Afford Anything - Q&A: Should You Cash Out Your ETFs? The Hidden Consequences of That Decision …

Episode Date: March 4, 2025

#587: Debi is stressed about saving a down payment to buy a house in her high-cost-of-living area. Should she cash out her brokerage account to speed up the process? Lucas and his wife are high earners, but they’re tired and ready for a change. What strategies can they use to maximize their investments and confidently step away from their jobs? Grant is thrown off by recent discussions about the efficient frontier. It sounds a lot like market timing to base an investment strategy on an arbitrary set of historical dates. What’s he missing? 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/episode587 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, would you ever live in New York City? At this point, I wouldn't, but I'll tell you this, if I were 25 right now, hell yeah, I would. Ah, what about with your kids? Like when your kids were young, would you live with them there? I think I would, absolutely, yeah. Awesome. I think there's so many opportunities, there's so many things to see, there's so much art and culture, which we're totally into. Yeah. Well, we are going to answer a question today from someone who lives in New York.

She's about to have a baby, and she is wondering, rent or buy. We're also going to answer a question from a caller who he and his wife make a fantastic income, and they're using that to make big contributions to their taxable brokerage account so that they can have FU money and choose to walk away from their jobs at some point in the future, if they ever decide that they are tired of the grind. And we're going to close with a question from someone who is wondering, why do we keep citing the year 1970 when we talk about the efficient frontier? that in one episode? Absolutely. So 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. The show covers five pillars,

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, I answer questions from you, and I do so with my buddy. The former financial planner, Joe Salcii, what's up, Joe? It's a great day to be here. I am caffeinated and ready to go, Paula. Amazing. Well, then our first question today comes from Debbie.

Hi, Paula and Joe. I have a house financing question for you both. My husband and I have been trying to save to buy a house, but it's been a little difficult because we live in Paula's favorite place in New York City. So we have about 5% of a down payment saved right now, but I realized recently that if we cash out our ETFs and mutual funds, that this could get us to about a 20% down payment. This would make our monthly payment on the house

much more affordable with mortgage rates where they are. I just wanted to get an outside perspective from someone that isn't so emotionally attached to both our savings, but also to the idea of owning a home. So I wanted to see what you guys thought of this idea. For a little added insight and extra pressure, I'll add that we are expecting a baby later this year,

which is part of why we are looking for a house now. As someone who works from home, I cannot share our small one-vis. bedroom, New York City apartment with both a baby and my office and my husband. So I just want to get your guys' opinion. I'll also add that we do contribute to our employer 401ks and we have an individual Roth account. So it's not like we're taking away from our only savings account. Okay, thanks. Looking forward to your insight. Okay. And also Paula, I want to add that you need to try Vala table and Hell's Kitchen if you haven't for a really great vegetarian Thai food and also

Supermoon Bakery in the Lower East Side for fun pastries. Thanks. Bye. Debbie. It's always great to hear from a fellow New Yorker. Congratulations on your upcoming growing family. And let's dive right into your question. So what I hear, as you are describing this dilemma, is a conflation of two different issues. And it might just be, I know you have the limitations of sending a one minute or two minute voicemail. So you may not have had a chance to unpack and explain everything. But here's the situation. as I understand it. You live in New York City and you're a renter, which means you live in an extremely small footprint and you also rent that space. As your family grows, you want a bigger footprint, which I absolutely understand, and you're also thinking about buying. And so this is where I see a conflation of two different issues because there's the question, should we move so that we can have more space. And then there's the question, should we buy? And I see those as two very different questions. And to the question, should we move so that we can have more space? That sounds like

that's not even a question. It's an absolute yes. Now, I don't know exactly where you're planning on moving to. I also don't know what part of New York City you live in. So it might be that you live in Manhattan and you're moving to outer Brooklyn or outer Queens or northern New Jersey where you can just have a bigger footprint somewhere. That absolutely, as your family expands, you work from home, you'll have a newborn baby, moving to an outer borough if that's what you're planning on doing, so that the cost per square foot becomes cheaper, which means you can have more square feet. Absolutely. But that's a very different question than the question of should we rent or buy. It's funny, Paula. The idea of a spacious Manhattan apartment is funny.

There was a comedian that I like who was talking about how spacious his Manhattan apartment is, and he said it's super spacious. There's room for a pencil and a bottle of water. It's great. In the words of Homer Simpson, it's funny because it's true. Yeah, right, exactly. And I thought the same way. But you know what I think most is that whether she rents or buys, this is the heart of financial planning for me, which is it isn't about more money.

it's about more life and doing the thing that you want to do. So no matter how we solve this, realizing that this is such an important goal, it's a thing that people work around. So I totally 100% agree. Move. Absolutely move. You could hear it in her voice. Yeah.

I want to move. So definitely move. And then now it's how do we optimize around that. Yeah. And I don't see any compelling reason that she needs to buy at this. juncture. In fact, in the greater New York City area, renting from a purely mathematical perspective, renting makes far more sense than buying. Now, the exception is if you're house hacking or if you are an investor who wants to generate an income producing property, that's different,

but it doesn't sound like that's her goal. Her goal is not to house hack. It's simply to move to another location that is more appropriate for what she wants at the this point in her life. And in New York, the financially sensible thing to do is to rent. And I'll tell you the way that you can calculate this, there's this metric called the price to rent ratio. And this is a way for everyone who's listening to do the math on whether it makes more sense to rent or buy in the specific area where you live. Now, the price to rent ratio is the home price divided by the annual rent. So, for example, let's say that you were to buy a home that was $500,000 as the purchase price,

or you could rent that same home for $2,000 per month, which is $24,000 per year. Well, $500,000 divided by $24,000 equals $20.8. And so in that case, there's a decent. argument. It's not a slam dunk. That's a bit of a gray zone. But there's a decent argument towards buying if you plan on being there for a very long period of time. There's also a decent argument towards renting if you don't plan on being there that long. 20 is like that gray zone. Now, let's change the numbers a little bit. Let's take that same $500,000 property. And let's assume that the rent on that property is $3,000 per month or $36,000 per year. Well, in that case, the price to rent

ratio is 13.8, which means it is a slam dunk purchase. You buy that property. Absolutely. Let's take it in the other direction, though. Let's say that same $500,000 property rents for $1,200 a month, which is $14,400 per year. Well, in that case, the price to rent ratio is $34.7, which means there is no question you definitely want to rent that. You do not want to buy that. So the priced rent ratio outlines whether it's a better deal to rent or buy. The broad parameters around it is that if the priced rent ratio is about 16 or under, buy the place. Buying is a much better deal. If the priced rent ratio is somewhere between 16 to 22, 23, you're in the gray zone. I'd even say up to 24, you're in the gray zone. And if that

price to rent ratio is anywhere between 16 to 24, your answer as to whether it's a better deal to buy a rent is largely going to depend on other life factors, such as how long you plan on living there, because remember, the transaction costs are the most significant costs when it comes to property purchase. If you think about it in terms of a mutual fund, there's a hefty front end load and a hefty back end load when it comes to acquiring a home. So 16 to 24 is the gray zone, anything that is 25 or above, you absolutely want to rent. Renting is a much better deal. And I know that there are people out there still to this day who erroneously believe that renting is quote unquote throwing money away, which is ludicrous. And if you want me to go down that rabbit

hole, I will, because I can rant about this for an entire episode as to why that statement is intellectually lazy and makes no mathematical sense. But I'll spare you that rant unless somebody requests it. Another day. Yes. But if the price to rent ratio is 25 or above, you definitely want to be renting that place. And granted, every borough is different, right? What's true in K-town, Manhattan is not going to be the case in even Bay Ridge, Brooklyn. But in Manhattan, the median price to rent ratio across the board is 50. 50. 50. So in Manhattan, you could have all the money in the world. You could be Jeff Bezos. It would still make sense to rent. So there's some easy math to do, but it sounds like you're strongly betting that it's going to come out in favor of rent is what I'm

hearing. I'm assuming that. Most probably, but don't take your word for it. Yeah, I'm assuming that, because she didn't specify exactly where she would move to. So I'm assuming that she, will stay in the New York City area. Unless there's some part of the New York City area that I'm unfamiliar with, I don't know the outer boroughs quite as well. Maybe she wants to go upstate. Maybe she wants to go just two hours north to Rhinebeck or to Poughkeepsie, right? The math totally changes there. So if she's planning on staying in Manhattan, I don't even know if she lives in Manhattan, but if she's planning on buying in Manhattan, it's a slam dunk, you should remain a renter forever. But if she's planning on going upstate, that completely changes the game because the numbers

they're vastly different. Yeah. They're the polar opposite. Most places upstate in upstate New York, it makes more sense to buy. So our answer is move to Buffalo. She doesn't have to go that far. Not all the way upstate. She can go like an hour and a half upstate. That's the thing about New York City. You don't actually have to go that far to get to a place where buying makes more sense than renting. Yeah, it largely is going to depend on where she decides to live. But, Debbie, the first thing that I would do in whatever area you're thinking about moving to is crunch the price to rent ratio. That's going to give you parameters around whether it's a slam dunk to rent, a slam dunk to buy, or gray zone. It'll be your guiding light.

Exactly. Now, with all of that said, Debbie, I do want to address the other portion of your question. And Joe, I'm curious to hear what your perspective is. So let's assume hypothetically that Debbie is interested in moving to a location where the price rent ratio is, let's say, 22 or 23. And she plans on living there forever. And so it makes, even though that is a gray zone, it makes. it makes sense for her to purchase. Should she?

Yes. I haven't finished the question, Joe. I think I know where you're going. Maybe not. Should she cash out the ETFs, the ETFs and the mutual funds? Should she take the tax hit of cashing out her taxable brokerage account? Oh, I'm never going to let the tax tail wag the dog. What I would solve for, and I love this question, I would first,

begin with, I want to take out less debt if possible. So my bias is going to be toward less debt, which means my bias is toward cash them in. Now, I don't want to do that right away. I love your point, Paula, about the tax, even though I don't want the tax tail to wag the buy a house dog. I do want to make sure I know what that tax is going to be ahead of time because I don't like surprises. And I want to be able to factor that into the math. If it's incredibly, high, maybe it becomes material, I'm doubting it would be. But even bigger than that, what I really want to know is how will that affect my long-term goals? So if I use this toward the house, phenomenal short-term goal, what happens to my retirement dream or baby's college front? Like,

I don't know what the other goals are, but whatever this money was being saved for, what's the impact in starting over or going in reverse on those goals. Again, my bias is toward cash them in. But if it's going to seriously affect my retirement goal and I can afford the cash flow, then I begin going in reverse, meaning maybe I cash in a quarter of it and then maybe half of it. That maybe it works at three quarters. so that I find this sweet spot of I've got enough money going toward the down payment

that I can afford the cash flow and continue on full blast toward my long-term goals. That's what I want to know is what's the economic fall? Because too often, Paula, what do we do? We have these goals and then we go after one of them forgetting, and I'm going to go back to Stephen Covey. Stephen Covey says you pick up one end of the stick, the other end of the stick comes with it. what's the other end of the stick? If I use the money for this, I can't use it for something else.

So because everything dovetails together when it comes to my financial plan, how does this impact the other end of that stick? That's essentially where my head is on this. How about you? I would want to know if she can split the tax hit between two different taxable years if she were to do this. I don't know exactly what the time frame is for buying this home. And I know that we've just flipped into a brand new calendar year. So this is probably the worst time of year to say this because it's like, oh, well, have fun waiting 10 months. Well, but there's a broader picture here, Paula, which is, I think what you're saying is look at the entire deck of cards, meaning if it's October, November, December, I'm going to easily make the decision in a way that that will help me save some money on taxes.

Again, though, I got to know how material the tax beast is going to be. Maybe it's not big at all. Paula, if it's not big at all, then who cares about year-end? But I love thinking about the tax hit. Don't forget, by the way, furnishing cost. People move into a new house. And the thing that always exploded the budgets of my clients and heck, my own budget was always not the cost of the house because I do that math. It's the 47 trips to Home Depot to beautify the place once I get into the house. And then you tell yourself at a time, well, we get in this house, I'll buy furniture later. And then you sit there for a week and a half and you go, you know what, I deserve. I deserve nice furniture because now I have a nice house and I need it to look nice.

And so we break the bank on all of this other stuff that comes along. So when I say, evaluate the whole deck of card, think about holistically the purchase, the tax bill, the homeowners insurance, the furnishings, the fix it cost. and come up with a plan that's much more than just, I can afford this mortgage. Yeah, there are certainly times when I've thought, why do I even bother getting a paycheck? Why not just send it directly to Home Depot? Why am I the middleman here? You know how we can make this easier?

Yeah, exactly. Just make up my checks to lows. Right, yes. Why is my bank account the intermediary? Because it's all just going to go to Home Depot anyway. It'd be great if you were like the line item on the Home Depot annual report. Yeah, the shareholders report. Wow, this pull of pants really keeping us in business.

You know, you're absolutely correct. Budgeting for all moving costs, storage costs. I mean, moving is just enormously expensive. Even if you don't hire movers, I've never hired movers, actually. I've always done it myself. And even still, the cost of renting a truck, the cost of packing everything up into boxes, the cost of buying more of your meals out because all of your utensils and pots and pans are packed away so you can't cook anything, all of those costs are significant.

I say that for the sake of everyone who's listening, because I know just the law of large numbers, some decently sized proportion of this audience is going to be moving this year or next year, and that's always something to keep in the budget. But, Debbie, to your direct question, unless there is some specific goal associated with your ETFs or your mutual funds, I wouldn't hesitate to tap that money just for the sake of letting it sit. What I would say is choose a goal for that money, whatever that goal may be. Maybe that goal is, in retrospect, money that you're saving towards a home. And at the time, you didn't know that that was the goal.

At the time, you were just saving money. And now you've decided that the purpose of that money is this goal of purchasing a home. If so, that's great. But assigns some type of a goal to it. But the goal could be anything. Maybe that's money that you want to put towards your child's college fund. Maybe it's money that you want to put towards having the option. to take a sabbatical from work or make an escape from work or just downshift to part-time.

Maybe that's money that you want to put towards your passion for race car driving. Could be anything. Maybe you're an avid comic book collector, but make sure it has a goal, whatever you choose that goal to be. Maybe it's for wacky cat posters. Is there a market there, like an actual upscale? Are there vintage ones that you can buy? If so, write to Paula because she will buy. Is this like collectibles trading?

Is this all the way out on the efficient frontier? Like way out on the X axis. But you know that's a home run. You know that's a home run every time, Paula, because you'll buy all of them. That very, very tail end of the efficient frontier, like far on the X axis but also far on the Y axis, like in that same category as collecting baseball cards and B. Beanie babies. Way, way up. Well, come on. Cat posters in the same spot as those. So, Debbie, I hope that helps. And thank you for the restaurant recommendations. It's funny that you

mention Thai food in Hell's Kitchen because my favorite restaurant in New York is in Hell's Kitchen. And it's this cute, like brick, but very cozy, very warm little Italian place. It's called Giardino on 54th and 9th. very warm. It's the type of place that you never really need a reservation for. You can pretty much just walk in at any time. So yes, if you're ever in Hell's Kitchen, Giardino, 54th and 9th, favorite place in the city. But I'll try that Thai place. That sounds amazing.

Let's go as soon as we finish recording. I'll fly up there. Awesome. Well, thank you, Debbie. Now, on the topic of building out a taxable brokerage account so that you can have F-U money to be able to walk away from your job if that's what you choose to do. And that's not a guarantee that you will make that choice. It's simply to have the option to make that choice. On that topic, we're going to answer a question from Lucas, who is not in love with his work,

but it pays really well. And so he wants to build out that taxable brokerage component so that work can become optional. We're going to hear from him next. 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. That's what being a fifth third better is all about. It's about not being just one thing, but many things for our customers.

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Plus, they have a loyalty program, 5% back on. every item across Wayfair's family of brands. Free shipping, members-only sales, and more terms apply. Don't miss out on early Black Friday deals. Head to Wayfair.com now to shop Wayfair's Black Friday deals for up to 70% off. That's W-A-F-A-I-R.com. Sale ends December 7th. Welcome back. Our next question comes from Lucas. Hey, Paula and Joe. Lucas here in North Carolina. I was hoping you could help me think through some things with my taxable brokerage account. We'd like some thoughts on any pitfalls or considerations as it relates to growing and then using a taxable brokerage account to supplement income before retirement. My wife and I are both 33 years old and have one child that's

nine months old. We've both worked in IT consulting for about 12 years, both for large firms and make about $315,000 combined gross salary before bonuses. Neither of us really enjoy our jobs all that much, but we stayed in the field because of the good pay and the flexibility the job provides us. One thing we'd like to focus on over the next couple of years is growing our taxable brokerage so that we can eventually take our feet off the gas of our IT jobs or shift into other careers entirely. Here are our financial details. Our finances between my wife and I are fully combined. We own our home that we purchased in 2019 for $375,000 that we fully paid off in January of 2024,

so no mortgage payment and no HELOC associated with our house. We own both of our cars full and clear. We have about $470,000 in traditional 401K, about $130,000 combined in Roth IRA and Roth 401K, $10,000 in HSA, $15,000 in 529, $27,000 in company stock from my wife, about $40,000 in emergency fund, and about $160,000 in our taxable brokerage. The retirement accounts are all invested per the efficient frontier, and will continue to contribute heavily to our 401ks while we're working. The brokerage account is mainly in low-cost S&P 500 index funds. We paid off our house in a little over four years,

and we're able to save about $100,000 into our brokerage in 2024 with all our extra funds pointing that direction. So you may be able to tell once we have our eyes set on our financial goal, we can usually hit it. Our yearly expenses are usually around $80,000, but with daycare costs and other baby expenses, we're expecting it to be between $100,000 and $110,000 for the next few years. What are some things we should think about and take into account as we continue to pat our taxable brokerage so we can ease off or make a change?

Obviously, we'll start to get more dividends and capital distributions as the brokerage grows and may need to pay quarterly taxes to keep from owing Uncle Sam more than expected at the end of the year. But outside of that, what is there? Is it as simple as building up the account as far as we think we need to and then drawing down what we need to to take care of expenses? Thanks for your help you too. And please keep up the good work on the show. First of all, congratulations on not just the new family, same as Debbie, the new and growing family, but also on the enormous gap between what you earn and what you spend. So $80,000 for a family of three is impressive. That's absolutely fantastic. And I know that you mentioned that

amount is going to rise to about $110,000 for a family of three. That is still incredible, particularly given the tremendous delta between what you earn and what you spend. So I want to congratulate you and commend you on that. Yeah, the fact that they are approaching a million dollars in investment assets alone, not counting the house and the fact that they have no debt. Right. puts them in an enviable position for the future. Exactly. And this is why there are quite a few of us that rally strongly against people who are generally

older, they've already made their way saying follow your passion when you're younger because of the fact that there are sometimes jobs that are not the thing that we are most passionate about, but because we've swam the moat like Lucas has and he now has a skill set that affords him this ability to do everything else that he wants to do, there's a lot to be said for that. There's a ton to be said for that. I think there's too many people that are not facing the hard headwinds that come with success in any job to get to the point where even if they don't love the thing, they love everything else about their life. You know, one of my biggest clients, my wealthiest clients made stop signs for a living.

made stop signs. And you know what was cool, Paul? Part of the reason he made so much money was there's not a lot of competition because there's not a lot of people going, you know what I'm going to college for? I want to make a stop sign. Cody Sanchez talks about this. She was a previous guest on this podcast and she advocates for buying what she calls Main Street businesses. But often these are dumpster, rollaway companies or porta potty companies or laundromats. Her first business acquisition was a laundromat. It is for me a way better approach to life than chasing something that seems on paper to be really easy and isn't.

And I'll point directly at it, Paula, because you and I were at a conference together last year where our friend Nathan Perry talked about the fact that the biggest thing high schoolers want to be right now is an influencer. And yet when you talk to them about what an influencer really does behind the scenes, high schoolers don't want to do any of that. Do not want to do that. I live in Texarkana, Texas. You know what's on the shelf at my local Target and Walmart?

What's that? Ring lights. Right. Ring lights in Target. That shows how many people are chasing this, quote, dream of doing what I'm passionate about. Which means if the market isn't oversaturated, which by now it probably is, that the money is in manufacturing and selling ring lights. Yeah, good point. Right? During a gold rush, sell shovels.

Yeah, we actually did a historical episode last year talking about Deadwood. And the people in the Wild West who made money were the people mining the miners. Right. The miners weren't making money. The people mining the miners were making money. Right. And Cal Newport, who's also a previous guest on this podcast, he's actually been on multiple times. I'll link in the show notes to our episodes with Cody Sanchez and with Cal Newport.

But Cal Newport has one of the best and most nuanced takes on this topic. He says that the notion of following your passion is a little too one-dimensional. It's a little too reductive. And that what a person needs to do is follow their curiosity, not their passion, but their curiosity. And assuming that they have minimum viable curiosity, curiosity about a given subject matter, then as they dive more deeply into that subject matter, they will naturally become more passionate about it. Because Dun & Kruger effect, when you are on the outside of an industry, if you don't know anything about that industry, you don't know what you

don't know. And as you start to dive into that space, you then become aware of what you don't know, which triggers curiosity because as you become aware of what you don't know, you want to learn about all of these many things that you are suddenly aware that you don't know. And so, assuming minimum viable spark, the process of diving into a new subject matter is what engenders that what ultimately a person would call passion. So passion is, therefore, the result, the consequence and not the cause of going into a field. And while we're on this topic, an offshoot of this, Paula, also for the part of the audience that is looking at retirement, this even translates into retirement because the happiest retirees volunteer with three community organizations and officially belong to one, either a religious organization or the Kiwanis, the Lions Club, whatever it might be, the Rotary, they belong to some community club where they pitch in. And a lot of people have given me the feedback. I don't know what I'm passionate about. Like, why would I join Rotary?

I don't know anything about it. And to your point in the Newport research, once you get in, you start exploring, you'll find out very soon whether it actually resonates with you or not. When I first got involved with charitable giving, I felt really bad because I wasn't really passionate about anything. It sounded horrible. I'm like, I want to give my time and my effort because I see successful people do that and they're in their community.

So I'm going to model that behavior, but I don't know anything. I had a client that was the president of the arthritis foundation. My mom has some arthritis. So I just volunteered for one of their events. And then I started going to a couple meetings that I found out about juvenile arthritis and how horrible it is for kids that have arthritis. And then I found out the research that's happening in the world of arthritis. So you see exactly what you're talking about is happening even with charitable giving.

I went down the rabbit hole a little bit. I found my passion by just lacing up my shoes and joining the organization. Right. And so to Lucas's situation. Lucas is like, what's that I do with me? Yeah. Lucas, we will get to your question, I promise. But to Lucas is a situation where he talked about how he and his spouse,

neither of them are really in love with the work that they do, the question that it brings up in me is, is it the subject matter itself, IT consulting, or is it the specific circumstance of the company that he's working for and the supervisor or the manager that he's reporting to that he and his spouse are both reporting to? Oh. Because what we know is two things. Number one, we know that if you can isolate a person's probability of liking or disliking their work, a person's feelings about their direct supervisor is the one single isolated variable that has the greatest degree of correlation with whether they like or dislike their work. If you like your

direct supervisor, you are far more likely to also enjoy your day-to-day work and vice versa. That's one well-documented piece of research when it comes to career satisfaction. And so one question that I have is, is it that they dislike IT consulting? Lucas, is it that you and your wife dislike IT consulting? Or is it that neither of you are particularly fond of your direct supervisor? Because those are very different problem sets to solve. The other question that I have is one other thing that we know from the research is that autonomy, mastery, and purpose. Those three, those three, variables, those three qualities, have a huge degree of correlation with job satisfaction. So in the specifics of the day-to-day work that you do and in the company that you work for,

in the way that all of that is structured and set up, how much autonomy do you have, how much mastery do you feel that you can develop, and how much purpose do you think that this work contains? And again, can you do this work in a way that optimizes for those variables? And there's a reason directly to Lucas's problem, Paula, that I think this is material, which is, I think the goal here, based on his lack of satisfaction, his spouse's lack of satisfaction, is to be what people call CoastFi. so that he has saved enough, he's wrung enough out of this job that he no longer has to save to reach his long-term goals. The reason that your question becomes material in the math is this.

If it's the nature of the beast, meaning it's not the employer, it's not his direct work culture, but it truly is what they do that they don't love, then I'm going to want money. that's readily available much more closer to today, which means that I am taking less risk with my assets and thereby I'm using probably a lower rate of return assumption because of that. If it can be solved with culture and if Lucas talked about maybe going out and getting work, working in something that does light him up, if he has some degree of certainty on that, and he knows that he's going to continue to bring in income for X number of years, then he can invest more aggressively and then used maybe a more robust, still conservative, but more robust rate of return than he would if it just is the nature of the work

and he's not sure if he's going to bring in money or not in his new pursuits. Given that most of his money is invested, on one hand, he wants to have a work optional setup, But given that most money is invested, he's got $40,000 in cash. That's an emergency fund. That's a very reasonably sized emergency fund. Beyond that, everything else is in predominantly S&P 500 index funds, is in long-term investments. Lucas, even though you say that your objective is to become work optional, it sounds based on the asset allocation, like the design of what you're building is. is let's optimize for 20 years from now, which is fine. But I'm just making that observation.

Well, it's fine until it's not fine. Right. Which means that all of a sudden he needs to tap the money today and at the same time the market's down. And then you start running into a sequence of returns issues. Yeah, but Lucas, I mean, two things that he's got going for. And one is that he's in a dual income household, which offsets some of that risk, right? Good point. Because it's unlikely that both of them will lose their job simultaneously. Well, unless they decide to willfully do it, right? Right. I mean, if they decide to will, which was my point, Paula,

if they decide that they're going to both enjoy time together pursuing whatever the next thing is, then they could do what you're talking about, which is stagger it if one of them enjoys the work more than another one, or one wants to get started on whatever they're going to do next, whatever the case may be. Yeah, it seems to me that it's unlikely that they would both volunteer. quit without reallocating some of their portfolio towards cash and cash equivalents. Sure. Otherwise, it seems to me, given the dual income nature, that they would stagger it. Because dual income is one of the best defenses against these types of risks.

You have that natural diversification in income sources. You have multiple streams of income because you have multiple income earners in the household. Well, and at the very least, if he wasn't considering that, he definitely should be. I don't know outside of getting granular about how much money he thinks he's going to spend and setting money up according to the way he thinks he's going to spend, Paula. I don't know that I have any advice over and above what we've talked about so far. The only other piece of advice that I may have is right now shovel as much money away as you possibly can. I look at his numbers and they look fantastic. They have nearly half a million dollars

in a traditional 401k. Their home is paid off, free and clear. They have no debt. They have money in an HSA. They have money in a 529. Their child is very young. And so relative to that child's age to have 15,000 in a 529 already is amazing. That's fantastic. And given that the benefit of a 529 is that tax deferred money is able to grow and compound. Prioritizing that 529 now as early as possible is absolutely the name of the game. It makes it so much easier later. Just so much easier. Let the market do the heavy lifting. Joe, I agree with you. It seems to me that Lucas is on the right track. I don't see any major changes that he should make other than if at some point in the future, either he or his wife decide that they want to exit out of the work that they're currently doing, then they would need to reallocate their positions accordingly.

But assuming that they both plan on continuing to work, then keep on keeping on. The time that I would make a change would be the time that they decide that they have some type of an exit date. I guess if we're going to get granular at all on where he's saving, because he really want to know about the taxable brokerage. What's funny, Lucas, is you want to know about the taxable brokerage. I want to know about the tax shelters. And the reason I want to know about the tax shelters is I want to know that I've got those later years taken care of with the money that I've saved there so that I can feel very comfortable about not saving more money into those spots as much while I chase the taxable brokerage more.

So I think that's just a good piece of retirement planning software, Paula, and looking at the ages 55 and after, and then comparing that number with what's a good conservative amount of money that the money inside the tax shelters will reach. And then I know that when I put money toward the taxable brokerage account, that I'm safe to use that money earlier, that it's 100% flexible. then I'm not worried about age after 55. I've got that taken care of. And this again, I think, is where the nebulousness of the, what is Lucas going to do next really plays into this, because ostensibly, you could take everything that I just said, be a little less efficient,

and just sock money into the taxable brokerage account, because now I have it for now or later, right? I've got no restrictions. Right. But knowing, that I'm going to need money for later no matter what. But he's got half a mill in the 401k. Yeah, my gut says that might be enough. Yeah. That might be. But I don't know what his expense, what his goals are.

So I think it's worth, you talked about earlier with Debbie doing just a little bit of math. It's fairly easy. Grab a calculator online and do some simple, some pretty simple calculations around retirement expectations and then give that money the seal of approval that you're good. I also think there's not that much money in the HSA. And if he has the ability to put money in the HSA, that would be great. Because no matter what happens, if he needs to spend that money sooner, he can spend it sooner. If he needs to spend it later. If he doesn't need it, he can save it for later. Exactly. In a way, for me, it's better than the taxable brokerage account because you know he's going

to need the money for health concerns at some point anyway. Right. Yeah. I was wondering about that as well. I don't know if they're still eligible to put money in an HSA. When I saw that they only had 10,000 in an HSA, my immediate assumption was maybe there was a point in time in which they were eligible to make those contributions. Some legacy thing. Right. Yeah. Maybe five years ago they had a high deductible health plan that was HSA compatible, but maybe they no longer do. Sure. Yeah. Well, if that's the case, Lucas, then forget it. Right. But no, Joe, you're right.

That was an unstated assumption on my part. So if you are still eligible to make HSA contributions, then absolutely do that. But do not go into a high deductible health plan purely for the sake of getting HSA eligibility. Don't let the HSA eligibility wag the choosing a plan dog. We're going to see how far we can stretch that out. Right. Don't let the make a podcast tail wag the financial advice dog. I don't know what that means.

And Lucas, I want to commend you on the fact that your investments are allocated along the efficient frontier. That is a fantastic way of allocating your assets at this juncture. So assuming that you and your wife will continue to work, it sounds as though you're doing everything right. So keep on keeping on. Oh, and speaking of Efficient Frontier. Right. Oh, ho. So Lucas, thank you for the question and congratulations.

And Joe, to your point, speaking of the Efficient Frontier, we're going to have a discussion about that next. Our final question today, which is about the Efficient Frontier, comes from Grant. Hi, Paula and Joe. My name is Grant and I've been a long time listener. I really love all of your practical content. I have a question, though, on the efficient frontier. In listening to a lot of these past episodes, I can't help but feel like there's a whole lot of cherry picking

and timing the market being implied in the way you and Joe are talking about it. Specifically, the number 1970 keeps coming up, or I should say the date 1970 comes up. And that just has red flags written all over it, because for so long, you all have cautioned all of us investors against thinking about a specific time frame as an arbitrary date from which somebody is going to pick their returns. In this case, why 54 years?

What is so significant about 1970? What happens if you go back to say 1965? or earlier. I know some of this is probably the limitations of the tools, but I would really love to hear your perspective on these things and justify it in a better way so I can help understand the efficient frontier more effectively. Thank you and keep creating all the great content. Grant, fantastic question. Thank you so much for the question. And I'm going to tease Grant just a little bit, Paul up by saying that, Grant, I get a nickel every time somebody uses the efficient frontier and you're on to me. I was trying to manipulate all the data. Damn it. You're a little efficient

frontier affiliate graft. That's right. We were going to see how long we could pull this over. You're actually part owner of portfolio visualizer, Joe. Is that? It is so. And why did I have to say on those training sessions to go with the free part and not click that big button. Oh, foiled again. What was I thinking? And actually, Grant, I know you're not the only one that wonders that question. And when I was a financial planner, I worked with a bunch of engineers. And I love your spidey sense, right? I love the fact that you're going, wait a minute. Why is he worried about 52 years? Why is he talking about, which is, by the way, because the time frame was 1970 to 2020. on that material.

So why that? There's actually a very simple answer, Grant, and to everybody else who's wondering this, which is when I went looking for this data, when I went looking for the fact that I knew that VTSAX and VTI were not efficient and that you could be more efficient, I wanted data that proved it.

And so when I went diving into the data banks, a guy that does a ton of data around this, was Paul Merriman and Chris Peterson. And they run a nonprofit foundation to teach people financial literacy. So I've known Paul Merriman for a long time. I don't distrust Paul Merriman's motives. Also, Paul Merriman's repute in this community. Imagine if he were making all this stuff up. And plus, you can look at the different portfolios that he,

has worked through in all of his writing, and it's not all 52 years, I just cherry picked that one only to make the point to VTSAX devotees who misunderstood what J.L. Collins was actually saying because he wasn't saying it was efficient. He wasn't saying it was the best way. He was saying you don't need to be neurotic about which investment to pick when you start out, pick the total stock market, and you're going to be okay. And so my goal was simply to show devotees the Paul Merriman work, and it just happens that it was 52 years. Now, that's not the only piece that he has, by the way, Paula. You can go into any of Merriman's huge stack of research, and they have all kinds of stuff. I just focused on that one because it made the very simple point that I was trying to make.

And my goal with the Efficient Frontier, by the way, and you know what, whether you use it or not, is completely up to you. My goal was just to show our community that if you get a little bit more scientific and look under the hood, A, it's not as hard as the words of Fish and Frontier sound like. And B, it's fairly easy to see why this won a Nobel Prize. Just the fact that you can go back to any time frame, you can go back. You can go back just 10 years, look at four different asset classes and say, put these in a pile in the most efficient way over the last 10 years and it'll do it. You can exclude, you can include, you can go 52 years, you can go 26 years, you can go, whatever.

By understanding and knowing what you have and having that money based on your goal, I think the big thing that happens then is when bad things happen in the market. And listen, every single strategy has an Achilles heel. There isn't one that has one. If you think you have a strategy that doesn't have an Achilles heel, you don't understand your strategy because there isn't one. So understanding in the case of the efficient frontier what the volatility is on your portfolio and why you placed it the way you placed it does the most miraculous thing I can say as a former financial planner.

And that is you don't enter the new. clear codes and blow up your plan the second something bad happens. That truly is what I'm looking at. Now, to a second piece of this that I also want to comment on, I don't love the portfolio Visualizer tool grant specifically for what you talked about. Because if I put every asset class in there, I don't know why some of these asset classes, they only have like six years of data. I have to then exclude that asset class because this particular tool doesn't have that. And if that drives you crazy, I'm with you. I'm totally with you. I want to see 52 years. I want to see 50 years. I want to see 42 years. I want to see 40 years. I can't even look back at all Merriman stuff using this particular tool because the tool isn't robust enough to dive completely into Merriman's research from the early years. I just know when I look at his data that I can check and knowing again he and Chris Peterson and the work that they do that that's been fact checked a thousand percent. They're going to be. is for people to have more money. I know that's an unsatisfying answer. I know that that's not what

you're looking for. What you're hoping, I think, is that I'll show you 51 years of data, 50 years of data, 49 years data, 48 years data, 47 years data, and print out all the different years. And here's how volatility would have expected it. I mean, Paula, maybe we can do almost like we did with money with Katie and have Chris Peterson or Paul join us for a discussion about their research. You know, I've spent quite a bit of time digging through the enormous trove of data on Paul Merriman's website. If you look at our YouTube video in which we interviewed Paul Merriman, and we'll link to that in the show notes as well, we on the YouTube video showed some tables, some charts from some elements of his research that we were able to find after hours and hours and hours. of looking through all of his data. But he has so many tables and so many charts and such robust data on his site that it honestly

takes an enormous degree of focus and an enormous degree of expertise just to understand how to read the data that he has produced, how to read the research that he has produced. Yeah, in a way, I feel bad because I pick this particular piece of research when, to your point, Paul, there's countless stuff. Now, why the one I picked happens to be 52 years and not just 50 years? That's a question for Paul and Chris that I have not asked. But I can tell you the reason that I picked it. The reason I like this study is it kind of shows Merriman and Peterson retooling and going, okay, let's see if we go from 10 funds to only four. Oh, we accidentally made more money. Let's see if we go from those four funds being worldwide and US to just US.

Oh, we made more money. Let's see if we go, well, it looks like value has been closer to being more efficient in what we're looking for. Let's see if we skew more toward value. And you can see then, Paula, them tweaking and tweaking and tweaking, which is why I like that specific piece of research. Because it shows, hmm, what if we did this? What if we did this? What if we did this? What if we do this? Now, the fact that that's coupled with 52 years, I don't know. So the question that I have, Joe, is as I listen to your answer, if I were a college professor whose job was to deconstruct an argument, the first thing I would do is I would pull out anything within your answer that says, Paul Merriman has a great reputation in this community. Paul Merriman is a trusted source. Like, okay, let's remove that. That, right? Let's make this identity agnostic so that it is not a referendum on any given individual.

Let's also remove the component in which we talk about the fact that it won a Nobel Prize, the research, not Paul Merriman himself, but the research around the efficient frontier from Harry Markowitz won a Nobel Prize. Let's pull that out as well, right? Let's pull out any appeal to authority as a corroborating construct. and let's look in an isolated way purely at the data. The question then that I have is, is there some type of tool or method that grant or any average individual could use

in order to replicate this research on their own? Because in the scientific method, a thing is proven if it's replicatable. Your answer is this. It is out there. I don't know where to find it for a person who is not a professional. What is the distinction between tools available to professionals versus tools available to lay people? Because the tools available to lay people don't go back that far, and I have no idea why.

Not every asset class goes back that far. So my problem with replication using portfolio visualizer is that for some reason, any of the people that have dug into this, some of the asset classes, they only go back seven, eight years, sometimes even shorter. And that drives me crazy because there is data for these asset classes, not like somebody came up with these seven years ago. I don't know why portfolio visualizer stopped. I don't know a better tool when I get to just the basic stuff. I can come fairly close. And I think that a lot of our people in the afford anything community can as well. but I can't get to the exact stuff because my tool isn't robust enough.

I know that when I was a pro, I had access to research a tool that, frankly, was easier to use. It cracks me up because you'd think it would be the other way around. It was easier to use. It was more intuitive. It was really fun. It was really fun. Portfolio visualized you were kind of fun. This tool was really fun.

But I don't have access to that anymore. Because you're no longer licensed. Essentially, you have to hold a license in order to access. Yes. What was the name of that tool? It was just an efficient frontier tool that was proprietary to American Express and then to Ameriprise. So I don't have that. That piece is frustrating.

I think, though, diving into the research that's on Merriman's site and then corroborating that with other outside, which there's ton, you can go to Morning Star, you can go to, you know what I mean, the year by year. So I can go to a Morning Star chart. I can look at what Merriman input is. and I can make sure those two numbers align. That's actually easy to do and definitely can be done. If somebody knows of an available tool, because I know we've got some phenomenal money nerds here, that I have not been able to find,

I would love to hear about other efficient frontier tools that I could go dig into as well. At one point, Paula, I was working with a tech guy on seeing what it would cost to build it myself. There's a quote from Buckminster Fuller in which he says, If you want to teach people a new way of thinking, don't bother trying to teach them. Instead, give them a tool, the use of which will lead to new ways of thinking.

And what that tells me is that if a person wants to learn the efficient frontier, the best way to do so is to play with tools that teach the efficient. frontier. That is so much more effective than hearing anyone talk about it. Right now, portfolio visualizer, despite all of its limitations, is the best tool that I am aware of that the average layperson can access that will help you learn the efficient frontier. And so for any questions that you have around the historical record and how far it goes back, I mean, just really for any questions that you have about the efficient frontier at all, go play with portfolio visualizer. Friday night with a beer, just sit down and seriously, have some fun messing around with the variables in portfolio visualizer.

And I think that will show you a lot. But you're right, the limitations, the data set limitations there are frustrating. And I don't know of any better tool. You know this is interesting, Paula. I don't have an answer, so I probably shouldn't say this. But one question, and I've said this before on the show, always ask who, not how. And so I just put it out there, like, who are my who's that might know this? I actually know a couple who's.

And I'll get back with everyone on a future episode, too. Ooh. Is this a cliffhanger, Joe? Unintentionally. I should just shut my mouth, but I really, really want to solve this riddle of finding a better tool. And if there is one, then I just thought of a couple of leads that are people I probably should ask before this. All right. Well, stay tuned. Dun dun dun. For a future episode in which we pull the minds of some of our frontierist friends.

So Grant, thank you for the question. And have fun playing with Portfolio Visualizer. Joe, we've done it again. All that in one episode. much. I didn't think we could do it, and we did. Oh, we can always do it. We can do anything, just not everything, but anything. Oh, where have I heard that before? It kind of sounds familiar. Joe, where can people find you if they'd like to hear more? You will find me at the Stacking Benjamin show every Monday, Wednesday, Friday. It's a variety show about money. It's meant to be a you can do this show, a confidence boost and hanging out with friends like Paula Pant. And that's on our Friday show. It's Monday, we have our mentor Monday and Wild Wednesday where we have our TikTok minute, where we look at

some hilariousness on TikTok and we dive into a headline about you and your money and some of the people who might be doing things that might separate you from your money. We've done lately, we've talked about some of the rash of layoffs, Paula, in the tech industry and what happens if you get laid off? What should you have prepared even if you think your job is safe? We talked about a lawsuit against a major brokerage firm where the firm really did everything correctly, quote unquote, by the book and still lost a lawsuit because an older person got scammed and they didn't ask enough questions. So how do you fight these battles?

We take headlines like that one and talk about here's what the standard is. Here's what your advisor should be asking if you have advisors. Here's what you need to do to keep your. money safe. So we take different headlines and do things like that at Stacking Benchments. Amazing. Well, thank you for spending this time with us, Joe. And thanks to all of you for being part of the Afford Anything community. You can chat about this episode with other fellow peers inside of our community by going to Affordanithing.com slash community. If you enjoyed today's episode, please do three things. First and foremost, share this with your friends, family, neighbors,

colleagues, your dog walker, your pet sitter, your barista, share this with all of the people in your life. Second, subscribe to our newsletter. Affordanithing.com slash newsletter. It is up and kicking again, and we send amazing stuff there that we do not put anywhere else. So for exclusive content, delivered to your inbox for free, Affordanthing.com slash newsletter. Thank you so much for tuning in.

This is the Affording Thing podcast. I'm Paula Pant. I'm Joe Sal C-high. And we'll meet you in the next episode.