Afford Anything - Q&A: How Much Insurance Is Enough When You’re Protecting Your Wealth

Episode Date: December 2, 2025

#665: If you’ve ever stared at an insurance quote and wondered, “Is this really worth it?”, you’re not alone. Liability and umbrella policies can feel like an expensive mystery, especially when your net worth is growing and your risks are shifting. In today’s episode, we dig into a listener’s dilemma about soaring liability and umbrella insurance costs, and we explore how to think clearly about protection, exposure, and the parts of your portfolio that may already be shielded. Along the way, we unpack how shifting household risks, driver ages, and asset location change the insurance strategy year by year. From there, we take questions about Roth choices, future tax brackets, and whether it’s worth giving up investment flexibility to build a stronger tax triangle. These conversations get to the heart of how we balance risk, taxes, and long-term planning in the FI journey. Listener Questions in This Episode Andy asks: How can I protect my $2 million net worth without paying nearly $950 a month for increased auto, home, and umbrella coverage, especially with a teenage driver in the mix? (01:47) Mike asks: Given our high current tax bracket and expected lower tax rate in retirement, does contributing to a Roth still make sense for us? (25:50) Cindy asks: Should I move my rollover IRA into my new 401(k) so I can start doing backdoor Roth contributions, even if the investment choices are more limited? (39:47) Key Takeaways Sometimes the question isn’t “umbrella or nothing,” it’s “what risk am I truly trying to insure, and for how long,” especially when a teenage driver temporarily changes the household risk profile.
 You already may have more asset protection than you think. Retirement accounts and primary residences often carry their own layers of protection, which influences how much liability insurance you actually need.
 The Roth decision hinges less on math in isolation and more on your likely future earnings, work style, and appetite for locking in today’s tax rates.
 Building a balanced tax triangle gives you flexibility later, especially when future tax rates are unknowable and retirement timing is uncertain.
 Backdoor Roths can be powerful, but only when the tradeoff between investment choice and long-term tax flexibility makes sense for your goals and timeline.
 Related Episode: Episode 649: Umbrella insurance deep dive Chapters Note: Timestamps are approximate and may vary greatly across listening platforms due to dynamically inserted ads. (00:00) Offense versus defense and setting up today’s questions
 (01:47) Andy asks about protecting a $2 million net worth
 (12:00) What’s already protected and how coverage layers work
 (17:00) Managing short-term risk when a teenager starts driving
 (29:50) Mike asks whether high earners should prioritize Roth contributions
 (35:07) How career trajectory and future tax rates shape Roth logic
( 45:54) Building a balanced tax triangle
 (47:47) Cindy asks about using a backdoor Roth to shift her tax triangle
( 52:10) Tradeoffs of moving an IRA into a 401k
 (54:06) How long Roth dollars need to grow to matter Share this episode with a friend, colleagues, your tax advisor: https://affordanything.com/episode665 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, between growing your assets versus protecting your assets, do you think one is more important than the other? Do you equate them equally? Where do you stand on the level of importance between the two? Oh, I think it depends on the goals and where you're at. I mean, there are times when you're behind and you really want the goal really bad, where you have to give up a little bit of protecting it to get the standard deviation, we call it, to put the volatility in your portfolio to give you a shot to chase the big dream. But if your goal is set and all you have to do is play defense to win, then protecting it becomes far more important. Offense versus defense, that's a good way to put it. Well, we are going to be talking today to a handful of callers, some of whom are

asking about offense. They want to grow. They want to put their assets in the right types of accounts. We're also going to be talking to a caller who's focused more on the defense. How does he protect what he's already built. So this will be a full game today. I'm right. Welcome to the Afford Anything Podcast, the show that knows you can afford anything, not everything. The show covers five pillars, financial psychologists, increasing your income, investing, real estate and entrepreneurship. It's double-eye fire. I'm your host, Paula Pant. Every other episode, we answer questions from you, and I do so with my buddy, the former financial planner, Joe Sal C-high. What's up, Joe? Well, I'm a little frustrated because Cheryl handed me an envelope this morning that said

don't open until 2026. And inside of it was this whole paragraph about how I can't even follow simple directions. So it hasn't been my morning. But you know whose morning it probably is? Oh. Look at that segue. It's probably Andy's morning. So let's hear from him. Hi, Paula and Joel. This is Andy from Valdas. Georgia. I just wanted to say, I love your first Friday episodes. They're always so enlightening. I also enjoy the questions episodes, though I'll admit I often disagree with Joel's, throw money at it mentality. I'm about 200% DIY. I never call anyone for help, and now I'm even leaning on AI to figure things out. My question is about umbrella insurance, which you covered in

episode 649. My net worth is about $2 million. My house is paid off. I have no really estate portfolio other than my primary residence, and I drive two 15-year-old cars. Right now, I pay $159 a month for state minimum liability on the cars, plus about $1,000 a year for homeowners with $300,000 liability. I've structured my life for the lowest cost of living car. I was considering getting an umbrella insurance policy to protect my brokerage account in home, but every insurer I've talked to requires me to raise my auto and home liability to at least $500,000 each. On top of that, they're quoting me around $750 a year for the $2 million umbrella policy itself. Crazy expensive for my lifestyle.

That would take my total insurance cost from about $242 a month to nearly $950. I really hate the just throw money at an approach, but at the same time, I'm losing sleep over the risk to my $2 million fire portfolio. I can't afford $900 a month, but I also can't afford to lose what I've built. Soon I'll have a teenager driver and I'm concerned, but there's got to be a smarter way to handle this than simply paying for umbrella, which I refuse to. I'd love to hear you guys going a little deeper on this topic and help me find creative solutions for it. Thank you guys so much, Andy. Andy, thanks a ton for the question. And by the way, Paula, you know this.

Andy and I were nearly neighbors. I came very close to living in Valdosta, Georgia. Cheryl had signed on the dotted line, as you know, Paula, with a company to work there. We'd found a house. We were 99% of the way there. And then events happened and we ended up back in beautiful Texarkana, 800 yards from the Arkansas border. But, Andy, we could have sat at that wonderful barbecue place in town and argued this out across the table. We could have taken care of business and it would have been super fun.

But it's going to be super fun doing it anyway, right? Absolutely. I want to start out with the Joe's throwing money at it thing. And then I want to address your conundrum because I think they're actually Paula won in the same. I think that by addressing one, we can talk about both. First of all, I firmly believe, and I think I puts it softly, Paula, like when you look at the landscape, the goal is to define your battlefield, right? I mean, Sun Su, they are to war, to find the battlefield. The battlefield here is one of two battlefields.

Number one, you're either going to throw money at it or you're going to throw time at it. It's going to be one or the other. That's going to be your battlefield. So you have to decide which battle you're going to fight. I generally prefer to throw time at it. But I also think that in this community, because we're so attuned to our money and we're so skilled in the area of money management that we don't pay enough attention to time. And we don't realize what a finite resource our time is. And we end up wasting so much time. So I don't have a throw money at

attitude. Maybe I do, but let's walk through this. First of all, Andy, I'm just like you. I drive a car that has 256,000 miles on it. It's been paid off forever. Cheryl drives a car also completely paid for. we did not use cash, but that's because I got zero percent financing and I defined a loan amount that we could afford. It was $250 a month for three years at zero percent. So I put mostly cash and then I took advantage of that offer. So I did take out a loan, but generally speaking, I could have paid off vehicles just like you do, had them for a long time. I live in a house that cost me less to buy than the average cost of a house in most of the big cities in America. I live in a house that is well below my means. I got out of the real estate market because

of the fact that for me, I couldn't find value. I hadn't taken Paula's damn course. And I couldn't find value for the money I was paying and the cost of figuring it out was higher than what I wanted to pay, I was not going to put more money toward learning how to be a real estate investor instead of following what I'm good at, which is the stock market side. Lead with what you know and what's going to get you there. Real estate and stocks will get you there. For me, I could throw less time and less money at stocks and get where I wanted to go. So none of that jives with you saying that I have a throw money at it mentality. None of it does. But, but if you've interpreted the view that I would rather have high results than low fees with lower results,

then yup, throw money at it. Or if you've interpreted my view that you should surround yourself with smart people. And sometimes you should pay for that expertise because it's going to put more value and more money in your pocket and get you where you want to go quicker than you could, then yep, throw money at it. Or if you've interpreted my view that sometimes for wealthy people, having insurance actually makes sense, then yeah, throw money at it. Given that, what I want to do is dive deeper into what you asked Paula and I, which was you have a net worth of over $2 million and you don't want to pay $900 a month to protect it because that's what the insurance company is going to charge you. And if we take that and we actually then do what

you want us to do, which is dive deeper, the insurance company that you want us to outwit has hired actuaries, many of which I know listen to the show because Paula, as you and I have gone around the country, we meet these people. They're awesome people and they're wicked smart. to put in my Boston, horrible Boston accent. But they're incredibly smart people. You want us to out with them with all their math, all their variables, their years of experience. They've done all the homework to determine what the risk is, risk versus reward. These things are also, by the way, state commissions, they are state regulated, an insurance

agent can rip you off. I believe it's very, very difficult for an insurance company to rip you off. So when they create a policy for a reason, they have to tell the commissioner, here's what we're going to charge. Commission says, yes, no. So you're going to find they're all drinking pretty close to the same water from the same well. That job is chasing windmills. It's 100% chasing windmills.

So I think you have a couple things. And Paul and I are going to dive into what you're trying to protect because. there may be some ways but when you back away from this I think what you got to look at is what am I really trying to protect and what is it worth to me so if this stuff is all worth protecting and you have two million dollars is it worth nine hundred dollars a month to protect two million dollars yes no and what you're saying is no it isn't and if it's not then that's okay that's 100% okay but the cool thing then is is that we know what your Achilles heel is Right. We know that when things go wrong, this is a possibility. And then what's cool is because that's your plan, you don't lose sleep at night because you know that you've accepted that risk. So it's not about just giving the insurance company the win. You can insure the risk yourself or decide I'm going to take that risk myself, which is why, again, anti throw money at it. The number one insurance policy I love, which saves you tons of money.

is an emergency fund. Because with an emergency fund, we could raise our deductibles. We don't need short-term disability to cover six months if I've got six months of money sitting in a savings account somewhere. I like paying less if I get less value. So I'm not sure where the throw money at it comes from. But what I do think is that we're not going to outsmart the insurance company. So, Paula, what you and I truly have to do is go through what's the Achilles heel going to be

or what does he have to be willing to look at if he doesn't buy the insurance? My first question is how much of this $2 million is already protected? Because my assumption is that some portion of this $2 million, probably a large portion of this $2 million, is in retirement accounts. And so if you're worried about legal liability, and this is disclaimer, this is not legal advice talk to a legal expert, but if you are worried about legal liability,

there is some degree of protection that assets in a 401k or assets in, to a lesser extent, IRAs and other forms of retirement accounts, there's some degree of protection that you inherently have based on the fact that those assets are inside of retirement accounts. Again, that's not legal advice, talk to a lawyer for specifics, but that was the first thing that popped into my head as soon as you started talking about this. the assets that you have that are going to be in in a checking account or in a taxable brokerage account are more subject to risk. That's the portion that if you've got, you know, the bulk of that $2 million in taxable

brokerage, that's a different conversation than if you've got the bulk of that $2 million in a 401k. You know, and I was also thinking on the insurance end, Paula, there's also, so you take those assets potentially and partly off the table. But then you don't buy the umbrella. liability, you might be able to also partially insure it just by doing what he said, which was raising those amounts of coverage that he has on his auto insurance and on his homeowner's insurance, but not buying the umbrella liability. Then he gets some partial coverage. He doesn't

get all the coverage. So his Achilles heel becomes smaller. And now he's taken some risk himself and he's given part of it to the insurance company instead of trying to trust the whole thing to the insurance company and paying that $900 a month. My other question is, with the exception of the liability that could arise from a car accident or the liability that might arise from, I don't know, if your teenager throws a party at your house and kids are drinking underage and something goes really bad, with the exception of instances like that, what are the major instances that? that you're worried about. I mean, most of the people that I know who buy umbrella liability policies

are rental property investors. Because if you own rental properties, then, all right, there's ice outside of your rental property. Somebody slips and falls on the ice. They can come after you for negligence if your rental agreement says that you're responsible for maintaining the sidewalks. I mean, I can see in a rental property context. I don't know, Paula, I get this. He's got a teenage driver coming. And when I was a teenage driver, I actually had to go to court because I did something that it turned out wasn't illegal, but was incredibly stupid. And that was just driving on icy roads, by the way. I wasn't doing anything super bad. I mean, I had a problem where I pulled in front of a bus. And the bus driver took down my plate number. And potentially, I could have caused a bad

accident, the bus driver, rightfully so, then reported me to the police and filed a complaint, and I ended up going to court because of that. But had I caused an accident, Paula, you know, all of my parents' stuff could have been at risk. So I think that teenage driver specifically is what he's worried about with that umbrella liability policy. Well, then maybe he gets an umbrella policy until his kid turns 18. Well, and this is the other thing too is think about this it's risk versus reward right like insurance andy is one of my favorite areas to talk about because i think there's so much misunderstanding and it also doesn't have to be a forever death sentence but if you look at the statistics let's go to those actuary numbers the more

you can dig in and spend time with an actuary it's super helpful again spend time around smart people in the thing that you want to know about so when you talk to actuaries you know that time frame paula from 16 to 18, even 19, 20, much, much higher risk of an accident in those first formative years than it is once you get the 10,000 hours of driving under your belt. So maybe you up your insurances to your point, Paula, just for that short term and then back it down when the teenage driver's gone. Right. So it might be short term duct tape insurance because up until now, Andy, your risk is

probably been pretty small. If you've been very comfortable just having the minimums, that's because you've recognized that the risk of you having something happen. Isn't that great? And you're okay with risking your assets against that. But with teenage driver, maybe it's not the case. So maybe you pay the 900 or my point earlier, pay a portion of that just by upping the auto coverage during that time. Maybe you just do that part way. You know, and I think that's a good point. Your insurance strategy is not static throughout your life. Like, your insurance strategy is going to change year by year, depending on the level of risk that your household has in that particular year, as well as the level of ability that your household has to be able to pay for certain things out of pocket. I know that there were years.

in some of my highest income years, I dialed some insurances all the way down to zero because I knew that my income was high enough in those years that if something were to happen, I could just pay for this out of pocket. And it would kind of suck, but I could do it. And then later, in years where my income fell, because as an entrepreneur, there's that volatility, in years where my income fell, my expenses increased because I dialed up my insurance. And that is why I love, Paula, just the reframing of the entire issue. Insurance companies want us to debate insurance.

We want to back away from that, widen the lens, and talk about what you're talking about, which is risk management. If we talk about what's the risk and what's the best way to cover it, insurance is just one avenue. I can accept the risk, like we talked about. I can put money in emergency fund. I can put the assets at risk where I'm going to have those assets that. then, you know, fulfill whatever the problem might be. So there are different ways to cover this. I can change my behavior even. You could tell your 16-year-old they're not going to drive. I mean, that could be ridiculous. It could be not what your 16-year-old or you want for a variety

reasons, but changing your behavior is a way to control the risk. So there's a ton of different ways to look at it, which I think then opens up this possibility of not buying, insurance policies. You could have your 16 year old chip in for part of the cost. You could do that too. Hey, hey kid, these are added household costs that are a direct result of you driving. So you're responsible for paying a fourth of them or half of them. I had a client who did that with his kids. The kids had part-time jobs and he helped them secure jobs. But when they brought money home, he called it a tax. And he's like, because I want my kids to be aware of tax people. immediately and how much tax there's going to be. What did the tax go toward? Part of it went

toward helping with the auto coverage. Part of it, he told them went toward their grocery bill. And part of it went toward the family had a family mission statement like Stephen Covey talks about a family mission statement where they were going to give and they were going to help a local food bank every year. And part of it went in the fund to help the food bank because that's what good people do. That's lovely. It was a great, it was a great lesson for the kids. And And truly, I mean, the kid's making nothing. So it didn't end up coming close, Andy, to your $900 a month. It was maybe 30 bucks that they put toward it.

But it was some great lessons, I think, early on. Yeah. When I was in high school, my parents and I had an agreement in which we calculated the cost of gas required for me to drive myself to high school and back. And I lived 17 miles away from my high school. So it was a 34-mile round trip every day just to go to school and back. So we calculated what that would cost in fuel mileage, and they gave me exactly that amount to cover gas.

And any other gas that I wanted to buy was totally on me. So if you were going to spend extra time doing X, Y, Z thing, you can do it. Yeah. It's just up to you. But it's on me. Yeah. That's cool. I love some of these teaching methods.

And by the way, if you want to share these in the afford anything community or online, I would love to see more because I know parents come up. Paula was some of the coolest stuff. Right. Some of the coolest things. I had a client, and this doesn't work with every kid, but his daughter was definitely college-bound. College was for her. It suited her.

It suited what she wanted. So high school years, Carla and Arnie taught their daughter how to have a job and put money away for her first year of college. So the key was to have her save for a whole first year. year, which was a bunch of money, save that for college. She then paid for her first year of college. Arnie and Carlos' feeling about college was this. You're there like it's a job. And this is their family view. By the way, this is not everybody's view. And I know all my clients had different things that they did. But their thing was, this is your job. It's going to be to be in

college for the next four years. And then to have the ROI of college, then to move on and do something else. So because of that, we're going to reward A's and B's. And so for every A and every B that you get, we're going to take not just the cost of those classes, but also the room and board, the cost of education, that percentage of the cost of education, and we're going to reimburse it. And I'm not going to reimburse it at today's cost. I'm going to reimburse it at the cost of, and I'm actually going to take that back. It wasn't even a full year, Paul. It was the first semester. So I'm going to reimbursed the second semester, the second semester cost based on how well you did in the first semester. So if you do well the first semester, all A's and Bs, 100% of that's going to get reimbursed

by me. And then all the way through college, reimbursing at these higher levels as inflation through college continued. And then when their daughter graduated from college, they reimbursed the last semester. So essentially, mom and dad paid for all of college successfully and their daughter ended up with this money that she was able to put toward her living expenses when she finished college. That transition. Yeah, all those transition costs. Doesn't work for every kid. And obviously, you can see their judgment and what they believed was important. But you can also see the teaching and, you know, giving their daughter the opportunity to get some help but also learn some valuable lessons along the way. I found that just a fascinating case study. Yeah, that's way better than

my experience, I just got yelled at if I ever got anything less than an A. I got yelled at and then I was like, screw this. I'm going to pay my own way. And then I learned. I should have gotten yelled at. But Andy, going back to your insurance question, it sounds to me as though if the major risk that you're worried about is the teenage driver, then maybe you do pay 900 a month for the duration that you have a teenage driver because that's a temporary thing. It's not going to be forever. it's just going to be for a few years, or you reassess how much you actually need, talk to an attorney, but reassess how much you actually need based on the proportion of your assets that are in some type of accounts that have protection. I mean, it sounds to me as though a lot of your assets

are in a primary residence, which has a greater degree of protection than vacation homes or rental properties, primary residence and retirement funds, there's going to be some level of protection there. So talk to an attorney, find out exactly what the implications are. This very state by state, you know, a primary residence in Florida has a very different level of protection than a primary residence anywhere else in the country, for example. So you'll want to get somebody who knows the state laws of Georgia. But that would be the other approach that I would take if you really don't want to stomach 900 a month, even for the temporary duration of time while you have a teenage driver, I would take some of that money, talk to a lawyer, figure out exactly how much you

want to protect and then re-quote all of your insurance policies based on that lower level of protection. It might not make that big of a difference because if the umbrella insurance company wants you to raise your home and auto before they'll give you any umbrella coverage at all, then it's the home and auto that's the big portion of your insurance costs. The actual umbrella piece is pretty small. So lowering it, let's say down to one mill, probably won't make that big of a difference, but it's still worth quoting out, just so you know what your available options are. And the other option is to ask your child to chip in for a portion of these costs. Going back to surrounding yourself with smart people, you know who I learned a ton

about flexibility with insurance from. And a lot of my worldview about maybe I need less insurance. Who'd you learn it from? From an Allstate agent. I took an Allstate agent to breakfast one day. and he was like, hey, people buy all these insurances they don't need if you have an emergency fund. And I, I mean, I didn't come up with that anything I know in a vacuum. People have taught me all this stuff. And so sitting down with somebody who is a trusted person in the insurance area that can tell you how to navigate the system to get protected. It's, you're never going to beat insurance. But what you will do is more accurately defend. your ability to protect the things you want to protect and then not protect stuff that you

don't want to protect. So you'll be more precise with how you protect your stuff. That truly is how you win with insurance, but you're not going to beat the actuary. Well, thank you, Andy, for the question. Best of luck with the decision. You know, when I was a kid, I remember on Christmas morning, I got lots of toys, lots of books, lots of clothes, gifts. Lots of clothes, gifts. The books were always my favorite. I'd spend all of Christmas Day just reading and reading and reading. But, you know, none of those are things that I have anymore. They were wonderful in the moment. But decades later, I have no idea where any of those things went. But by contrast, when you give a gift that brings somebody financial security, that's something that lasts a lifetime. Now, when it comes to financial security, nearly half of American adults say that if they lost their primary income earner, they would suffer financial hardship within six.

six months. And so if you want to secure your future before the new year begins, lock in your life insurance today because that's something that you don't buy for yourself. You buy it for your loved ones. You buy it so that in the event that the worst were to happen, your loved ones would have some financial security. Policy Genius helps you find your most affordable policy that meets your needs. They answer questions, handle paperwork. Their license team helps you find what you need in terms of coverage amounts, prices, terms. They have thousands of five-star reviews on Google and Trust Pilot. With PolicyGenius, real users have gotten 20-year, $2 million policies for just $53 a month. Don't wait until next year. Give your family the gift of security today with PolicyGenius.

Head to PolicyGenius.com to compare life insurance quotes from top companies and see how much you could save. That's PolicyGenius.com. Welcome back. Our next question comes from Mike. Hi, Paul and Joe. My name's Mike, long-time listener, big fan. I have a question for you guys about Roth IRAs. I feel like I'm missing something, and I can really use your perspective.

So a little about me, I make $85,000 a year. I got married a few years ago. My wife makes about $280,000. a year, so quite a bit more than me. I know you and many others praise the Roth, and I do too. I get the draw. But when we talk about investing, my wife and I are really unsure if the Roth makes sense for us. We're in a high tax bracket given our income. We're married filing jointly. We currently live below our means and expect to continue that trend into retirement, meaning we expect our tax rate to be lower in retirement than it is today. We're maxing out our 401Ks.

we have two small children and are contributing to their 529 plans with extra support from their grandparents. I don't want to over-contribute there, but I feel pretty comfortable with our contribution levels. Aside from that, we've got about $190,000 primarily sitting in high-yield savings accounts, though we've recently decided to quickly ramp up our contributions to our brokerage, mainly investing in Vanguard S&P 500 index fund. We're in our mid-30s and, you know, have some time, have some runway there. I like the idea of putting it somewhere that might be able to earn a better long-term return than a high-yield savings.

The brokerage seems to make sense, given that any withdrawals will only be hit with the 15% long-term capital gains tax. And I like that it's a bit more liquid than the Roth. But what am I missing here? Should we be contributing to a Roth, given our high income at the moment, and the fact that we expect our income and tax rate to be lower in retirement? I don't know. Appreciate your thoughts.

Mike, thank you for the question. I love the thoughtfulness behind the question. So I have a handful of questions back to you. Number one, for the rest of your careers, do you expect your combined income as a couple? Do you expect it to substantially either stay the same or increase? That's question number one. Question number two, is your goal to retire early-ish, maybe 55, 60? I'll even count 16. I'll even count 16. Is that your goal? And of course, this is unknowable because this is, you know, I'm asking about something that's 30 years out into the future. Or is your goal, hey, we really love our jobs. We think that we'll always have some kind of an income. We have this. For us, it's about building and it's about producing and it's not even about the paycheck. It's we just really like doing stuff and that stuff just tends to be income producing.

And so we might end up. up having Steve Martin's career where he's 80 years old and still starring in only murders in the building, right? We might, look at me with a pop culture reference. Who are you? He might end up, right? Exactly. But I think Steve Martin is a perfect example of somebody who is very wealthy. Very much. Does not need the money. He's 80. And he's making great money starring in a show because that's just what he loves to do. So are you Steve Martin or Betty White?

or Warren Buffett, all examples of people who worked into their 80s and 90s and loved it, they didn't need the money. They just really enjoyed what they did. And it gave them purpose and gave them a social community. And it just kind of gave them some fun, cool projects to engage with. Is that the trajectory that you see for yourself? Or do you see something different? So how do those change your equation then, Paula? I mean, why do you ask those questions? I think everybody's wondering. The thing about a Roth that is completely unknowable is what the tax rate in the future is going to be because that is determined by the government and we have no way of knowing who the government is going to be or what they're going to decide in the year 2035, 2040,

2045. I think you could have just stopped with. We have no way of knowing what the government will decide. End quote. 2046, 2047, 2048. Yeah, you don't need all those. words. If I were Paulus editor, I would have edited the rest of that. That's the unknowable piece of a Roth. And that's honestly, part of the reason that I biased towards Roth is because I like the certainty of locking in today's tax rate as opposed to the uncertainty of accepting whatever unknowable tax rate lives in the future. You could even think of it as a certainty premium. There is a certain certainty premium that I'm willing to pay in order to know that I'm locking in today's rates.

But to answer your question, Joe, as to why I'm asking them about their career plans for the future, while the tax rate is uncertain, your own personal career plans, and therefore your own personal income trajectory, is more within your own circle of control. Yeah, monitoring and focusing on what you control, yeah. Yeah. I think, again, to widen this lens, there's a reason, Paula, that you and I say that we are biased toward the Roth, not that it's Roth all the time, right? Do as much as you can or it fits a lot of the time. And I think if we widen it even more, I think this is why people get so annoyed

with some of the major names in personal finance is because they're speaking to millions of people and they don't want to do damage. So what they do is they do the thing that is the law of large numbers. So Dave Ramsey, there's a lightning rod, right? Dave Ramsey gets a lot of vitriol because he's talking to millions of people and he's decided that, you know what? For the most people, Paula, debt is always bad. And so what do we get online? All these people go, well, that isn't always bad. There's a gray area to everything. But when somebody's talking to the vast majority of people, debt is bad. I think we can all agree is a good place to start. Susie Orman had another lightning rod. having value for a dollar right folding your money in your wallet and having this value for a

dollar is is great stuff but when susy says some of the crazy stuff that i've heard come out of her mouth again she's talking to millions of people and she's making a broader point that we might be the exception to i think that's the reason why i like that you and i talk about we bias toward the roth because in my mind mike you're not missing anything except for i think what the future might be, and if the future continues the way you're talking about because you and your spouse are Steve Martin, then yeah, maybe the Roth isn't for you. I don't think there's a reason to have FOMO here. I think people do this sometimes with the HSA. There's plenty of people that make it through retirement without having an HSA. I think you can do retirement without having the Roth. Well, no, I would say if they are Steve Martin and they're going to be doing really interesting, cool, projects into their 70s and 80s and those projects. And earning a bunch of money. Right. Exactly. Then Roth it up, Roth throughout the years, because their income is only going to keep going up. Right. Yeah. I was backwards on that one. So if they are Steve Martin,

then Roth it up big time. But if they planned a piece out of the game at 55. Well, and I think Paula, based on his question, he's thinking the latter, right? He's thinking I'm in a high tax bracket now, probably be in the low tax bracket later. What I would say, is what we don't want to kill, Mike, is we don't want to kill the ability to give ourselves flexibility later on. So you don't need to be whole 100%

everything Roth. No, take advantage of the fact that you're in a high tax bracket today and get that money in pre-tax to avoid this high-tax bracket today. Take the bird in the hand, as my mom says. But I might still Paul Roth some,

Roth a little, because even though that's going to cost you today, you're building flexibility to have options in your plan down the road as well. And we don't want to forfeit that. And this is where that tax triangle comes in. A hundred percent. The other piece about the Roth is that for most people, the amount of Roth that's available to you is not that much. So for a lot of people, many people don't have access to a Roth 401K, which means your ability to contribute to a Roth account is more or less limited to a backdoor Roth IRA, which caps you at a pretty low, I think it's what, 7,000 right now for 2025 if you're under 49.

So that caps you at 7 grand. That's not a lot of money relative to the total amount that you, I'm assuming, are contributing to retirement accounts and brokerage funds. That's a fairly small amount of money. And even if you do have access to a Roth 401K, the employee portion of that contribution will be Roth. but the employer portion necessarily is required to be pre-tax. And so the other component of the Roth discussion is given the fact that Roth opportunities are so limited and the system that we live in tends to bias more towards pre-tax opportunities rather than Roth opportunities,

you may as well take the Roth opportunities that you have because those opportunities are so curtailed. and do you do want to build out that, Joe, to your point, the tax triangle. Yeah, have some flexibility. But if you're the exception and you do have the ability to do a Roth 401k, then, you know, maybe it's a small portion of it. Maybe it's a, I don't think you need a ton of money in your Roth position to give yourself flexibility because the game you're going to try to play later doesn't necessarily require

a ton of money. You just need money above the top tax bracket you're going to be in to, try to spend as much of your pre-tax money at lower tax brackets later on and then live additional life at a zero tax rate with money from the Roth. And I'll go back to to the unknowable, 252, 2053, you know, to the unknowable, we don't know what tax rates in the future are going to be. And that's a big part of the judgment call that we're making here is how optimistic or pessimistic are you about future tax rates slash how important is it to you to lock in the

certainty of today's rates? But I truly don't think he's missing a lot, Paula. I don't think he's missing much. I don't think taking advantage of all the pretext is a bad thing. You know, Mike, my other question for you, when we talk about this tax triangle, I'm curious if you look at proportionately at the assets in your portfolio, what? What percentage of them are in a pre-tax position versus in a taxable brokerage account versus in a Roth account?

As percentages, how is that triangle formed? Because I think if you take a look at the tax treatment allocation of your portfolio as a whole across those three categories, you'll be able to see if that triangle is too lopsided, too imbalanced. And again, given the opportunity limitations of the Roth, it's common for many people to have tax triangles that are just tilted too far towards the pre-tax position. Yeah, that is the big danger, is that there's nothing on the top in that tax-free bucket. Or not nothing, but like very little.

Very, well, nothing or very little, right. So, Mike, I hope that gives you some food for thought, gives you some questions to add. ask yourself. And I hope helps solve some of the question of, are you missing out? No, no, not. I don't think you're necessarily missing out. As long as you've got a tax triangle bill and you've got a decent balance of assets across all three points of that triangle, that's the critical part. And then if you want to lean into one of those points of the triangle a little bit more than the others, then the questions that I asked about how you see your own life playing out and what your guess is about what the government's going to do and future tax rates, those are going to

influence how you lean in terms of that triangle. So thank you, Mike, for the question. We're going to take one last pause to hear from the sponsors who make the show possible. And when we return, we're going to hear from someone who is not Steve Martin. Someone. No? No, not Steve Martin. We're going to hear from not Steve Martin because we're talking to Cindy who wants to be work optional by the age of 55. Way better than Steve Martin. Oh, that's not better or worse. We're not judging here. Steve Martin's got a great career, but being work optional at 55 also great. 55. I'm just saying if Steve Martin's a fan of the show, then he's okay too. But if he's not, then Cindy's way cooler. Oh, okay. Yay. So you're not saying 55 versus 80 is better. judging the goals. I'm 100% judging the people. Got it. You're saying Cindy is better than Steve

Martin. Because she's cool enough to call in. Steve, when you call in, you can be cool too. All right. Well, when we return, we're going to hear from Cindy. Welcome back. Our final question today comes from Cindy. Hi, Paul and Joe. This is Cindy. First, I want to thank you for answering a question I've asked earlier this year about dividend investing versus growth. I appreciate the guidance you provided. My question today is focused on building out my tax triangle and whether it's worth it to use backdoor Roth conversions. My goal is to become work optional in 10 years when I turn 55. Currently, 71% of my $1 million net worth is in tax deferred accounts. 21% is in taxable

accounts and the remaining 8% is in a Roth account. My new workplace allows me to transfer my rollover IRA held in a brokerage firm into the company's 401k, which would enable me to start doing backdoor Roth conversions, which I had not done previously because of the pro rata issue of having a rollover IRA. Is it worth it to transfer my rollover IRA to my 401k and give up the current investment flexibility and options I have with my brokerage firm in order to be able to do backdoor Roth conversions, knowing that I can only convert a maximum of $7,000 each year for the next 10 years, which would result in a minimum of $70,000 in my Roth accounts. But compared to my tax deferred counts, will continue to be a much smaller portion of my

overall network. Thank you for taking the time to answer my question. I really appreciate it. Cindy, personally, and I'm curious to see if Joe agrees with me or not, I love the plan. I also have taken the same strategy in my own life in which I have minimized my pre-tax IRA assets. In fact, that is specifically the reason that prior to when I hired employees that afford anything, specifically I had a Roth solo 401K, and I did that so I could concentrate my assets into a 401k position, which would then give me the ability to backdoor Roth the maximum amount without facing the pro rata rule. Prior to when I hired full-time employees, I prioritized 401K over IRA for exactly that reason. And then once I hired full-time employees, that changed and I was no

longer eligible for the solo 401K. And that kind of goes back to what we were talking about with the last caller, the opportunities for putting money in Roth accounts are so low. limited. Like, once I hired employees, I no longer had the opportunity to put money in a Roth solo 401k. And so now I've got to go into a SEP IRA if I want to contribute to a retirement fund and that necessarily has to be in a pre-tax position. So anyway, opportunities to put money into a Roth account are very limited. And now you have the opportunity to do so and to build out that tax triangle and to have more of your assets in a Roth position. So I personally love that approach. For me, I don't know what the end goal is. I mean, I just start with the end and work

backwards. So, you know, I hear 8 percent and I hear the fear that that's not enough money in a Roth position. And I think, is it not enough? I don't know how crazy you need to get about this. I don't have any idea. I wouldn't feel a ton of fomo about not having enough. I like it. I'm not overjoyed like Paula is. It's, yeah. Overjoyed. Well, it sounds to me as though the big drawback, the Achilles heel of the plan, is that the investment opportunities, if she were to switch into a 401k position, are not as good.

Which can be a big Achilles heel. Yeah. And I don't know the specifics of how sucky is the delta, right? That's the question that I've got. Like, what is the delta between the opportunities and how much of a suck factor is there? Yes, suckiness, I think is the word that the pros use. Yeah. When they come up with this stuff, all the CFAs use it.

Yeah, exactly. Huge. I think also there, Paul, people get confused because it isn't how good the choices are as much as it's how good are the choices that you need. So I've seen some 401ks that seemingly have sucky choices. to speak because there's only six but the six that you have available are phenomenal give you a case and point the federal government's 401k plan not many choices phenomenal choices the c fund the s fund the i fund fantastic great at what they do amazing at what they do but if you just look at it based on a number of choices no there's not a lot there but i love what the federal government's done

simplicity is a great answer you have the asset classes you know you know need you don't need more very low expense ratios andy love it and performance at the same time i think because we don't know the specifics if it's bad because there's not many choices that's bad now if it's bad because of the fact that it's an annuity based plan like a lot of small employers have and they have to because they just don't have the wherewithal to administer a 401k where they cover the cost they have to have you cover the cost well then I mean, maybe the 401K has sucky choices because the fees then get really, really, really big. Right.

And by the way, when I say annuity-based plan, I might have thrown a bunch of people off because that totally is jargon-pola. Because you won't see it as an annuity-based plan. You will see, though, a lot of funds that are offered by an insurance company inside of your plan, and you'll see very high fees. You won't hear the words or see the words annuity-based plan anywhere. That's what industry insiders know that it is. It's when an insurance company is managing your plan, and they're passing on the fees to the employee so that the employer can offer you 401K without having a lot of overhead. And so that comes back to the Achilles heel is the suckiness delta. And I want specifics on just what she.

Yeah, yeah, exactly. What is that delta? What would she be giving up? but assuming that that delta is not too wide, then personally, I love the notion of converting more money into a Roth position. I mentioned Paula that I can see the making of a spreadsheet here. Like I don't have it down in my head yet, but I can see this like crossover point. So part of that I think also depends on her age.

How long can you leave that money in the Roth position to have it grow as a Roth so that it make sense for that to happen. I think if you're going to spend the money fairly quickly, then I think doing that doesn't make a lot of sense. If you're not going to spend that money for 30 years, then building that vault of Roth money makes more sense. Cindy, I hope that was helpful. Joe and I have slightly, I mean, complimentary takes, but slightly different takes, which is always my favorite. Mine was slightly better. Is that what you're saying? I do think I'm a hair more of a Roth fan girl than you are. I think so too.

And for me, the reasoning comes down to the certainty premium. A big part of that reasoning is the certainty premium. I like that. I mean, I do like the idea of building more certainty into my future. That, you know what? I've already paid the tax. Don't got to worry about it. Exactly.

When you look at the balance inside of your Roth account and you know this is the money I have to spend, none of this is going to be taxed. I'm not sharing it. Right, exactly. There is so much peace of mind that comes from having the certainty around that number. I think I like that because on a daily basis, that's the way that I like to live my life is if there's something that is a difficult thing, if I can take care of it today, so I don't have to worry about it tomorrow, I'm going to take care of it today. And to some degree, paying the tax today and getting rid of it.

So I don't have to ever worry about it again. It just feels better. Yeah, it's a bit of a gift to your future self. Yeah, there's this emotional response. And I get that it's not all emotion. There's some math there as well. But I do just generally like the idea of gifting myself less thought. I can go enjoy whatever I'm doing in the future.

Right. But that said, Cindy, I truly don't know how much you're going to need there. And that could also bias whether the pro. matter rule is worth fighting that and what all the experts call the suckiness factor I think are the two big things right you should be worried about the pro rata rule and the suckiness factor uh well joe we've done it again it's amazing cheers cheers cheers coffee cheers look at the size of this coffee mug wow that is a big mug yeah proportionate to our heads i know uh yeah I'm drinking like double the coffee.

She's got a mug the size of half her head. Yeah. Mine's like closer to a third. Well, Joe, when we're not measuring our head sizes relative to our dishware, what else do you tend to do with your spare time? Where can people find you? Paula, we got some really fun stuff coming up. Of course, we have our annual board game episode on Black Friday that we do every year.

It's amazing. Don't waste money on bad board games when you play. It's one time people play board games with all their friends and family. every year is around the holidays, right? If you're going to play them, it's probably going to be now. We've got Kylie Primus from Games Unlimited, a store that won all kinds of awards for retailer of the year in that cottage industry. And then the following week, we've got Hannah Cole, who is an artist initially,

became a tax expert and has taxes for humans. So not like complex taxes, but if just the whole thing freaks you out, Hannah has this great way of just explaining the basics so that you can start dealing with some of the things that money geeks take for granted, right, some of these tax rules. I remember when a CPA first sat me down with a 1040 and went over it, and I finally realized Paula, what the difference was between a credit and a deduction. Like, I kind of thought they were the same thing. I kind of, you know, one is a longer word, but a credit or deduction, who cares?

Right. They're a massive difference. Huge difference. And when you look at them in the order of which they occur, a deduction just makes your income smaller where a credit pays dollar for dollar the tax. Are you freaking kidding me? I want to credit whatever I can get it. So Hannah's going to do stuff like that. And then some guy, I don't think anybody knows who he is, but Morgan Housel is going to be on the show. Morgan is incredible. I've heard, but I don't know who is he. do we know he's a famous uh famous skier of course yeah morgan hassell we're going to talk about skiing through your spending the art of spending the art of spending while you're skiing awesome well all of that is on the stacking benjamin's podcast available everywhere where finer podcasts are found only the finest only the finest well thank you again to all of you for being afforders if you enjoyed today's episode please share this with the people in your life share it with your accountant who is helping you with building out that tax triangle.

Yeah. Share it with your friends of Valdosta, Georgia. Right. And share it with your legal advisor who's helping you figure out how much money is protected from lawsuits. 100%. Share it with that insurance agent that's going to help you figure out how to buy less insurance.

Share it with every teenage driver that you know, because that is the most important way that you spread the message of F-W-I-R-E. Also, subscribe to our newsletter, afforda-anything.com slash newsletter, where we send out stuff that you don't hear on the podcast. Finally, please open your favorite podcast playing app and then open your least favorite podcast playing app. And on both of those, hit the follow button so you don't miss any of our amazing upcoming shows and leave us up to a five-star review. Thank you again for being an afforder. I'm Paula Pant. I'm Joe Salsi, hi.

and we'll meet you in the next episode.