Afford Anything - Q&A: The Case for NOT Paying Off Your Student Loans

Episode Date: April 14, 2026

#706: When the numbers look straightforward—but the rules, timing, and future are uncertain—how do you decide what to do next? KJ has $90,000 in student loans, a recent inheritance, and a lot of uncertainty around changing repayment policies, and is trying to decide whether to pay down debt now or hold onto cash in case future payments become unaffordable. Anonymous (let’s call her Andrea)  is about seven years away from retirement with $1.9 million saved and is thinking about sequence of returns risk, and is wondering whether working part-time could help protect against a poorly timed market downturn or simply delay the risk. Anonymous (let’s call him Andrew Ryan)  is a retired homeowner in their early 70s who recently bought a second home to be closer to family and is planning to rent it out part of the year, and is wondering how to structure it and how taxes work for a property that’s both personal and income-producing. Learn more about your ad choices. Visit podcastchoices.com/adchoices

Hey, Joe, pop quiz. Oh? Yeah. Question is, what do the following three things have in common? Paying off your student loans, managing money during the first couple of years of retirement, and having an Airbnb. Is this a personal finance dad joke? Because I love those. Those are great.

No, no, no. It's a trivia. It's just a question, just a trivia question. Oh, man. What is the common thread between student loans, the early, the early years. of retirement. Early years of retirement and Airbnb. Yeah, yeah, and hosting an Airbnb. Well, if you host an Airbnb in the earlier retirement, certainly it's extra income and with, you hope your student loans are repaid by the time you get there. By the time. That is actually

a good through line, yes. But I assume that's not right. The other thing they have in common is those are the three questions we're answering today. Oh. We should get that started right now. Welcome to the Ford Anything podcast, the show that knows you can afford anything, not everything. This 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, ish, I answer questions from you. And I do so with my buddy, the former financial planner, Joe Salisie. Hi. What's up, Joe? Paula, I'm so excited because we are going to have a lot of fun today. Just based on these questions, I think there's going to be some great discussion. We also, two out of our three callers are anonymous, which means we have to give them names. That's coming up a little later in the show.

We're going to start, though, with this question that comes from KJ. Hi, Paul and Joe. I love your opinion on my student loan repayment situation. I currently have about 90,000 in. student loans, government student loans, direct student loans, which are currently in forbearance due to the sort of court issues and changes that have been happening. I'm on the save plan, which they're trying to remove, and they're trying to figure out what's going to come next. So until then, things are in forbearance, but still growing interest. I also haven't had to

re-certify my income for quite a few years, and I've gotten married in the meantime, and my partner makes quite a bit more than I do. So when I do need to recertify, which will supposedly be in December, of 2027, my income on which repayments are based will be much higher. In addition, recent changes and low repayment options have massively increased the monthly payment for a lot of people, sometimes multiples of their current payments. So I worry that the repayment amounts, when they actually come through in a few years, could be in the thousands per month and above what I can actually afford. I recently inherited some money. It's about 20 to 25K. That's currently in a savings account that right now is getting 3.3% interest. It is variable. I can go ahead and start putting that

towards my loans. That money is basically earmarked for loans. All of my loans are at 6.8% interest. And so I'm debating whether to put that money towards paying off some of my loans now. And financially that makes more sense because the money is making less. in interest that I'm getting charged in interest on my loans. But regardless of how much I pay now, it won't impact my monthly payments once they come due. It'll only reduce the number of months that I would need to make the payments to finish paying them off. So it also seems like I might need to hold on to this cash to be able to afford those payments in a few years. Most likely, I guess I would still keep them in a savings account, maybe a short-term CD or something,

but obviously I wouldn't want to put them in the market or something riskier, given that I would need to use it in a few years. And to add to my uncertainty and everything is the fact that student loan repayment policies can change dramatically with different administrations. So this could change and get back to more reasonable payment terms in the next few years. So I'm curious how you guys would approach these various tradeoffs and uncertainties. Are there other things I haven't thought about that you might consider? but I would love to get your opinions. I appreciate you guys. Thank you. KJ, thank you for the question.

Hello, a quick update before we get into the answer. Joe and I recorded this answer before everything changed. One of the challenges when you record in advance, which due to our schedules we have to do, is that sometimes in between when you record and when you release the episode, news happens, and that's what happened here. So we're going to play the answer for you so that you can hear our thinking process, the decision-making framework, since you, for all of you listening, might be in a situation that is similar to the situation that the caller was in, where you're trying to make a decision with incomplete information and you don't know

what's going to happen next. So I think the answer is valuable for the decision-making framework that it highlights. But just so you have an update on what's going on with the, save student loan plan. Here's the highlight. The Department of Education has shut down the plan. That means no new people can join the Save plan. Current applicants get denied.

And the 7 million borrowers who are on Save are going to be moved to other plans. On March 28, the Department of Education issued guidance regarding how that's going to work. And it's a little confusing, so hang with me on this. You, KJ, the caller, and anybody else who's under the Save Plan, you're going to be notified by your loan servicer that you need to switch to another plan. When your loan servicer notifies you, your 90-day clock starts.

So KJ, this caller, is going to get a notice either by email or a servicer message. That notice will include her specific deadline, and from that point, she's going to have 90 days to pick a new plan. Now, in practice, many people are going to get noticed right around July 1st, Some people might get notified a little bit later in July, so people will have different 90-day windows. But July 1st, specifically, is when new plans, like the tiered standard plan, become available. And July 1st is also the date that loan servicers are expected to start sending these transition notices. So July 1st is the launch date for these changes. Now, if our caller KJ does nothing, or if any other save borrower,

does nothing, then after that 90-day window ends, they'll be automatically enrolled into either the standard plan or a tiered plan. All of that is to say, the changes get rolled out starting on July 1st, and then everyone gets 90 days to make a decision based on their individual notice date, which means, assuming that you receive your notice around July 1st, that means it'll be around the end of September, if it's July 1st and 90 days from that is September 29. that's when you've got to pick your new plan. That's the deadline by which you pick your new plan. Otherwise, you get automatically enrolled into either a standard or tiered plan.

That's the latest update. That guidance came out on March 28th. We recorded this answer before then. And so here is our thinking process as we thought through prior to March 28th, how to grapple with a financial decision in the face of uncertainty. This is a fascinating one. We actually, we wanted to start with, Joe and I had a pre-show meeting. We were talking about which one do we want to start with. We never share, by the way, we never share what we're going to say, but we do share like first, second, third. We save, we save our thoughts about exactly what we're going to say for the show. Exactly, exactly. Yeah. So we have no idea how the other person is going to respond, which is how you get these like live real time debates. You're wrong. No, you're wrong. What we both liked about your question, is that it paves the road for an interesting conversation around managing cash flow versus managing interest rate. That's the broad theme here. And what's particularly interesting about it

is that you're not trying to manage cash flow at the present moment. You're anticipating that in the future, your cash flow might become tighter. So the question is anticipatory cash flow management versus optimizing for interest rate. Which is super cool, Paula, because I think we should think about our money as if we're the CFO of a company. Too often we get embroiled in these emotional thoughts, well, I got to do this or I really want to do this or I feel so much better if I paid off that loan. Don't get me wrong.

If it really makes you feel a lot better, paying off that loan, even if it's suboptimal, if it gives you confidence, that can really help behavior. But the more you can train yourself to think like a CFO, the chief financial officer of a company and make non-emotional decisions about your money, better you're going to do with your money. You're going to have a better debt strategy. You're not just going to have debt. A lot of people just have debt. CFOs have a debt strategy.

They go, you know what? I don't want to have a mortgage forever. But I'm going to take the bank for the best terms I can get and then pay it off however the hell I want as long as it's inside of their terms. Other people will go to the bank and they'll go, oh, you've got a 15 or a 30? Well, I don't want to pay it off in 30. You want to pay it off in 15, so I'll take the 15. A CFO will pay it off at 18. They'll pay it off in 22. They'll pay it off in whatever fits the narrative the best for what they're trying to build. And that's what I like about KJ's question.

Right. And that CFO will rethink their payment strategy quarter by quarter or year by year depending on new economic headwinds or tailwinds that the business faces. So I can see how she's looking at both sides of this equation. Number one, I'm going to need this cash in the future. Or she might. And, you know, that's because it's anticipatory, right? She has no idea what's going to happen with her student loan repayment to make the payments. But on the other side, if I can knock it down, that's really what this money's here for. Right. Exactly. But between those two things, if, you know, what would a CFO do? Cash flow management comes first. because cash flow management is what allows you to survive.

Whereas optimizing around interest rate, it helps you build your net worth in the long run, but the long run doesn't matter if you haven't survived the short run. And what is interesting is the number of times on this podcast, do people just go back and if you've been with us for a while, you think about this. How many times have we talked about the idea that free cash flow wins the day? When you evaluate stocks, we evaluate stocks this way.

We look at, hey, does a stock have great free cash flow? If it does, they're probably going to win because they can take advantage of opportunities when times get rough. Like we've seen in the market lately, right? There are companies right now that are squirming because they're hamstrung by a bunch of debt and because they are worried about making payroll next month. And then there's companies out there that are going, this is going to be a field day. Because we can take advantage of the fact that it's a problem. people are sweating. Right. Exactly. Exactly. And I, the key words to me, KJ, in your question,

the words that really made my ears perk up and go, ding, ding, ding, ding. You talked about how your required payments could potentially reach a level that could be difficult to afford. And as soon as you said that, my ears were like, boom, there's the answer. That's the answer right there because the situation that you don't want is you don't want to get into a situation where your new student loan payments are so high that in order to make those payments and cover your other bills, you end up getting into credit card debt. You end up selling your car and then financing another one so that you can free up some cash flow so that you can pay your bills, right? You end up taking extreme measures because cash flow in the short term

is tight. I've seen people do that and it's not pretty. And so managing for immediate cash flow, think of it like this. Managing for immediate cash flow is playing defense. Optimizing for the interest rate is playing offense. And you've got to have a good defense first before you can play offense. So do we want to talk then strategy? What would you do, Paula? I would hold on to this, keep this as dry powder until she knows what's going to happen with the future of these student loans. I hate it when you're right. It drives me crazy. Oh, I saw Joe make a face and I thought he disagreed. No, I agreed, which is so annoying.

Joe hates agreeing with me. For those of you who are new here, Joe really hates it when we agree. here's the way I look at this. I really don't like waiting for the government because if you're waiting on the government to make a move, you're going to wait forever. But here's what the flaw is. So let me give you my optimal strategy. And then I'll tell you the flaw in the optimal strategy. Clearly, she could, if we didn't have all of this government intervention right now happening, she could pay off part of the debt, refinance some of those student loans, consolidate those student loans to solve for a less egregious payment. And I don't think her interest rate's going to change a ton.

She's going to have to monitor interest rates while she does this, but I don't think they're going to change a ton at this particular juncture. So she could do this to make it so that she preserves free cash flow. in the future by refinancing the loans. Doing that right now when she has all of this government intervention could kill the plan. I mean, it could kill everything if she refinances now because a lot of these consolidated loans aren't eligible for some of this government help that the loans that she has are currently.

So if she nukes one of the loans or some of the loans, then she really does something that's suboptimal. You're never going to have complete clarity. That's a fallacy. I think you've got to be comfortable with a little bit of ambiguity. But right now, there is a ton of ambiguity. There's supreme ambiguity. So I might set a timer. Maybe it's a year that I make a decision on this.

I think I sit on the cash. the loans are what they are for that amount of time. And then once a year goes by, I think then I decide whether this is the right time to make the move or not. What would you do if a year goes by and nothing changes? We're in exactly the same situation that we're in today. Everyone's saying, well, I don't know, I don't know, maybe blah, blah, blah. I think at some point the move is to pay off part of the day. So here's what I would do.

KJ didn't mention her emergency fund. I'm going to assume some of this money might be emergency fund money. If she doesn't have an emergency fund, I might pay off whatever amount she's comfortable with to keep an emergency fund, pay that off, refinance it. If we're not getting any more clarity, then I just got to assume. At some point, I got to move because the problem she has is the clock truly is ticking because every month that mountain of death, is being added to because it's in forbearance and she's not making payments. And so she's getting behind every month as she waits. I don't think she can wait forever. I think at some point she's got to go, you know what? The government's not moving. They're still not moving. There's still no

clarity. I just got to go. And clearly, I think the move that she's contemplating is what I mentioned earlier. Pay off some of it, refinance the rest of it so that she gets a payment structure that she's comfortable with, good CFO move there by not doing one or the other, but by doing both, and then live with whatever the government does in the future, which is what most of us do on a daily basis anyway. So essentially, you don't want to wait for the government forever, but give it a year, see what happens. And if nothing changes within a year, then it's just time to be proactive and say, to hell with

what they're going to do. I'm just going to make the moves. And that's not even, this is, by the way, KJ, for me, I don't know about for you, Paula, but for me, it's an exception to the rule because the rule is never wait on the government. But I read about this yesterday. Right. In my daily reading, like in probably three of the last five days, I've read about Department of Education moves and things on this front. So this is an exception.

KJ, in that year while you're waiting, the other thing that I would simultaneously be doing, is take a look at your fixed expenses to see how you can nudge those down so that just in case your monthly loan payments become a lot higher and become difficult to afford. And again, that was for me the key phrase that you said in the question that you asked when you talked about how potentially it could become difficult to afford. And whenever something becomes difficult to afford. You know, you look at your variable costs and you look at your fixed costs. And most people target their variable costs first because those are the easiest ones to change. But as a long-term strategy, if you can reduce some of those fixed costs, those are much harder.

They require a much bigger lifestyle interruption, but they make a much bigger dent. And so what do I mean when I talk about fixed versus variable costs? So I think the mistake that a lot of people make in the budgeting and personal finance base is when it's time to save money, the first thing you look at is how often do you go to restaurants? How often do you buy new clothes? Those are these variable costs that's a low hanging fruit. And the reason that we target those first is because there's very little friction to changing that. like the friction around not going to a restaurant as often is near zero. That's something that you can put into place today.

And boom, it's locked and loaded, it's in place, you're done. So the friction around a decision like that or the friction around a decision like, from this point forward, I'm not buying any more clothes for the next six months or the next 12 years. Oh, not that. There's no friction around those choices, and that's why they tend to be the first things that people reach for. Cancelling Netflix and HBO, there's no friction, so it's the first thing people reach for. The problem is those are relatively, A, they're relatively small moves. Most of those things don't move the needle that much.

Maybe restaurants do. Maybe DoorDash, depending on how much you're spending. Most of those things don't move the needle that much. And B, after two, three, four months, it's easy to slip back into those habits. So often those behavioral changes don't last that long. Now, compare that with tackling some of your fixed costs. Like, if you're a renter, moving out at the end of your lease term and moving to a cheaper home, a cheaper apartment or house. That is high friction.

there's a huge level of work required. There are even costs, moving costs required to do that. But once that's locked and loaded, you get a much bigger long-term payoff from that because of the fact that you endured that friction. Same thing with I mentioned earlier. I know someone who, in order to free up some cash flow, he sold his car. He went without a car for a little while. then he eventually financed into a different car. But by virtue of selling his car, he got a lump sum of

money, which he at the time needed. That's a high friction. That's like not something that you want to be in a position that you would have to do that because it is so high friction. But huge material change. You could take that lump sum and, uh, lop off a bunch of debt that represents X amount of cash flow. He had credit card debt. Credit card debt with like a 23% interest rate, boom. I mean, talk about knocking out a high interest rate. worth it. But again, and you made this point, and I want to reemphasize this, Paula, which is, if he makes that move and pays off that credit card debt and doesn't change the behavior, then what did you do? You just took a paid off car and the lump sum of money,

wiped out some debt that came right back, and now you have a finance car and that debt. So you really have to couple it with budgetary change, which means money meeting, which might mean some type of a zero-based budget for a while to get your handle on. You know, Laura Vandercom talks all the time about impersonal time management, about tracking your time, which is so annoying. Tracking every dollar's annoying. But it's a great first step to start asserting change in your life so you don't, you know, get rid of the restaurant and then start going to the restaurant again.

Right. So, KJ, during the year, while you're sitting on this dry powder and waiting to see what's going to happen with student loans. The question that I want you to ask yourself is, how do I bring down some of my fixed costs so that if my monthly student loan payment were to go up, there would be space in the budget for that. And the reason that you want to bring down the fixed costs is because it lowers the baseline. And the second place to look after fixed cost for most of us is, are there ways then to increase your income? I will say this, Paula, in defense of the little things, and this is just a one-time move.

If you're new to this community, if you're new to this whole area, when I would first work with people who just had a really sloppy budget, like a super sloppy budget, and they're just getting started, you can take a budget. of those little things at first and really clean up your life if you're diligent. So you could take HBO, Netflix, Apple Plus, dining out, ridiculous clothing expenses that you already know you shouldn't be making. Take all those little things and pop them together. And we could create significant change in a person's life that way. And that would also then bring on material change in the way that you felt, which was sometimes very difficult as well. So much like it's very difficult to get rid of your car, it's very difficult to change houses. It also is very difficult to get rid of a bunch of your streaming services at once, cut your clothing budget back much more.

Stop going out to restaurants because you get these knee-jerk dopamine hits that now are going away. and you have this withdrawal. I even still have it. Man, last night, can I just say last night, my dopamine need to eat at a restaurant meter was so high. It was so high. I had to reframe it into, I'm having so much fun with the gamification of eating everything in my refrigerator that I had to, in my head,

get myself in a place where I got a dopamine hit from the gamification of eating leftovers. Because at first I was like, I don't want leftovers. Man, wouldn't it be fun to just go to a restaurant? I'm like, what, what is this all about? It's just a random Wednesday. Like, why the hell am I going out to a restaurant on a random Wednesday? And then I thought, oh, this is just, this is just, you know, my, my, my, my quick fix. Yeah. Well, and Joe, you work from home. And I know when I was working from home a lot, sometimes I would want to go to a restaurant just to get a change in scenery. A hundred percent. Once I figured that out, then I joined a gym, right? Because it gave me the emotional thing I was looking for, which was a change in scenery. But the cost of a monthly gym membership is way cheaper than the cost of going to a restaurant three nights a week. It's so funny you say that because I coupled the gamification of not having food waste, which I love that game. That's such a fun game.

Eat everything in the fridge is actually a really fun game. I coupled that with pop in some headphones and turn on Audible and go for a walk. And I got out of the house and I saved all that money. I mean, double save, right? I didn't eat at the restaurant and I didn't have the huge third waste, the average American, waste 30% of what's in our fridge. KJ, all of that is to say, prioritize cash flow. Exception to the rule, KJ.

You are the exception to the rule. Yeah, I agree. As a general rule, I don't like waiting for the government to make a move. But in this particular case, it does make sense to wait for the government to make a move. So frustrating. Yeah, exactly. And by the way, some of them are analytical afforders are going, okay, why a year? Like, where does that come from?

I want to talk about that too because every investment at a certain point is a leap of faith. Every investment is leap of faith. When you put money into an investment, it is a leap of faith. Now, what we need to do is narrow that leap of faith gap. My goal in doing homework around an investment is to create more certainty, but also to be comfortable with the fact that no matter what I do, things can go against me. So leading with the fact that this is a leap of faith is, I think, a great place to start mentally, that everything could go against us. But when I think about six months and the rate of change for the government waiting six months to see if the government makes a move and the fact that we also have a Supreme Court thing going on right now and two of

Trump's past things have been thrown out in Supreme Court, Biden's student loan stuff was thrown out in Supreme Court. So six months is too short for me. This was my thinking. In six months, you could still really step in it with this current situation. A year and a half, just too long to wait at a 6.x percent rate. I don't want to wait that long on that much debt. Like a year and a half is too long. So the answer is, is one year arbitrary? Yeah, it is. But it's, but it's, because of the fact that six months based on what's happened the last 20 years with the Supreme Court and with executive orders is too short. A year and a half based on the interest rate is too long. Joe, you ask, is it arbitrary? You know, there's a distinction between directionally where we're pointing and

precision. I like to say one of the things I tell my students in my, I have a course on rental property investing. And in the rental property course, we walk through a lot of these formulas around Caprate and around, you know, various return formulas when you're analyzing the returns that a house could produce, a rental home. And the problem when you're crunching all these numbers on a spreadsheet and running through all these formulas is that you end up with an answer that is unduly precise, right? You end up often with answers that are precise to two decimal points. And when you see those decimal points, that level of precision can often get conflated with accuracy. And so one thing that I often tell my students is never conflate precision with accuracy.

I tell that story because when we say a year, we don't mean precisely 12 months from, From the day that this episode airs, we mean exactly, you know, 365 days from now. Like, no, directionally, you're aiming for long enough that there could be a decision that sticks, but not so long that you're letting the interest rate linger. Yeah. But KJ, overall, I love the fact that you are thinking like a CFO. Absolutely. So, KJ, thank you for the question.

And best of luck with that debt eradication. Coming up next, we're going to talk to a couple that's building a $1.9 million portfolio for retirement. They've got some questions about sequence of returns risk, which is that risk that you face right in the early years of your retirement. Welcome back. Our next question comes from Anonymous. Hi, Paula and Joe.

I'm calling with a question about sequence of returns risk. My husband and I are saving for retirement in approximately seven years, and we're on track to have $1.9 million saved in our IRAs and 401 case by then, which should be enough to cover our expenses using the 4% rule. I've been thinking about our sequence of returns risk when 233 draws closer. Other than dry powder, would working part-time be a way to mitigate that risk, or does it just kick the can down the road? In other words, if we work part-time, just enough to cover our living expenses but no more investing or saving for our three years, would that solve the sequence of returns risk or would that risk still be there when we retire full time in 10 years? We do still

plan to have three years of dry powder, but I'd like to ease my anxiety about the effects of a badly timed market downturn ruining all that we've worked so hard to attain and would love to know if working part-time can alleviate the risk. Thanks so much for your insight. Anonymous, thank you for the question. And before we answer, we've got to give you a name. I've got an idea for a name, and it's a sneak peek of a guest who I am interviewing right now, but the interview is not going to be published until the end of June. We are bringing on a guest who wrote a book about legacy planning, which is a big piece of retirement. And in this book, she really dives into, in a huge level of detail, everything to think about when you're thinking through

multi-generational wealth management and legacy planning. It's very dense. When I was prepping for it, I had to really slow down and read every page slowly and take a lot of notes. It's extremely dense. I was very inspired. Her name is Andrea Bowman Lustig. And so in honor of that guest, Let's call you Andrea. Andrea, there's the question that you asked, and then there's the question that you didn't ask that I also want to address. And I think there are also unexpected benefits. It's so many tangents in this question that I would love to address. Because as you know, Paula, I've been studying retirement happiness lately.

What makes retirees more happy? And I think I have some good news for Andrea there as well. Oh, I wonder, because again, you and I have not talked about our answers in advance. I wonder if we're going to coalesce on this. That would suck. Please. No. Because the question, as soon as I heard it, I'm immediately thinking, oh, oh, I hear the question

that she's not asking. And the question that she didn't ask stood out to me. And I wonder if directionally it's similar to what you're thinking. But all right, before we get to that, Andrea, let's start with the question that you did ask, which is, if you work part-time, does it mitigate sequence of returns risk, or does it just push the can down the road? The answer is to think of it like this. I'm going to take at face value that $1.9 million is the appropriate amount of money that you need, you and your spouse need, in order to retire, that $1.9 million at your given withdrawal rate will cover your living expenses.

If that's the case, then anything that's in excess of $1.9 million softens and mitigates a sequence of returns risk. And so by virtue of working part-time, what you're functionally doing is making that pot of money bigger. Now, you are not literally making that pot of money bigger by virtue of putting more contributions into it. So the account statement might still read 1.9 million, but you're functionally making it bigger by drawing down less of it for those first three years, which gives the remaining money that's held

inside of it more time to grow and compound. And so by virtue of pulling less money out of that 1.9 million bucket, by giving that bucket more time to grow, you are in effect. quote unquote, over contributing to retirement. And therefore, you are softening sequence of returns risk. So don't think of sequence of returns risk as based on timing. Think of it as softening or mitigating the likelihood that that $1.9 million bucket is not going to be enough. Yeah, let me slice this a slightly different way, Paula, but come up with, annoyingly,

the same conclusion that you came up with. which is sequence of return risk is a secondary risk. It's not a primary risk. It's a secondary risk because the real risk is this. It's that you end up too close. This is the main risk. You end up too close to the safe withdrawal rate and it becomes unsafe. So the safe withdrawal rate is this razor's edge, which is why all the pontification in online personal finance communities, about safe withdrawal rate drives me crazy. Not because the research doesn't matter. Bill Bangin is a very smart guy and a Karsden Jeske, bigger, a lot of people call him.

His research is fantastic around building portfolios a different way to increase safe withdrawal risk. All this is valuable research. But I also feel like because we spend so much time talking about it, people in the community think, well, hell, the experts talk about it all the time. we extricate from that that this must be the most important thing. And it's not. It is not by a long shot.

The more important thing is to recognize what your own expenses are going to be in retirement because that can fuel so many positives in your retirement. It'll make it easier for you to invest. It'll make it easier for you to come up with a tax structure. And then the third thing is you then backtrack to safe withdrawal rate research. and see, am I far enough away from the razor's edge of safe withdrawal that I don't have to care about it? If I am, then guess what?

Sequence of return risk doesn't even compute. It does not matter. So, Joe, we are actually coalescing around a similar answer because if she works part-time, if they work part-time, they draw down less from that portfolio. and because they're drawing down less, they're going to be, for the first few years of retirement, they're going to be so far under their maximum safe withdrawal rate that sequence of returns becomes a non-issue.

It 100% does. And that's not the cool thing in my head about where Andrea is going with this. It does take her further away from the chance that she's on that edge of safe withdraw rate. which means sequence of returns. If she ends up with a horrible sequence at the beginning of retirement, it's not going to affect her as much. But what creates a happy retiree is also a big piece of this. Because when you're right at that razor's edge of safe withdrawal rates,

you begin worrying about every little thing, Paula. I mean, look at all the things to worry about right now. And if she retired right now, imagine you just retired. and you're right at safe withdrawal. And you're like, oh, my God, I've read about gasoline prices. Well, I don't have to read about that. I see it on my gas problem. But now we're seeing it in airline tickets.

So all this travel I wanted to do that makes me happy, I can't travel as much. If I do, whether I take a car or an airplane, it's going to show up because fuel prices are through the roof. I've got all this government intervention stuff going on. Not sure what to do with that. That makes me worry. I got the stock market has had a nice slide for the last several months. That makes me worry.

I feel like if we spend every dime because we based our spending on safe withdrawal rate, it creates a really unhappy retirement, a very worrisful retirement. So that's number one. Number two is this interesting research around sliding into retirement, if at all possible, you know, 52% of people retire on a date different than they expected. So for 52% of us, we don't get to choose. Our company chooses for us. Maybe our parents choose for us because we have to take care of them. A loved one decides for us. Maybe circumstances of life change so that we have to stop working today and all of a sudden we're retired on a different day than we thought we were.

But for the other 48% of us, the research shows very convincingly that if you're able to slowly move into retirement where you can back down your work schedule, it creates this really cool move into retirement because now I get to experiment with things more. I feel like I get involved with my own community more versus the tendency of people to abruptly move away and cut community ties, which is often the first thing we do if we go into retirement immediately. And those community ties are so valuable for a happy retirement. So we don't do that. We get more into our local stuff. We also become a spender a little more, which is really cool because, as you know, people, especially people listen to podcasts like this one, we're not people that go blow money.

We are people that have navigated either training ourselves or leaning into the fact that we are a saver. And we've had all these great saving habits. And now we have to create this retirement paycheck and people naturally freak out when they have to turn into a spender. And to be able to do that a little bit more at a time also creates happy retirement. So I think that going part-time for three years has all these happiness benefits that I actually judge as way more beneficial than the functional benefits that Andrea, you're talking about. I think it's going to solve the problem you're talking about. When it comes to happy retirement, the Wall Street Journal had a piece back in January,

which said that when we're looking at happiness in retirement, The money is important, and you asked a question based on the money, we answered it. The health care piece is important. You didn't ask about that. But as you know, that's a whole different thing. But before all that is this concept of mattering and lifestyle design by far is what creates a happier retirement than either of those two things. Joe, that was not where I thought you were going to go with that. But I like the answer.

Well, you're welcome. But that was not even remotely where I thought you were going to go with that. Yeah. I was super excited to hear the question because I think this is a great approach. I think it's a fantastic approach for reasons she didn't ask. Wow. Okay. So you have an answer to an element of her asked question.

And I have in my head a question that she did not ask. And the question that she didn't ask is, is she over preparing for those first three years of retirement? because what I heard in her question is she's got three years of cash saved, right? So she's got that bucket for the three years of cash saved. And on top of that, they're also planning on working part-time. So I actually wonder if that's over-preparation for the beginning of retirement. Monetarily, maybe. And if that wouldn't then give them the optionality, the flexibility,

to either retire a little bit earlier or not work part-time for as long if they don't want to, right? If maybe that three-year bucket could go down to a two-year bucket, if they're also going to be supplementing that with part-time work. Because when she says three,

I assume that's three years without factoring for the part-time income. Yeah. So if that's three years without factoring for the part-time income, then once you factor for the part-time income, income, then that's, you're overfunded. Well, she kind of factored for it because she said, then I don't touch the portfolio for three

years. I make enough money that I cover my living expenses so I don't touch the portfolio. So in that way, she is factoring it in. But I see what you mean. She's only factoring in partially. You factor it in completely then. Right. I think the question not being asked is, what do I really want to do for those first three

years of retirement, given that it sounds as though she's planning for multiple levels of protection, right? There's the cash savings plus the part-time income. So there's redundant levels of protection there. And given those redundant levels of protection, I think she's got more flexibility than she realizes. And given that she's got more flexibility than she realizes, that then opens up the question, what would the best possible use of those three years be? And that goes back to happiness. I'm on board with where I think you're headed, which is financially I do think it might be a little overkill. Right. And if it's overkill, then does she want to work part-time?

Does she want to work maybe part-time for a portion of the year, maybe seasonally part-time, but then seasonally take some time off and travel? But I do think the benefits of working part-time, happiness-wise, are all there, assuming that that's what she wants to do. Yeah. Yeah. Or maybe they take part-time jobs that are lower paying but more fulfilling or more interesting, lower paying than what they're currently factoring for. Well, and if money's not an issue, talk about more fulfilling, it could even become committed volunteer work. Right. If they want to, if money isn't the issue. I would also look at what's called a Monte Carlo simulation here and see what the probability

of sequence of return risk would be based on what they want to spend because, you know, Paula, if it's in the 90% range, meaning 90% of all of the outcomes. So what a Monte Carlo simulation is, everybody, if you're not familiar with this, is it's a financial planning tool where it goes through all kinds of sequences of returns, based on how your portfolio is built. And it gives you a probability of success. And some Monte Carlo simulations look at a thousand different ways that the sequence might happen. Some look at way, way, way more than that.

But it will assign then a percentage of the time that you were okay. Amateurs when they use a Monte Carlo simulation, they always wanted to be 100, right? A professional will tell you, if it's 75% or higher, you're really looking good. If it's 80, 85%, you're really, really, really good. And the reason is, is that we already know this to be true. Just based on the fact, Andrea, that you called us to ask about this means that you are, by nature, somewhat of a planner. And all 85% of the time means is that in 85% of the cases, you never had to plan again,

that you were good. But in the other 15% of cases, it doesn't mean you were screwed. I think the average amateur using a Monte Carlo simulation looks at 85% of, oh my God, 15% of the time, I didn't make it. No, it meant 85% of the time there was more planning to be done. There was planning that was to come in the future. I might run a Monte Carlo simulation as well to give you a little more confidence if you're feeling like I might be too close to that edge. Yeah. The fact that both Joe and I, without discussing it in advance, both have.

the sense that there's a possibility you might be over-prepared? I mean, that's a good position to be in, especially given that retirement is still many years away and you've got time to make plans, time to adjust, and time to think through what does happiness in those first three years look like. So thank you, Andrea, for the question. We're going to take one final moment to hear from the sponsors who make this show possible and allow us to bring this to you at no cost to you.

when we return, we're going to hear from a gentleman who he and his wife are in their early 70s. They want to get a place that they can live in part-time and then use as an Airbnb for the other part of the time. They've got some questions around that. That's up next. Welcome back. Our final question today also comes from Anonymous. Hi, Paula. My wife and I are retired and in our overall.

early 70s. We recently bought a secondary home to be close to our grandchildren. We will be living in this house for less than 180 days a year. We would like to Airbnb the house out for the remainder of the time, using an Airbnb management company to manage the property. My first question is, should we have the Airbnb business under an LLC or S corporation? Second question is, can we expense all our purchases for the house like furniture in the proportion of time it is rented out? I appreciate your input and your help. Thank you. Anonymous. Thank you for the question. And congratulations on the second home close to your grandchildren. All right. Let's talk through your questions. And I'm going to start with your second question first, which is around, oh, we have to give you a name.

We can't talk to somebody who's anonymous. We're all friends here, Paula. Oh, okay. So what should we call him? Well, I've got a great name. You know, so often, really since the pandemic and Hollywood shut down, I think most of the blockbusters have been kind of eye roll. The blockbuster movies have been, yeah, okay.

All right. Few are decent, fairly good, but nothing that really truly lit me up. I saw a movie last week that really lit me up. And it's called Project Hail Mary. it's the same writer who wrote The Martian. Oh, Andy Wheel. Isn't that his name? Yes.

Yeah. Yeah. Yeah. I love The Martian. Absolutely fantastic. Film, great book. And Project Hail Mary, same thing. But Ryan Gosling does a phenomenal job of playing the guy who's going to go out and die in space,

essentially. The whole movie is so well done that I walked out of that theater going finally, maybe the first since the pandemic, big time movie, which I didn't go. Yeah, it was okay. It was fantastic. It was really, really good. And this is a fantastic question. So let's put fantastics together. Let's call him Ryan. All right. Ryan. We'll put him together. He'll be Andrew Ryan. You got to counterbalance the Ryan with the Andrew. Andy Ryan just doesn't have the same ring to it. It's Andrew. It definitely is Andrew. It needs the dual syllable of Andy. And so it's Andrew. It needs the dual syllable of Andy. to counterbalance the monosyllable of Ryan, right? That's what you're going for. And he sounds dignified in his question, so it's a more dignified name. So Andrew, Ryan, in terms of deductions, what makes it interesting, as you've sort of intuited, is the fact that you are using this for two purposes.

You're using it sometimes for a rental and sometimes as personal use. if your personal use is greater than either 14 days or 10% of total rental days, then it's going to be treated like a mixed-use vacation home rather than like a rental property. So those are the two IRS thresholds. So again, if your personal use is more than 10% of total rental days, so let's say that you're, you know, you said you'll be in that home for less than 180 days. Let's say that you spend 175 days a year in that home, right? Meaning that you have it available for rent 190 days, you would very much meet the threshold of it being a mixed-use vacation home rather

than a pure rental property. And so I say that for the benefit of everyone who's listening, because there are some people who are wondering, if I have a rental property, but during a turnover, I crashed there for, it's out of town, and during a turnover, I crashed there for a week. Would that make it a mixed-use property? No, it wouldn't because you're there for less than 14 days. But in your case, it's different. In your case, you very much meet the threshold for it being a mixed-use home. When it's a mixed-use home, you prorate expenses based on the proportion of rental use versus personal use. what that means is that for any kind of shared expense, like property taxes, utilities, furniture, mortgage interest, right, all of that gets prorated between personal use and

rental use based on the number of days that it fits under each category. Now, there are certain expenses that are fully deductible. So you mentioned that you're going to have a property management company that manages it. that property management company is a direct rental expense, so that doesn't get prorated. You can completely expense that. You're going to use Airbnb. Airbnb has platform fees. So all of the Airbnb fees that you pay are fully deductible.

Likely your management company will charge you for a cleaning service that they probably subcontract to either they have their own cleaners in house or they have a subcontractor. and the cleaning that comes from your property management company that is specific to a guest turnover, that's going to be fully deductible. So those types of direct expenses are fully deductible, but then those shared expenses like buying furniture for the place, that's prorated. I think it's important then to really focus on what do you need to do record keeping wise. I think keeping the purchase date, cost of the furniture, rental days versus personal use days, and then, you know, folders of receipts showing properties condition before or after rental use

if you're going to do depreciation schedules. Yeah. You know, and the use of the balance of rental days, personal use days versus rental days. And I should note, rental days are days it is available as a rental regardless of whether or not it's rented. Yeah, good point. That in particular, I don't know if you've ever had the experience of moving from one state to another state mid-year, and you're trying to establish partial year residency in both states, particularly if you're trying to get away. Let's say you live in a place where there's both state and local tax, but local tax is only assessed on full-year residence. and so you're trying to not pay local tax by establishing yourself only as a partial year resident

if you're moving mid-year. If you've ever done that and you've needed to create a paper trail in which you are documenting partial year residency, then there are a couple of things that, a few best practices. One, of course, is for the purposes of state residency, you have an app on your phone that pings a cell phone tower that notes where you are every single day. And so that app will track your location. And so you'll have a record. And if you get a really good app like Maneo, it's a fully auditable record, some of the paid apps that are very, very robust. Monaco is expensive. It's a thousand a

year. But like that's a paid app. It's super robust. It has passed 100% of audits, of known audits, I should say, and it allows you to establish that residency. So you want to take a page from that playbook and do something similar with tracking your personal days versus your rental use days for the Airbnb. Because the Airbnb platform itself is not designed to track availability dates that are not filled. So the Airbnb platform directly will track the dates of occupancy, but it's not going to track the dates of availability. So what you want is a separate solution where you are specifically tracking dates of use, dates of availability. I would look to see if there is an app that does that.

I'm not aware of any because that is more of a specialized use case. State residency is much more common, which is why there's a. there's a proliferation of those. But if you can't find an app that does it, then you want a spreadsheet and you want to be updating that spreadsheet routinely. Like that should just be part of your normal weekly process is update that spreadsheet with a day-by-day tracker of today was a personal use day or today it was available but unused, available but unrented or, you know, today available and rented. Right. So you want to be just updating that very, very meticulous. in whatever tracker system you're using.

That's one thing. The second thing is I would recommend setting up an email alias, because you don't want this like cluttering your inbox, but set up an email alias where, you know, it could just be Airbnb at whatever.com. Every shred of documentation, every plane ticket to and from the location, of this rental, or every gas receipt that shows that you filled a tank in the location of this rental, every email that you've sent to your management company saying, this month, we're going to be staying here only on these dates, and for every other date, it's going to be available for

rent, like every single shred of documentation, forward it to that email alias. And so that way, at the end of the year, you have one concentrated place where every shred of documentation lives, and then you can go to your accountant and say, boom, here's my spreadsheet or here's my app with a meticulous day-by-day, 365-day tracker of personal use days versus rental use days. And in addition to that, if you need secondary documentation that corroborates this information, here's the login where you can look through every single piece of, you know, every airline ticket, every train ticket, every gas receipt, every shred of documentation that corroborates what's on that spreadsheet or what's in that app tracker.

It sounds like a lot of work when I'm saying it, but it's actually, when you get into the habit of it, it becomes second nature. Yeah, I'm actually thinking the opposite, Paula, which is that what you just introduced is a bunch of systems that are going to make your life a lot easier over time. It used to be that I wasn't very diligent about tracking my expenses for the IRS. And I would just take out whatever credit card gave me the most points. And I was like, I'll solve this later. Well, not only did having smart people in my corner slap me into shape on that

in terms of if I get audited, like having that one place. But even better, it's so much easier to track all this stuff just by having, having systems that funnel it to the place where I'm going to need it later versus me spending a week before tax day trying to go through four different places where I might have spent money on this and putting it together, which is what I used to do. It's just going to make your life a lot easier later on. And you don't want this to be onerous. You want it to be additive. Yeah, exactly. And speaking of that, yeah, set up an LLC. That way you have a separate bank account, you can seed it with some money, and then that initial seed money,

which you mark as an owner contribution, can be spent on the upfront costs such as furniture. And then because it'll be a separate bank account with non-commingled funds, all income and all expenses come from that one particular bank account with one specific business credit card that's linked to that bank account. And then all of that goes to QuickBooks. So boom, boom, boom, you're done. there is a completely separate account in which all of your Airbnb-related costs are segregated from the remainder of your personal spending. And so to go to your question about LLC versus S-Corp, taxation-wise, it's the same. They're both passed-through entities. LLC is much simpler. And, I mean, if you really start making big money, you can always elect to have an LLC that receives the tax treatment of an S-Corp.

because even that is simpler than actually setting up an S-Corp. But I don't think you're, unless this is a very, very high-ticket property, I don't think you're going to have so much revenue through just this one property that you would even need to have an LLC that elects for S-Corp tax treatment. I think you can just do an LLC and be good. I realize that what I just said, like talking about the state residency tracking apps, using that as an analog for. or either finding an app or setting up your own unique custom management system.

When I say it, like I hear myself describe it, and it sounds like a lot of work when you're expressing it in words. Once it's set up, it's super simple. Once it's set up, all you need to do is once a week, every Friday, for 10 minutes, you update it. And boom, done. And that's it. And then same thing with the email alias.

The beauty of it is that it's so simple. It's just when anything comes in, you just, it becomes muscle memory. You automatically forward it to that email address. And then you never have to think about it again. That means that at the end of the year, you're not hunting down the paperwork. You just auto forward everything to one very particular email address, and then you can just give your accountant the login. because you've got the tracker,

no one's going to have to Sherlock Holmes detective work where you were. The whole point of keeping all of that documentation contained in one email cluster is so that in the event that you get audited, you've got a paper trail. And I think this applies not just to this or to business owners. I mean, this idea of turning the potential. potential problem into a system, I think is the way to think about your financial life in general, because, you know, the main goal here, I don't think, is to contemplate more every money move and to spend more time. It's how do I efficiently spend as little time on this as possible

and still make a nice, significant contribution to my success. Yeah, but I'm excited for you. I hope that the complexity of describing it hasn't scared you off because once it's set up, it's very, very simple to run. And you get this great place that's, you know, an Airbnb, it's offsetting most, if not all, of its cost. And then you get a place to hang out with your grandkids that mostly, if not entirely, pays for itself. Sounds like a great retirement. I hate the word hack, but a great retirement technique to defray the cost of spending time with your grandkids. Of course, over the short run, the purchase of the property and maybe furnishing it like he's asking about is much more expensive. But I think, man, if you're going to keep it there for a while, this could really make visiting the grandkids much easier.

because the cost of going there, you have to check on the property from time to time. So your travel expenses are covered to check on the property. Of course, you want to run all this by your accounting team. But I think there's just a ton of upsides, Paula. Yeah. Oh, by the way, there's one more thing that we should probably say in the context of tax planning, which is you can't deduct more than you make. So your deductions are going to be limited by the Airbnb.

income that you have and any excess deductions are going to be carry forward. Well, that's a bummer. Way to end it on a sour note. I know, right? Way to end it on a bummer note. They're not going to send me money back for deducting extra. Yeah, exactly. Well, and that's what makes this different from a standard rental property, a full-year rental

property. Yeah. Well, Andrew Ryan, thank you for the question. And congrats on this new place. Joe, we've done it again. It was every bit as textured and as fun as I thought that was going to be. Oh. Joe, where can people find you if they'd like to know more?

Man, we've got a great, great discussion coming up. And like you do, I love some of the greatest minds that you and I get to talk to, these amazing people. A gentleman named Jim Murphy a number of years ago wrote a book that athletes around the world took to immediately. but also then business owners. His name is Jim Murphy, and he wrote a book called Inner Excellence. He has a new book out. We don't, of course, on Stacky Benjamin's, we don't really talk about the book, but the ideas around living your best life, which is what his new project is all around, is, you know, often, and this gets to what we talk to Andrea about. Yes, you need the money to get there, but the reason you need the money is to live your best life.

and how do you live more of your best life? And a lot of that, as you know, Paula, is in your head. So because many of our afforders, many of our Stacky Benjamin's listeners are well on the road to the systems to solve the money game, a piece that you and I both want to help them solve is the, how do I think about this game? And Jim Murphy is a very contemplative, a very thoughtful guy who coaches people on living their best life. So we're having that discussion, which was so wide-ranging when we recorded it. I just can't wait for people to hear it. So that's tomorrow on stacking benchmarks. Oh, amazing. Well, Joe, thank you for spending this time with us.

And thanks to all of you for being afforders. If you enjoyed today's episode, please share this with your accountant, your bookkeeper, your Airbnb management company. Your sports team coach, the guy that wrote the book that you love about, Martians and going into outer space. Share it with Andy Weil. And Ryan Gosling. There could be other people.

Yeah, share it with the actor who plays the guy. Sure. Which doesn't have to be him, just Ryan, Matt Damon played the guy of the Martian. So you share it with Matt Damon. Oh, really, you could share it with any of the staff on the movie, right? Probably should. There's the key grip and the dolly grip.

And, you know, what are like there's the PA, right, who ran out and. got extra makeup brushes when they were running low. All those people important to making it work. Yeah, exactly. Taking care of those day-to-day details. Yeah, share this with them. Just the people who do the day-to-day details in your life.

Aw. There's so many people around you. Share it with your postal worker. Yeah, and the guy who fixes your dryer when it breaks. Share it with your student loan processor. Share it with your friend with student loan debt. Who's not thinking about it the right way? share it with anybody with grandkids or anyone who is seven years away from retirement share it with

anyone who's got a part-time job share it with anyone who's dense there's a there's a joke in the after show you'll you'll understand why that's funny when you hear that so share it with all of those people and more because that is the single most important way that you spread the message of f double i r e we've got a newsletter afford anything dot com slash newsletes newsletter. I've actually started this new thing. It's called Three Things Monday, where every Monday I write three things. So if you subscribe to that newsletter on Mondays, you hear about three, three things that you need to know. Could be about the economy, about retirement, but it's three things every Monday. Affordanything.com slash newsletter. Thanks again for being part of this community. I'm Paula.

pants. I'm Joe Sol C-Hi. And we'll meet you in the next episode. I had to read this three times because it was so dense. Either that or you're really dense. Oh my God, don't put that in. A decision that sticks, but not so long that you're letting the interest rate linger. Yeah. It's my great contribution. Yeah. Correct. Affirmative Affirmative.