Afford Anything - Q&A: "I'm Scared of Running Out of Money in Retirement!"

Episode Date: June 4, 2024

#511: Sara is five years from retirement with a paid-off house. But she’s worried that her money will run out before she turns 80. What does she need to do now to protect her future self?  Lauren is a personal finance nerd who gets it. But one question perplexes her: When should she should choose an ETF over an index mutual fund? What about vice versa? Paula and Joe explain. An anonymous caller plans to sell her house and live a “slow-madic” lifestyle. But she’s on disability and needs to keep her money safe. How should she invest her $500,000 windfall? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode511 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, you've heard of nomadding, but have you ever heard of slow matting? Slow matting. No. It's the slow travel of nomadding. And we have a caller who has half a million dollars from the sale of a home. Part of it has to be dedicated to slow matting, but part of it needs to, you know, remain intact for retirement. So we're going to talk about how to manage the proceeds from the sale of a home in the context of both slow matting and long-term planning. All right. Welcome to the Afford Anything podcast. This is the show that understands you can afford anything, but not everything. Every choice carries a trade-off. And that applies to any limited resource that you're trying to manage, whether it's your money, your time, your energy, your focus. And so this is a show about how to optimize those limited resources. I'm your host, Paula Pant. I trained in economic reporting at Columbia, and I help you focus on what matters. Every other episode, I answer questions that come from you, and I do so alongside the former financial planner,

Joe Sal C-Sie-high. What's up, Joe? I am present and accounted for. I've got coffee. We're going to do this. Absolutely. So I'm excited to answer the slow-mating question, but first, we're going to talk to Sarah, who was 60 and about to retire in five years.

But she's got some questions. Let's hear from her. Hi, Paula. I'm 60 and aiming to retire. in 4 to 5 years. Currently, I earn about 35,000 annually. My house is fully paid off and I have approximately 250,000 in brokerage account in Roth IRA and traditional IRA, as well as 250K in non-retirement CD account, which earn about 5% interest. My tax bracket is 12%. My social social security benefit after retirement is about $1,000 monthly. I have three grown-up children.

They do not live with me. Two of them are already married. I plan to leave the house for their future retirement. I'm worried about my financial future. If I retired at age of 65, my money will be exhausted before I reach AD. Can you advise if I am. I'm on the track to retirement at age of 65. I love to travel. Additionally, should I adjust my retirement investment to 70 stocks, 30% bonds, now or wait until closer to retirement? By the way, I need to remodel my house, and for the updates, I estimated I will need at least $65,000. Lastly, would it be beneficial to pursue a part-time work from home job to maximize my income. Any suggestion would be appreciated. Thank you, Paula. I'm a big fan of your podcast.

Sarah, thank you so much for calling in. Congratulations on having raised three children who are now adults and on having saved half a million dollars plus having a fully paid off home, let's talk about how to get you ready for a secure retirement. Now, first, you're 60 years old. That means you were born around 1964, depending on where your birthday falls. That means that per social security, your full retirement age is 67. And the reason that I point out the fact that you were born around 1964, is because the year of your birth determines what Social Security considers your full retirement age to be.

So, for example, if you were born in 1958, your full normal retirement age per Social Security would be 66 and 8 months. If you were born in 1959, it would be 66 and 10 months. But for anybody who was born in 1960 or later, full retirement age per Social Security is 67. You mentioned that your Social Security benefit will be about $1,000. That is, I'm assuming, the calculation if you were to withdraw in four to five years, meaning if you were to withdraw at the age of 64 or 65. What I'd like to encourage you to do is wait until you reach full retirement age, wait until you reach the age of 67, because that is a path towards collecting a higher payout

for the remainder of your life. Said another way, there will be a benefit reduction if you were to claim that money prior to the age of 67. And of course, you don't want to see your benefits reduced. So wait until the age of 67, if you can. Now, let's talk about the other component, the half million that you've saved in investment accounts. We can have a separate discussion about whether or not

we ought to use the 4% rule, but just for the sake of discussion, using the 4% rule, that could generate an income of around $20,000 per year. So a fully paid off home plus an additional $20,000 per year is what you're looking at as a basis, which means, and I don't know what your normal monthly costs of living are, but it means likely you're going to need something to supplement that in order to bridge that gap between the $20,000 income that you can derive from your investments, the gap between that versus whatever your normal monthly costs are. And the one piece of information that we're missing is what do you spend a month? So let's just say hypothetically, you spend on average $3,000 per month, including property taxes and insurance and everything else. If you spend $3,000 a month, which is $36,000 a year, that gap that you're trying to plug is $16,000.

So that's the way that I would approach it. That amount of money that she gives up by taking Social Security earlier is not an insignificant number, Paula. That is a very significant number. It's around 8% per year that you gain. If you look at any financial planner, that's the target rate of return they'll use. So you don't want to give that away, especially since Sarah wouldn't have called in if she didn't think it were close. And it's going to be really, really close. I do some good news for Sarah, though, Paula.

Not just during my time as a financial planner, but talking with lots and lots of CFPs over the years, you know what doesn't ever happen? What's that? Sarah's biggest fear, you never run out of money. I've never seen a person run out of money. Now, that doesn't mean that it's all rainbows and unicorns, but the average person gets to a certain point and they realize that it's close, Paula. And so they change their lifestyle to make sure that they don't run out, that there's still enough acorns left in the nest to make it. I've never seen a person pull up to a, you know, a Coke machine just before they clutch their chest and put the last quarter in the Coke machine and then die. Never seen it happen.

So Bill Perkins's whole thing about die broke, a great book. Die was zero. Die was zero. Die broke. Same thing. Yeah. It doesn't come true, which by the way is great news. But that said, it is going to be close.

So when she mentioned getting a job, I like the job for a few different reasons. Right. I like it not just because of the income that'll bring in. It'll also make it easier for her to delay social security. Another book I like is West Moss's book, What the Happiest Retirees Know. And they stay active. They've got stuff going on. They've got purpose.

They've got mission. They got these things. So, Sarah, if you can align yourself with some organization where you get paid and you're bringing an income and you're driving into retirement with this organization that needs you to show up a few days a week, you know, on this part-time basis, good for everybody. Good for you. Good for them. So I would highly recommend that you consider employment during your retirement years.

Absolutely. It can be something flexible, something part time. And again, I don't know how much money you spend per month. That is the key piece. That is the missing piece of information. If you assume that you retain this paid off home and that you derive $20,000 from your investments and you assume that you don't take any social security, then it's simply what is the gap that you need to plug? between the 20,000 per year that you're collecting and the amount X that you spend annually, right?

And then once you know what that gap is, that's the number that you're aiming for when it comes to some type of part-time work. I worry when she asks about investment allocation. I worry, Sarah, about you getting too conservative too early. And the reason I worry about that is because it's going to be so close and you already have in my estimation for somebody that's going to be as close as you're going to be, too much money sitting in cash. Now, here's what we have right now. We've got, we still have a lot of inflation.

We have a lot of inflation in the area of construction. Paula, I would tell her to do that renovation now, do it as soon as you possibly can, because prices are just going to keep going up in that arena. There's no way construction prices don't continue to at least keep up with general inflation, but may even continue to outpace it. So just the risk of that makes me go, you know what, if this is $65,000 today, you're not gaining anything, leaving that money in a savings account and waiting until next year, the year after, or five years from now, do that now so that you know what you have and then keep a reasonable amount in your emergency fund and move

the rest into investments because it's going to be about keeping up with them beating inflation and we need as much of your money to beat inflation as possible. So I wouldn't be looking at moving more money toward bonds. I would be looking at how much money do I need in cash as a buffer so that if the market takes a tumble for a couple of years, I've got enough money in cash and cash flow to get myself through those couple years so that I can stay in a place where I have a shot at beating inflation. Got to stay in equities as much as you possibly can, I think. Sarah, you also mentioned that you love to travel and you do plan to leave the house

when you retire, so you're not necessarily going to be at home all the time, which is great because first, there's a lot of part-time work that you can do that's remote. We're living in the new normal of remote work. And so there is a ton of opportunity for you there. But also, what's wonderful about travel is that it can actually be a path to saving money. Because depending on where you go, a lot of locations, particularly outside of the United States, have a lower cost of living than locations in the U.S. And so you can decrease your cost of living by going to another country and spending six months there, working remotely, geo-arbitraging such that the dollar exchange rate, really works in your favor. What I think a lot of people forget when people talk about long-term

travel is that a lot of people sometimes mistakenly assume that long-term travel is expensive. It's actually often a money-saving tactic, right? If you rent out your home and then geo-arbitrage, go to a different location where the dollar exchange rate works. in your favor where the cost of living is significantly lower, you spend six months there, you actually end up saving money by virtue of doing that. So it's the best of both worlds and that you get to enjoy long-term travel, slow travel, and you end up with a bigger savings account than you had at the beginning. I think it's applying some creativity like that, Paula, that can really bridge the gap, not just for Sarah, but for a lot of people.

Right. Now, I know someone who, when he reached his 60s, he didn't really have much in the way of retirement savings. He had not much of a plan and not much in the way of investments or anything like that. And so he moved to Colombia in South America. He moved to Medellin. By virtue of moving to Medellin and working remotely, he was. able to put himself into a much better position. Now, certainly far, far better than what he would have experienced had he stayed in the U.S.

I've also heard there's a wonderful expat community there. Yeah, there are great expat communities in a lot of places. Quenca in Ecuador, another great expat community. Well, and in Bogota as well, I've heard there's a great expat community. Yeah, yeah, all over the world. There are expat communities everywhere. A great one in Texarkana, by the way. I get along great with all the expats who've moved here.

Fantastic one in Kathmandu, if I can give a plug to my home country. I went there. I was a part of it for a couple weeks. Yeah, you met my sister in Kathmandu. Seeing that photo of you and her, that was crazy. It was so fun. We had a wonderful breakfast. Yeah, on New Year's Day.

So your sister was slightly hungover. It was the Nepali New Year's. So it was April, New Year's in April. It was so fun. It was so wild, realizing that it's 2080. Yes. Happy 2080. Yes.

I've aged and I look, I look great. We were talking in the Stacky and Benjamin show about how J-Lo doesn't age. Look it. It's 2080 and look it. I look like I'm only in my 50s. Jay-Saw doesn't age. Jay-saw, yeah. Jay-saw, Jay-Saw-C.

But you can, there's this arbitrar. though, back to the point, there is this arbitrage that exists that if she chooses to travel that way, Sarah could use in her favor. Absolutely. Absolutely. So Sarah, I would definitely consider that as well. Rent out your home so that you're collecting some type of an income on it, at least enough of an income to cover property taxes, insurance, maintenance, management, all of those operational costs. And then indulge that love of travel and go to places where the U.S. dollar stretches further and work remotely while you're there. It's a great way to have an adventure while also building up your savings coffers. Before we sign off, Sarah, there's one other detail that I would be remiss not to bring up, and it's a controversial one. So we started this answer by encouraging you, both Joe and I agree, that you ought not to take Social Security until you reach full.

retirement age, which the Social Security Administration designates as age 67. But, but your benefits will increase if you further delay taking Social Security to the age of 70. I'm curious to know what you think, because this is where you and I might disagree. Joe, do you think that she should delay Social Security until the age of 70? So she should delay it past full benefits age? I think the first thing to do is consider your family's longevity. If there's extended longevity, then I think that works in favor of that.

But generally, my bias is against it. Let me tell you why my bias is against it. It is nothing to do with money. The cool thing about this show and the cool thing about what we do is our goal is not to manufacture more money. Our goal is to manufacture more happiness and to get the goals, as you stated them. And the further we get away from that, the more strain she's going to put on the rest of her portfolio, which means that it's going to start putting cracks in what she told us she wants to do. And so what I see often is people delay happiness in favor of more money.

I don't know, Sarah, but I could see just based on what she's told us about her portfolio value and where it's at, I could see you're making that decision. No, I'm just not going to retire until 70. Well, that's horrible. You told us you want to go five years from now. We've already talked about delaying social security, whether she retires or not, it's a different thing. Now, let's say, Paula, let's say that she finds income that's meaningful that she really likes, and she finds that the drain in her portfolio those first few years is what she thought it was. And she has some longevity in her family.

Then I start changing my mind. But my bias is against because I see too many people delay what they say is going to bring them more joy. Interesting. Sarah, here's what I would recommend. So if you go, we're going to drop a link in the show notes, but the social security website, ssa.gov slash benefits slash calculators, go to that page on the social security administration's website, and they have a calculator where you can see an estimate of what your benefit will be if you take it at full retirement age, which for you is 67, or if you take it at the age of 70. So you can input your data.

to see what the expected future income will be for either decision, take a look at the differential between the amount you would get if you took it at 67 versus the amount that you would get if you took it at 70. And based on that differential, I think when you see the actual numbers, that is going to inform which one you are more likely to want to do. Again, we'll put that link in the show notes. And you can subscribe to the show notes at afford anything.com. slash show notes. The benefit enhancement, if you delay Social Security by an additional three years,

is significant enough that at a minimum, it warrants looking at the numbers. It warrants looking at that estimate. But I agree, Joe, a lot of it is also going to depend on, will she find some type of remote part-time work that she enjoys that also complements her lifestyle? Yeah. We'd have to have a much longer discussion about how she feels about the stickiness of that five years from now number. There are some people I met with. They're like, oh, yeah, it'd be nice to go in five years. Yeah, if I could, I might. And there are people like, I've got to get that a lot of here.

Yeah. Well, thank you, Sarah, for asking that question. And best of luck. And enjoy your travels. Hey, Joe, do you want to talk about the difference between an index fund and an ETF? I was hoping you'd ask. Wow. Well, what a coincidence because we have a caller who also has asked that question. And we're going to get to her question in just a moment.

But first, we are committed to making sure that we can spread financial education and financial literacy to the public at no cost. And there are a number of sponsors who help make that possible. So we're going to take a moment to hear from the sponsors who allow us to bring us. you this show at no cost. And after that, let's dive into some index fund versus ETF nerddom. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine.

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Hi, Paula and Joe. This is Lauren from Portland, Oregon. Thanks to you and the information you provide on this podcast, I have a pretty solid handle on my personal finances. But one question I can't seem to wrap my head around is index funds versus ETFs in investment accounts. I have about 190,000 in a 401k, about 63,000 invested in an HSA, 190,000 in an IRA, and 160,000. in a taxable brokerage account. What should I look at to determine whether to have those accounts invested in Indus funds or ETFs? Does the answer vary by account type? Currently, I'm in mostly S&P 500 index funds and I'm trying to learn if there's any benefit to switching to the ETF equivalent in any of my accounts. Thank you. Oh, Paula, this is such a great, nerdy, interesting question.

And I love it because it just gets into the history of mutual funds and exchange traded funds. It gets into the taxability of those positions. But there is good news. All right. What's the good news? They're both great. Yeah, they are. There are lots of little differences between them.

But it truly isn't going to make a lot of difference on your ability to gain financial independence. Right. At a practical level, at an academic level, it's fascinating, but at a practical level, it doesn't really matter. Yeah, super, super fun. Let's talk about the distinction at the academic level. Yeah. So mutual funds are older. This is what we have to remember, is that mutual funds became more prominent in the 1940s. Exchange traded funds, much, much, much lighter, really didn't find any prominence until the 2000s. They were certainly around before then. But even the prints of exchange. trade of funds and low-cost investing, Jack Bogle, back in the 1960s, talk about how ridiculous

low-cost index investing was. He wrote a paper on it, right? Before he became the guy who was behind it, he was the guy that said, no, thank you. Right. So, but obviously everyone's feelings have changed there. Exchange traded funds, though, because they were created later, are more efficiently created. So to very succinctly answer your question before we dive into the nerdery, An exchange trade fund is nearly always better than a mutual fund.

They're going to be slightly less expensive. They're going to be more efficient. When they trade out positions, exchange traded funds inside of the packaging of the exchange traded fund can swap out positions without tax consequences because of some legal loopholes where mutual funds have to replace and sell. Let's say you've got Nvidia and now some of that Nvidia needs to be replaced, needs to be moved. Inside of a mutual fund, everybody will pay a tax when some of that Nvidia gets sold off to redistribute to make sure that we stay exactly where the S&P 500 is, which I'll use as an example because that's what she's invested in. when that happens then regardless of if you've gotten in last week last month last year at the time of record

which is generally late november for most mutual funds at the time of record everybody who owns it on that day if you're outside of any tax shelter you're going to pay the tax so let's say that paula you go buy this in mid november not thinking about the tax you just pick some up and then they sell off this invidia with this monster capital gain because they sold it, no fault of years, you're going to get a gigantic tax bill. Even though you weren't there for most of those gains, you're going to get a tax bill. And it's just purely the way that there's no fair way for them to distribute the capital gains tax. So what they do that is fair, they tell everybody ahead of time, they're like, hey, this is the day in

late November, we're going to do it. This is how much it's going to be. You decide if you're on board or not. And they make that public information every year. But if you're in a mutual fund, you're going to pay. pay the tax. If that's an ETF, that doesn't happen. There's a different mechanism they use where they're able to swap it out and swap in another one and technically not sell. And like I said, it's just a loophole that ETFs get to use because it's more modern invention. And so there will be no tax on the

ETF. So, ETF's generally more tax efficient. So to directly answer the question, outside of your IRA is where this matters more. It's going to matter anywhere. It's going to matter outside of your. You your IRA inside of an IRA because you're not going to have any of these taxes. That doesn't matter. The only thing that matters then, Paul, are two other things. The difference in fees and expenses, Q Joe's gigantic eye roll, who cares? Because the fee on the mutual fund is still going to be super tiny, but the ETF will be tinier. Right.

The bigger thing is, is ease of buying, which ease of buying currently is in favor of of the mutual fund. Mutual funds, because they're older, also have this wonderful on-ramp where you can just say, I want to put $100 in it a month, and the mutual fund company can hook that up and you just buy, you know, whatever percentage that happens to be on the day, it's easy to dollar cost average in. Most ETFs still don't have, this is like 90, 99% of ETF still don't have that mechanism. So every stinking month, you're going to have to go buy that $100 worth of ETF on your own. You can automatically have it added to your Schwab account,

your Fidelity, your Vanguard, whatever your account is, but you're going to have to go in and buy it every month. Behaviorally, we just don't do that. Yeah, we just don't do that behaviorally. So behavior always wins the day, always wins the day. Buy the mutual fund if you're buying in. If you're not buying in,

if you're just lump summing a bunch of money in or you have a bunch of money sitting there and you want it, almost always choose the exchange traded fund. Because if you're going to have to make the move once manually, then the ETF is going to be the way to go. By the way, I do think, and I believe you're on board with this, Paula, I do think that's going to change. I think, you know, they talk about breaking news. I think it's coming. I seriously think in the next five years because of how sexy exchange traded funds have become and how much these companies know that the

word is out about exchange traded funds. So I'm thinking in the next five years, we are going to see that change where ETFs will be as easy to buy as mutual funds. Right, right. And by the way, I should make a note here, and we probably should have said this up front, that index funds are a type of mutual fund. So an indexed fund is an index mutual fund. So for anybody who's wondering, hey, wait a second, this question was about index funds. Why are we talking about mutual funds? Index funds are a set of mutual funds. Yeah, they are passively managed funds, meaning they are just going to try to do their attempt is to do exactly what an index is. And Lauren is in one that mimics the S&P 500. So different companies have products that do this. I shares has one. There's another one called

the spider that does it. There's several different iterations of this. But an index fund is generally a mutual fund that mimics the index. And the only difference between it in the index really is the fee they take out, which is minuscule. It is a tiny fee they take out. So you will always just barely underperform whatever index you're trying to mimic. One, we like for new investors to make it just to press the easy button and get rid of the freak out factor. Everybody gets, what should I invest in? Forget about that. Just go by the total stock market index, which for a beginning investor, I think, Paula, I can even speak for you here. I like better because you're buying a little bit of everything. You get some small companies, some medium-sized companies, some international exposure,

large companies, and they're all in proportion. It is truly pressing the easy button for a new investor. Right, right. And as I said on a recent podcast episode, as I said on the May 2024 first Friday episode, another reason that I love the total stock market index fund, particularly right now, is because I'm extremely bullish on AI. And I think the best way to invest in AI is through a total stock market index fund. Because the future of AI and the future of the U.S. total stock market are moving in lockstep. Yeah. It is an interesting time to be an investor.

I love, by the way, what Professor Scott Galloway said recently about this. Because you know how Paula, everybody is worried about AI. but you talk to smart people and they're not worried about it. And so many investors are like, how can you not freak out about AI? They're coming for all of our jobs. They're coming for all our jobs. You've heard this.

You know what Scott Galloway said? And I love this quote. I wish I would have thought of this myself because I 100% agree. AI is not coming for your job. People who understand AI are coming for your job. Beautiful. Beautiful. Isn't it?

Yeah. Yeah. And it's 100% true. Get on board or get left behind. Yeah, it's exactly what you certainly need to know what AI can do for you in all aspects of your life, because it is very exciting. Right. Absolutely. And I said this also on the first Friday episode, we are living in 1999 and learning about the information superhighway. It's the brand new information super highway. Exactly. And the people who embraced the internet in the year 2000 were the first to have flourishing careers. that were online based by 2004, 2005, 2006.

The ones who were slow to adapt to the Internet suffered some career hits. You certainly saw that in the world of journalism, and I know that you saw that in many other fields. So be bullish, be optimistic, get ahead of it. Don't swim against the tide. And as an investor, the U.S. and specifically, the U.S. Total Stock Market Index Fund is an amazing way to get exposure to the growth that is coming.

But back to the original question, the distinction between an index fund and an ETF, while interesting, is in practice not something that the average investor needs to worry about. Because we're talking about squeezing a couple of basis points, too few basis points to really worry about. We're talking about picking up pennies. And it is in a life that has limited time and limited cognitive bandwidth, simply not a good use of time or energy to worry about a minor expense ratio differential between an ETF versus an index fund. Save your brain power for the big things. The only time that this may be big is if you're considering buying a mutual fund with a lot of money outside of an IRA before the capital gains tax.

Right. In early November. Right. Yes. Yeah. Under that incredibly specific circumstance. Then it is truly material and can change your trajectory because you could end up paying a big tax, which is not yours.

Right. But if you simply wait until December to do the same thing. which December is right around the Santa Claus rally anyway, which is the historically, the stock market typically has a December rally known as a Santa Claus rally. Great time to invest. Yeah, exactly. Just wait two weeks. Yeah, exactly. You avoid the capital gains problem and you may pick up a few points, you know, which you never count on.

But, hey, if you do, you do. Yeah. Yeah, there's certainly a lot of enthusiasm for investing in early December. in anticipation of the Santa Claus rally. You know what the theory is around that? It's because so many companies are giving year-end bonuses. There's a lot of money that is just automatically put into the sideline as bonuses get paid out. So the rally, historically, if you look at charts in years where the economy does really, really well, that rally is bigger.

Years when the economy doesn't do as well, less companies paying the big bonus. So that's one reason. A lot of people making moves the last week of the year for tax rate for all kinds of. of reasons. There's so much movement that last week of the year to try to get things in under the wire that that's why that rally occurs. It's almost like that rally is collateral damage or collateral wonderfulness that happens as people do things for things that have nothing to do with the market. It's like collateral benefit. Collateral benefit. Yeah. I don't think I've ever used that term before, but that is correct.

Right. As people make moves for tax reliefs. purposes or for, you know, shifting money from one account to another account, from one hand to another. Yeah. Selling out of certain positions and into others. Well, thank you, Sarah, for asking that question. And remember, you can't go wrong with either one. Index funds and ETFs are both great tools.

All right, Joe, do you remember at the start of the show when I asked you about slow matting, like no matting, but slow? Would it be wild if I said no? No, I don't remember that. I have no recollection. I can either confirm nor deny. Joe, it was recorded. Oh, damn.

Caught on the record again. Yes, I remember. I can't wait. Well, excellent. Well, we are going to take one final break to appreciate the sponsors who allow us to bring you financial literacy at no cost to you. And after that, we will have a discussion about slow matting. and for this particular caller, slow matting in the context of a disability.

Final question today comes from an anonymous caller. Joe, we give every anonymous caller a nickname. What would you like to name this one? Man, I was just looking at new movies coming out. There's so many. It finally, you get the feeling that the strike really made going to the movie theater horrible. But coming out, Pixar's got a new one inside out too. And one of the main characters is joy.

And this person's looking for more joy in their life. So how about we call them? In honor of the emotion. Let's call them joy. Well, then our final question today comes from joy. Hi, Paula. This is anonymous. And I'm calling because I am on disability.

But I am still, I'm able to do a lot of things, including travel. And I'm about to sell my home at about half a million dollars. And I would love to know. know what I should do. I'm not going to buy another home for a while. I'm going to be nomadding or slow matting like I used to do very carefully as to cater to my needs and take care of myself so not to have a flare up with my disability, which I've already done a test drive last year and the year before and it's a go. So just as long as I can have some really good safe investment

styles and diversification strategies for this half a million dollar windfall, that would be wonderful, Paula. Thank you. Thank you so much for calling in. I absolutely love the plan that you've made. You know what I love is the fact that you have done a test drive. I was going to comment on that too. That was like the first thing. Exactly.

Exactly. Because an and I actually, I love the fact that you've done two. You did a test drive last year and the year before. right? So you've tested this out. You've run a sample. You know that it works. Can we talk for a moment about why that's so important? And this is a message really for the broader audience because Joy, you have set such a great example. Joe, you know, we hear over and over and over from people in both of our communities who say, I really want to do X, but they've never actually done a test drive of X. So people say, I'd like to retire and go sailing. I'd like to retire and go RV. I would like to move from Florida to Oregon or Oregon to Florida or wherever. As you know, Paul, I was one of those people. Right. Exactly.

Exactly. You yourself sold your home in Texarkana and decided you were going to go live somewhere else. No, this was my house in Michigan. Ah. My house of Michigan, we were going, we sold all of our stuff, which is amazing because you were just at my house. Look at how much crap you can reaccumulate. It is amazing.

our ability to make this house seem like we never sold all our stuff. But we sold the vast majority. We didn't sell everything. We sold the vast majority of our things. We sold our house. We were going to live this nomadic lifestyle where we would live in different places for a few months at a time. I can work from anywhere. Cheryl was going to do these based on her career.

She was going to be able to do these six months stints. And between those, we were just going to go live in Portugal for a month, live in Brazil for a month, live in wherever. And I realized after doing that for six months, I freaking hated it. It wasn't for me. But it was that test drive, Paula. If I hadn't tested driven that, this was the big thing in my head that I thought for sure was my, quote, retirement vision. We were going to have no possessions. We were going to travel.

It's going to be awesome. I love traveling still, as you know, but I also love having a home base far more than I thought that I would have had I not test drove it. So that is wonderful. Yeah, exactly, exactly. Wait, and didn't you have it? You had a house in Texarkana and you sold it and you thought you were going to live elsewhere and then you came back to Texarkana. We moved to Michigan and then we thought we were going to be nomads. And so we sold our house and we tried out the nomadic living. We lived in Palm Springs for a while. We lived in Vermont for a while. We lived about a month at a time for that six months in different places. And yeah, and then decided that you have two families. You've the family that you're born into and you have the family of. of friends who truly are that network that you create during your life. And it was back here and beautiful TXK. Wow.

Well, your story and Joy's story, I think both highlight the importance of test driving, whatever it is that you think that you're going to do, right? So Joy, thank you for sharing that because it's such a good example that you're setting for the community and such a good lesson for all of us to take, which is whatever it is that you think that you want to do during retirement. test drive the idea, make sure that it works. I love what you've done, which is you did two separate test drives in two different years. You know that it works. So you could have total confidence in the plan that's ahead. So first, I want to commend you for that. And now to answer your question, which is, how do you handle this $500,000? The first question that I have back to you is,

how much of that 500,000 are you going to invest and how much of it are you going to spend? I'm going to take this on the assumption, and I don't know if this is the case or not, but I'm going to take this on the assumption that you'll be investing the entire 500,000 lump sum and living on a 4% withdrawal. Now, I don't know if that's actually your plan or not, but if the goal is to preserve the principle and to live off of the gains, then I'll address the question. as though that is the plan. But of course, you're no pun intended. Your mileage may vary. Oh. Wait. Why? Thank you, Joe. I'm here all week, folks. So if I guess as we were just discussing with Sarah, if you are going to invest this as a lump sum, don't do it in early November.

In a mutual fund. Yeah, in a mutual fund in a taxable budget. brokerage account. I'm glad we just had that conversation. Generally speaking, lump sum investing is better than metering this out because if you do invest it in a lump sum, statistically speaking, you are better off deploying that money into the markets immediately than you would be if you were to hold it in cash and slowly start metering it into the markets. So when you sell your home, putting that entire lump sum into the markets right away in a manner that is asset allocated based on your timeline, that lump sum investment is better than keeping a portion of it in cash. And for a detailed explanation as to why, I'll refer you to episode 507, afford anything.com slash episode 507. I think there's a discussion, Paula, we need to have around the word safety because when people think,

safety, the default feeling people have is that means freedom from fluctuation. The thing that I will, I will encourage you to do is to think about safety in a different way. Safety is making sure this money lasts for a long, long time. And unfortunately, if you're going to try to beat inflation, then fluctuation comes with the territory and it's much more about being getting more comfortable as the passenger on that moving portfolio that's going to be on a bumpy road than it is about safety because if you go for things that are fdIC insured this money's going to not last very long at all right right right yeah you need an equity bond split yes safety is for me as much of this inequities as possible so order

of operations pay down high interest debt because that's a guaranteed rate of return Next is make sure that you've got your emergency fund money that you can get to if the markets go, Haywire that you don't want to worry about. That's your FDIC money, high yield savings account for that. And then the rest of it as aggressive as you can stomach. Now, when I say aggressive, I don't mean going and picking individual stocks like you're some stock jock that's betting. We don't want to bet. But certainly buying some responsible large company.

Mutual funds are exchange traded funds, I think that asset allocation, though, should have a bias toward equities. The cool thing is that you can buy different types of equities that will give you some cool diversification. This piece blew my mind, which is that you can buy a large company, a large company, ETF, like the S&P 500. And you can add to it three other exchange trade of funds that generally are more aggressive let's say small company, mid-sized company international, your overall volatility for that portfolio

will go down even though you added three more volatile ETFs to that, which blows my mind. How do you add more aggressive stuff to it? And it's less volatile. The reason is you're on four different up and down roller coasters versus one. And so I think diversification is your friend, not FDIC insurance. Right. Exactly. And Morningstar is a fantastic resource, particularly the efficient frontier. Yeah. Yeah, portfolio visualizer as well. We'll link to all of that in the show notes.

Now, Joy, you'll notice that we did not recommend a specific asset allocation. There are some people out there who do that. There are some people out there who will use these very broad rules of thumb that says, oh, you know, your age minus 10 is the percentage that you should put in bonds with the remainder in equities. There are these broad rules of thumb. But the thing, the problem with those rules of thumb, is that they are so generalized, so blunt.

And when I say that, I don't mean blunt as in direct. I mean blunt as in dulled, unsharpened, right? Unhoned, uncut, right? These broad, generalized, dulled types of broad rules of thumb are useful teaching tools tools for the sake of getting a big picture framework of directionally where are we going, but they should never be applied to a given individual. So what you should do, what you specifically should do if you want to find great asset allocation for yourself, go to Morningstar, and we're going to put this link in the show notes. And again, you can subscribe to the show notes

for free, afford anything.com slash show notes. You can also go and see the show notes. You can also go and see the show notes of any given episode by just searching afford anything.com slash and then write the words episode and then the episode number. So for today's episode, it's afford anything.com slash episode 511, episode 511. At any rate, go to Morningstar and they have a particular page where you can see these model asset allocation portfolios. So what you'll do is you'll go to asset allocation portfolios, right, the main page, which we're going to link to in the show notes, click. on the button that says view portfolios, and then you'll be taken to a page where you can choose among a variety of portfolios.

There's ESG, there's active mutual funds, there's fixed income allocation. What you will want to do, assuming that you want a passively managed low-cost tax-efficient strategy, which is what we promote here on the Afford Anything podcast, is click on the choice that says ETF. It's right at the top of the page. So you click on ETF and then you can use the slider to choose your time horizon. So maybe you want to choose a time horizon of, let's say, five to seven years or a time horizon of three to five years or a time horizon of 15 years, right? So you choose the time horizon for a batch of investments that you want.

And then you can look, click the button that says full portfolio overview and you can see some model portfolios. So this is a really good resource for not just you, but for. anybody who's listening who wants to get a sense of what their asset allocation ought to be. And remember, with this $500,000 that you have, this big lump sum has different timelines and different goals within it. So there's going to be some portion of this $500,000 that has a 15-year time horizon. There's also going to be some portion of this $500,000 that has a five-to-seven-year time horizon. There's going to be some portion of it that has a three-year time horizon, right? So you'll want to divide the money that you have into different buckets based on the time horizon of each

bucket. And then you'll want to asset allocate for that particular time horizon. So let's just say, for the sake of keeping it simple, let's say that you break this $500,000 up into five different buckets and each of those buckets has a different time horizon. You've got one bucket that is that 15 plus year time horizon. You have a second bucket that has a time horizon of 10 to 15 years. You have a third bucket that has a time horizon of five to seven years. You have a fourth bucket that has a time horizon of three to five years. And then you have a fifth bucket that has a time horizon of one to three years, right? You'll want to asset allocate each bucket differently based on its time horizon. Using a tool like Morningstar's asset allocation builder

will help you see what some model portfolios might look like. We're going to link to that in the show notes. Subscribe at afford anything.com slash show notes at no cost. You can also view it on the website, afford anything.com slash episode 511. Thank you, Joy, for the question. And enjoy your nomadding and your slow matting. That concludes today's episode. Thank you so much for being part of this community. If you enjoyed today's episode, please do three things. Number one, most importantly, share this with a friend, a family member, a colleague, a neighbor. Share it with the people that you know, because that's how we spread financial literacy. Number two, please follow us on three platforms, Apple Podcasts, Spotify, and YouTube. Please give us a follow on all of the above if you

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and on Instagram as Paula Pant. Thank you again for tuning in. I'm Paula Pant. I'm Joe Sol C-Hi. This is the Afford- Anything podcast, and I'll meet you in the next episode.