Afford Anything - Q&A: Can They Be Financially Independent in Five Years … By Breaking the Rules?

Episode Date: July 30, 2024

#527: Luke and his wife are breaking some personal finance rules in the name of financial independence. Are they right to take this approach or is there a better way? Christina is worried. She’s retired with a paid-off condo in Florida. But rising fees, insurance rates, and a major HOA assessment are killing her cash flow. Is it time to become a renter? Les is surprised by Paula and Joe’s allocation recommendations for international equities. Based on market capitalization, it makes no sense. What’s he missing? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode527 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, is it ever okay to break the rules of personal finance in order to get to the goal faster? It's always okay to break the rules. But the key is, you know this, Paula, but I think a lot of our afforders don't know this. You've got to actually know what rules you're breaking. And if you're actually unintentionally breaking other rules, later on you don't want to have to go, oops, my bad. Ah, yeah, yeah, yeah. So, okay, so it's like grammar, right? Know the rules really well so that you can break them with style.

Yes. Nice. All right, well, we are going to hear from a listener who is breaking some personal finance rules in order to get to financial independence faster. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice that you make carries a trade-off, and that applies not just to your money, but your time, your focus, your energy, your attention to any limited resource you need to manage. What matters most? And how do you make choices accordingly? Those are the two questions this podcast is here to answer.

My name is Paula Pantt. I trained in economic reporting at Columbia. I help you focus on what matters. Every other episode, we answer questions that come from you. And I do so alongside my buddy, former financial advisor, Joe Sal C-Hi. What's up, Joe? How's it going, Paula? Oh, I am fantastic.

Joe, you know why I'm in such a good mood? Because you're hanging out with me, duh. Yes, well, obviously. But in addition to that, we got an update from someone who called in earlier and now has a win to share. Take the W. Here's Elizabeth. Hi, Paula and Joe. You kindly answered my question about taking a four-month pottery course in episode number 487, and I wanted to share a brief update.

Paula, you told me that if it was important to me, I should just do it. And, Joe, your advice was to consider any alternative ways I could explore pottery more without making such a large expense. ultimately, I decided not to go on the pottery course this year. Losing four months of income on top of spending on tuition, housing, and supplies felt like too much for me at this time. However, an opportunity finally arose to rent my own studio space here locally, and I just signed the lease. I'm also taking six weeks off work unpaid the summer to enjoy the studio and enjoy the summer. This felt like the perfect compromise for now. Doing the course in the future is still a possibility, but for now I'll get to scratch my pottery itch without spending so much

cash. So I guess Joe won this one. Thank you again for your kind advice. What does that mean? Paula 30, Joe won. That is amazing. Congrats. But I do like the fact, Paula, that she widened the lens, right? I mean, this is what we do here. She widened the lens. She looked at her current excitement around this project and she found a way that really fit. That's really the key. Yeah. I see this is a huge win. Elizabeth had this dream, but also has practical considerations and is like, all right, what do I do here and found a way to make it work? Yeah. And I think a key there is this idea that because she pumped the brakes a second, she called us for our genius expertise. But seriously, she pumped the break. She took a second to think

about it to widen the lens. I think that also then Paula may have, and I'm not saying talking to us, but I think just pumping the brakes for a second and thinking wider about all the different possibilities, which could have been how she found the new opportunity because she was so open to it and available for it that she then when she found one that fit, she knew, oh yeah, this is what was missing earlier. Right. Exactly. So, Elizabeth, I love the broader thinking, the bigger thinking, the the way that you reframe the question as, how can I do this? What are the various iterations and incarnations that this could look like? And then you found a way that works.

A huge win for you. Congratulations. And you know what's funny? Taking the time away from her normal pursuits to. Right? I think it's going to do two things. I think number one, what it does is it lets her focus on this, which clearly is a passion for her. But you know what else it does?

when she comes back to that, to what she used to do, to whatever this job was that she had before. The former job, yeah. I've never seen somebody come back that was worse. Right. Exactly. You come back. You know, if you take a year off, and I took a sabbatical from Afford Anything in 2020, 2022, 2003, a one year sabbatical.

And that time that you spend away from your primary job, it reinvigorates you. It really does. When you're staring down the barrel of a 40-year career, even if it's something, that you love, even if it's something that's your calling. So in the best case scenario, you know, you're like, I don't want to retire early. I love what I do. That's the best case scenario. But even in that context, it's still nice to take a breather just so you can come back with renewed vigor. And for people that can't take time off, because I know, you know, not every job allows you to do that. There may be some big consequences. You can do it, but there might be some consequences you're

not willing to face. The episode we did recently from Boise, Paula, where we talked about going to industry conferences. It's not the same as the sabbatical, but it can give you a lot of that lift as well. Right, the motivation. I heard this quote because some people criticize motivation. They're like, oh, motivation doesn't last. The quote that I heard was, well, neither does showering. That's why you do it every day.

I love that. Yeah. Yeah. It's like, I'm a sports fan and people, the coach doesn't play. So the coach doesn't matter. It's the players. Well, the players still got to know how to focus. Right.

They still got another, yeah. Exactly. So, Elizabeth, I love that you have found a way to take this passion and make it your own and do it in a way that fits your life. And Elizabeth, I love the fact that I won. So congrats and thank you so much for calling. And now, let's hear from Christina, who is wondering what to do about a condo in Florida that, well, you know, I'll let her explain what's going. on with this. Hello, Paula and Joe. My name is Christina, and I'm 60 years old. I'm retired due to health issues. I currently receive $1,661 a month in Social Security. This is my only income.

I own a two-bedroom condo in Florida, which I paid off and is worth about $200,000. Since retiring, my monthly condo fees have increased about 20% to $600 a month, plus there is a $10,000 assessment. My monthly expenses are about $2,000 a month. I'm concerned that my condo expenses will continue to increase to the point where one day will no longer be able to afford to live here. I have $330,000 approximately in retirement accounts. half of it in Roth and a half in regular retirement IRAs.

My condo is worth $200,000 and I've been thinking about selling it to access my equity and invest it. I would then at that point rent. Other options that I'm thinking of is to sell, invest half, and with the other half purchase a smaller one-bedroom condo with lower fees, which makes more sense at this point financially. Is it to stay, sell and rent, or sell and downsize? Thank you so much for your help. Christina, thank you so much for the question.

And first, congratulations on living in a paid-off home. That is such an enormous win to be able to retire at the age of 60 with a fully paid-off home. So congratulations to you on pay-off home. paying off your condo on being able to live free and clear, mortgage-free. I understand it's tough when the fees go up. It's tough when the assessments happen. But thank goodness that in the midst of all of that, you at least have freedom from a mortgage.

Between the three options that you listed, option A, stay put. option B, sell and rent, option C, sell and downsize. Between those three options, I want to eliminate option B immediately. I don't like the idea of you selling and renting. And I'm willing to consider the pros and cons of option A and option C, so option A being stay put, option C being sell and downsize. I'll go through the pros and cons of both of those, but I want to take option B off the table.

Reason being is you're 60 years old, which means you're 60 years old, which means you're You are very young. You have potentially 30 years, 35 years of housing ahead of you. And there is a decent likelihood that increases in rent, which are outside of your control, could exceed any increases, inflationary increases, cost of living increases in your living costs. You are living on a fixed income, and rent could go up at a much high. higher rate. So I don't like the idea of you being exposed to the risk of rent just going up and up and up and up and up. And by the way, the reason that rent rises so fast is often because property taxes rise really fast and insurance costs rise really fast. And costs associated with maintenance and repairs, labor costs, material costs, all of those tend to rise really fast. And so those then get baked into the rent. And as a homeowner, yes, you're also going to have to deal with higher property taxes and higher

insurance costs that's inevitable. But at least you'll be buffeted from rent increases that are outside of your control. Well, and you've got another person involved in the middle who has a profit motive, which is also interesting because you and I, Paula, I know, don't have a problem with someone just starting out renting for an extended period of time. We have no issue with that. I like this because this idea of Christina on a fixed income where her income stream is maybe capped. I think I want to dive into that a little bit more makes renting problematic because of the three to your point, she's so much less in control.

By the way, I don't like playing the trend game. I don't play the crystal ball. Where's it headed next game? But I will tell you this. We did a headline recently on our stacking deeds, our real estate podcast, where we looked at some of, the big venture capital firms, KKR specifically, getting into apartments in a big, big way. And venture capital uses big money to do their research. And a lot of the time, you can see where the trend may be headed where the big money is heading. And if the big money is heading toward

apartments, and by the way, the size of new build apartments has been increasing. There's a lot of big money betting that people are going to be renting for a longer period of time than ever before. Right. Meaning there's a lot of people getting into that business, meaning they're looking at profit motive. I will bet rents tend to increase quicker in the future than they have. Again, I don't want to base any plan on that, but based on where the money's headed now, I would say that it makes it worse for Christina if we're seeing venture capital getting into apartments. Yeah. Part of the reason that I am so staunchly an advocate for individual investors, mom and pop investors, getting into homeownership generally and particularly rental homeownership, real estate investing, is because I want to live in a world where the landlords who are out there are mom and pops landlords rather than, yeah, real people who form a direct relationship with their tenants, who know them by name, rather than these big hedge funds and these big Wall Street firms.

Yeah, I groaned when I saw that. Oh, good. KKR is getting involved. That's going to end well. Yeah, I want to bring rental property ownership back to mom and pop rather than Wall Street. Take that Wall Street. Yeah. So, Christina, I would not sell in rent. I would either stay put or sell in downsize. I don't like any of these options. You.

Well, and this is a frustrating piece, Paula, is when all the options have significant downsides, I felt like when I was a financial planner where A, I earned my money by helping make a difficult decision like this and be also when we needed to be really, really, really careful about what the, what the choice was, because they all have pretty significant downsides, I think. Yeah. I think that, first of all, the idea of moving from condo to condo, I don't see these big increases that Christina's talking about going away anytime soon. Right.

And I don't think that HOA fees, condo fees are going to be. decelerate. And I certainly wouldn't put that in my plan. So even if she downsizes, I would be reticent to tell Christina to budget in whatever the number is that she locks in her condo at as the number, because that number is still going to go up, even if she buys it free and clear, and it's a smaller number than if she has the two bedroom versus the one bedroom. And I get the freedom of worry. And I get if she retired because of a medical condition and then doesn't want to care for the outside of the house. So I'm fully cognizant of that.

I just think from a budgeting perspective that the pain is going to continue, even if she downsizes. I feel like it kind of band-aids it. It band-aids her situation. It makes it incrementally better, but then she's going to continue to see the prices go up. And if she continues where she is, this bleeding that she's experienced from her budget is also going to continue.

Nothing's going to change. So I don't like staying. I don't like going. And I don't like renting. I mean, basically at the end of the day, HOA fees are going to continue to rise. Insurance costs are going to continue to rise, especially in Florida. Property taxes are going to continue to rise. Repairs and maintenance, right, which in a condo, the HOA takes care of a lot of repairs

maintenance in a single family home, you pay for that out of pocket. Those costs are going to continue to rise. All costs associated with the maintenance and operation of a home. Which is why I don't like, how many times we said this, I don't like the premise of what we've been asked. Hmm. Because what we've been asked is which one is best. I don't know which one is best. They all suck. So I think here is for me a better question. Back to Christina, which one do you want to do. And then can we make that work? How can we make that work? So if she says, I want to stay, we then model out this, these increases that have happened. We apply the $330,000 she has as her nest egg, you know, and just back of the envelope math, which, you know, makes me nauseous,

but we'll do it anyway. That gives her just over $1,000 a month, $13,200 a year that she can apply as income in any given year if that money is not currently allocated. So if she's going to use it as extra money coming in, how long does that last? What does that look like? Can we make it work? I can totally see the math equation that we would use to do that, right, to figure that out. And if that doesn't work, then we do what Elizabeth did. And we go, is there a way for us to widen the lens and make it work? And my question then has been a very difficult question. especially for people who are retired because of medical conditions is this very, very difficult question. I hate to ask, but it is always my responsibility. And the answer of no, it doesn't

work is fine? But I think we have to ask the question, is there a way, even if it's inconsistent to bring in an income check? Is there a way? Is there anything? And I'll give you an example. we have a member of our team at Stacky Benjamin's who has a medical condition. And we know ahead of time that this particular individual is going to have times when they're not going to be able to do the work and our times they can. But you know what? They're a valuable member of our team. And heck yeah, we love having them on our team. And so while it may be inconsistent for this person to get money, they do with money coming in. And so it works really well for them and it works for me. And I'm wondering if there is an employer who can work around. whatever your condition is. And again, I understand that the answer might be no. I understand the answer probably is no. But I think that the income stream, if that answer in any way, is yes, buys you flexibility for any of these, which is truly the safety valve answer for either one of these considerations, whichever one you want to do. You know, Joe, what you just described with your team member in stacking Benjamins, I want to highlight two factors that make that

work. One is that you guys, as stacking Benjamins, are a small business. You are a team of, what, half a dozen people or so? Yeah. Yeah. So you're a small business with about half a dozen team members, and the person that you're describing works from home. So it's a remote working situation. Right. Yeah. So I think, Christina, if you were to look for an employer who would be able to accommodate, those two factors, look for a small business employer. And look for a remote work from home, flexible hours position. Those two factors will play a big role in it. We're not talking about some crazy six-figure salary. Not at all. Yeah, we're talking we're talking about something. Just enough money to make this not as painful for you. And you know

what? There are tons of studies that show. I was recently talking to Dr. Daniel Crosby, who Paula, I think you know, very well, behavioral scientists. He was talking about the positives of work and all of the socialization things we get from work, the power of relationships and socialization and the different aspects of wealth quote that we build because of the fact that we're in this community of people with a like-minded goal. So even though some people may grown it and work, there's some great stuff that can come with that too. So it's not all just more income. It also has, I think, other side effects that can be really good. Joe, I'm going to do the opposite of you, where you're questioning the premise. I'm going to accept the premise as is.

Let's do it. Go with Christina's three options that she outlined. I've already eliminated option B, which is I don't want her to become a renter. I see a case for both option A and option C, staying put or selling and downsizing. The reason that I see a case for option A is because it's a known, known. Christina is already accustomed to living there. She presumably likes living there, at least likes it enough. The special assessment has already happened, so it's unlikely that there will be another one, so we know what that special assessment is. And she doesn't have to deal with all of the expenses associated with selling, which carries incredibly high transaction fees. selling a property is enormously expensive when it comes to real estate agent fees, closing costs, etc.

Then there's the cost of moving. I was going to say indirect fees, right. Yeah. Yeah, the cost of moving is also astronomical. So the cost of transitioning homes, we're talking tens of thousands of dollars. So is it worth spending tens of thousands of dollars to free up the equity? Yeah. I don't know if it is when equity is so.

precious. So those are all of the reasons that I like option A. Option C, I have some more questions about. Does she know that there are going to be homes at a substantially cheaper price point that she likes enough, she feels safe, she feels comfortable, she could live there, she could age there, she could live there into her 80s and into her 90s. Are there homes that meet that criteria. If so, then what specifically are the price points of those homes? I want numbers. What are the price points? What are the HOA fees? How recent was the most recent special assessment? How solvent are their HOAs? I want specifics about what that alternative would be rather than some vague notion that there might be something out there that's cheaper. And so option,

see in theory, I think sounds good, but I want specifics around the alternative before I'm willing to endorse it. It sounds like it's research time. But I'm also with you, Joe, in that I think you can simultaneously accept the premise and answer that while also questioning the premise. And I do also want to make the point that, Joe, the team member at Stacking Benjamins that you're talking about, just for clarification, is not a full-time team member. No. No, not at all. This is a person who has remote, freelance, part-time work from home at a small business where the employer understands. And you understood, Joe, at the time of hiring.

I did. This person was very upfront about their situation. Very much. And said, here's how I can contribute, but also here is my limitation. Is this something that you can work with? Show me their qualifications, which were huge. I understood why bigger employers would be reticent to hire this individual, which was the perfect opportunity for me, frankly, to steal somebody with fantastic assets just knowing up front what we

were getting into. And it's been a great marriage. It's been really good. You know, and I'm going to make a plug here for this is why I'm also such a staunch advocate of entrepreneurship, because it's when you have these small businesses, these teams of five or six or seven or eight people, that's where these opportunities emerge, not just for the entrepreneur themselves, not just for the small business owner, but also for all of the people who work on that team, right? This is the beauty of mom and pop business. It's not just mom and pop real estate ownership, which is important. It's also mom and pop business. Yeah, Paula, I'm awesome. Well, you are awesome, Joe, but awesome is not just limited to you. You are like one of many small

business owners who creates so much opportunity. Yeah, for lots of people. With over 330 million people in the United States, there's plenty of opportunities. You may have to look harder. And I think if Christina is able to, and again, the answer could be clearly, no, I can't do it. We don't know about Christina's situation. But if there is, I will tell you there's plenty of flexible people. Although, I do like the love fest between you and Elizabeth today. This is good. We need more episodes where it's just pile on Joe. By the way, for those of you who are watching this on YouTube, I am looking at Joe's background right now, and the background is mostly empty, except Joe, behind you, there's a tin label Dad Jokes. Is it really? Yeah. So my friends,

my friends know me, and we actually use this for the Stacky Benjamin Show, just as research. We've got some good ones. You need a couple dad jokes? Yes, give us some dad jokes, Joe. Is that we need? Let's open these up. Most of these suck. I like really good jokes. By the way, before I get into these, I just got hire Paula as a fitness model. I'm the before. Ha, ha.

Why did the barber win the race? Why? He took a shortcut. Oh. What do you call a man who can't stand? Neal? Oh, that's sad. If buttercups are yellow, what color are hiccups?

Burple. I don't know. Why did the invisible man turn down? on the job offer. He couldn't see himself doing it. Yeah, those are dumb. We'll put the lid back on those. I didn't even know you could see those. It's literally the one, for those of you watching on YouTube, it's the one thing in the background. Just that the carpet's cleaned in the basement. Yeah. We haven't moved the furniture back in. It's the one and only thing that it's in Joe's room right now is a tin of dad jokes. Thanks to my friend Mike, Mike and Dina for making my dad jokes worse.

All right. What did the angry flamingo say? I don't know. I'm putting my other foot down. What did the chimney say to the fireplace? You're smoking hot. Oh. Well, thank you, Christina, for asking that question.

By the way, Christina, never date a tennis player because love means nothing to them. Oh. I actually understand what that was referencing. I normally don't understand those references, but I got that one. I got it. You're welcome. You're welcome, world. And thank you, Christina, for the question. Your next steps are number one. If you're going to sell and downsize, let's have some precise numbers on exactly what homes you're looking at so that we can really sit down with a spreadsheet and run the numbers between option A and option C. So that's one of your two next steps.

And then the other next step is, as Joe said, let's see if there's any way, and I don't know the specifics of your situation, but if there's any way that you can increase your income, even a little bit, even by a few hundred dollars a month or $1,000 a month, that will make a big difference. But thank you, Christina, for the question. We're going to take a moment to hear from the sponsors who allow us to bring you this show at no cost to you. And when we return, we are going to hear from someone who questions an answer that we gave on a previous episode related to how much of your portfolio you should put in international stocks. And after that, we're going to hear from somebody else who's breaking all the personal finance rules. Stay tuned. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments.

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The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home, so I got tons of shelving. that's in the entryway, in the bathroom, very space-saving.

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Terms apply. Don't miss out on early Black Friday deals. head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-Y-F-A-I-R.com. Sale ends December 7th. Welcome back. Our next question comes from Les. Hi, Paula and Joe.

This is Les from Washington State. I was surprised to hear you say on a recent podcast that it would be crazy for someone to have more than 30% of their portfolio in international equities. When you look at market capitalization, the international market, is currently about 38% and before the most recent bull market in the United States was up to 50%. The Vanguard Total World Stock Market Index has a higher capitalization and proportion of their stocks in internationals than the 20 to 30% that you and Joe suggested. Am I missing something? currently I have about 40% of my portfolio in international index funds.

Also, if you have time or for another podcast, could you talk about your thoughts on the small cap value premium? And if you do think it will continue in the future, what percentage should one consider allocating to this momentum factor? Thanks again. Oh, my goodness, Les. Thank you so much for the question. And by the way, Paula, I hope it's not lost on anybody.

And it might be lost on a significant amount of the audience what less is actually saying. There are so many people I'm seeing in online communities right now talking about I don't do any international investing. And it's worked out great for me the last 10 years. And I feel like I've been the person going, do not give up on your diversification. This never ends well. You need to keep international investing. in your portfolio. And I'll have some people, I'll call them know-it-alls, going, well, I've never invested

international. I'm doing okay. Well, good for you. It just drives me crazy, the survivor bias. So what less is actually saying is he wants more. I'm trying to get most people to 30%. And we said it's crazy that somebody has, I don't remember what the number was. So the 50 or 60% international, we're like, whoa, that's a big number.

but less for you to question us on the you should have even more international you are a salmon my friend you are swimming so far upstream i love you we need more of that yeah exactly less is zgging when everybody else is zagging yes everyone else is burned out on international international's not performing you know everybody wants to concentrate in the u.s and less is a contrarian i feel like it's like the end of the first decade of the 2000s everybody's like large cap does nothing i'm getting a large cap. Right? But seriously, that was what it was like.

2015 was like the heyday of everybody piling into small cap. I mean, you really saw it. Our ability to do the wrong thing is just amazing as human beings. So, Les, I love this question. So let me answer it for the Uber nerds out there that are thinking the same thing that less is. And by the way, when I say Uber nerd, that is not at all put down. That is you're my kind of person.

Yeah, we're Uber nerds. Yes. First of all, I wish I was more of a. scientist and less of a practitioner. But what you're talking to right here is a practitioner. I think this would have been a great if, Paul either you or I get to talk to somebody like a Michael Kitz's or a weight bow. This is an even better question for them that it is for you or me. Michael was on last week's show. We talked about this on last week's show. But did you talk about international specifically? Yes, we did. Well, there you go, Les.

Joe, don't you listen to this podcast? Actually, in full disclosure, Joe and I are recording this prior to that episode airing. So I'm really giving Joe a hard time. Paula loves watching me sweat. But it was funny to see your face. Yes. Yeah. Funny for one of us.

Sorry, Joe. That's all right. But I will say this, two things. Never working with a major company like American Express and going in and looking at lots of different corporate benefit packages and 401k pie charts. Did I ever, ever, ever see a. number larger than 30%, even for the most aggressive people. I just never saw it. And by the way, and the proof for me is borne out if we want to get a little scientific. The longtime fans know what a

fan I am of the efficient frontier and following the efficient frontier. If you follow the efficient frontier based on different time frames, you have not seen an allocation of international stock that paid out on the efficient frontier, which means that while the market cap might be 38%, you never saw a that matched the standard deviation enough, meaning risk level versus return that made sense enough to be more than 30%. Dr. Markowitz and the work that people have done on the efficient frontier shows that the juices hasn't been worth the squeeze. So historically, we haven't gotten the returns out of international over long periods of time. We have gotten a return enough to still justify 30 percent, those of you that have given up. And I think that there is a

reversion to the mean coming. So, Les, I like where you're going, but the data around the efficient frontier doesn't bear out that a 38% or 40% allocation has made sense historically. And until it does, we won't see the efficient frontier change because that's all based on what's happened in the past. We haven't seen that change. Beyond that, I'm going to get really nerdy now. If you look at a portfolio allocation of no constraints using modern portfolio theory and the efficient frontier, it will actually tell you. based on recency that a much lower allocation to international makes sense, like 10 to 15. But that's all based on recency bias, which the efficient frontier will show if you show it over a

small enough set of numbers, a more recent set of numbers. In fact, if you show it over a 10-year time frame, obviously it's going to show you 0% international makes sense, which is what people have done and why they're all high-fiving themselves. So that's about as far as I can go on that. Right. Based on that data, the reasonable outer edges of the range are 10% international allocation at the low end, 30% international allocation at the high end with the more reasonable in between being somewhere around 15 to 20, 25%. Yeah.

I use a 30 in my portfolio. And again, I don't start here. So, and this will get into the small cap value question, which I love as well, which we can dive into next, but I don't start here. I start with what do I need to do? What do I need to do? And then can I do it? So I set a target. I go to the efficient frontier on that target. I put in my constraints, and then I work backward. And when I work backward, then I get my international, which gives me 20 large company international and 10 emerging markets international, which is, you know, Paula, if I was left to my own device, it's not the efficient frontier. I'd be like 90,

Emerging markets just because I get so excited. Talk to me about Southeast Asia. I'm a fan. But I got to temper my emotional attachment to that sector with reality, which is what the efficient frontier helps me do. And the Vanguard Total World Stock Market Index, I mean, yes, it has a higher proportion of that fund in internationals, but that fund itself inherently is supposed to be an international fund.

As Americans, as U.S.-based investors, when we. put that fund in our portfolio, we are putting that fund into our portfolio as part of an international allocation. Now, yes, there are some U.S. stocks in there as well, because it isn't ex-US, as we talked about on an earlier episode, but it is intended to be a sliver of that international allocation. And that is why that fund is a great place to start out. Right. And Paula, the sister fund of that, the Vanguard Total Stock Market Index, also has some international exposure because a lot of these companies are international companies, General Electric International Company, the company I used to work for, American Express, international company.

So you get some international exposure immediately just in that fund, which is why I like starting with that fund as well. The Vanguard Total Stock Market Index. Total stock market index, yes. VTSAX. Yes. I like that better than a Target Date fund. I like it better than a robo to start off with.

I think J.L. Collins nails it with buying the total stock market index. It also buys small companies and small company value. So let's explain what less is talking about there before I lose everybody in this discussion. Small cap value. For people that don't understand the word cap, which always has driven me crazy. If you're not a practitioner of this on a daily basis, just take out the word cap and put in the word company. So small companies, value oriented. So there's two sides of this equation. There are growth companies and there are value companies. Growth companies are companies that investors are looking at and they may be way overvalued, but they're growing at such a pace that investors don't care. So these are companies that are super hot, they think, and they're in hot, sexy industries like AI as an example. You're not going to find a small AI shop that is a value stock. Because everybody in their sister is buying small company values looking for the next hot thing. So they're going to be overvalue.

But you're going to buy it anyway because these companies, if they continue to perform, are what we're relying on tomorrow. So that's the growth side of the equation. If I'm evaluating it based on growth, who's going to take over the world? Amazon has always been one of those companies, right? Very growth-oriented. All those years where Amazon didn't make any money and value investors were driven crazy by this. Paul, remember this? Everybody's like, Amazon hasn't made a profit. What the hell are we doing?

And the growth side was always like, nope, they're coming. Nope, they're growing. Nope, it's going to work out. Look at who won that battle. Amazon worked out. The value side of the equation is the opposite side of that where we're looking for a discount. We're looking for a company that is undervalue, but unrightly so, where the pieces of the company are more than what investors say the sum of the parts are. So you take the parts and it's worth $100, but the stock price is 80. We got a deal there. This is an undervalued company. So small cap value or little tiny companies that have not been discovered yet by the mainstream. This is always until the last few years been the big winner out of all the asset classes.

This has been the place where you won, you won, you won, you won. Now, the last few years, recency bias, you've lost. you've lost, lost, lost, lost. However, what's really cool about this, Paula, we're seeing what Les is talking about with the international game where he's overvalued international. We've seen this already happened in small cap value. Small cap value, the last few months, has smoked it,

has been amazing, has been on this huge run. So for all those people that were like, yeah, that whole small cap value thing, that didn't work for me. So I got out, shame on you, because you lost a ton of money by ditching. your diversified approach. I like small cap value, but that roller coaster ride, as I even explain, these are small companies not yet discovered. This is going to be a hell of a roller coaster ride. So for that reason, I always kept my exposure to this area at a 10% allocation to small

cap, small company value stocks. Could it be 15? I could make an argument if you're really aggressive for 15. Would I go 20? I think you need to take some tums. I think you need to be ready for years where you're pulling your hair out going, what did I do to my portfolio? Because this is a mess. It'll come back, but you never know when like it is now. It's like, hey, yeah, we're here. But now the roller coaster ride up, we know maybe six months from now, maybe a year from now, maybe five years from now is going to have a huge roller coaster ride down again. So that's why we cap, I often cap it at 10 to 15 percent. But again, I don't start there less. I start with what do you need to do?

And then does that roller coaster ride hurt me or help me? Certainly, if it's a long time roller coaster ride, like you've got 30 years to use this money, I'm in. Maybe then I'm 15%. If I'm Christina and I'm wondering about my housing today, I think close to zero is a good number there. So, Joe, for somebody like Christina, 60 years old, concerned about expenses today, not investing for the long term, investing for today. What type of allocation do you think is appropriate?

What is interesting about Christina is the discussion that we would have first around, is she going to turn this into an income stream, right? Currently, she hasn't turned into an income stream. And we would then, based on when she's thinking about doing that, creating the allocation, she is going to need some money. If she's 60 today, she's going to need some money when she's 80. 80, 90. Yeah, so her having some money in small company value, even though it's going to roller coaster ride today, that roller coaster is going to be way up the hill 20 years from now. If history repeats itself, which if the economy is going to continue, it will. Having that doesn't bother me. In fact, I think it's actually a good move to have maybe 5% of that money in that small cap value to give her the growth she needs to beat inflation over the long run. However, when I was a financial advisor, what I need to do with Christina was caution her about what that roller coaster ride is going to look like. And it's much like the pilot that comes on the plane and tells you there's turbulence ahead. I would have to tell Christina, don't watch this fund.

Right. I noticed sometimes my clients would look fun by fun. They go, this fund is awful. And I go, yeah, guess what we're going to reallocate? We're going to put more in it. I wouldn't say it that way. Yeah. I would say, well, the way it works is, you know, it goes up and down.

We're going to put more money there. Well, okay, Joe, where are we going to take it from? We're going to take it from this. No, no, no, that's one that's doing good. Why am I going to take it out, quote, the one that's doing good? I'm going to take money out of that and put it in the one that's doing awful. That is contrarian investing. Harvest the winners, put it into the losers.

And it smooths out your ride. Exactly. That's another reason why, going back to Christina, I would start with which one do you want to do? Or at least come up with, am I doing option A or option C? and then build that portfolio around what engine she's trying to drive. I love this question though, Paula. Right. How come you don't have more an international?

I love you less. Exactly. That's the type of question in a current environment when so many people are looking at the recent performance of the U.S., which has smoked international. And everyone's saying, why not just go all U.S.? I love the fact that less is talking about making the contrarian move to go heavier into international. Oh, come on. Just say it.

Less is thinking about more. It's true. Less is thinking about more. So thank you, Les, for the question. We're going to take one final break to hear from our sponsors. And when we return, we are going to hear from a couple that's thinking about breaking. the rules of personal finance for the sake of reaching financial independence faster. Welcome back.

Our final question today comes from Luke. Hi, Paula and Joe. I love listening to the show and how you analyze listener questions. I like how you can answer the question and challenge the premise all in one response. My question came up after listening to Episode 515, where Paula challenged the premise of how we think about retirement accounts. My wife and I are currently breaking some personal finance rules with a particular goal in mind, and I wonder what you think. For a bit of background, we are in our late 30s with a relatively high income.

We are in a 35% federal tax bracket and live in a state with a 5% tax rate. We save $150,000 to $200,000 per year to various investment accounts with an aim to make work optional in five years or so. We are attempting to pay off a small portfolio of rental real estate, five doors, in the same time frame. We can't say for sure that we'll retire completely at that point, but I expect we will scale things back a bit. My question relates to the investment accounts we are using. My wife maxes out tax deferred accounts in her business. I max out Roth 401 amounts with my employer, and we contribute everything else to after-tax accounts. I like the three-bucket strategy because it provides the most flexibility when we arrive at our work-optional date,

particularly because we are not certain what we will do. However, with our high tax rate in mind, I understand that it would be more optimal for my Roth contributions to go into a tax-deferred account with my employer instead. If we do, in fact, slow down, we could pursue Roth conversions at that time. What do you think? Paula, you know what I think. What is that? I think Luke likes to think of himself as a bad boy. I'm breaking all the rules.

I'm naughty. And he's not. I don't think he is breaking the rules. I don't think he is. You think Luke is a rule follower. Well, I do. You know why? Because as you know, Paula, the thing that I like, I like breaking this rule, Luke.

The rule that you're breaking is the rule that I like to break. So I don't think you're breaking any rules. You think it's not even a rule at all. Well, I do. But the rule that I like, we call the tax triangle. He calls it the three buckets. I call it the tax triangle. Same, same. Yeah, we don't know where tax rates are going to be in the future. And if we give that up, if we go, I don't know. I don't have any idea. Well, then especially, Luke, if you're making big money today, which congratulations, number one on the great income and also number two on having the foresight to shovel a lot of that money into savings. Yes. Because, man, I know so many people that are making good money and they spend every dollar of it and the future is going to hurt. But not for you because you thought that way. But also giving away the fact that we don't know where tax rates are going to be in the future, you're taking with a part of it the burden of hand with the pre-tax. I'm going to accept the pre-tax today. I'm going to do Roth with some of the money to give myself flexibility in the future. And because of the fact that I'm going for this early financial independence, I giving myself the flexibility of non-qualified investing as well where I don't have any chains put on me by any institution, the federal government or an insurance policy or

an annuity or whatever it is. I'm just putting money in a spot where I can get it whenever the hell I want. He's doing what I think should be the rule more of us follow. So Luke, even though I know you probably want to get a tattoo that says bad boy and I'm breaking all the rules, I think you're. doing amazing. I love this. And if more people did this the way you did it, I would be super excited. I'd be way more excited than telling people to pump the brakes on so much money in pre-tax, you know, pump the brakes on everything has to have this optimized for today tax

strategy. You know, I wonder if Luke talked to his accountant and that's why he thinks that he's making a wrong decision. Because no offense to the accountants out there. But my account, My accountant has said the same thing. My accountant once physically winced, we were sitting next to each other. We were having a face-to-face meeting. He physically winced when I told him how much of my money I directed towards Roth accounts. And I will plant that flag in the soil. I will die on this hill. My take, my bias, however you want to call it, is extremely pro-Roth, very pro-Roth. Because you take that tax hit once, but you have all capital gains, all dividends, all growth, tax exempt for life. How can you pass that up? And particularly, the younger you are, the better, because that means that money is just going to grow for decades and decades tax exempt. Here's the thing that people don't realize is that especially when you're young, to your point, I put money in that pre-tax position. I put money in a spot where I take the tax the one time

text break today, every dollar that account makes from here on out, I'm sharing with the IRS. Because the IRS is going to take a percentage of every dollar it gains. Or if I go the Roth route, I take the amount that I put in today and I give the government what they want from that. I get text on that. But every dollar gains from here on out, I get to keep all of it. Right. I'm not sharing it with anybody.

Now, the more money you make today, the more I can make a case for, maybe putting some of the pre-tax and taking the bird in the hand is fine. But yeah, I totally agree with Roth, Roth, Roth, non-qualified, Roth, not qualified, Roth, non-qualified Roth. Yeah, Roth all day, every day. My bias is extremely pro-Roth unless you can make a solid case otherwise. And I understand, Luke, that you're in a very high tax bracket. you're a high-income earner, and you don't expect to be a high-income earner in perpetuity. You and your spouse have a goal of taking your foot off of the gas pedal and scaling things back and reducing your income.

And so I get that on Reddit or in the online forums, they'll say, hey, you've got a high-income and high-tax bracket today, and you think that your tax bracket is going to be lower in the relatively near future. I get that's why the internet would tell you to tax defer today and then do the Roth conversions at the time that you scale back. I get that in theory. But what I have seen in practice over and over and over from the financial independence community is that even if you think that you're going to scale back, you often accidentally end up making more money than you expected. I mean, that storyline has played out again and again.

People are like, yeah, I'm done. I'm tired. I don't like my job. Then they hand in their resignation and they have a big party about it and they celebrate the fact that they've quit this grinding corporate job. And yay, isn't that so exciting? And for a month or two, they, I don't know, sleep in and play video games or play golf or whatever your thing is.

But then there's this like project that they're sort of tinkering with. And they don't really have big goals for it. It's just like a fun thing. And next thing you know, eight months later, it's making way more money than they ever expected. And they weren't even trying to do it. It just kind of happened. And I see that storyline play out over and over and over because the type of people who reach financial independence are necessarily, they self-select as the type of people who are curious, are driven, are intelligent, who have hobbies that give rise to making money.

And it doesn't really feel like making money. It just feels like fun. But then the fun gets monetized and then that monetization just sort of takes off. I know I'm sounding glib about the money-making process. But honestly, I think one of the myths out there is that money is hard to make. I think in the age of the internet, I don't know what things were like pre-internet, but in the age of the internet, making money is a lot easier than most people are led to believe. I think that's true. It's just making more money in general. Yeah.

We often focus on the expense side of the equation and the income side of the equation is more resistance between our years, but in every other way for most people is a lower barrier to entry, easier, path to wealth, making more money, increasing your income. Yeah. So often overlooked. Yeah. And we're taught that it's hard. We're taught that it's a struggle. We're taught that it's a grind and you need hustle culture and business is war and you've got

to go and combat. I sleep when I die. Yeah, exactly. Like we're taught that it's treacherous, but it's actually a lot of fun. And yeah, you do to really take off. I mean, to be like ultra, ultra successful. Yeah, you do have to work a heck of a lot harder than everybody else. But that's only true if you want to be at the top, top, top of your game.

If you want to be in a position that's maybe not top level but still lucrative, you're sitting pretty, you're making great money and you have a great life, it's actually not that hard. And I'm going to asterisk not that hard for the type of person who is intelligent and curious and who derives joy from following their curiosity. So, Luke, I guess my answer is part of the reason that I bias towards Roth is because I assume that you're going to make more money than you think you will. I assume that even after you take your foot off the accelerator and decide that you're going to be intentional about slowing things down and you're going to accept a lower income in exchange for a lifestyle tradeoff, I think you're accidentally going to make more money than you intended to.

100% agree. I think there is a second important piece to this. Like Luke said, we like talking about how you think. I think there is danger in accepting things as rules. I think when you question the rule and ask why did that become a rule, how is that a rule? Why is that a rule? I think you become more careful about which rules you accept as rules and which ones are not actually rules.

rules. I think that's important because how many times have you and I been in online forms and we've seen people with a whole set of assumptions that we question? I mean, daily, I see this, Paula, where I just want to jump in. I don't have the time. I don't have the energy, the inclination to go, we just need to go back to the beginning because you're looking at this in a way that just is not healthy. And it's because this particular person daily is accepting a bunch of rules that are not really rules. Goes back to questioning the premises. Is it, Is it a premise I think it's premises. I'm messing with you.

Just trying to get you back for Michael Kitts's. But Luke, great job. Yeah. Both Joe and I are on your side. We are very pro-Roth. And we're pro-Luke. Yeah, exactly. So congratulations on everything that you've built.

Congratulations on getting to the point where you and your spouse have a high income. And on being so responsive. with it and investing it well, stewarding it wisely, working your way to financial independence. I think you've got some big, big things ahead, bigger than you realize. Joe, we've done it again. So fun. So, so, so, so fun. And thank you, everyone, for the great questions, the thoughtful questions. It makes it fun, Paula, for you and I. And I'm just grateful we get to help so many people do this. Absolutely. You all are the reason that we do this. So thank you. you to all of you for being part of this community. Joe, where can people find you if they'd like to

hear more of you? Oh, on the Stacking Benjamin show, Monday, Wednesdays Friday, we call it the greatest money show on earth because, as Paula knows, because she's part of the circus that's the stacking Benjamin show. We are in the season of the Olympics, Paula. And last Friday, you were part of a fun episode with a woman who's a financial planner and the first American woman to win medals in both the winter and summer Olympics. Our good friend Lauren Williams joins us to talk last Friday about the opening ceremonies and winning the gold. How do you win the gold with your money? And you have ideas. Lauren has not only great ideas, but great insight. She tells us what it's like to be part of the opening ceremonies, to be part of the Olympic community. She also shows us her

medals, which are in a place where you wouldn't believe. And our partner, CFP, OG from our team also has ideas and you guys come up with some great ones so it's a fun light episode with a lot of laughs and a lot of insights into what goes on behind the scenes kind of at the Olympics from Lauren and taking these ideas of becoming an Olympic athlete infusing them with how to become better at money so that's last Friday on the stacky and Benjamin show yeah and that was so much fun to record thank you so much for tuning in if you enjoyed today's episode please share it with a friend or family member that's the most important thing you can do to spread the message of great financial health.

Subscribe to our newsletter at afford anything.com slash newsletter and make sure you're following us on Apple Podcasts, on Spotify, and on YouTube. On the first two on Apple Podcasts and Spotify, you can leave us up to a five-star review. On YouTube, please leave a comment, leave a thumbs up, follow our show, hit the notification bell. Those are always that you can support this show. And remember, you can chat with members of the community at afford anything.com slash community. All of it is absolutely no cost and available for you to help you in your

personal finance and financial independence journeys. Thank you again for tuning in. My name is Paula Pant. I'm Joe Salsi-hi. And I'll meet you in the next episode. She also shows us her medals, which are in a place where you wouldn't believe. Yeah. And Lauren is the first American woman to have meddled in both the summer and the winter Olympics. Oh, I didn't say that correctly. Did I get that wrong. Wait, did you not say it? Did I? I thought I just said that. Did you just say that? I thought I did. Sorry, Joe, I zoned out. Is Joe talking again? Yon, right, right, right, right.