Afford Anything - Q&A: The Scary Shift from Saving to — Gulp! — Actually Spending Your Money

Episode Date: April 1, 2025

#595: Eva is finally closing in on her financial independence goals, but she’s grappling with how to make a smooth transition from accumulation to decumulation. What should she consider? John has noticed a game-changing omission from recent discussions about traditional versus Roth IRAs. Is this as big of a deal as he thinks it is? An anonymous caller is excited to convert his primary residence into a rental property. But he’ll only make a profit if he first sells some equities to pay down the mortgage. Is this a good idea? 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/episode595 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, we've talked a lot about saving for retirement. Accumulation. Do you think that we're not paying enough attention to decumulation? I think that is a whole science that is unfolding as we now are at an age where fewer and fewer people have pensions. But yes, we don't pay enough attention to how we take money out of our portfolios. Well, we're going to deep dive into that in today's episode. Welcome to the Afford Anything Podcast, the show that understands you can afford anything

but not everything. Every choice carries a tradeoff and that applies to your money, time, focus, and energy. This show covers five 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 Saul See-high. What's up, Joe? Oh, man, I had something cool happen in the last couple days, which is I live in Texarkana, Texas, work out of mom's basement as people that know me know, and they are laying fiber optic cable out in front of mom's house today.

Ooh. I know. I know. Wow. I know. Now you don't have to use Starlink to access the internet. Yeah. So all the scratchy is in my audio, you will find my face doesn't get any better.

when it's crystal clear. But hey. Honestly, with high resolution, you can really see everything, every vein. Isn't that sad that we worry about the superficial stuff? I mean, don't get me wrong, it's to some degree we need to. If you look like you take care of yourself, I think you're a little more believable. And I don't think that has anything to do with anything besides the fact that you just look like you care. Just show up like you care.

But the fact that we're going to judge people based on these exterior things still kind of makes me a little sad. Yeah, exactly. Unfortunately, we don't live in the world of should. We live in the world of is. I've often thought about a healthy society needs both idealists and pragmatists. In the aggregate, a society does well by having both types of people. But there are consequences to which one you decide to be. and I've very much chosen to be a pragmatist.

Yeah, I've decided to live in my own little dream world, so. You're the idealist. I'm the pragmatist. Of course. No wonder we're such a good team. You've known me for how long? The glass is always three-quarters full, Paula. Always three-quarters full. Beautiful. Well, then as a team, we will answer this first question, which comes from Eva. Hi, Paula. Hi, Joe. My name is Eva. I've been an avid listeners.

since I first opened fire in 2018. The way you articulate complicated topics for lay people like myself has been so life-changing. I truly wouldn't be this far on the journey without your Q&A episodes where your logic and reasoning take the stage. That's my long-winded way of saying thank you. I had the pleasure of meeting you both recently at a local event for a purpose code book launch in New York City this December. A lot's been on my mind since that Q&A that night when an audience member discussed. reaching FI and how much cash to hold to ease sequence of return risk. It made me think, given that so many longtime listeners learned about FIRE since your podcast

launched, combined with the favorable market conditions in the years running up to day, I suspect a good chunk of us are nearing or crossing our FI goalposts figures, and was wondering what you both would recommend for someone to transition their portfolio to when switching from accumulation to decumulation and when to do so. In my research, there's two concepts that pop up as you near the FI target. The Efficient Frontier, which you recently did an episode on, where you lower your risk tolerance on the EF line, but there's also risk query models designed for decumulation, something Frank expands on in his Risk Parity Radio podcast. The latter, I don't believe I've heard you do a deep

dive into and would love to hear the two of you discuss both, especially as it relates to anyone looking to retire early or make work optional in decumulation. From my understanding, the two concepts work well in tandem as different means of reviewing asset allocations, while EF looks at the relationship of rate of return versus risk and volatility, while risk-pery models add an at a layer of evaluating withdrawal rates, some of which can offer a permanent withdrawal rate of 5%, like the golden ratio model, personal risk levels in the drawdown phase. Let's assume we're less worried, about adding some level of complexity if it supports long-term success. Already excited to tune in to this episode.

Thanks so much. Eva, thank you so much for the question. Wasn't that in fun event, Paula? That was so much fun. So great. And Doc G, being able to share the quote stage with him, it is a big moment when you do something like birthing a book. It's so exciting.

And the fact that we got my surly co-host, OG, there. as well. Yeah. And all four of us in the same place. It was a super fun night and thanks to everybody like you, Eva, who came out that night. And it was, it was so great. I want to be careful because it's going to be easy to misconstrue my answer to your question, Eva, because I'm going to start off by saying that your line of thinking, which is using the efficient frontier to start off with to make sure your assets are invested as efficiently as possible. And then pairing that, with a strategy called risk parity, which you mentioned Frank Fasquez and Risk Parity Radio, and Frank is awesome and knows his stuff. Frank's research, by the way, is based on Ray Dalio's research,

and Ray Dalio is the guy that kind of took this term risk parity, Paula, and made it a big thing. And then in this community, Frank talks about how you use the Ray Dalio principles to create portfolios as a do-it-yourself investor that are designed to allow you to take more money out. There is nothing I could ever say that will go against that research. There is nothing. There is zero. If you want to know how to create a portfolio that is dynamic enough to withstand the pressures of different market forces that's been well researched, then using the risk paradigm,

model is a good way to go. The risk parity model looks at is the fact that the longest stretch that you might have where your portfolio is underwater, it's not one year or two years or three years. O.G, my co-host on Stacky and Benjamin says you want like three years in cash so that you're able to withstand this downturn. And he is also known for if you can withstand the, you can withstand the ups and downs, the roller coaster ride, even during retirement, staying as much in stocks as possible, is the way you want to go. He always says it's much more about you than it is about the financial markets. Now, you pair that with what Ray Dalio talks about and a 13-year downturn that we're protecting against three years of cash paul ain't going to do it. And if you're on a roller coaster

ride where you're looking for the most extreme withdrawal rate that I can take. Let's use Eva's number, 5%. I'm taking 5% out every year. My portfolio is underwater. I'm all in stocks. You can see that is a recipe for frippin' disaster, which is what Frank also talks about in the smaller community with his followers. And they are not wrong.

Here is where the difference comes in. And it is the way we talk about maximum. safe withdrawal rate. I can't stand the obsession with safe maximum withdrawal rate. And here's the reason why. I think it's fine to contemplate it. I think that Carston, aka Biggern, doing all of his research on it, is fine. I just see in the community this question all the time, what's a maximum I go, what's a max? What's a max? What's a max? What's a max? I'm going to tell you this. If you are obsessing over the maximum safe withdrawal rate, and you decide that the second I reach that number, that I'm going to go risk parity, Ray Dalio, Frank Fasquez, and I get on this model, you're going to live a life of

freaking scarcity the rest of your life because you're going to be wondering, can I really continue to do this? It doesn't matter what the science says. It doesn't matter anything. You're going to be in the most scientific way you can get there, and you're still going to be worried about it. I don't even worry so much, Paula, about that. As I do about the research I've been diving into my entire career, which is what makes a successful retirement. And let me tell you what doesn't make a successful retirement. Basing my actions, basing my budget, basing my activities on what my budget says I can do is a bullshit way to plan your retirement because I'm letting the what can I do wag the what is my purpose dog and that doesn't compute. I don't like talking about safe withdrawal rates,

not because they're not important, but because here is in my mind a better planning model. What is going to be my purpose? What's going to be my drive? What's the thing that I want to do? And then I want to compute, what is that going to cost me? Once I know what that cost me, then I set up a withdraw strategy that matches what my purpose is. what my budget's going to be to make that happen, what the activities are that I want to do. And studies have shown this. This is a way for you to live longer. It's a way for you to live healthier. And truly, if that's what I'm going for is a meaningful retirement, I don't want to worry about safe withdrawal rate. I don't want to worry about the fact that I'm planning on the razor's edge.

So when I hear people talk about retiring early because I just barely made it, think about this. if I'm able to have a portfolio that is more in stocks and I can get that long-term bump, what does that mean? Well, that means that I might not have the safest, quote, withdrawal rate if I'm on the razor's edge, but I'm doing it from a bigger number. So instead of going all VTSAX and having $1.9 million, what if I got close to the efficient Frontier and I had $6.4 million and my safe withdraw rate's only 2% versus 5% on 1.9. I'm going for the 2% with a bigger number.

This is the reason why I think it's so much more important to be a little bit more scientific while you're in the accumulation phase. If you're more scientific then, you're going to create a multiple by which that safe withdraw rate is compounded, which means I got the ability to do whatever the F I want versus is worrying about my grocery bill and the price of eggs every stinking day of my retired. I don't want to live that way. That's not, I think, a healthy end game that gives us the ability to live a long time because we're living a life of purpose and meaning.

So I want to begin with the end of mind, which is purpose and meaning. And then I want to go backward from there. Eva, this is not at all about your question. I think, listen, Frank's got it going. on because Frank is proselytizing Ray Dalio. And if I have a rant where I'm like, Ray Dalio is full of crap, that's probably not good, right? But even Ray Dalio with his retirement doesn't start with what's my safe withdrawal rate. There is no way Ray Dalio is thinking, you know what? If I can just get to the point where I can max out 5% instead of 4% of my minimal

number, that that's going to give my life more. No, it's not. It isn't. This also, Also, by the way, if I can continue for just a second, is why I can't stand when people start their job, the first thing the HR department does in many cases is they put a risk tolerance questionnaire in front of them before they pick their 401k choices. This Paula drives me crazy. It drives me nuts because another Stephen Covey principle is the idea of the stick. When you pick up one end of the stick, you pick up the other end and we got to think about what the other end of the stick is, meaning, aka, these decisions aren't made in a vacuum. You can't make a risk management decision in a vacuum. It has real, real outcomes.

And so if I take a risk tolerance quiz and, oh, I don't like the bumpiness, well, that's fine, but what does that mean? So here's where I like to start. What type of risk do I need to take to reach the goal that's going to give me purpose and meaning? And then I backtrack into, okay, I need. to take this type of risk and then I ask myself through whatever risk tolerance quiz I want to take, do I have it within me to withstand that onslaught to withstand that risk? If I do,

hallelujah. If I don't, then the question is, what do I have to do differently to make this happen? Do I have to save more money? Do I have to push the goal back? Do I have to lower the goal? Like, what other levers do I have to have? But it drives me crazy when I would see these people all the time when I was a financial planner. Why are you in such conservative funds? Oh, I just don't like the bumpiness. Do you have any idea what that's going to give you on the end? Do you have any idea if you're going to end up anywhere? And you know what the answer always was, Paula? It was I have no idea where this has taken me. I'm going to ride this roller coaster to the end, this I don't like risk roller coaster. And I have no idea what it gives me. Forget that. Begin with the end in mind.

And I think you're going to do a much better job. So, Joe, what I'm hearing from you? Start with the life that you want to lead, figure out what that costs, and work out your withdrawal rate from there. My follow-up question to you, though, is let's say that the life you want to lead, the life of purpose and meaning, is going to cost you, let's say, for the sake of easy math, $80,000 a year. You've crunched the numbers, you've done the work, you're anticipating 80K a year in retirement in order to be fulfilled and meet your goals. There is still the question, though, of based on that withdrawal rate, how big does a portfolio have to be? How many more years do you stay at your job? But the reason that people have this obsession with safe withdrawal rates is for that $80,000,

do I need a $2 million portfolio at a 4% rate? Or do I need less than a $2 million portfolio? Because I'm tired of working for some employer. Well, that's an easy answer because that is where safe withdrawal rate comes in, right? I mean, then if my goal is now, I know that my goal is going to cost $80,000. I just want to know what I can afford to hang it up. Well, then we know that your safe withdrawal rate can be five, right? Can actually be 5 percent, not four. And then I have to be really, really scientific about it.

The thing that then I would ask is, do I then want to leave my job the second that I reach that? do I want to. And now the answer, by the way, because like what I just did with Eva's question was I said, I'm going to challenge the premise of the question. And I'm going to even challenge the premise of the question that I just asked, which is, do I leave my job that second? Maybe the answer is no, but maybe the other answer is this. Maybe now I'm going to take some chances on some things that I've been thinking about that still earn money that I wouldn't have taken chances because if the chance doesn't work out, I have the comfort of no. going that I'm on the razor's edge, but I have reached that 5% number. And so I want to bring in more money, but I want to do something more closely aligned to my goals. I love with what this certified financial planner Benjamin Brandt's been talking about a lot lately, which is retirement begins today, meaning if we think of ourselves as a lab rat,

pre-retirement Paula, we're going to then meld retirement better than if we think of it as this goal line and all of a sudden there's unicorns and rainbows. I love the Adam Sandler skit where he is a travel agent and he's talking about going to Italy. And he says, if you're, Italy's not going to be wonderful. You're still going to go to Italy no matter who you are. If you're miserable right now on a trip to Italy, you're going to still be miserable in Venice. It's still going to be the same you. So what I like is working on the me now, which means that rather than have today, I hate it my life.

and then there's going to be unicorns and rainbows, we already know that's not going to happen. So how can I meld the two of those together? Number one, when I take my vacations now, if I'm going to geo-arbitrage, I start looking for community in those places. And if it's not there, that's great intel. If I think I'm going to move to Portugal and I go to Portugal and I hate everybody there,

I'm like, why am I doing this? But knowing that up front is phenomenal intel. By the way, people in Portugal are awesome. That would never happen. Send your hate mail to Joe at stacking benjamins.com. But I think that the amount of disillusion you have when you think it's going to be one thing, but you never playtested it. And so you don't really know is incredibly difficult.

So doing that. But my point is that let's say there are things that can bring in more money that also meld into that purpose and meeting. But you're not sure if they're going to work or they're going to be for a reduced salary or they're a reduced number of hours. or there's a way to slowly work your way into it where it melds the two. I'm not going from sucky job to doing, quote, nothing. I don't think that works. Looking at Christine Ben's new book this fall, this idea of doing nothing doesn't work for a successful retirement anyway.

So I think there still is a middle ground behaviorally that will also make the safe withdrawal rate safer. And I think this is the thing. I think we're obsessed with the science and we're not obsessed. enough with the behaviors, Paula. I think the behavior piece is the part that really excites me. And this is the part, we get so wrapped up in the numbers game of enough money, enough money, enough money, enough money. And yet when you take a look at what the happiest retirees are doing, it often doesn't have anything to do with the money.

Don't be wrong. I think more people need to be on our end of the nerdery piece where I'm backing people off of the science legend. Let's start looking at the behavior. If people would just get to the point like that Eva's at, that's fantastic. We need to get to that point. But for our community, I think, hey, once we're at that, now that we've done the math, now let's look at what do happy people actually do. What I'm hearing from you, Joe, is a model of a graduated or iterated retirement

in which phase one of retirement is leaving perhaps a high-paying, but undesirable job that you have. And then you inter phase two, which is not for retirement in a binary zero one yes, no, on off switch sense, but rather a graduated career step in which you're making a well-funded career change into something that's more aligned with what you want to be doing. Well, quite possibly. This is not a yes, no. So the answer is possibly.

I would entertain it, though. My point wasn't that it has to be graduated. my point is is that it doesn't have to be an on-off switch. There can be this cool middle ground. And I know that I've used this woman as an example before. I will use it again because it is so compelling to me, which is I worked with this client who wanted to live along the western shore of Lake Michigan. Have I told you the story before?

Oh, yes. Yes, you have. Yeah, but I think it's been a long time. And I think it's worth telling again because this is what I mean about graduated is that she want to live along the west shore of Michigan. Well, if for people that live along that shore have visited it, you know how expensive those houses are along the Bank of Lake Michigan. Because every day, you get this beautiful sunset that's like you're looking out over an ocean, right? And there is a lot of Chicago money, a lot of the high-paying Detroit money that

buys houses, often second houses that are bigger than most of our listeners' houses that are along this coast. So when she and I started doing this work, she was initially, really disappointed that this on-off switch of, I'm going to leave my job and then buy this house and move to the western shore of Michigan that that wasn't going to work out. But then we said, let's think creatively about this. Let's get a little more creative

and look at who she is and what kind of person she is and she is way an extrovert, like way, way, way an extrovert. So that, knowing a little bit about herself was important. The second thing was, when we looked at some of the areas away from the bigger towns and cities like St. Joseph or Ludington or even heck up around Glen Arbor Traverse City, if we look between

the spots, land got a little less expensive. And she didn't mind that at all, being more in a countryside. So we could lower the cost of the land, but she still couldn't afford it. Then we looked at going across the street. And there was this beautiful old Victorian house across the street that had a wonderful view of Lake Michigan over the trees, considerably less expensive, needed some work. She still couldn't afford it. But through this idea of it doesn't have to be an on-off switch, she was able to remodel the house, turn it into a bed and breakfast that gave her income, also gave her purpose, because every day she's out there flying her extrovert flag with these brand new people that are coming in to visit her.

And she treats new people like they're just her brand new friend. She's that type of person. And she loves it. It gave her energy. And guess what? Every day she's serving breakfast to people that she loved doing, meeting new people. And she goes out on the porch of this beautiful house. And she's looking out over Lake Michigan every single day.

So by being a little more creative, she makes her retirement have purpose. She's in a job that she loved. doing things that she loves in the setting that she'd always dreamed about, which at first she didn't think she was going to get. Now, this is what I like about Benjamin's research that I mentioned earlier. You're talking about phase two. Benjamin's doing something really cool right now, Paula, with his research, which is even phase one, where Eva is today, changing the way that you vacationed today, changing the way you spend your free time today while you're working in this job that you hate, spending that free time to be a lab rat and start thinking about the possibilities and playtesting

the possibilities now is fantastic. And that's what you mean by retirement begins today. Yes. Well, that's what Benjamin means. But I love it because like most people, I didn't get it. When he was talking to me about this at first, I'm like, oh, that's cute, retirement. Okay. So I start thinking, no, no, no, no, no.

I start changing my behavior today to begin modeling the stuff that's going to be that phase two for me. Which makes sense. I can tell you in my own life, if I think about how would I ideally want to spend a day in retirement, I would be at the gym every day. I'd be reading books. I'd be volunteering with animals. And I'd be making more frequent trips to Nepal and around the globe, but Nepal in particular. So those are all things. that I can do now. Yeah. And by the way, that gets you through these thankless hours easier. When you go home, you're doing this wonderful stuff. And you realize there's a means to the end of this job that you really don't love. There is a purpose to that job, which is to feed these hours that I have today, not some time in the future, these hours that I have today to do the things that I really want to do.

And then I get really excited about my Saturday. Right. I found as I started practicing this after Benjamin and I were talking about it, like my Saturday is super fun. And the trips that I'm planning now, the trips are including spending more time with locals and exploring the local, not just going to see the places. Right. But spending more time in the community to say, maybe this is a place. I know already from my last being a nomad that I don't want to do that forever. But I do want to spend summer here's hot as hell.

It's horrible. Yeah. I want to spend three months every year living. somewhere. So going to Portugal, I'm going to spend time looking at what the community is like. We're going to Greece in a few months. I'm going to look at what, heck, what's the expat community like in Greece? Yeah. When you went to Kathmandu, you hung out with my family there. I did. That was so fun. Yeah. It was so, so fun. So yeah, it changes the way that you even think about what you're going to do is you're planning your travel. Eva, to answer your question directly, following the efficient

frontier into risk parity is a fine way to go. is a beautiful way to go. And Frank and Risk Parity Radio, write on. Like, right, right, right, right on. I know enough about Frank and Frank's been in the community for so long and Frank's research and all the great science that is based on. If you decide that that's the way that you want to work your decumulation, that is a fine, fine, fine strategy that I have no problem with whatsoever. Wonderful stuff. And since you bring up Ray Dalio, he has an amazing book, Principles, that came out in the last year or two, and a new one that's coming out later this year. So there's a lot for anybody who wants to get to know his ideas better.

He is very prolific. And I would encourage anyone to check out his work. So Ava, thank you for the question. And thank you for coming to our event in New York City. Because in this increasingly digital world, I think there's a very human hunger for face-to-face interaction. And that's something that we at afford anything really want to prioritize as we plan for the years ahead. Well, Joe, speaking of Michigan. Okay, that's a segue. Speaking of Michigan. Well, we were just talking about Michigan.

We were, yes. Lake Michigan, beautiful place. And on the topic of Michigan, our next caller is somebody who is moving away from Michigan. Oh, why? Because they're moving to my home state, Ohio. Oh, God, no. God, no. And we are going to hear a question from that person next.

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Ohio won the war. Toledo's fantastic, but I will take all of that land, all of that fantastic land. No offense to Toledo. Love me some mudhands baseball. Well, our next caller is moving from Michigan to Ohio, which I endorse. And I don't. Our next call comes from Anonymous. Hi, Paul and Joe. Thanks for the podcast.

I'm going to remain anonymous because I kind of like it when you give people names. It's fun. I'm going to caveat this question by saying that I really should have taken the Your First Rental Property class. I missed the sign-up deadline. It was a mistake. and now my question is basically going to be straight out of that class. And I'm hoping you'll grace me with your expertise.

And I promise you, I'll look for the sign up and I'll sign up next time. Big picture, my wife got a job in Cleveland. We're thrilled. And we're going to move from Michigan to Cleveland. And we have to decide, should we sell our house or should we convert the house into a rental property? I think if we were to sell, we would break even. No net gain to our net worth, no net loss. but I've been kind of wanting to dip my toe into the rental game for a while, and it strikes me as a good opportunity to maybe do this and learn and grow from the experience, although granted, I could also just do that in Cleveland. So there's that caveat as well. To give you a few numbers to help you get a sense of where we're at, our mortgage is 4.875 percent. It's a seven-year arm, and it readjust on June 1, 2030. We were $0 down. Oh, and I should say that that readjustment would be the

the one-year treasury rate plus 2.75% up to a maximum of 9.875%. I said we were $0 down, and at the time that we would sell the place or turn it into a rental property, our outstanding loan would be about $421,000. Now, I've created an Excel sheet and like try to fiddle around with this and I have all sorts of assumptions, right? I've got like a 1% repair cost assumption and a 4.2% vacancy assumption and all this sort of thing. But any which way I slice and dice it it really works out that we're probably going to have a cash flow negative situation a year, anywhere from 5K a year to 15K a year. So if we were to turn it into a rental property without doing anything else,

we would probably need to make it up in appreciation if this were to be a positive investment for us. Now, granted, the other option that I've given some thought to is selling some equities in order to recast. We have about 105,000 in cash, $5,000 in tax advance. accounts in 578,000 in taxable accounts, and we have no debt. So that's an option, and I've given it some consideration. I think if I did that, it really would work out to this place would be cash flow positive if I were to pay down like $200,000 in the mortgage, for example. But I'm nervous about that for a few reasons, primarily two. Number one is I don't like capital gains taxes, and I haven't really looked into how to optimize that. And then the second reason is my wife and I

just hit our coast fire number with our invested equities. And I really like that. So I want to kind of leave it where it is, although I also wonder if maybe I'm missing an opportunity here. So I'm curious what you think. Anonymous, thank you for the question. Before I answer it, we've got to give you a name. And Joe, I've got the perfect one. Oh, you must. Because Anonymous is moving to Cleveland, I thought it would be perfect to name him after General Moses Cleveland, the namesake of Cleveland, Ohio. General Moses Cleveland led the surveyors who established the city in 1796. So, Anonymous, your name will be Moses. Moses.

How about that? I did not know that. Yeah. I did not know where that name came from. You know, I didn't know either. I assumed actually that it was probably after Grover Cleveland. but... Oh, it would have been around the way before Grover.

Yeah, and it would be... You know, we've never named a caller Grover. No, but that'd be fun. That'd be the Sesame Street. Yeah, that would be fun. Yeah. It's funny, I wouldn't think president at all. So Anonymous, next time you call in, we're calling you Grover.

But I will say, Ohio is known as the mother of presidents because seven U.S. presidents were born there. Grover Cleveland is not one of them. Is that a brag? Are you bragging now? About how many presidents born in Ohio? We have produced more presidents than any other U. U.S. state. Michigan produced Derek Cheater. We produced Grant, Hayes, Garfield, Harrison, McKinley,

Taft Harding, and we're claiming William Henry Harrison. Although, what is that disputed? Well. Is there the great Harrison dispute? He was born in Virginia, but he settled in Ohio, so we're claiming him as well. Gotcha. Well, so what does he do? Does he keep it? Does he rent it out? Moses, of everything you suggested, I'll tell you the idea that I like the least. The idea that I like the least is selling off some of your stock investments, selling off some of your equities in order to pay down the mortgage. But I dislike that idea. And I could tell from your question, you also dislike that idea, but I think we dislike that idea for different reasons. You mentioned that you dislike that idea because the capital gains tax

would be cumbersome. That's not my reason. I get why you would think that way, but that's not my reason for disliking it. And the reason for that is because I don't want to let the tax tail wag the decision dog. Meaning, if selling those equities was the right thing to do, then even if you had to take a tax hit, pay some capital gains taxes, if it's the right thing to do, then it's the right thing to do. But in this case, it's not. In this case, selling those equities, I believe, is the wrong thing to do. And the reason for that is twofold. Number one, it's clear that you and your wife had a goal of reaching Coast Phi. No one is CoastFi accidentally, unless you're very, very lucky. People who reach Coastify have been

working towards that for a while. So building that equities portfolio that you have is something done by design, that's something done with intentionality. Now that you've achieved that, I don't like the idea of undoing that. You had a goal. You achieve the goal. Let's celebrate that win. That's one of the reasons I don't like the idea of selling the equities. The other reason is because putting more cash towards a property in order to get it to perform distorts the performance of the property itself. And here's what I mean by that. Hypothetically, if you had unlimited money and you could buy a bunch of properties in cash,

it would be pretty easy to build a cash flowing rental portfolio. But that doesn't necessarily mean that you would have a great underlying selection of homes. it just means that you have a big bucket of cash, and when you're purchasing properties in cash, it's easy to make those properties cash flow. By contrast, let's imagine an extreme opposite end. Let's say that you had to borrow at a 25% interest rate on properties. Well, pretty much every property on the planet is going to look terrible under that set of conditions. So financing distorts our perception of whether or not a given property is a good underlying investment.

Because if the financing was zero percent or if it was non-existent, a lot of things are going to look good. If the financing was 25 percent, a lot of things are going to look bad. And neither of those give you any type of answer about the underlying quality of the asset itself. And that's what we want to evaluate first and foremost. If you look at stocks as an analogy to real estate, let's say that you are in the business of selecting individual stocks. Tesla, Coca-Cola, Nike, you would never select those stocks based on the amount of margin that was available to you. You would select those stocks based on their own intrinsic fundamental qualities. And then if you wanted to use margin to leverage further into that bet, well, I would tell you not to, but there are people who do that.

But it isn't the margin itself that makes the purchase good or bad, putting air quotes around good or bad. It isn't the margin itself that makes it a viable investment. It's the intrinsic qualities of the asset. And so that's what we want to answer when we're looking at this home that you own. And the way that we do that, the way that we figure out, is this home that you own worth holding on to is by understanding what the unlevelable, total return would be. And so here's how you calculate the unleveraged total return. Start with the purchase price of the property, the price that you yourself actually paid for it. Add to that any upfront repairs that were required for you to be able to inhabit the property, which for most

owner occupants, there typically are not any. Generally speaking, owner occupants, retail home buyers tend to buy properties that are move-in ready. But if that assumption does not hold true for you, if you bought something that was an uninhabitable fixer-upper, then take that purchase price plus upfront repairs and those two factors together are your total acquisition cost. Now, you're going to hold that number in your back pocket, and then you're going to take a look at what the monthly rent is and multiply that by 12 to get your potential gross annual rent. Now, that is theoretically, what you would collect from that home if it had 100% occupancy. And obviously, it's never going to have 100% occupancy, but roll with me for this calculation.

So you calculate your annual rent at 100% occupancy. Then you add in annually any other fees that you could collect from this property, parking fees, pet fees, storage, laundry, any other supplemental income that the property can generate. Add that all in. That number is your potential gross rent. Once you have your potential gross rent, you then make an adjustment for vacancies. So you subtract that out. And what you are left with after making a reasonable vacancy estimate is a different number that's called your effective gross rent.

So potential gross rent minus vacancy adjustment is effective gross rent. Then you add in any other income. So when you add in other income, that's pet fees, laundry fees, storage, parking fees, any supplement. any supplemental income that that property can generate. You add that other income to your effective gross rent, and then that together turns into a number that's referred to as your gross operating income. So now that you have your gross operating income, the next step is to subtract out operating overhead. Now remember, operating overhead does not include financing costs. It includes expenses associated with running the property, such as utilities,

water, trash, repairs, property management, maintenance, but it does not include the debt servicing, so the principal and interest portion on the mortgage. It does include homeowners insurance and property taxes. You've got your gross operating income minus your operating overhead equals your net operating income. Now that net operating income divided by the total acquisition price of the property, which remember is the purchase price, plus any upfront repairs needed to get it ready for its first inhabitants, which were you and your spouse, that net operating income divided by the total acquisition price, that's going to give you a percentage, which represents the cap rate on the property, which is functionally the

unleveraged dividend that you're collecting from the property. So take that cap rate and then add to it some reasonable appreciation assumption. Home prices nationwide over, the past 40 years have appreciated at around a 5% rate, but of course your mileage may vary depending on your specific location. But add that cap rate to some reasonable appreciation estimate. And the number that you have now created is your unleveraged total return. And I want to know what that number is, because that's how you assess the property itself independent of any financing. And once we've done that, you can take a look at that property. What is the unleveraged total return on that property?

And then ask yourself, is this even worth holding? Often, not always, but often if you've selected a property for the sake of it being a primary residence, usually it's not. Because the decisions that go into purchasing a primary residence are very different than the decisions that go into buying an investment property. you're looking for a separate set of characteristics, but sometimes you get lucky. Sometimes it is. But what I want to know first and foremost is what's the cap rate on that property and subsequently what is the total unleveraged return on that property.

And that's going to tell me a lot. It's interesting to me how no matter what investment you're using, there's a couple go-to analytics that you will explore, right? and cap rate comes up again and again and again when it comes to investment property. Yeah. Now, I will say generally speaking, I don't like things being negatively geared or negatively cash flowed simply because there's a limit to how many of those you can acquire. Sure, right. But I also understand that he's interested in potentially regarding this first one as a learning experience so that he can learn the ropes around out-of-state management, which is a very,

very valuable life skill. In addition to that, there are certainly years. There are certainly temporary periods where properties become negatively geared because you're doing big repairs on them or you're doing a lot of CAPEX. Every long-term landlord has had their negative cash flow years. That's like any type of entrepreneurship. That's par for the course. In this case, it's different because his negative cash flow would not be the result of major capital expenditures. It would be the result of the rent simply not being high enough to keep up with the basic bills. But given that he already owns the property and there are major transaction costs associated with selling the property, if he has a reasonable expectation that rental rates for that property are likely going to

increase significantly in the coming years, maybe it's an area where there's huge population growth and there's insufficient new construction to keep up with that population growth. So if it's an area where he has a reasonable expectation that that rent is going to rise pretty rapidly, well, sure, then it's worth holding on to the property because in two or three years, the rents will likely have risen so much that it will no longer be cash flow negative. So that's why all real estate is local. And that's why any analysis of a property needs to include not just one set of assumptions, but a range of possibilities, including what's the bottom and the top of the range of what it might rent for now. And then what's the bottom and the top of the range of any rental

increases that you anticipate in the next one, two, three years? And when we put all of that together, we arrive at a much more comprehensive look at what kind of returns he can expect. And from this particular asset. It pains me to say this, that I love Cleveland. Really? I do. My sister lives in Cleveland. Wow. Yes.

And every time I visit there, we have a nice stacking Benjamin's community that gets together when I go there. So we had a couple meetups last year. And super nice people in Cleveland. I like the downtown. I like the Playhouse District. It is so annoying how much I like that town. Ah, Joe, I didn't expect to hear you say something nice about Ohio.

I know. It absolutely sucks. Ah, well, I love Michigan as well. It's a beautiful state. Traverse City, Mackina Island, Ann Arbor. There are so many just really fun places. You had me until you said in Arbor, and then you lost me. Oh, that's right. You're a Spartan. Yes. Now, East Lansing, very beautiful. What about Kalamazoo? Calamazoo is where I grew up. Oh, nice.

So Kalamazoo is badass. Western Michigan University. Yeah. Yeah. Go Broncos. Good stuff. Calamazoo, Grand Rapids. Nice. Just there's that pit around Ann Arbor. And actually, it pains me to say this too, but that's also you write a beautiful town. It is. It's a great town. I got to go wash. Well, Moses, enjoy your move to Cleveland. And congratulations. That's Drew Carey says. Cleveland Rocks.

Our final question today is around one of my favorite topics, which is Roth IRAs. That's coming up next. Our final question today comes from John. I am John from Philadelphia. I have heard every podcast. I learn from them all. I especially enjoy the deep interaction between Joe and Paula on caller's question that provokes my own thinking. I listened to several episodes on the pros and cons of traditional

versus Roth IRAs. Joe is usually big on flexibility, such as bucket options and time. I was surprised that neither one of you, especially Joe, did not espouse on the Roth advantage to continue in time in near perpetuity versus the trad, which comes to an abrupt drawdown beginning on the established day of reckoning as RMDs or required minimum distributions are reined in. I converted my traditional to a Roth in 1997. I retired five years ago in 2020. I have well over a million in just my Roth that I've never touched nor have a foreseeable need to touch as I near the age of 72. With my Roth, I can continue to let it run for years and decades, all growing tax-free. If I would have left it as a trad investment, the tax-free would all come to an unceremonious end about now with a Piper to be paid.

is this not a significant Roth advantage for those who can extend the tax regrowth to even multiples, or am I missing something? John, that is a fantastic question. You are spot on. It is absolutely one of the many, many, many reasons that we love the Roth. My favorite line around this, and John, I apologize. Maybe Paula, I haven't said this on afford anything, but we talked about the Roth on Stacky Benjamin's, John, you nailed it. The fact that you are not sharing any of this growth, you're paying the tax once and you never

pay it again. One of my favorite lines on this comes from Ed Slot, who's the IRA expert. Ed says the cool thing is, Paula, you don't have to share any of it, any of the growth on a Roth with your uncle in Washington ever again. And then he always leans into the mic and Ed goes, and he's not even your real uncle. Well, but it's not just that. It's also that you are not going to be required to tap it whether you want to or not. Yeah, I love the idea of not having to interrupt your strategy, whatever your investment strategy is.

When you've got to make that withdrawal, you've got to interrupt it, move it out, and then redeploy it. And often mistakes get made then. The strategy changes, you start doubting yourself. So even behaviorally, the Roth in the spot where John's had is wonderful. Well, and RMDs are annoying when you don't want to make them. When you're making an RMD just for the sake of obeying some arbitrary rule. Can I also say just the fact that he had the foresight in the late 1990s to convert it all? I was thinking that too.

Yeah. Just take the plunge and do it, John. Holy moly. Not the first word I was thinking was moly. but it's just as in guacamole. Holy guacamole. Holy guac. It's just fantastic. That is some foresight.

Yeah. That is a move that's paid huge dividends, John. Absolutely. Because in the late 1990s, no one was really talking about the Roth. Not that much. And if they were, it was, hey, you want to put a little there. You want to dabble in this thing. Right.

Because the thing that was uncertain as a fairly new way to invest is, is the government going to keep this available. So the fact that he locked it in trusting that at the very least, he'd get grandfathered on those contributions was some foresight. But then the fact that that law hasn't changed. And really, we've seen the government doubled down on the Roth over time. And it's really become a cornerstone of a lot of people's investment strategy has been wonderful to John and anybody who did it. Right. Well, actually, so I just looked it up. So the Roth IRA was created in 1997. Right away. Just jumped on it. Yeah. So he did it in the same year that the Roth IRA was created.

It was introduced as part of the Taxpayer Relief Act of 1997. I remember even so many pros then that were doubting the Roth and going to you, think the government's really never going to tax this again. They're going to change it. In fact, I've talked openly on this show, Paula, about a woman who helped me get my financial act together when I was surrounding myself with better people, a woman named Sue, who was a CPA, my CPA, was like, I don't know if I would go full-fledged into that Roth.

Like Sue, brilliant human being, even the good pros doubting it back when John said, nope, jump in with both feet. Yeah, that's absolutely fantastic. So I have nothing else there, but to high five you, John, and go, fantastic work. Another reason why bias toward the Roth said very succinctly by you. Since John brings up freedom from RMDs as one of the many benefits of a Roth, I do want to take this moment to elaborate on that for the sake of everyone who's listening because John, I'm sure you already know this, but if anyone inherits a Roth, then you may need

to take annual RMDs on that inherited Roth. So while the original owner of a Roth IRA is alive, you have total freedom from RMDs, but your beneficiaries will have to take RMDs. Unfortunately, It can't continue to remain a Roth account in infinite perpetuity. If you have an inherited Roth IRA, the amount of RMD that you will have to take is going to vary depending on a lot of factors, including the age of the original owner and the number of beneficiaries. So it's going to be a complicated equation for which you're going to need a financial professional. But it is good to know that you have an account in which, as the original owner, you are not mandated to take any money out of that. account if you don't want to. Which gets back to the flexibility that John was talking about that I like. Yeah. I can choose when where and how. Well, Joe, I think we've done it again. We did. It was so

fun. It was fantastic. Joe, what are you working on these days? We just released a week ago great interview with Barry Ritzholtz, who of course is the top person at Riddholtz of wealth management where our friend Nick Majuli works and downtown Josh Brown from C&BC fame is a partner there. Many more people, Ben Carlson, this guy, Barry attracts so much talent. And what we did the week before, we did a deep dive on Wednesday the 19th on Barry's strategies and then the following Monday we interview him. So if you want to hear a nice one-two punch about everything Barry Riddholtz that we could possibly dig up all the investing goodness behind this guy so many people respect. Listen to the Wednesday, March 19th episode and then follow it down with the interview of the man himself

the following Monday. Oh, wonderful. And Barry Rittholtz and what he has created, Rittholt's wealth management is in New York City, I can state as a local very well known. Yeah. Incredibly well known. The Rittholt's name commands a lot of respect. He has maybe the number one financial conference for advisors in the nation as well, where when people are wondering what the future of financial advising is, they go to Barry's conference because he is very much the voice of reason in the community. What I love about Barry is he cautions you about all the junk, Paula, all the junk that Wall Street firms create, all the junk people listen to.

And the fact that I love his basic premise, nobody knows anything. That is his basic premise. And when you give up the fact that you might know something, that's when you become a really good investor. When you let go not only of being right, but of even having any idea in the first place. It's so powerful. You're buying something and you go, yeah, I don't know. So Barry and I, we talk a lot about all the gurus over the ages who have been wrong.

Michael Burry is one person we talk about who called the the big short, right? The 2007, 2008 stuff. Michael Burry hasn't called anything since then. He's called so many things. We also have a good time talking about the man, the myth, the junk that is Robert Kiyosaki. And one of the guys in Barry's firm, Barry relates his story is that it's not rich dad, poor dad. It's Rich Robert Poor Reader. Ooh.

is what one of the people that people talk about. Barry has no problem with calling out BS. And Robert Kiyosaki has had a ton of BS. Yeah, I will say it's unfortunate because the book, Rich Dad, Poor Dad, was fantastic. The sequel to it, Cash Flow Quadrant, also fantastic. I love both of the books. But unfortunately, Robert Kiyosaki since then has taken a turn. And now...

Yeah. And the bad news, Paula, is that I even have interviewed his co-author, Sharon Lecter. And when you hear about what Sharon says about Robert, you understand why that book was good. And my personal feeling is it might have had more to do with Sharon than it had to do with Robert. Because to your point, Robert left to his own devices since then has been pretty... What was that, Joe? You like the sound effect? That's a great sound effect.

You're like, wait, what? What? When he talks, you're like, huh? Where do you get that? Yeah. And I should say, we're not gratuitously trash-talking him, but we do want to warn this community. If you ever hear interviews with him, it's sad to say because I really did love the books. But as a public service, you all should know that despite the fact that he wrote, or at least his name is authored on some great

books. If you hear any interviews with him, be very cautious about what Robert Kiyosaki talks about. And that is specifically, I think Barry's point in this interview is think about what people are really selling. What is Robert really selling right now? When you start digging into that, you understand really some of the method behind that madness. And then you really have to ask yourself, do I want to follow this person on social media? Do I want to attend their stuff? do I want to, am I buying what they're selling? And Barry really parses between being a good investor, being somebody that just blindly follows some strategy, which may or may not be in your best interest. Right. It's also, by the way, the first interview I've ever done, I've ever done, where the second

I meet this man, I'd never met Barry before, the second I meet him, I immediately love him, which is why, of course, he attracts so many, I'm sure I'm not the first person to say that, right, that he and I hit it off. I get the feeling he hits it off with everybody, Paula. But literally, we just get into it. And I go and I hit record. And then I realize, and I tell our mutual editor, Steve, I'm like, I just need you to fade into this interview. And what you'll hear is that I had to fade into the interview because we just got going. And then I stopped and I go, Barry, I was going to start the interview. But I think we already began because a couple money geeks sitting and talking about this stuff that we're so passionate about.

I've never had an interview where I've just rolled into it. But that's the kind of man Barry is, which is, I think, why so many people are attracted to him. He just is very, very excited about the topic of personal finance and good financial planning. Well, I look forward to listening to that interview, Joe. Thank you. And I am heading to Panama next week. But there will still be fresh episodes. Panama.

Yeah, I'll be there for two weeks. I'm going to do episode 600 is coming up. So episode 600 is going to be the one that I record from Panama. Wow. I can hear that introduction live from Panama. Yeah, you know, I was thinking that except it's not going to be live. It's going to be pre-recorded. So it's going to be pre-recorded from Panama.

From Panama. Doesn't have the same ring to it. Still really cool. Very cool. But not the same ring. Yeah. So all of that is on the dot. So make sure that you are following both of our shows in your favorite podcast playing app so that you don't miss any of these amazing episodes.

Thank you so much for tuning in. This is the Afford Anything podcast. I'm Paula Pant. I'm Joe Solci. Hi. And we will meet you in the next episode.