Afford Anything - Q&A: How Much Risk Should My Mom Take in Retirement?

Episode Date: March 11, 2025

#589: Kimmy is worried that her mom’s retirement portfolio is invested too conservatively. Is she right to advise her to take on more risk? Peyton has heard the financial advice about staying away from Whole Life Insurance as an investment, but what about as a savings account for children? Is there good a use case for this? Jeff and his wife are in a great financial position, but they fear that their retirement savings are too heavily apportioned in traditional IRAs. Will they run into tax problems in the future?  Former financial planner Joe Saul-Sehy and I tackle these 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/episode589 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, did you ever advise your mom on asset allocation? I actually just did. Some people may know my dad passed away this last spring just under a year ago. And so my mom, when she received some life insurance money and she was redeploying her assets for one person versus two, I got to walk mom through the efficient frontier again. Oh, she's learning from the best. Well, thank you. Stop, stop. Ah, keep going, keep going. Right.

Well, today we are going to talk to a caller who is helping her mom figure out how to invest as she approaches the most critical years of making sure you're getting it right. We're going to help her through that. We're also going to talk to a return caller. This is somebody who spoke to us in 2022 with a question about whole life insurance. And she's calling with an update and a follow-up question. And for the true money nerds out there, we are going to dive deep with the numbers for a caller who says that by the time this episode airs, his wife will likely have quit her job. Oh. You ready, Joe?

I'm Buckle Up. Welcome to the Afford Anything podcast, the show that understands you can afford anything but not everything. Every choice carries a tradeoff and that applies to your money, time, focus, and energy. This show covers five fillers. Financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double eye fire. I'm your host, Paula Pant, I trained in economic reporting at Columbia every other episode, ish. I answer questions from you, and I do so with my buddy, the former financial planner, Joe Saul C-high.

What's up, Joe? Well, it's kind of a sad day because I also found out that in the last week, Paula, the crater of the throat lozange died. Oh. Yeah, there was no coffin at his funeral, by the way. Oh. Come on. That deserts better than a Wot-Wat. In an effort to not lose our audience, we're just going to jump right into the first question.

Okay, fine. This one comes from Kimmy. Hi, Paula. My name is Kimmy. I'm a huge fan girl. Chow's fine, too. My question is mostly about my mom. We grew up dirt poor, but she turned her life.

life around and now has about $1 million in liquid assets save for retirement. She owns a home worth about $300,000 with $40,000 left on the mortgage. I recently did an analysis of her spending using Monarch and her retirement benefits. If she started drawing next year at age 62 between her pension, $29,000 a year, and her Social Security benefit, $27,000 a year, at her current rate of spending, she only needs to pull a paltry $8,000 out of her 403B every year, with a little extra in the first three years to cover health insurance before Medicare kicks in. This obviously leaves her with some R&D problems as she ages, and I'm planning to do some Roth conversions with her before she reaches 73. Her assets are currently invested, in my opinion, in an overly conservative way,

given how little she needs to rely on them. She currently has about 15% of her assets in high-yield savings, 50% in bonds, and 35% in equities. I spent a little time with a Monte Carlo simulator, and in every scenario, it looks better for her to move more or all of her assets into equities. Is there anything I'm missing as I push her towards more risk? I'm looking out, of course, for her comfortable and secure retirement, first and foremost.

I love my mom, and she deserves the absolute best in life, although she insists on living simply. Secondarily, I'm looking out for my own future since I'm 41 and have been severely disabled and unable to work since I contracted COVID two years ago. I live in a very high cost of living area and because I'm disabled, all of the third of a million dollars I save from my own retirement is currently accessible to me without the 10% penalty. Nearly all of my money is inequities and I am okay with the roller coaster.

I currently draw disability benefits of 2000 a month and have been spent. spending down my savings at a rate of $3,000 per month, which will slow to a nominal amount if and when I am approved for SSDI, hopefully in two years. Thanks again for all that you do and looking forward to your answer. Kimmy, thank you so much for that question. First, I love that you're calling with a question about how to take care of your mom. It shows the enormous generosity of spirit and care that you have for your family and for her. I agree. Her asset allocation sounds too conservative. You said she's 15% in high yield savings, 50% in bonds, and 35% in equities. Now, as I think through the framework of what she's going to spend, I'm thinking in buckets. So I'm thinking about the bucket of money that she will rely on in a two to three year window. And then I'm thinking of sort of a medium term bucket and then a much longer term bucket. The very long-term bucket, I agree, could go very heavily into equities. Now, what percentage precisely would be determined by running the efficient frontier,

running some simulations around the efficient frontier to take a look? But when it comes to withdrawal strategies, the primary thing to guard against a sequence of returns risk. And the way that you guard against that is not by being overly conservative with the entire retirement portfolio, but rather by keeping that particular two or three year reserve invested conservatively. And then outside of that, getting more aggressive with the remainder of the portfolio, financial advisors refer to this as a glide path, which is just a jargony technical way of saying you decrease risk for the early years of retirement and then you increase risk again.

because after you get out of those early years of retirement, you've survived sequence of returns risk. I 100% agree with you. And I think just the question of, are you overlooking anything? Her instincts are right in terms of what the best thing to do is. But when I look at Achilles heel on this plan, whenever you are working with someone who is older and who's been conservative their entire life, I would assume that this portfolio has always kind of been this way. Might not be the truth, but that's my assumption here, Paula. If that's the case, and then you decide on a glide path, which is scientifically more appropriate, you're still increasing standard deviation.

And so the thing that I worry about then is just mom's behavior, which means, is mom going to all the sudden see bumps in her portfolio that she didn't see before, and that's going to give her some consternation. Because it seems like, Kimmy, that you're pretty savvy about this if you're running Monte Carlo simulations on this. So if you can find what the standard deviation would be on this portfolio and then explain to mom that, hey, you know what, this could do 14% worse or 14% better. And that's a normal day at the office for this portfolio. Just tell mom what the volatility is going to be ahead of time. That's the main thing that I worry about. Joe, do you agree with my instinct that essentially I'm conceptualizing this retirement money

into three buckets, one being that very immediate term two to three year beginning of retirement bucket? Yeah. And then a medium term bucket and then a long term bucket. Sure, absolutely. But most of that long term bucket, it appears if mom's going to be frugal her entire life, I think also her instinct, which she didn't say outright 100%, but a lot of this is inheritance money. So for Kimmy, we can really look at her goals with this money as much as mom's goals. And by the way, this is where a lot of people get this wrong. During my career when I was a financial planner, I had people call me angry. They're like, this dumb financial advisor has the money aggressive and mom's 75 years old.

Mom has no business to 75 being an aggressive investments. And they're like, we want you to take a look. So then I would go take a look and I'd talk to mom. And guess what? The advisor was just a bad communicator because what they were really doing, Paula, was they were basing it on when the money was going to be spent. Mom wasn't going to spend any of that money. So if mom's not going to spend any of that money and the beneficiary is not going to spend it for 15 years,

that essentially then is long-term money regardless of what mom's age is. Because it's not about the age. it's about when the dollar is going to be plucked. That's the big thing. But yes, absolutely. The bucket approach and keeping that first bucket just in cash is also going to help with mom's behavior. Just go, mom, you know what?

This is going to bounce around a little more, but it comes out better in this in terms of when you're going to need that money. And with that short-term bucket, we've got all this money in cash. So when the market's bouncing around, you don't have to worry about it. Right. And to the example that you just gave, the person who's 75, I would argue that even if the 75-year-old is the person who plans on spending that money during their retirement, if you make the assumption that that 75-year-old is going to live to the age of 100,

which is not unrealistic these days, well, they've got 25 years ahead of them. Yeah. That's a heck of a long road. Yeah, good point. Longevity risk is a real thing for the CFP community. Which I'm sorry, I still, every time I hear that, all I can think is financial planning is the only industry in which living a long and healthy and happy life is considered a risk. What a pain in the in. What a great problem to have.

Oh, I live too long. My goal is to live to a triple digit age. But in financial planning, that's referred to as a risk, apparently. I don't have an age goal, though. Do you? assuming I'm healthy, assuming that I can live independently, wake up and put my pants on every day.

Yeah. Yeah, assuming I'm healthy, I would love to live into the triple digits. Well, I would too, but I don't have, that's not like my goal. It's much more, I want to say holistic, but that's not the right word.

It's more organic. I just want to be able to enjoy what I'm doing. As long as I'm enjoying what I'm doing, I want to keep going. So I don't have a number. Well, you know, Joe, as they say, what gets measured gets managed. Well, I am measuring my fun.

I'm measuring. I'm measuring my fun. The funo, the standard deviation on this funometer. The fun meter. Kimmy, I want to address the portion of your question where you ask about yourself as well. You're 41 years old. I'm so sorry to hear about the long COVID and the disability that has come out of that. I have a good friend who also is suffering from a multi-year disability as a result of contracting COVID.

And it is, I know from talking to her, a tremendously difficult thing to deal with. So I'm so sorry to hear that you are facing that. And I also applaud you for having saved a third of a million dollars so that you are rooted in a position of strength, the position of power that can help fuel you through this current challenge. Absolutely. So huge kudos to you, huge congratulations to you for building that source of power for yourself. There are a couple of things about the financial circumstance that you outlined that I want to note. First, you mentioned that you're running right now a $3,000 monthly deficit between your current cost of living and the payments that you're receiving. and you expect that this will continue for another two years, at which point you hope SSDI will kick in.

That means that over the span of the next two years, you would end up spending $72,000 out of your savings. And it sounds as though with third of a million dollars, your savings are, we'll say, ballpark somewhere in the neighborhood of 330, 340, somewhere in there. So to spend $72,000 out of that is a significant. chunk in the context of my concern that that money might not be replenished. Where my mind is going is, what is the bucket that you need that can get you the portfolio that you can rely on when you are in your 60s, your 70s, your 80s? Because right now you're 41. You've got a lot of compounding on your side. I want to make sure as much money as possible retains the opportunity to compound. Yes. A lot of the big wins that both she and her mom have had, I think, is because of

frugality, Paula. And this is a place, I think, where just a little more frugality can go a long way in securing a future, making sure that everything's going to be great for a long period of time. But I don't know how much more she can do. I mean, she lives in a high cost of living area. and total living expenses of $5,000 a month in the context of a high cost of living city is cut to the bone. Yeah, that's already a small pool of money to live on. This is where a great tracking tool, right? She said she uses Monarch, phenomenal tracking tool. I always advocate, as you know, Paula, this weekly just 20-minute meeting to look at it.

It sounds like she does that. Just staying up with the heartbeat using technology to her advantage to continue to stay up on the heartbeat of what money's going out the door and how quickly is it's going to work in her favor. Right. What worries me is what happens if SSDI doesn't kick in two years. Which is you look at the way that program operates. It is very, very difficult to get. It can take even longer than that for the most qualified people. Yeah, that's my major concern. I don't mind running a deficit. I understand that oftentimes in a person's life, they may have to run a deficit. And speaking in broad generalities, in a person's life, there will be moments where they may have to run a deficit.

They may have to tap into savings. And I don't mind that in the context of a lifespan in which there's cyclicality. Sometimes there's a surplus. Sometimes there's a deficit. And those times of deficit are offset by future surpluses. That's just the rhythm of life. What concerns me is running a deficit with a very real possibility that there might not be a future surplus to pay that back. And I don't know how to address that because I don't know how else she can cut back, given that she's already living on $60,000 in a high-cost city. I think the most significant financial move would be to go someplace. that has a lower cost of living. But if she has relationships with doctors in her current city, if there's certain medical treatment that she's getting in her current city, then she might have a very good reason for prioritizing living in the place where she does. Well, and this is what's been

on my mind a lot lately because we talk about geo-arbitrage. And I know it works for some people very well, Paula. But the issue, as I study more and more successful retirement planning in particular, moving to areas where you don't know people, you don't have a social network, that can decrease your longevity. We talk about the fun meter. Right. Men over 70 have the highest rate of suicide of any age group. I think part of it has to do with the way that we model these behaviors. I deserve to move to a different area where the weather is nicer or suits me, but we underplay the fact

that we don't know anybody in that spot. We don't have any friends in that spot. And I've actually seen it as I, in my 50s, I'm seeing friends approaching normal retirement age. And they are already making some of these things that I think are kind of a mistake for a lot of people, not for everybody, but for a lot of people. I have a friend named Todd who spends lots of time at this lakehouse that they purchased that's a couple hours away. I'm very lucky that I've developed this great friends network. We have game nights and we'll have between nine and 15 people come to game nights. As a guy in my late 50s, I feel very lucky to have this support network. But we all, we never see Todd anymore. We don't see Todd. And we forget to invite Todd to stuff because of the

fact that we don't see Todd anymore. And yet when you talk to Todd, the reason he's got this vacation house is because, quote, I deserve it. And I work my whole life for it. And it's isolating and it's difficult when you isolate like that for a lot of people. So the flip-it answer is, well, geo-arbitrage, but to your point also, we don't know what's going on, why she lives in this spot. While I like the idea of geo-arbitrage, I also want to make sure that you develop the support network wherever you go, at least look into it wherever you go before you go. I agree. Staying in a place where you have family, where you have friends, and where you have really good medical care. That's the other element of it is sometimes there's just better medical care

in certain areas than there is in others. And if there are relationships that you've developed with particular providers or any particular specialists, it's worth staying in a place in order to maintain those relationships. I certainly know people who live in the location that they live in purely for the sake or largely for the sake of continuing to see the providers that they see. Yeah. The value capture of a location is important. I think the reason it's such a challenging question is because, as we always say, the key to financial planning is to grow the gap between what you earn and what you spend.

And there are only two ways to grow that gap. You can earn more or you can spend less. And so when there are a gap, limitations in both directions, that's where there's a real challenge that occurs. But hopefully, Kimmy, during this, you've thought of a few things. I know that whenever I contemplate these, my subconscious mind begins working and hopefully there's a spark. Right. Kimmy, I think if there's one thing I would say, it's remember how young you are. 41 is this interesting age where you're old enough to assume that you're old,

but you're too young to realize how young you are. 41 is really, really flipping young. And I'd say that's the biggest point that I want to emphasize. There is far more ahead of you than what's behind you. But Kimmy, tell us how that lands with you. and please call us back if you have any follow-up questions, anything else, because we're rooting for you. We're in your corner. We are big Kimmy fans.

Yes, we are. So thank you for the question. Well, speaking of return calls, our next caller is a return call. This is somebody who called us back in 2022. Wow. With a question about Whole Life Insurance. And she is calling with an update and a follow-up call. question. We're going to hear from her next. Fifth Third Bank's commercial payments are fast and

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I, you guys gave me a really beautiful name to memorialize a journalist, and I, for the life and me, can't find what it was. I feel really bad. It might have been nor. I don't remember. I was the caller whose parents took out a life insurance policy for me on me when I was, like, seven and paid the premiums on it until I got my first big girl job and then wrote it over to me.

I had called in asking what in the world I should do with life insurance policy. I don't have any dependents. And you guys gave me the great advice to donate it, which I didn't even know was an option. So I ended up making the beneficiary a organization that both my parents and I really like in support because it's partially my money and partially theirs that we need to fund it. So I wanted to honor them. But it came up in conversation with a friend and her husband who are going to have kids. I'm not. That my parents have done this as like a savings account essentially.

And they said, oh, that's a good idea to do for your kids. And I said, I actually don't know if it is a good idea. So I guess that's my question for you guys. I mean, for me, that ship is sailed. He bought that 20 years ago, I don't know. And it is what it is. But is that for parents, something to look into to, like, gift money to your children. I guess maybe assume that educational expenses are being saved for, that this would necessarily be an inheritance. I know that my parents, I think it's called a 529 plan, the one where you save for educational expenses. I know that my college was paid for from saving in a 529, and I know that I will receive an inheritance. So this is all separate from that. Is this a good way to pass on money? I know there's a lot of debate over whether or not a whole life insurance can be used as an investment vehicle. And if yes, in what circumstances, that's reasonable. So I'm interested to know y'all's opinion. If maybe on the scale of different ways to give money to one's children, where does this fall?

Thank you guys for your great advice and interested to hear your perspective. Daughter, thank you for the question. First of all, I was really curious about what name we gave you. So I looked it up and please correct me if I'm wrong, but I believe you were the caller on episode 378, which aired on May 5th, 2022. And if that was you, then we... Can't find it. Well, if that was you, then the name that we gave you was daughter of generous parents.

When I re-listen to that question, so it's episode 378, air date May 5th, 2022, starting right around the 51 minute mark. And I listened to the entire question and answer. I assume that that was you. And I didn't hear any mention of a journalist there. And the name was daughter of generous parents. But I do recall at some point that fall of 2022 and early 2023, that was the time in which I was giving a lot of people journalists-based names. So did we say it on a different episode?

Or did we answer two different life insurance questions? So that's the part that we've been trying to sleuth. We actually spent a decent chunk of the morning trying to figure it out. Okay, if you were the caller on episode 378, air date May 5th, 2022, then that means that your premium was $47 a month. And your parents bought that policy for you and your two siblings. And so you wanted to know what to do with it, given that you weren't planning on having any beneficiaries. And sure enough, we told you, name a charity as the beneficiary because you've got, you know, for the cost of less than 50 bucks a month, you have a guaranteed payout to your favorite charity of choice. This is not something that most people think about.

So I was glad that we were able to give her that advice. I remember when I first heard that a long time ago, early in my financial planning career, I saw an experienced advisor recommend that with a client. They're like, I really want to give money to the local humane society, but I don't know how to do it. And it was a single woman. And the advisor said,

do you have a life insurance policy through work? Yes. And does anybody need your money? No. Well, then, why don't you name the Humane Society? And then when you retire, you can take over that policy if you'd like. Wow, I can do that. Yeah, great. Beautiful. So if you were the caller in the 378, then that was the name that we gave you. To answer the question that you asked, no, a whole life insurance policy is not a good savings vehicle for parents who want to pass some savings down to their children. There are much, much better ways to do that. Now, the exception would be if you are so incredibly high net worth that you are worried about tax consequences because the benefit that you as a parent would give to your child is going to have severe estate tax ramifications and is far outside of any type of gift tax. I mean, if we're talking advanced tax planning strategies, that would be the exception. but for the average parent who wants to give money to the average child in any either middle class or even upper middle class home, no, it's not a good method.

Because a parent could open an account, even a taxable brokerage account, contribute money there, and let that money compound over time, and that will produce far more than money that has been subject. to this drastic haircut that insurance companies have taken. Yeah, most of that haircut is just the cost of the insurance, which is unnecessary. Right. If you believe, if you're buying insurance to replace assets or replace income when somebody passes away, how much money is your three-year-old making? In 99.999% of cases, they're not making any money. They're not contributing at all to the bottom line.

And if they're not... Freeloaders. I don't really a loser. What do you do it? Get out there. Yes. Parents across the world now all of a sudden going, wait a minute, my kid should be making money at three. Yeah, the Olson twins did. Yeah, they could do it. Your kid can do it. Come on. But I see people do this all the time. And it's been very popular for a long time. I think because it's forced savings. But if you're somebody that listens to a show like this, you can set up your own automatic savings into either a 529 plan or, or just a kid's brokerage account called an Utma or an UGMA account, depending on the state that you live in. You can set up those just as easy as you kind of life insurance policy and you'll avoid all of this, A, unnecessary insurance you don't need, which that means B, all the fees that are associated with that life insurance that you also don't need.

Yeah. Daughter, to explain why we told you to preserve the policy that you have, even though we're also saying that this is not a good new thing to get into is that is the decision. distinction between a policy that already exists and has existed for 20 plus years versus a brand new policy. In your case, your parents bought a policy on you 20 plus years ago, right? So, they've already been paying into that for decades, literally decades, which means that the haircut, the fees, the expense, the payment for that insurance, they've already paid it. So now, 20 something odd years later, now you're in the golden phase. They've already paid that upfront fee. They've already gone through the mess of it.

So now you get to have this guaranteed payout that's going to go to your favorite charity. And so why would you throw that away once you've already gone through those two decades of paying the fees, right? That's the distinction. You wouldn't want to sign up for those fees as a brand new thing. there are better ways to do it. But if you've already paid them, then why would you throw that away? So that's why for you who already has a 20 plus year old whole life policy, it makes sense to keep it. Whereas for somebody else who doesn't have a whole life policy, it doesn't make sense to sign up for one.

Keep the existing policy, the old existing policy, but don't get a new one. At this point, it's best use of the money at this moment. right. Right. If you've charitable intentions, then certainly using the cash value that's already here inside of this policy, to be able to maybe even at some point stop putting money into the policy and it's guaranteed to last your whole life is a great way to lock down this charity no matter at what point you pass away, lock down this gift. The problem the advisor had in the earlier story when they were using a term policy, Paula, is that there is a chance that the person will live so long, that term policy ends up becoming really, really, really expensive. And you can't afford it anymore. And so if you die after X age, when you can't afford the policy anymore, well, then there's no charitable gift anymore to the place.

With the whole life policy, though, that's not going to be the case. As long as you either continue to make contributions or make contributions into the point that it's, quote, paid up, meaning you've prepaid enough money at a young age, that it pays the cost of insurance during those older years, which is the main reason why cash value actually exist in a whole life policy, then it's locked down. So I really like a whole life policy in this case for a charitable intention that you want to lock down. Yeah. But the other thing about a whole life policy, you can buy these policies that have what look like mutual funds

inside them. Technically, they're not mutual funds. It's called a separate account. But you can buy a very policy like a variable universal life policy. Again, I don't like mixing my food groups to touch. I want my risk management stuff in one corner and I want my assets in another corner. To your point, unless I'm Uber wealthy, once I get there, then there are some wonderful tax strategies that take forever to explain where life insurance can be your best friend, stock and money away. but to a young, new parent who's a friend of yours, it's not the type of advice I would give them. Right. However, if you say to your friend, I don't recommend it, and they say, well, I'll talk to my private banker about that.

And you can put the permanent insurance back on the table. Because if they're going to talk to their private banker about it, well, then maybe. Meaning the implication being their ultra high net worth. Yes. I'm going to talk to my family wealth management officer about that. Yeah, then you're super high net worth and then it might work out great. Great question though, Paula, because we see people make mistakes with this all the time. There's tons of people buying these life insurance policies today.

There are far, far, far better ways to grow your child's net worth. Yeah, exactly. So whole life insurance is not a good savings vehicle for a child as a new account to sign up for. But if you have an existing account. You want to do something fun, though? Yeah, go ahead. Let's do something fun. How old do we want to make the kid?

Three? Sure. Three years old. Let's say that we use VTI or VTSAX, right? We just use the total stock market index and we open up an account in the child's name. And you're not going to touch it until they're 65. So we can use this rule called the Rule of 72. People that don't know what the Rule of 72 is, it's if you take the interest rate,

you think you're going to get divided into 72 that tells you how many years it takes your money to double. So, Paula, let's say long period of time like that, we can use 8%, don't you think? Yeah, absolutely. Eight into 72 every nine years. That means if you put $2,000 into an account for your three-year-old right now, this is going to be awesome, right? It means it doubles every nine years. So it's going to double when they're 12, double when they're 21, double when they're 30, double when they're 39, double when they're 48, double when they're 57. and let's go ahead and say 66, right? Social Security full benefit at 67, currently. Those rules

will change by them, but you're going to double seven times by 66. So you're not putting away $2,000. So seven doubles, which means it's going to be $4,000 the first double, $8,000, $16,000, $32,000, $62,000, $12,000, $12,000, $25,000, $25,000, $25,000,000, $3,000, $12,000,000,000, $256,000. $26,000 of retirement money at 66 years old. If you put $2,000 into an account for a three-year-old, it's so awesome. It's so incredible. Wow. This is a concept that I was talking to Scott Yamamura about on a recent episode. It was an episode we aimed at beginners, and it was the multiplicative power that's associated

with that. time at which you invest. So depending on your timeline, every dollar that you put in could have a multiplicative power of two, four, eight, sixteen, it could have these incredible multiplicative powers based on exactly what you were talking about, Joe, based on the number of times it doubles. $8,000 at age three then is over a million dollars at a fairly conservative interest rate for that amount of money. I mean, don't get me wrong, everybody doesn't have $8,000 to put in their three-year-old's account. But if you think about 8,000 is a million equals a million.

Boom. There's a guy, Bill Ackman, who is a big hedge fund manager. Bill Ackman has publicly said, what would solve Social Security's problem, Paula, is if we gave everybody when they're born just a few thousand dollars and put it in this account that becomes your Social Security account, so to speak. and it would make the cost of Social Security so much less. He's already done the math. I haven't done the math.

This guy has done so much work in this area that I just find it. I find it fascinating and believable that we could solve the issue if when you're born in the U.S. You're given X amount of money. Maybe it doesn't solve all our problems, but how cool would that be? So, daughter, for your friends who are having a new baby, talk to them about this. about simply opening up a taxable brokerage account for that child or an UGMA or an Uttmar or any other type of account, but talk to them about opening up an account for that child rather than purchasing an insurance product.

That would be so happy they did. Yeah. Well, thank you for calling in with that update. And if you figure out what journalist you are referencing, please call back and let us know because I would love to know as well. nor sounds like a beautiful name. All right, up next, we're going to dive into a question

for the money nerds out there. Jeff lays out all of his finances, total disclosure, in order to figure out what his next step should be given that by the time this episode airs, his wife most likely will have quit her job. We'll hear from him next.

Our final question today comes from Jeff. We're a family of five living in Colorado with children ages 3 to 10. I'm 46, my wife is 39. Our family spends about 12K a month. I make just over 200, and my wife makes around 90K. In 2023, our taxable income was 218K. I have 2.3 million in my 403B, 401A retirement account, which is all pre-tax, another 66K in the Roth IRA.

I get a 10% match on my employee sponsored retirement. plan. Also, because they don't have a traditional IRA, I'm able to do a backdoor Roth conversion each year. My wife's company automatically contributes 12% of her income to retirement, and she's been maxing out the rest also in a pre-tax 403B. She currently has 60K in a Roth, a 78K in a traditional IRA that was recently converting from a SEP when we moved all of our funds into Fidelity. We wanted to do a backdoor conversion with some of her IRA money, but got consistent. confused by both the pro rata rule and whether we take a huge tax hit or even run into knit if we converted it at all.

We recently moved our money to Fidelity out of a traditional brokerage account, and we've been working to shed some of our legacy individual stock investments. Last year, I was able to pull out about 75K with a small capital gains hit due to capital losses, but now we've got 380K with 270K of capital gains in traditional stocks, including the money we pulled from the brokerage account. We now have about 115-ish in cash. That's in Fidelity Cash Management, sitting in SPACs. Other items of note, we have 300K and 529s for our children,

about 50K in crypto and almost 80 in an HSA. Last year, we decided to stop contributing to the 529s and switch to just putting about 350 a week into a bogglehead-style taxable investment account with the mix of VTI, VX, US, and bonds. I've got a 10-year mortgage of about $2,500 a month. It'll be paid off in October 2030, and the house is worth about $7.15. Obviously, we're in really good shape for our long term,

but we are concerned that too much of our money is invested into pre-tax accounts. We might get hit pretty hard with taxes come retirement. Our long-term goals would be to cover undergrad at a state school for all three kids. My wife doesn't like her job. She's planning to quit. We believe we can afford that, but we're looking for advice. What should we do to optimize before she quits? What do we do to optimize after?

I know I can put a portion or maybe all after secure 2.0 into a raw versus traditional for my work account. Just looking for some hope. And there's a good chance by the time this air is that she will have already quit. And lastly, is real estate the answer. Jeff, thank you for the detailed list of assets and for the question. I got to say, Paula, he's spot on. He knows that things are going to go pretty well.

Jeff, you already know this is a great problem to have because it's a question of, are you going to be okay or are you going to be really, really, really okay? And that's a nice spot to be. So congratulations on a nice job of planning, minimizing your debt. And I don't know, Paula, part of me thinks there was a smile there when he said is real estate the answer. I think real estate can solve a lot of your problems, Jeff. just take everything, put it in real estate, and you're done. Is that where we go?

No, absolutely not. That's not where we go. All right. Here's where we do go. Jeff, of so much money in your tax triangle, being in a pre-tax position can be problematic and means that you will pay higher income taxes throughout your retirement. So I like your feeling about lowering that. My feeling initially was based on your...

two-income household that your tax situation was such that I was going to wait for an opportunity. Well, guess what? Your wife deciding to quit her job gives you this opportunity possibly this year. So using whatever tax software you use and figuring out doing some tax projections of what tax bracket you're going to be in, assuming that you're not along a line this year where it makes sense to wait until next year when you be at a lower bracket, I would fill up as much of the next bracket as, or the bracket that you're in as possible that you feel comfortable with turning over some of that pre-tax money into Roth money by doing these Megabectore Roth conversions. So the math always begins with, and I think you know the math, so I'll tell

everyone else here in our community about the math. So the way that the math, Works is that you're going to pay tax today on every dollar that you convert from pre-tax, which has never been taxed before, into a Roth. The rule is there's not going to be a penalty, but you are going to pay a one-time tax. So it's going to be tax today, and then it becomes Roth inside of your tax shelter. That's why we begin with the tax bracket that you're in, because let's say Paula that he's got $30,000 until he hits the next bracket line, he can then remove $30,000 worth and flip that money over to a Roth. And when he does that, he's going to pay an additional tax on the $30,000 bucks.

The cool thing is he's got this really nice cash reserve sitting there. That's the way I look at this $100,000 plus dollar sitting. in cash right now is this is money, unless you've got it earmark for something else, this is a decent chunk of this money, maybe $40,000, $50,000, is to help you pay the tax as you lower the amount of money that's in your pre-tax position. Now, that said, I see people that try to get it all into Iraq. A, you're never going to get there, right? But number two is, I don't think there's really any reason to do that.

I mean, the lowest tax bracket, you will always be able to fill that up with your pre-tax money. So it's going to be okay to leave some money in a pre-tax position. But to the amount that you can endure the tax pain and you have enough money in cash to be able to move the money over to the Roth position, which it looks like you have several years worth of conversational. versions that you can do based on the amount of cash you have, assuming that this is just emergency fund money and it's not allocated for some other goal. That's the strategy that I would take. But I would only say take it now because your wife has quit her job. If she hasn't quit her job, then I may wait till next year. If she quits her job next year, then I begin doing it next

year. Yeah, exactly. Now, as to the question, is real estate the answer? My question back to you would be, why would it be? Real estate is a great opportunity for people who want to invest in real estate. But the number one qualifying criterion is that you must want it. And there wasn't anything within your question that indicated a curiosity, a desire. And I understand there are limits to what you can leave in a three-minute voicemail. So maybe it is the case that that's always sort of been a lingering curiosity. Maybe it does peak your interest or it piques your wife's interest and there just wasn't enough time in the voicemail to say it. If that's the case, then follow your curiosity. Absolutely. But remember that real estate is a hybrid between owning an investment and running a

business. It's actually in the fire acronym, it's perfect that the letter R falls in between the I for investing and the E for entrepreneurship because that letter R for real estate really is directly in between the eye of investing and the E of entrepreneurship. It borrows from both. And that's precisely why it's only an answer for people who are interested in it. You have to be interested in it. Same is true for an entrepreneurship. You have to be interested in. You have to be interested in running a small business in order to have any possibility of doing it well. If that minimum viable interest, that minimum viable curiosity isn't there, then don't do it just because everybody else is. Don't phomo your way into it.

Yeah, leading with the investment versus leading with the process of how you got to that investment is always a mistake. going, oh, is the answer real estate? Like if I'm solving for crypto, surprise, I'm going to end up at crypto. But I think a much better way of getting there is what is the perfect investment for my time frame and my overarching goal. Right. This is going to help propel me there the best. And there is no such thing as the best, but there certainly is going to be a smaller field.

So if I need something that's four years, if I need money four years from now, certainly the cost to buy a piece of property and then sell a piece of property is ridiculous. So it's not going to be a great investment. Unless you're flipping. Well, sure, yeah. By the way, and if it's your first time buying real estate, I wouldn't do a flip because I think a flip is much better if you've got a team that is reliable that you've worked with for a while. And you can, those numbers are like clockwork now because I know that so-and-so is going to do the job. for X price. I know all of the steps. Yeah. I think flipping's fantastic for somebody that's a seasoned pro in that area. Right. With flipping, holding costs often end up being a significant portion of

your outlay. And if you are not well versed in how to estimate holding costs, then you can quickly lose all of your profits to delays. And so that's something that once you have a few deals under your belt, you have a much better fluency with that time frame. Sure. I would think between that and having a team you can rely on who there, you know how they estimate the project and what to build in. I mean, there's so much more confidence. Yeah. Later on. But anyway, if you begin with the end in mind, you're going to do much better than beginning with the investment in mind. Right. Exactly. Yeah. It's always worrisome when

someone presupposes the answer within the question. But Jeff, I'm very excited for what's ahead. And please tell your wife, I said congratulations on leaving her job. It's a great moment. Yeah. How gets to explore what's next. Exactly. Well, Joe, we've done it again.

Thank you for spending this time with us. No, thank you, Paula. Ah. Joe, where can people find you if they'd like to hear more of you? You could find me at the Stacky Benjamin's podcast, which is every Monday, Wednesday, Friday. Monday. We have Monday mentors. We have very smart people. We talked recently about budgeting. We got a little tactical and talked about budgets that work, budgets that don't work, and why so many people seem to be allergic to it and why how we can get a little better at it. So had a couple great mentors talking to us

about that. Wednesday is always a potpourri that includes our TikTok Minute, which is where we look at some of the ridiculousness that is out in TikTok world. Speaking of Paul, one of my TikTok minutes I just shared when I spoke at UC Santa Barbara, because I take these TikTok minutes on the road, these real estate people on TikTok telling you to rip money out of your 401K because, quote, 401Ks are a scam, 401ks are a scam, and invest it in flipping houses your first time. And the guy goes, well, let's say I've only got like $40,000 in my 401k. You think I should do it? Yes, absolutely rip it all out and use it to flip a house.

That is tragically bad advice. You know what it's even worse? That's horrible advice, yeah. 750,000 people have watched that video. Oh, 750,000 people have watched that video. Just so painful. So anyway, we point out stuff like that on Wednesday, we dive into topics with just our team, OG, and I. And then on Friday, we have people like the brilliant Paula Pant, our friend Jesse Kramer, and OG,

talk about a topic like recently we talked about your financial go bag. You look at people with the fires recently having to flee their house. What's in your financial go bag? Amazing. Well, all of that is on the stacking Benjamin's podcast, which you can find everywhere where you like to listen to podcasts. Finer podcasts. The finest. Thank you so much for tuning in. I'm Paula Pan. I'm Joe Sol Cuyai. And we'll meet you in the next episode.