Afford Anything - Retire at 30? The Math Behind Making Work Optional

Episode Date: October 1, 2024

#545: Kat feels thrown off. She’s realizing that the simple investing strategy that nearly 5x’d her portfolio in six years might be unwise. Should she course correct? And how? Ryan and his wife are torn between buying what they want (a single-family house) and what seems prudent (a multi-family house). How do they decide? Is there a third way? At 30, Danielle has saved enough for a traditional retirement. But she’s confused about how this meshes with planning for an early retirement. How should she think about money buckets? Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode. Enjoy! P.S. Got a question? Leave it at https://affordanything.com/voicemail For more information, visit the show notes at https://affordanything.com/episode545 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Joe, what would you tell a 30-year-old who already has enough money saved for retirement? I'd tell him, high-five me right now. Heck yeah. Heck yeah. Well, we are going to be hearing from a listener today who is 30 and already has enough saved for retirement. We're also going to be hearing from someone who's wondering if he should buy a single-family home or a multifamily. And there's been some kerfuffle about VTSAX and chill. Huh?

Fawful, I believe, is a technical term, so we're going to be discussing that a little bit more as well. Welcome to the Afford Anything Podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade-off. And that applies not just to your money, but to your time, your focus, your energy, your attention to any limited resource you need to manage. Saying yes to something always carries trade-offs. So what matters most? 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. I hope you focus on what matters. Every other week, I answer questions that come from you alongside my buddy,

the former financial planner, Joe Saul C. Hi. What's up, Joe? Hey, I am super excited about today. How have you been, Paula? Honestly, I'm sick. I don't know if you can hear it in my voice, but I am sitting here, for those of you watching on YouTube, I've got a bottle of cough syrup literally on my desk. In the dark. Yeah, I'm in the dark. My face is kind of red. I can't have bright lights on. It's going to give me a searing headache. So for those of you watching on YouTube, wondering why I look like this. I'm hanging on by a thread, but I've brought the energy. She has brought the energy. Even before we started today, she had the energy. Yeah, for those of you watching on YouTube looking at me, this is how I always look. So this is it. Ah, Joe, well, you have a face for YouTube.

Yeah, thanks. You have a face for YouTube. All right, let's hear our first question, which comes from Danielle. Hey, Paula and Joe. Love afford anything in these Ask Paula episodes are my favorite. My name's Danielle. I'm 30. And my questions are in regards to figuring out how to fund the different buckets of my life. I think my retirement bucket from 60 to 90 is fully funded.

I have $400,000 in retirement counts and using the rule of 72. that would be like 3.2 million in retirement. And I've, back of the napping math, figured I need 120,000 to live off of. So if I do that, how do I figure out what I need from 30 to 60 to make work optional? I figured my number of 3.2 based off 25 times what I currently am living off of, but I don't want $3.2 million from 30 to 60. That would crazy overfund me. So how do I figure out what I need from 30 to 60 to be done, to make work optional? Thanks for your time.

Excited to hear back from you. Danielle, I absolutely love this question. I couldn't love this question more because I think you're thinking about all the right things. First of all, congratulations on your saving so early. Absolutely. work that you avoid by getting started. And I know there's a bunch of people out there in the community going, you know what, I can't afford to. I said the same thing. If I had anything that I would have done differently, I would have found a way, Paula. I would have found a way to start earlier. And that's

what Paula did very well that I did not do. So I had to play catch up. But it doesn't mean you can't do it. It just means start playing that tree today, no matter where you're at. And Danielle, because you already did, I think you've got a lot to look forward to. I also like the fact from my old financial planner days, that you backfilled from the end game up to 60. What a lot of people do is they go, well, I got enough to retire now for the next 10 years, so I'll do it now. But backfilling and saying the end of my life is locked and I got that taken care of. That is a much safer way to plan. And I absolutely love that, especially since we don't know what your health is going to be. The chance that you'll have some health concern later on may limit your ability to bring home more

income and because of that, locking down those years, I think, is a prudent move to do, much safer move to do. I also like the fact that you're not counting on the rule of 72 for these closer years. And I have to say, Paula, when you and I see a lot of people in the fire movement, they make this mistake that they think my money's going to continue to appreciate the way, if I need it five years from now the same money I'm going to need 15, 20 years from now. Simply not true. It's not true. And so I love that you're worried about that. And the answer to that question is very nuanced, because I don't think you can take age 30 to age 60 and have a 30 year solution.

I was about to say the same thing. Are you going to tell her to break this up into constituent decades? Of course I was. Oh, my, that's what I, we literally did not talk about this ahead of time. And that's exactly what I was thinking. Yeah, I think she needs to do 50 to 60. Yeah. And you can continue to use the same methodology for 50 to 60 you've been using. That's fine. 40 to 50. I think you're still okay, but I would be a little worried about it. By the time you get those 20 years filled, frankly, you may be at age 40. And I'm laughing because, as you know, Paula, life brings complexity. And I don't wanted to, Danielle, I hope sooner equals better. Right.

But you have to begin looking that first 10 years, I would almost look dollar for dollar. Whatever amount of money you need to save, I need that money in savings. So if I'm going to spend $60,000 a year, I need $60,000 in the place for that. Because assuming that your money is going to beat inflation is going to be incredibly difficult if you don't have 10 years. Five to 10 years, maybe below five, that money is going to lose money to inflation. probably or at the very least keep up. So I'm a proponent of being conservative in my planning. And then anytime the universe gives me a break, then I get to high five. Like we did you earlier,

Danielle, we high fived you. So my thought is break it up into three buckets. Yep. 50 to 60, 40 to 50. 40 to 50 is going to be a little bit roll of the dice, but I think you're fine. So to me, as I think through her question, the 40 to 50 is the hardest one. Because age 30 to 40, I agree with you, Joe, you've got to go dollar for dollar because necessarily you are going to be investing that bucket of money conservatively. Necessarily, that money, because you plan on spending it from age 30 to 40 or realistically by the time, let's say that you get this goal done by the time you're 33 or 35, you're going to be spending it in the next five to seven years. So necessarily you're going to be investing it in ways that limit your downside and therefore limit your upside. And so you've got to assume that that is money that you're going to be putting in Ginny Mays, in a very, very conservative mix of equities and bonds.

You've got to assume extremely conservative growth with that money. And so going dollar to dollar is just a safe way to plan for that. Yeah. And I also agree with you, Joe, that when you look at the decade from 50 to 60, I mean, the major change is, of course, she's not going to be able to tap tax advantaged retirement accounts. She's going to be responsible for paying for her own health insurance. But in terms of projecting out investment returns based on the timeline, if money goes into the account at age 35 and you plan on pulling that money

out of the account at age 55, all right, you just project the investment returns across a 20-year timeline with the assumption that that money is going to be invested slightly more conservatively in its last few years. And then you simply run that projection and that allows you to project the growth of the money that you would be spending between age 50 to 60. So that to me seems relatively simple. A little bit of a tedious spreadsheet project, but relatively straightforward. It's the decade from 40 to 50 that I find to be the hardest. So difficult, because that could go either way. Yeah. And maybe backing down your assumption to be that you'll, you know, let's say using the rule of 72, instead of looking at an 8% return, maybe, maybe, like a 6% 7 maybe. Right.

Like just back down that rate of return that you think you're going to get just in case things go Fubar. What is Fubar? Are you kidding me? No, that's, I feel like I've heard that before, but I don't know what that means. Really? Yeah. I'm Googling this. Out of working or seriously or perhaps irreparably damaged. Yes. Do you want to hear what it really means? Yeah. F*** up beyond all recognition.

Ah. I know some friends who are like that on Saturday night. I've been like that on a random Saturday night. I think if you want to be really safe. The thing is, given 10-year time frame, and most of the median there is 15, right? So given 15 years, I can say, yeah, the second half of that decade, you're cool. you're fine. Use the same thing.

It's the first half, those first five years, 10 to 15 years, where it's a little bit of a roll of the dice. So I think maybe even instead of like an 8% return, you could use seven just because I think the second half you could easily count on eight, but the first half, yeah, the first half slightly lower. If you want to be even safer, Paula, just go five-year periods there. You know, because I think 45 to 50, you're still fine with the same methodology she's been using, but I think anything less than 15 years you're asking for trouble.

I would spend some serious time with investment return calculators online. Like I would go to Projection Lab is a great one, but I would spend some time with some very robust calculators while you're gaming out precisely what your return expectations are based on the aggressiveness with which you are investing. because what we don't know is her risk tolerance. What we're discussing right now is her risk capacity, which is logistical, but what we don't know is her risk tolerance, which is psychological. She didn't say what return she's using. She didn't.

If she's been comfortable with that benchmark so far, I think she could probably go with that. Yeah. But I would graduate when you're gaming out ages 50 to 60, 40 to 50, or even, Joe, I like your idea, game out 40 to 45 as one discrete bucket. game out 45 to 50 as a separate discrete bucket. And then I would go beyond the rule of 72, and I would go for those more robust calculators in order to run those projections. Yeah.

I think the more interesting part is the part that you referenced earlier, Paula, which is now I think the where she invest game begins to change. Right. More skewed, if she's not skewed toward the Roth already, skewing as much toward the Roth as possible. And then using non-qualified, non-IRA, brokerage accounts so that she's able to invest in in things that she can get her hands on whenever she needs it. Yeah, taxable brokerage accounts. Yeah. I saw some good news there, Paula.

Speaking of taxable brokerage accounts. You saw some good news? Yeah. On a previous episode, you and I talked about the fact that investing in exchange traded funds on a monthly basis has been difficult. And somebody wrote in and said that fidelity, you can do it. And my answer was yes, but it's not universal. But I have predicted the next five, six years, we're going to see it become more universal. Vanguard just did a pilot program, released a pilot program to some of their investors

where you can now invest in exchange trade of funds in a taxable brokerage on a monthly basis or in any account. But it's a pilot program, which means, Paula, it is coming. The future is close to now. The future is getting closer. Not hard to predict that, by the way. I would pet myself on the back really hard if that was particular genius, but you can see that one coming, I think, from a long ways away.

You know, the other element of Danielle's question that we haven't discussed is are the assumptions that we want to make about her level of spending in the future. She's running these projections based on her current level of spending. We don't know if or how that will change beyond inflation and cost of living. We don't know if or how her current lifestyle will change. And so, Danielle, that's one thing for you that I would want you to think very carefully about. What changes might you want to make in your life between the ages of 30 to 60? What might that look like? And what consequences would that have on the level of spending that you have?

I think that's why we call it planning and not set it and forget it. You're continually tweaking because definitely things are going to change. but man, she's in a great spot. Being able to do this at 30 is fantastic. Absolutely. For people that are closer though, Paula, I think we do have to address what you just said because, you know, if somebody's listening to this

and you're 10 years out from, not work optional, because she's talking about work, not having flexibility. But if you're 10 years out from retirement, that's where I just pushed back and said, yeah, maybe she should. Maybe she shouldn't. She just plans as she gets closer. I think if you're 10 years out, you really need to start locking down.

What is my income stream going to look like? Where are those big rock spending going to occur? How am I going to spend my life after I stop one career and maybe begin a whole another section of my life? You want those expenses. You want to know as granular as possible as you can because that will help you then determine how to invest money. If you end up needing a lot of money, let's say you're going to,

to build a house in a more expensive area than you live in now, because it's been your dream to live in this area. Well, then you might have a whole hell of a lot of expending right up front. And if you invest in things that are 15, 20-year investments, and it's only 10 years away, you could really hurt yourself by doing that. So your plan becomes a lot more granular, I think, when you get to 10 years out, certainly when you're five years out, you better be thinking much more around what my real spending is other than what I heard from people.

People usually spend more time planning vacations than they do planning their retirement. The average person spends more time there. You need to plan much, much better than I ever saw. Man, when I was a financial planner, I'd say, so what do you want to do? You know, there were always two answers, Paula. There were always two. I want to. Travel.

And for some people, what's the sport retirees are passionate about? Oh, golf? Play golf. Really? Retire or play golf. Yeah, but it was only, that was a subset, but it was. was a huge subset. I want to retire. I want to play golf. And I would look across the table at my client. And I go, do you think you could play golf for 30 years? And those people

always go, well, I could try. I'll give it a shot. But you know, a guy named Ken Dykewald, who's done a ton of research on longevity has shown you've, if you don't really think about it, you have 18 months of euphoria, aka travel and play golf. And then at the end of 18 months of that, you have this deep, deep, deep, emotional reset where you, you're, you, seriously begin thinking about purpose and is this all there is? Is this it? Because you realize how shallow that planning truly is. It needs to be deeper than that. Right. And so for Danielle, I think part of the question of how much money does she need between the ages of 30 to 60 includes, are there certain things that she wants to do between the ages of 30 to 60? That's great. Yeah,

absolutely. At specific moments in time. Maybe there's something that she wants to do when she's 40 or 45 or 50. I've talked about sabbaticals, right? Right. And about. play testing because I play tested. I realized I was all wrong. Like I was planning on the wrong stuff for my lifestyle. So I think that I think the more she can play test now. She's got, I feel like she's she's got this wonderful lab. She gets to be a person in the lab running experiments now about how she wants to live. Because she did that heavy lifting up front, now she can really begin playing with purpose. Right. Which is, I think, where the fun stuff is. Exactly. But speaking of lab, Danielle, go to projection lab or something like it, some very robust planning software so that you can go beyond the rule of 72 and then break out increments of time into five to 10 year buckets so that you have a specific investment strategy for the money that is age 50 to 60 or age 55 to 60, 50 to 55, 45 to 50, etc.

Yeah. So thank you for the question, Danielle. And congratulations on being coastfi, being set up for your retirement by the time you're 30. Bam. We're going to take a quick break to hear from the sponsors who allow us to bring you this show at no cost to you. And when we come back, we're going to answer two questions. First from Ryan, who's choosing between a single family home or a multifamily home. And then at the end of the episode, we're going to hear from Kat,

who has some questions about VTSAX and Chill, particularly stemming from Joe's vehement reply in a previous episode, the episode about whether or not your DIY investing strategy is holding you back. Joe had this vehement reply that VTSAX and chill might not be for everybody. And Joe, we're going to hold you to the fire. We're going to make you clarify that. Oh, no. I didn't know your voice could get that high pitch, Joe.

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molecular biology, and I am an engineer. Together, our comb income is about 10,000. We save anywhere between $67,000 per month. We have $235,000 saved in high-year savings account. We've been maxing out our Roth IRA for the last three years. I also contribute $3,000 to my HSA, and 5% of salary to 401k, and 1% of salary to company stock. And we invest all of this into index funds. I also have a stock portfolio of $55,000.

Currently, we're torn between buying a single-family home and a multi-family home. My wife has two to three more years of Ph.D. left. We'd like to start a family in two years. The single-family homes we have seen are around 550 to $650,000, more towards the center eastern side of Massachusetts, because that's where both our job opportunities are. We looked at condos, but even a two-bedroom condo monthly is coming out to be about $3,300, $3,300, without utility due to high HOA and interest rate.

With 20% down, I've estimated routine monthly costs for a $600,000 house to be $5,000, which includes mortgage, tax, insurance, and utility, which I feel like will make us housebroke and will also increase her walking commute of seven minutes to an hour-long drive. On the other hand, lack of experience makes me nervous about having tenants. So with all that said, do you think it makes sense for us to buy a single family home now or should we get a multifamily home? The other option we have is to wait until she graduates in two to three years and continue to save up and buy our first single family home then. We'll have more buying power and we'll have more option in terms of location and house we can afford. Thank you in advance.

I would like to know your thoughts. Ryan, thank you for the question. And I think you answered your own question inside of it. I heard a couple of keywords, right? I heard the word housepour. The moment that I hear someone say, oh, I think this might make us house poor, that's instant red flag without even playtesting it. If you already realize that this decision would make you house poor, that's a giant do not pass go, do not collect 200, right? That is a giant. no no. In addition to that, the same decision that would make you house poor would also make your wife time poor. Her commute would go from seven minutes to an hour. And that's each way. So her round trip commute goes from 14 minutes to hours. So not only would you become house poor, you would also become time poor or she would become time poor. So I don't see any upside to it, to that choice. Now, you mentioned in the question that you feel nervous about having tenants, having tenants in a situation in which you are personally living there is one of the best ways

to get started with the experience of having tenants, because you are literally on site. So you have a really good sense of what's happening at the property. You are able to spot any problems that arise. The drawback is that the tenants are going to feel free to flag you down at any time of day to be like, hey, my sink, my faucet is leaking. But I mean, that's a relatively minor thing. It's certainly an extremely minor thing when the alternative is a two-hour commute plus being house poor. And by virtue of living there, you will have such close relationships with your tenants that you will learn how to be a good manager of tenants. You'll learn it by doing it and you'll be immersed in it when you live there. My first time ever being a landlord was in a triplex where I lived

in one of the units. My tenants, I lived with roommates. So technically my roommates were my tenants. And then I also had two other units. And so the inhabitants of those other units were also my tenants. And so I lived with roommates in one unit within a three unit triflex. And everybody there was a tenant. And that was how I learned how to be a landlord. You know, it's funny. Back in March of 2023 to celebrate the March Madness, NCAA tournament on our old Stacking Deeds podcast, you'll find it in the stacking adventure back feed because we kept

the same feed. But it used to be real estate. So just go back to March, 23, March Madness. we took 16 different ways for people to invest in real estate and with experts, Mindy Jensen, Tom Brickman and Alan Corey. We voted on all 16 of these and kind of did like a playoff style matchup. And without a doubt, all of these experts, Paula, agreed house hacking the number one way for somebody to get started.

Maybe not the best way overall for an investor to make money long term, but the easiest way to get started the way that most people were surprised by the upside and frankly the lack of downside that they worried about. They found that, sure, you should be worried and you should certainly take precautions, but their worries did not match, their expectations did not match their worry. Their expectation was far more upside and most people thought, why didn't I do this sooner? Yeah. It's like now that I have experienced house hacking, it feels, it feels luxury. to not house hack, right? It feels like unduly luxurious to live in any home in which I am not actively house hacking. Hey, wait, I get the whole thing. Right. Yeah. It was easy. It was easily number one

out of all 16 different ways that we looked at. Yeah. I think if he does it now, he needs to do the house hack route if he does it now. Yeah. But I think my real question is, Paula, I struggle with questions like Ryan so much because I know in his heart there's one he would rather do. I would rather have you tell me, this is what I want to do. How do I make it work? Then pick the one. Because both of these have significant downside. You know what's going to happen? You and I are going to pick the one for Ryan. The downside is going to happen and Ryan's not going to be happy. I would much rather that Ryan decided which one he wanted to do. Does he want to wait or does he want to wait? If you talked about multifamily. I talked about multifamily. He still doesn't want to do the house

act. Well, then we know. Then we know that waiting is the better option. The one thing I want to talk about about waiting that people don't think about is remember, Ryan, that whole time you wait, the price of houses continue to go up. Yeah. Right? Because I think people are surprised. They wait three years for a better time. And the opportunity doesn't seem as great as you thought it was because you forget about inflation. So don't forget that as you wait, you're going to have to be. You're going to have to beat the amount of inflation that happens on the house you end up buying to make that time value work in your favor. Right. And if the house appreciates beyond inflation, which houses in many parts of the country do, they appreciate it a rate that is greater than inflation, well, then

you've got to pay that. And overall, it's hard to predict, right? I mean, we just add the Fed slash interest rates by half a percent. And if that passes through to mortgage rates, that could accelerate and heat up the housing market, which it slowed slightly, not a ton, but it slowed slightly. So that could accelerate things. Yeah, that means more buyers. Everyone who's sitting on the sidelines waiting for interest rates to drop are now likely to be rushing into the market. There it is.

And so that drives home prices up. We're not saying, don't wait. You didn't say this, Ryan, but I kind of heard in your question that waiting seem like no downside option or fewer downside option. And that's the one downside people forget. Yeah, I recently reposted a tweet. I forget who originally tweeted it, but you can see it on my feed. The person said, you know, I have a friend who sold their home at quote-unquote the top of the market.

And they've been waiting for home prices to fall so they can get back into the game. Problem, they sold in 2015. The reality is. we have a housing shortage, a severe, severe supply shortage. And until that supply shortage is met, right, until supply can keep up with demand, given the long cycle involved in home construction, we are years and years and years and years away from solving the supply crunch crisis. And I don't use the word crisis lightly. The housing affordability crisis is a supply crisis. We lack supply. That is why houses are already expensive and getting more expensive. When you don't have

enough of something, the price of that thing goes up. You're not the only one calling it a crisis. We recently spoke with Peter Malook, the head of one of the top financial planning firms in the country in Kansas City. He recently co-wrote a book with Tony Robbins. And Peter said that this is going to take a while for this to work out. So you've got people who are big-time financial planners worried about that issue. And we're not. telling you to do it now, Ryan. I certainly don't want you. At least I'm not. I don't know what you're thinking, Paul. I'm not saying do it now. I am just saying make sure that you evaluate the downside of waiting. You know, so often when people ask what should I do and they're choosing

between a couple of options, and I'm with you, Joe, those are always, they're tougher questions because oftentimes there's something that the person really wants to do, but maybe they themselves are not aware of it. And it's a lot easier to solve for, hey, I want to do X, how do I do it? But in a case like this where a person is saying, hey, I'm evaluating between X and Y and Z, what should I do? Oftentimes, if it's two choices, I tell people to flip a coin. And then, based on that coin toss, see how they feel about the result. Well, that's exactly what I do in my financial planning process. I would flip a coin and I would hide the result and I'd say, which one do you want it to be? Because during the time of that coin flip, you made the decision, man, I hope it's tails.

Man, I hope it's tails. And then they would say, well, I hope it's tails. So what is it? And I would put it back in my pocket. I'd say it doesn't matter. He chose tails. Yeah. I do something similar.

My variation is flip a coin, see the result. And then immediately, how do you feel when you saw that result? Ryan, I think, though, you're looking at things the way you truly should be. At first, I wondered why you had two hundred. $100,000 sitting in cash, house down payment. Nice job. Yeah. That was great. First, I was like, no, no, no. And then he gets to the question and that was fantastic. I also like the idea of being, I don't like the idea being house poor. I like that he brought up the idea of being house poor as being a problem just like you, Paula. Yeah. I thought that if you're worried about that

now, I can't think of a time that I ever bought a house and everything came in under budget. I mean, And the house does, but then I spent three weeks at Home Depot on stuff I didn't expect. Like I walk in and everybody's whole place goes, Joe, you're back. Yeah. I mean, it's all the little things. It's you need window treatments, right? You need a garden hose. Any one of those things don't seem that expensive on their own.

But the aggregation of there were years when I was like, why, why do I even bother giving myself a paycheck? Why don't I just send it directly to Home Depot? I think there's another piece to this equation, though, which is, Ryan, I would look at your other goals and make sure that those are funded also. You know, you talked about saving toward your HSA, which is great, 5% to your 401k, 1% to company stock. Based on the amount you have now, if you buy the house, will you be okay for the other goals? because often, Paula, we look at these goals in a silo, and we don't think about the Stephen Covey line from Seven Habits, a highly effective people. When I pick up an end of the stick, there's another

end of the stick that comes with it. And the other end of the stick is he's talking about being house poor. He might also be retirement poor, kids education poor, whatever other goals he has poor. You may be poor in a lot of different areas when you score your dream home. And if you're okay with that, that's fine. But I wouldn't look at this by itself. I would, would evaluate this alongside all those other goals that Ryan's going to want in the future. Yeah, absolutely. And you know, it's a cool way to do this, Paula. What I like doing is pretending that he has the new house now and saving that money automatically, they're from his paycheck or from his checking account into an account that he can get his hands on. So we can feel that tighter

cash flow. And he can feel what this is like. We would do this when clients had children. We do it when they bought a new house, we'd do it when they're looking at retirement and how they're going to spend money, we would eliminate, we'd vacuum out all the money besides that into other places. So they could feel it. But the cool thing is, if they went over budget instead of having bought the house already, now it's just sitting in a savings account, right? And if it feels good, now I have extra money for all those Home Depot runs that I didn't expect to have. Bam, good. Another problem solved. If it doesn't feel good, well, then you just built your emergency fund even more and you haven't made the move yet. So I like playtesting your accounts and your budget that way, too, to see if the cash flow really is what you hope it's going to be.

Well, I would do the same thing with your time or with your wife's time because. Just have her sit around for two hours, pretending she's in a car. Yeah, exactly. Yeah, just sit in a chair with an imaginary steering wheel. She's like, don't talk to me. I'm not home yet. Don't talk to me. But you're sitting at the table. Nope, I'm in a car. Yeah, unable to look at your phone. It's fabulous.

Playing the radio, listening to podcasts. Exactly. Yeah. She might want to do that anyway. Two hours a day, right before and after work, just have her sit in a chair, look directly forward and listen to podcasts. Perfect. Well, because oftentimes it's easy to think, like, oh, it's just an hour of my day or

It's just two hours of my day. Man, when you start incorporating something that's even an hour a day, it's big. It takes up a significant amount of your day. It does. That is a lot of time. Yeah, that is a lot of time. No, and I know what you're really saying, something much more like when you and I both spoke to Laura Vandercam, write down your hours and what you do during that time and then decide

what two hours of stuff goes away. Can I afford to have that two hours of, like what tasks are going to go by the wayside? Yeah, and it has to be discrete blocks of time because little things checking Twitter, you can do that in the margins, right? You do that in five-minute increments here or there when you're in the waiting room at your doctor's office. It's grocery shopping. Yeah, it's grocery shopping. It's unloading the dishwasher. It's walking the dog.

It's all of those things. It's folding laundry. It takes that time out of your day. Yeah, agreed. I love worrying about it ahead of time, though, Ryan. I think you're on the right track because so often I would get people in my office going, I think I made a mistake. I bought this house and now I'm house poor. What can we do? Well, thank you for the car, Ryan, and best of luck with whatever you decide.

It is funny already, Paula, we have this theme of playtesting, right? I mean, Danielle modeling, Ryan modeling, like we're modeling these things. We're projecting the stuff into the future. When I was in high school, I was a little. rate of math. And then I realized that life is math and life is storytelling and storytelling often involves math. And to get the true story for Ryan and for Danielle, we just got to do a little simple math. And this math is fun because now you're projecting out for Danielle, what am I going to do between 40 and 45 and 45 and 50? That's awesome. And for Ryan, how can I make it project this

time suck and this money that it's going to take for this house? Like, how can I think about these thing. It's really powerful. All right. Well, thank you, Ryan, for the question. All right, we're going to take one final break to hear from the sponsors who allow us to bring you this show at no cost to you. And when we return, Joe is going to have to answer for his comments on VTSAX. Welcome back. Our final question today comes from Kat. Hi, Paula and Joe. My name is Kat, long-time listener, first-time caller. A conversation that the two have you had in episode 535 regarding, is your DIY investment strategy holding you back? Really confused me. And I was hoping you could provide some clarification. You were in agreement

that a VTSAX and chill investment strategy is helpful for newbie investors, but that a more nuanced approach to investing is necessary once one reaches a certain level of investable assets if one wishes to maximize gains. Previously, I had been under the impression that Paula, you were favor of a set-it and forget-it approach to investing in index funds that track the S&P 500, and that you were largely opposed to working with a financial advisor. Joe, I think that any longtime listener knows that you see great value in working with a financial advisor. However, if you both agree that once a certain level of investable assets has been attained,

VTSAX and CHILL is not the ideal approach, then please explain to us what is? a professional investment advisor, a robo advisor, and how does one of those even work? Self-picking an array of index funds that track different markets that I've heard are doing well, since I don't have much time to do research regarding investments. And at what level of investable assets does VTSAX and CHILL stop being the wisest investing approach? Thanks to the VTSAX and CHILL approach, my husband and I went from $150,000 in retirement savings, in 2018 to $700,000 in retirement savings currently. What points would you have us consider regarding investing to help us best maximize our

retirement savings at this point in our investment journey? We thought we were taking the best approach until now, but now I'm not so sure. Any suggestions are greatly appreciated. For those of you watching on YouTube, I am sitting here with my VTSAX coffee mug. So I'm just going to be sipping. You know what? I actually, Joe, do you mind if we take five minutes? I'm going to fill this with some mint tea to ease my sore throat.

Oh, let's do that. And then I'm just going to sip out of my VTSAX coffee mug while I listen to your explanation of VTSAX and chill. By the way, the reason that we're talking about this so much, we're hyping this so much is because apparently Joe has already had to go in and give some explanation to our Facebook group, our Facebook. community. Do you afford anything Facebook community? I have. I'm not in your Mighty Networks community, but I bet based on the Facebook response

that there were a lot of people that did not understand completely what I was talking about. All right. Okay. I'm going to fill my VTSAX coffee mug with some mint tea and then let's hear it. Well, that went by quick, Paula.

It flew by. So now, as the people on YouTube can see, I've got my VTSAX coffee mug with mint and honey tea. I want to give a shout out, by the way, to Refined by Fire, a listener of this show who gave me this coffee mug. You can see on it the... Oh, I see how it is. You can see the VTSAX stock chart from dating back to 2000. So, you know, you can see how, yeah, there's some, you know, which means it includes 2008. You can see 2008, 2009 right here.

barely a blip, barely a freaking blip, right? Because over time, DTSAX always goes up. Over time. Over time. I think the word always we've got to be careful with. Historically has always gone up. Over a long period of time. Yes.

Not always every day, people. Yes. And Kat, I'm going to apologize at a time because I'm not going to attack your question head on because there's enough people that didn't hear episode 530. that instead of answering the question directly, which was what I did during my rant, I'm going to instead build the foundation assuming people did not hear that episode. I think that's a better way to go, Paula. All right.

So the first question is, if you haven't heard of VTSAX and Paula with her VTSAX mug and people that have built shrines to VTSAX, what does that mean? That is the Vanguard Total Stock Market Index. you can buy it as a mutual fund as ticker VTSAX. So when you go to buy it, VTSAX, bam, you own the Vanguard Total Stock Market Index. If you want to buy it as an exchange traded fund, which is a little bit cheaper.

And now for some of you, maybe you can buy it just like you at a mutual fund. I'd recommend if you have your choice to buy VTI or VTSAX to buy VTIEF. So VTSAX is a mutual fund, VTIF. same thing as an exchange traded fund, more modern approach to the same thing. But why are people so attracted to this? The reason they're attracted to this is a lot of reasons that were really put together in the nicest way possible by a brilliant gentleman named Jail Collins.

Jail Collins has been on this podcast before. Jail Collins wrote this wonderful book that I love beginners to read called The Simple Path to Wealth. And the summary, the Joe Salsi summary of this book is this. Everybody freaks out when they invest about what to invest in. Do I have the right investment? They get FOMO. They might not have the right investment.

How am I going to do it? And J.L. Collins basically, during the course of this wonderful book, tells the story of, don't worry about it. Take this big worry everybody has and get rid of it. Just buy everything. And you know what's cool? If you buy everything, which is the total stock market index, VTI, or VTSAX, you're going to get there.

You're going to be wealthy. It will happen because all we need to have happen is the economy to continue. If the economy continues, you're buying all the stuff and all of it. So stop worrying about what to buy and just worry about the thing that's important. And Nick Majuli when he was on this show, kind of reiterated that. It's important when you start off. Forget about Robo Advisors. Forget about Target Day funds.

Forget about Bitcoin. Forget about all this stuff. Worry about one thing. how fast can I shovel money in? Nick Majuli is a Stanford trained data scientist, and his whole slogan is just keep buying. Because he also, when he was in his 20s, he made that same mistake. He over hyperfocused on what to buy and didn't think enough about how much to buy. And so his message is, just keep buying.

You know, focus on your contributions. So smart. Especially when you're young. And if you buy VTSAX, you don't have to worry about that. Now, here's where the problem came, Kat. The problem came when good, well-meaning people took J.L. Collins' simple path to wealth and thought that meant optimal path to wealth or brilliant path to wealth or best path to wealth. He didn't say any of those things.

J.L. Collins super smart. He wrote Simple on purpose. Another brilliant gentleman, who I'm going to reference a lot here, is actually good friends with J.L. Collins. His name is Paul Merrill. I also found, at least in the Facebook group, a lot of people that know Jail Collins do not know who Paul Merriman is. Paul Merriman is where you graduate to when we leave Jail Collins. He was a guest on the Afford Anything podcast in episode 300. Affordanything.com slash episode 300.

He's a wonderful human being. He and Jail Collins both. They've given so much to this community. But Paul is, Paul has done a ton of research. I don't need to reinvent the wheel. So rather than me reaffirm all Paul's research, I just always referenced Paul. But I knew this for my days as a financial planner, Paula, that the most efficient way to grow money is not buying a little bit of everything. So when I heard that people with hundreds of thousands of dollars were still doing this, I thought, are you nuts?

And then I went and began building the research. And then I saw Paul Merriman had already done the research. Then I found out that he and J. L. Collins talk all the time. And they're not budding heads. They both get it where they exist in the universe. So here is the deal. When you just begin investing. And somebody said in the Facebook group, Joe said when you're young, I didn't mean when you're, if I said when you're young, I apologize.

I did not mean when you're a beginning investor. I don't care if you're 20, 30, 40, 50. Doesn't matter. When you start off by VTSAX, by the one thing, focus only on shoveling money in. Kat asked the direct questions. So when do I rotate? When do I start moving away from that? The time to move away from that, again, I've done this research too, but I'll reference

Nick Bajulie's research because he put this way more brilliantly than I could have way more succinctly, which is this. When the returns over a given time period matter more than you shoveling money in, that's when you begin focusing on your asset allocation, it's called, your more perfect diversification. So for most people, that's around $80,000 to $800,000. If you get to $80,000, maybe $120,000. Invested, you mean, invested dollars. Invested into a place like VTSAX, you will find that that swing in a month that the money will do on

its own is going to be greater than the amount of money you put in. When that happens, then it's time to get more analytical about your investing. I'm going to start off with the research here, and then I'll go into what I think is best. The good news, Kat, is you talked about researching a bunch of stuff. You don't have to have time to, you don't need any of that. This is the other mind-blowing thing to me, Paul. I think people think that VTSAX is so simple and the next step is super hard. The next step is super easy. It is super. It's incredibly easy. It will take more time, maybe about 45 minutes a year. So if you've got 45 minutes to not VTSAX and chill, the difference is going to be huge. Now, before I get to optimal, let me just show you better because Paul Merriman did some research.

I've given the link to Paula. She'll put it in the show notes. You're going to love this. Those of you watching on YouTube will also see it on your screen. So first of all, Paul Merriman doesn't evaluate VTSAX. He evaluates S&P 500. S&P 500, people don't know what that is. That's the 500 biggest companies in America. Standard and pores turns them into an index to evaluate how large companies are doing in general, how the economy is kind of doing, right? So you'll hear the Dow Jones Industrial Average went up or down. That's 13 companies. Or you hear the S&P 500 went up or down. That's 500 companies. Paul Merriman looks at the S&P 500.

So I went and dug up what's the difference between the S&P 500 and VTSAX over long periods of time? I've given Paula two of many sources I find saying that since the 1920s, and by the way, a great, great YouTube video from Financial Tortoise dives into this. Since the 1920s, he's extrapolated using scientific, using research firms beyond when these indexes actually were created, where these researchers went back to the 1920s to say had these indexes been there in the 20s how would it have happened even into the 1920s vtsa x and the s mp 500 have damn near mirrored each other return wise you can look at 20 30 40 50 60 70 100 years and they've mirrored each other now that's not on a daily basis i would tell you that vtsa x is better than s mp 500 when you're starting out because you're buying more things you are more diversified, you will see the standard deviation, which is the amount of swinging that the fund does on an

average day is going to be a little lower. But when we talk about returns, the point I want to make is Merriman looking at the S&P 500 is exactly the same as Merriman looking at VTSAX. So Merriman says the S&P 500 can be beaten. Joe Sal Seahy has said that means VTSAX can be beaten. Paul Merriman didn't say that. Paul Merriman, in one piece of research that I'd like to start with. This is not optimal, but he takes 100% money in the S&P 500, then he takes nine different types of funds. And little by little, he tears 10% off of the S&P 500. So he starts off with 100% S&P 500, zero anything else, then 90% S&P 500, and then 10% something. And then 80% and then 10% of two different things. And he slowly makes it where he's got 10 holdings all 10% each.

Any good financial planner will tell you that's crap asses. asset allocation. You don't go 10% this, 10% this, 10% this, 10% that, you can be much, much better. But this is how easy it is to beat VTSAX. He starts off with 100% in the SMP 500 and he goes from 1970 to 22, 53 years, just goes back to 1970. He starts off with $100,000. The S&P 500 or VTSAX, 100% invested in just that fund grew from $100,000 over 53 years, grew to $18,900,000 just over that. That's a ton of money, Paula. J.L. Collins is 100% right.

Given 53 years, $100,000 adding nothing to it, grows to $18.9 million. You will be okay with VTSAX. That wasn't my point. My point isn't that you're not going to be okay. My point is, then he takes just large company value stocks, which is already, you know, Paula, a piece of the S&P 500. but he over, he over allocates toward that one. So now it's going to be 90% S&P 500, 10% large company value stocks.

Large cap value? Large cap value. Now the standard deviation of the S&P 500 during that time for the nerds out there like me starts at 17.2. This reduces it to 17.1. The portfolio gets a little bit less risky, a tiny bit less risky. But instead of 18.9 million, if you just took 10%, you focus. focused at large cap, large company value stocks, almost 20.8 million. You gained almost

$1.9 million just by putting 10% overvalued into large cap value. Wow. What's interesting to me about that to just cut in here is that the S&P 500 slash VTSAX necessarily are already overweighted towards large cap companies. So it actually surprises me that siphoning off 10% from that initial allocation and putting it into large cap, to me, that just seems like redundant. Yeah, the same thing in a different outfit. Yeah. And it just says, I want to take this and I want to focus more on big, solid, boring companies. And for people that don't know, the difference between value and growth, if Paul and I are investors and Paul is a growth investor, I'm a value investor, we're both looking at a company, say, Nvidia, right?

Paul looks at Nvidia and goes, is Nvidia going to take over the world? We're clearly they already have, right? So that's what growth investor. Is Nvidia going to continue to grow? And that's a question you see every day, by the way, in the financial press right now. Vivida going to continue to grow? Is this magical train of a video growth going to keep going? Who knows?

A value investor looks at if I sold off Nvidia for parts, for the name and for the parts, do the parts equal a value? Is it something that's on sale? Clearly, Nvidia's not on sale. Right. Value investors are basically looking for discounts. Yes. They want to make money by finding discounted stocks, where the market doesn't adequately

price in what they assess to be the value of the stock, whereas growth investors focus on stocks that they believe will continue to grow like bonkers, even if it's not necessarily on sale. Amazon, great, particularly in the market. 90s in the early 2000s. Fantastic. Right. Amazon in the early 2000s, great example of a growth stock.

The financials never look good. Right. And they continue to grow and grow and grow and grow and grow. So Merriman's not done there. He then says the next step is I'm going to take 10% and I'm going to move it out of the S&P. So I'm going to go 80, 10, 10. I'm going to have 80% in SB 500, 10% really focused on large cap value, large value

companies. then I'm going to take that last 10%, and I'm going to buy small cap blend, meaning I'm going to buy small companies that are either not respected yet by the market, their value or their growth. They might be right in the middle, right? So a small cap blend of value and growth. Instead of $18.9 million, that portfolio grows to $22.3 million. The standard deviation only goes back up.

The risk only goes back up to what it was originally with the S&P 500. So without taking any more risk, we added $3.4 million to the portfolio just by going 8010, 10. Bam, huge gain. And again, what surprises me about this is that the fact that the S&P 500 slash VTSAX is comprised of primarily large cap funds, but also small cap and midcap. So what we're buying are things that are already represented inside of VTSAX slash S&P 500. But we're getting more technical about exactly which parts of the market we buy, right? So now 801010 is better. Still not what I recommend and not where Merriman's finished.

Next, he takes another 10%. And he goes, instead of 80, 10, 10, 10, 10 now, 70, S&P 500, 10, 10 large cap value like we did before, 10 small cap blend like we did before. And then 10 small cap value. So he takes part of that small cap blend, Paula. And now he emphasizes 10% just on the value side of small company stocks. Again, kind of repeating himself. But he's doing this just like a top chef will add a little more pepper. They know exactly what to put in the recipe. Instead of 18.9 million that you had with VTSAX, you now have $27 million. You grew it by. $8 million and the standard deviation instead of 7.2, 7.7.7.17.3. So you ticked up just slightly more

risky. But I would say as a former financial planner, if you were okay with 17.2% swing, you're going to be okay with 17.3. Yeah. Things are going to be fine. Next, he added real estate. Now he goes 60% to S&P 500, 10% to large cap value, small cap value, and then he adds in REITs. Real estate investment trust for people that know. So he's added. passive real estate now to the portfolio. The cool thing this does, this calms down the volatility, right? Because Paula, as we were answering the earlier question, real estate cycles are longer. They tend to be more boring. They take much longer to play out. So your risk on a daily basis becomes less. So we go back down from 17.3 to 17.1. So we take some volatility out of the

portfolio, but instead of 27 million even, we're now at 27.6 million. We've now grown an additional $8.7 million because of that. Then he goes 10% international. That ticks the risk up, right, to 17.9, but we now grow the portfolio to $35.6 million. And this is an interesting lesson, Paula, because what are people saying now about international? Oh, the last 15 years, international isn't done anything. Yeah. Right? Yeah, exactly.

Why bother? The best companies are in the United States. We had a whole conversation with Michael Kitsis about this. And when Merriman and Kitsis and everybody else takes a longer view, the pro takes the longer view, they go, don't make the mistake of recency bias. Do not make that mistake. Because instead of 18.9 million, now we have 35.6 million. Certainly the volatility ticks up and you go to international.

And then for people that want a little pepper, he puts in emerging markets. Emerging markets means now you're buying international, but you're buying just small companies on the international stage. So 10% to the S&P 500, 10% to large cap value, 10% to small cap blend, 10% small cap value, 10% real estate, 10% international, 10% emerging markets. Instead of $18.9 million, we grew it to $41.8 million. $10. Geez. Wow.

A gain of 22.9. And all you had to do, Paula, is keep those 10% even, right? All you had to do is rebalance 10, 10, 10. Keep them the same. It's all you had to do. We more than doubled the returns. 45 minutes a year. Still, you know, this isn't where we're headed.

All I'm showing you with this, and Paula will put this on the screen, Paul Merriman's excellent research, all you have to do is get a little more analytical, just a little bit. It isn't hard to beat VTSAX. It's not hard. It's not hard at all. It doesn't take a lot of time. What should you really do, though?

The real thing you should do is not buy a robo. I don't think you need to buy a robo. You can. A robo will do something like what Merriman's talking about. They'll do it for a fee. And we can chat about whether that's worth it or not. Kind of depends. If you work with a pro, they will work with the efficient frontier instead, which I like better.

The efficient frontier looks at your time frame and your tax. situation of your investments and looks at optimally, how would you, instead of 10, 10, 10, 10, 10, how would you diversify that pie to really reach your goal? Because frankly, it isn't about beating VTSAX. It's about more safely and more easily and more consistently reaching your goal. And the way to do that truly is through Markowitz's research. Harry Markowitz won the Nobel Prize for his work on the efficient frontier and most efficient balancing of investments. But certainly, I would think, as a starter, Paula, just diving into Paul Merriman. And this is just one piece of research he's done. He's doing this type of research all the time. Just graduate from J.L. Collins to Paul Merriman

and do that when you get to the point that your investment strategy means more than the money you're shoveling in. At that point, then I think start digging into Merriman and that's when you're going to get better at investing. Kat, and to the part of your question in which you said, that you were under the impression that I, Paula, advocate a set it and forget it approach and that I am not a fan of financial advisors. I would not say that at all. I like the idea of working with a financial advisor if, if, and this is my big if, if you think they are both a wise and brilliant person, right? They need to be both intelligent and wise. They're not the same thing. Just because somebody has a given credential does not necessarily mean that they have good judgment. So yes,

at a minimum, make sure that they are properly credentialed, make sure that they have a fiduciary duty to you, make sure that they are fee only. So I absolutely as a floor, as a bare minimum, advocate for working with a fee only fiduciary, but, and this is the huge asterisk here, just because somebody has checked the right boxes does not necessarily mean that they have good advice. You remember when we were all in elementary school and there were those kids in the classroom that were just kind of like, you don't want that kid to grow up and become your financial advisor. And so even if that kid has assembled the right credentials, you still don't want that kid. I also, Kat, am less excited about working with a financial advisor than you think.

I am much more about surrounding yourself with smart people and making sure that you have smart people that are talking to you so that you have that positive growth mentality that you need. And when you're stepping in it, you've people that have the guts to tell you that you're stepping in it and to really help you get where you want to go. In fact, Paula, you and I were talking about a guy that I think is brilliant. I don't even know if he has any credentials, but I said that guy would be my financial advisor. I don't know what his credentials are. I don't even care how I would pay him. I just want to talk to him more often. That's a guy that I want to talk to the people that we referenced today, J.L. Collins, Paul Merriman, Nick Majuli, those are people

I want to talk to more often. I want to fill my ears with people whose opinions I respect that I truly would take advice from in a heartbeat. They have the gravitas, they have the experience, they have the background that I know that not taking advice from them would be a mistake. In fact, Paula, the reason why you and I ended up with Westwood One, both of us, is because of one of those people. And this is nothing to do with financial planning. This just has to do with, I told you when I went to Westwood One, aka Cumulus, that

there was a guy here who was amazing, who was in. Incredible. And then you talk to him and I think you think he's incredible too. Just an incredible guy. We're talking about John Wardock and just a great guy. If John gives me advice and I don't take it, I'm an idiot. That's who I want as my financial advisors. That's who I had as a podcast mentor was this guy because he's a guy that not only did I know that he had my back, he knew what he was talking about. So the takeaway then is in all elements of life surround yourself with brilliant thinkers. Absolutely. It is less about financial advisors, though. I'm not as concerned about just financial as overall. Well, Kat, I hope that answers your question. A set it and forget it approach, as far as I am concerned, is behaviorally make sense for people who don't want to think about it or people who get easily overwhelmed. And it's also a good approach for somebody who is just getting started, someone with less than $100,000 in assets, in investable assets.

Beyond that, getting a little bit more sophisticated. And again, that can come from running projections online using some of the more robust tools and calculators that are out there. There's a wide variety of them. So if you're going to go that route, use a few so that you can test the results of a whole. one against the other. That's an approach that you can take. And working with a brilliant and wise person who does not have an assets under management model, an AUM model, that's another approach that you can take. In fact, even regardless of whether or not you do work with someone, you should be running those projections on your own, just so you can model out your own ideas to

bring to the meeting and see whether or not their ideas mirror what you found. And if not, why. So thank you for the question, Kat. And thank you, Joe, for the brilliant discussion. It was fun. This is a fun topic. And as you can tell, one near dear to my heart. Well, Joe, we've done it again. Again. We have. Where can people find you if they would like to hear more of your ideas? More scintillating. Yes, scintillating commentary on VTSAX. I've got two great things, not about VTSAX, but with all the vitriol and all of the, oh my goodness, my social media feeds, overwhelmed with political junk. If you want to talk about presidents, but not about this election, I did a great interview with Meg Gorman. Meg dives into the details of how different presidents manage their

own money, Paula, and about how Calvin Coolidge was a guy who didn't even own a house when he was vice president. Like he was so, so overly conservative. Or Ulysses S. Grant, who accidentally entered a Ponzi scheme or FDR who always like doing these venture capital things, these, you know, rolling the dice and getting the big money and often losing. So if you want to hear the stories of how presidents are much more like you and me and lessons we can learn from past presidents, listen to us with Meg Gorman. And then, of course, a guy who you've seen all over financial talk shows, if you're into that type of thing, Josh Brown, who is actually Nick Bajulie's boss is joining us. on the show to talk about kind of under the financial planner hood, like all the stuff that you

probably need to know about investing that the Wall Street people don't tell you. And I generally hate that term, but Josh knows all the dirt. And it's a super fun conversation as always with Josh Brown. Hmm. Awesome. So all of that is available on the Stacking Benjamin's podcast. Wherever finer podcast are distributed. Nice. Well, thank you so much for tuning in. If you enjoyed today's episode, please do three things. First, sign up for our newsletter, afford anything.com slash newsletter. Second, make sure that you're following this podcast on Apple Podcasts, on Spotify, and in any other favorite podcast playing app. Also, make sure that you are subscribed to us on YouTube and hit the bell for notifications. Leave a comment on YouTube as well. Like, comment,

let us know what you thought. And of course, most importantly, share this with a friend, a family member, a colleague, a neighbor, share this with the people in your life. That's a single most important thing you can do to spread the message of great financial health. Thank you again for tuning in. I'm Paula Pan. I'm Joe Saul-Chi. And I'll meet you in the next episode.