with me on pre-tax versus Roth, one more time. The other thing to know, and when I said they don't care where you die, they care about everything for the first two years in a life insurance policy. Life insurance has come with a two-year contestability clause, which means if you're going to lie, let's say that you are a chain smoker and you have these abscesses all over your body. You have no idea where they came from, but you somehow say that you don't smoke and you have a clean bill of health and there's nothing wrong with you whatsoever. during the first two years if you pass away, the insurance company can contest it and they can go back and look and see if you were lying. After two years, they had two years to decide whether you were lying or not. Anyway, just to clarify, the first two years, they're going to challenge everything.

Interesting. Cool. Well, I think that is all for today. Joe, where can people find you if they want to hear more of your beautiful voice while you're still alive? Yeah, you will find me a mom's basement where we broadcast every Monday, Wednesday, Friday, the Stacking Benjamin Show, and it's stacking benjamins.com. But thanks again, Paula, for including me. This is the highlight of my week. Wow, I am so sorry to hear that. We will take up a collection for you, Joe. See if we can get you more fun weeks. Get you some friends.

Yeah. I'll take you out to Burger King. Excellent. it. If you enjoyed today's show, please head to iTunes, leave us a review, and hit subscribe so that you'll be updated about future shows. You can check out the show notes at Affordanything.com slash episode 80. That's Affordanything.com slash episode 80. Check us out also on YouTube. We've got a new YouTube channel, which has audio of these podcasts plus extra goofy video that I've created. And check us out on Instagram as well. I'm Instagram.com slash Paula Pant. My name is Paula Pant, host of the Afford Anything Podcast.

Hope you enjoyed today's show and catch you next week. Man, insurance today, Paula. It's not a clickable headliner. You know, it's not like 12 sexy things about insurance that will... You're going to L.O.L. Yeah, exactly. Alma, a great question, but it won't make the headline. I'm just predicting.

Oh, I'm so putting this in the headline right now. Just to prove you wrong. You're going to call it, Joe says this won't make the headline. Right. Yes, that's going to be the title of this show. Joe says a life insurance won't make the headline. And it did. Yes.

Done with Joe. Done. Done. That's the headline.