BiggerPockets Money Podcast - 118: Retirement Planning During (and After) The Coronavirus with Kyle Mast

Episode Date: March 30, 2020

Kyle Mast is a Certified Financial Planner, back for his third episode to answer YOUR questions about our current market conditions. We ask him the questions YOU had on your mind, including rebalancing your portfolio, staying the course, and trying to time the market. We take a deep dive into the retirement planning system, including weighing the benefits of Roth plans vs a traditional plans, and even discuss whether converting pre-tax retirement funds into post-tax funds during this down market is the right choice for you. While this episode focuses more on the state of the stock market, we do discuss real estate investing, and considerations for whether you should jump in or hold back. As always, consulting your own tax advisor and financial planner is advised, but Kyle brings up some very interesting ideas to take advantage of this down market.  In This Episode We Cover: What people should do on their asset allocation with the situation right now The best way to protect your net worth in this economy Talking about Roth contributions Contribution limits on a Roth 401k A good plan to start investing in stocks for a short-mid term leaving the Real Estate aside for a while Kyle's thoughts on 4% rule Kyle's thoughts on withdrawing Roth IRA contribution for down payment on a rental property What is a good use for Stimulus Check How can someone find a good estate planner or estate planning attorney The importance of estate planning And SO much more! Links from the Show BiggerPockets Money Facebook Group BiggerPockets Forums BiggerPockets Money Podcast 41 BiggerPockets Money Podcast 84 BiggerPockets Podcast 374 BiggerPockets Money Podcast 116 Mad Fientist Dow Jones - DJIA - 100 Year Historical Chart | MacroTrends BiggerPockets Money Podcast 49 Mindy's email Scott's email   Learn more about your ad choices. Visit megaphone.fm/adchoices

In general, you just need to have your plan for the long term. What are your goals? You know, the time you want to spend with your family, the time you want to travel, the amount of income you want to have, what you want to give away. That's what dictates what you do during times like this. It's not the times themselves. It's where you want to go that should be dictating your decision making. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen. And with me, as always, is my stimulating co-host, Scott Trench. How's it going, Mindy? Scott and I are here to make financial independence less scary, less just for somebody else, and show you that by following the proven steps, you can put yourself on the road to early financial freedom and get money out of the way so you can leave your best life. That's right. Whether you want to retire early and travel the world, navigate a coronavirus-induced, a crash, or maybe possibly future recession, go on to make big-time investments in assets like real estate or start your own business.

will help put you in a position capable of watching yourself towards your dreams. Welcome to the Bigger Pockets Money podcast, episode number 118. Just a note, we are recording on Thursday, March 26th in the morning, which is about four days before it's released. So any revelations that came out over the weekend happened after we finished recording. A quick note, Natalie Coletti and I are going to discuss the stimulus plan and the CARES Act that was a approved by the Senate last night and is going to the House, presumably will be approved by the House, and then signed into law by the president. But again, I'm just talking about future stuff. We're going to be doing a Facebook live on Saturday. So if you catch it, that's awesome. And if you

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money. Today we are speaking with Kyle Mast, who is a certified financial planner, and you probably remember him from episode 41, where he shared some pretty phenomenal tips on how to choose a financial planner, and episode 84, where he discussed how to handle your investments as you're nearing retirement age. Yeah, in this episode, we chat with Kyle about the questions you guys post, at least those of you who are in our Bigger Pockets Money Facebook group, which you can find by searching Bigger Pockets Money in Facebook. And just the questions surrounding this kind of unprecedented situation that we find ourselves in with historic drops, economic uncertainty, and all that kind of good stuff.

So we asked your questions, and we put a little spin on some of them to make them more relevant to the broader listener group here. But I hope you enjoy it. And I think he just brought really good advice. So should we bring him in, Mindy? Yes, we should. Kyle Mast, CFP, from episode 41 and episode 84 of the Bigger Pockets Money Show podcast, Welcome back to the show today. Thanks for joining us. Thanks for having me back.

All right. So let's just jump right into it. We got a question from somebody here. And they're asking, hey, I'm 60 years old. I feel like I've done everything right. And I've built up a retirement portfolio and preparing to retire in a couple of years. Right now, I'm 70, 30 split stocks and bonds with only my rainy day funds and cash. How should I be reacting to the situation right now? Well, so for a 60-year-old, did you say when they're planning to retire? Are they planning to retire? 65. What's their time frame? They don't really outline that, but I imagine it was 65 here. Okay. So let's assume 65. So 70-30 for an entire portfolio for a 60-year-old is probably on the aggressive side of things. There'd be a couple other things to take into account. Any potential other income sources they might have might allow them to have that aggressive of a portfolio right now. If they have a couple rental properties that are maybe paid off, so they have some cash flow coming in,

so they want to be a little more aggressive with their portfolio. If they're in that situation now, and that's all that they have, and they still have five years, it's really tough to tell someone this, but I wouldn't sell it all and rebalance it all right now. There's a lot of variables here. I'm trying to rush a broad stroke,

but they also have Social Security income that's going to be coming up, and potentially they could start that, As early as 62, I wouldn't recommend that in most cases. Usually I'll recommend to wait till age 70, so you get the highest amount of guaranteed income for life from Social Security. But in a market that we're in right now, if it drops really close right to when you're going to start

withdrawing from your retirement account, you're running to that sequence of returns risk, where you're pulling out money. The sequence of returns is really bad for when you're beginning to withdraw all your money. So that might make you want to begin that social security. earlier on, have it be a larger portion of your monthly income, allow your portfolio to come back a little bit

to be able to start drawing from that in the future. This scenario right now, five years from retirement, 70-30 stocks, ideally, it would be nice to not be in that aggressive portfolio at this point in time. I'd have it split up between maybe four different buckets, one that's really conservative for like a five-year time frame to begin that withdrawal and the one with a 10-year, 15, 20 year. We kind of talked about this in previous episodes.

You know, you guys can say the episode numbers go back to that. I won't go through it again here. But for someone who's in this situation right now, try not to respond too emotionally. These are usually the times when people get either hurt really bad or do really well. And the emotion is what dictates that. So if someone pulls out at the bottom, people did this in the Great Recession,

you may miss out on significant gains down the road. Even if you have to wait till age 67 or 70 to start drawing from your stock portfolio and your bond portfolio a little bit more, you might be able to weather that as long as you don't sell out right now. I guess it's probably the best way to think. Again, this is a broad stroke. There's a lot of other variables that go in here. If it's just you, do you have a family to provide for? How much debt do you have? Do you own your own house? There's a lot of other things here. But in general, try to stay calm. Is it fair to say that the appropriate time to play defense was over the last three, four, five years and build up that defensive portfolio that's gearing you up towards traditional retirement? And that now, if you weren't playing defense and you were aggressive, 70, 30, now is a really bad time to rebalance to a defensive portfolio. Is that what I'm hearing you say? Yes, that's exactly right. Yeah. You want to use in the good times, prepare for the bad times, especially if you're nearing that retirement age. You know, if you're within 10 years,

of retirement, I would say you really need to start structuring your portfolio for a potential market drop right at retirement so that you just have enough of it ready to weather a few years. And that might be two years worth of cash if you're a really conservative person, one year worth of cashed, and then maybe three years worth of conservative government bonds or something like that. But you want to kind of structure it out. You don't want to make it all conservative because then when inflation comes 15, 20, 30 years into your retirement and people are living longer now, you're not going to be able to keep up with your spending for the cost of health care and things that are rising at that point in time. So you need to have that split out. But yeah,

defensive before it happens. And I want to make sure that we're not getting on people for not doing that. You know, it's 2020 vision is or hindsight. Hindsight is 2020. But we just want to make sure we don't look at the past and try to make, present some solutions for what people can do now. You know, this is where we're at. Yeah, I wish I would have sold. When did the market hit its peak in February, what, 19th? Something like that, yeah. Oh, my crystal ball was not working that day, so I just kept it all in.

We just interviewed Jim Collins on this, though. The whole point is, hey, it doesn't matter for us. We're not retiring in a few years. So you keep it in and doesn't matter. Yes. And maybe I'll add something else to this too. Dead people have the best returns. That's exactly right.

They do. So I have some clients right now that they just this year, started their retirement income. And we're postponing their Social Security was the plan. So we're taking some from their, they have some savings initially, and they're going to take some from the first most conservative part of their portfolio, which was going to begin this month. It looks like they'll probably be able to make it until July with what they have in their savings, and then continue to postpone Social Security. But one hedge in their plan was if the market dropped in when we wanted to start beginning those withdrawals, we could potentially begin one or both of their Social Security incomes

early to mitigate or reduce the amount that we're pulling out of their portfolio when it's low. So we haven't decided one way or the other to do that yet. We still have about three months to decide on that. And then we could, you know, if it looks like it's still really down and we want to not draw so much from their portfolio, we'll start their social security at that point. Ideally, I'd love to have them wait longer because that is a right now, the people that are just living off of social security feel pretty good. They're not losing jobs. They're sitting at home. Their check is still coming in. There's not a huge difference other than being. and isolated from what it was a month ago.

So, and to clarify that, once you start taking Social Security, you can't stop taking it, correct? Correct. Yeah, there's a little window where you actually can pay it back and then readjust the age that you take it from. But as it in general, yes, once you start it, that's kind of it. Okay. And this kind of, you know, that question kind of leads to the next question.

What is the best way to protect your net worth in this economy? I have taken a hit to my net worth. I know nobody else has. It's just me. Everybody listening has most likely taken a rather large hit to their net worth. And I don't know what the best way is to protect your net worth in this economy. Don't sell. You did it.

That's it. So I listened to a couple of the podcasts you guys did just recently. You're getting some people on. And I like the Roundtable one you did especially well on the bigger pockets, the main real estate podcast. you talked a lot about cash reserves. So I would say how to protect your net worth in an economy like this is have cash reserves to whether you six months, you know, depending on your age, you might be willing to be a little bit leaner on that three to six months or, you know, if you're closer to

retirement, maybe look at a year or two years. Don't panic sell. Don't get emotional. The nice thing is we have just 10 years ago, an example, to look back to have a huge market drop and see what happened afterwards. This time is different, but this time is also the same. So every new down swing, there's something different, but there's also a lot that's the same. And we've been here before. Things change. Things are different. This is, you know, a worldwide pandemic is a pretty unique and historic situation. But don't panic, sell, hold to the financial plan that you have in place. What if I'm kind of moving the other direction? What should I be thinking about if I'm 30? and I am fairly aggressive, maybe 100% allocated to stocks with a relatively small cash reserve,

but a very big saver, right? That's probably a profile of a good amount of our listeners here on the Bigger Pockets Money podcast. You know, what should I be thinking about right now if I only have a two or three month cash cushion and invests entirely in stocks, but have been a good saver throughout this and feel like I'm a reasonable income earner? Do you guys know about what your demographics are for listeners, income level net worth or anything like that? Yes, most of our listeners are between the ages of 25 and 55, just kind of skewing towards that younger group. Our listeners typically earn between $50, and $200,000 a year in household income, generally have good credit, interested in money, thinking about investing in real estate as part

of their financial journey, but it may not necessarily be the whole part or even a major part. Okay, great. Okay, so taking that kind of into account, I'm going to add something to your younger person that you're describing here, someone who's fairly interested in education and is fairly capable from a hustle standpoint, work ethic, I'm guessing. So if I was 25, I'm 34, I'll be 35 next week. If I was 25 to 35, you know, in that age frame, I think in a year or two or five, we're going to look at it back at this time and it's going to be a tremendous buying opportunity for stocks, potentially for real estate, depending on how things shake out in the next couple months, there might be buying opportunity in a month or two. We just have no idea. But my guess is

historically, when something so drastic like this happens, it's a very big opportunity for long-term investors. That's why Warren Buffett does so well during times like this. He buys a whole RV manufacturing company at the bottom of the market in 2009, 10, and now it's one of the biggest RV manufacturers in the world. Those are looking for those opportunities. So a young person, you know, if you're still employed, you know, look at, make sure you're getting that employer match. You know, if your income is decently, if it's not real high right now, I would definitely look for, look to investing in Roth accounts, you know, your Roth 401k, your Roth IRA. Down the road, it's looking like those tax-free accounts are going to become more and more

valuable as we have pretty large social programs that are underfunded and taxation or inflation is a way to shore those up over time. So if you have money that grows with inflation, in a tax-free capacity or with future taxes potentially going up. If you're doing that in your 20s and 30s, when the market is low, you're eliminating all long-term capital gains taxes. You're eliminating income for later in your career when you were making more. So I would go there really quick. And then I just to chime in there a quick?

Yes, yeah. Just personally, I put 100% of my contributions this year into a Roth 401k through my employer, obviously, with bigger pockets. So just to say that I agree with that sentiment largely when I think when I zoom out of a very long term. Yes. If people are watching, I did a fist pump. That's good. And I'm just raising my hand to ask, what are the contribution limits to a Roth 401K? Roth 401K is 19,500, I believe, this year. And for a Roth IRA, it's $6,000. It's $7,000 if you're over age 50. For a Roth 401k, if you're over 50, you can put another $6,500.

in there. So you can actually do 26,000. So you can really sock some money away if you have the income to do it. Okay. And I wanted to make a little note that the tax filing deadline has been pushed back to, is it July 15th? Yeah. This year, which means I checked with my tax people. It means that you can still contribute to your 2019 Roth IRA up until July 15th. So if you did not max it out last year. Now, from what I'm hearing from you, Kyle, is a surefire, really good time to start putting money into there. And then you can also put money in for your 2020 contribution. So last year's was, I'm sorry, I don't remember the number that you just said. Is it six or $7,000 for Roth? $6,000 for last year and $6,000 for this year. Correct? Correct. Yep.

So I could put $12,000 in, $6,000 for 2019 and $6 for 2020 right now if I had not put any in for 2019 so far and take advantage of this slightly down market. Correct. Yeah. And you could even do something crazy with your paycheck, too, if you have enough in cash reserves. And this is assuming that you have done well with your financial independence journey and you do have cash reserves and emergency funds, but you could literally put 100% of your paycheck in for a few months. If you think this is a good time to be putting into the market, that gets into market timing a little bit. And I'd probably caution people against that a little bit and rather spread it out over time. Since the IRA,

you have a timeline deadline for the Roth IRA for 2019. Get that in before July 15th for sure, but maybe spread the 401k out over a timeframe. But if you felt like you wanted to dump it all in, you could do it pretty quick and live on no paycheck for a couple months, live on your cash reserves, and then replenish it in a couple months. On that point, a few years ago, I did not contribute to 401Ks because I thought it was more valuable to me to house hack. right? And I think that was the right decision for me. I had made much more money on a house hack than I would have even adjusting for the tax evidences of the 401k in that first year or two. Since then, I have maxed out my 401k or Roth 401k more specifically. And what I do is I, at the beginning of every year, every calendar year,

I max it out. And I do that. I take a zero paycheck because I have cash reserves. I do not try to time in the market. I just do that because it gives my tax advantaged accounts more time in the market. This year, maybe I paid the price. If I had not done that and done it later on, I might have been able to buy more now when it's low, but I can't possibly time the market. So I do exactly what Kyle is suggesting here at the beginning of every year with that, because I think that's the right mathematical long-term approach. Yeah, in general, that is, you know, and you can't time the market, so you can't ever beat yourself up for, well, I should have known that a coronavirus would go nationwide and the stock market would drop by 35%. I should have waited a month and a half. There's no way anyone could know

that. So time in the market, like you said, is better than timing the market if you probably heard that in the financial independence world. Yeah, that's a great quote. Time in the market is better than timing the market. That's tough to hear the difference. We'll definitely tweet that one out. That's a good one. Okay. For beginner real estate investors, I think we are entering a very hard and unpredictable time. And these are questions that are coming directly from our Facebook group. I agree with this person. I think we are entering a very unpredictable time. Would it be a good plan to start investing in stocks for a short midterm, one to two years, leaving the real estate aside for a while? And I'm going to correct them right now and say, one to two years is definitely short term. It is not midterm. You need to be thinking long term with stocks. But Kyle, you're the guest today. Would it be a good time to start investing in stocks? It's a good point. So this is, I should have said, given my disclosure at the beginning of this whole thing, but just to make sure, like, everything that I'm saying here, everyone's situation is so unique. And not only that, the historic landscape that we're in right now is very unique in itself. And I'm learning a lot, you know, of how to manage what it looks like when, so personally, I have properties in Oregon and Ohio. What does it look like when a pandemic affects tenants in both of those states? You know, when potentially you think you're versus fine and you have rent that might not come in in both those states. So taking that from the

backdrop, this situation, a beginner real estate investor. And you guys touched on this a little bit in the Bigger Pockets Real Estate podcast. I don't want to reiterate it too much. But a good cash position is a very good thing right now. You know, make sure that you know that your job is stable and that you have some runway if you need to weather something where you need to, you won't have income for a little while. So as far as the time frame one to two years, avoiding real estate and investing in stocks instead, I think it's a great time to be investing in the stock market. I think continually investing in the stock market as a diversifier with real estate is always a good thing. They move different ways. Sometimes they move together. Sometimes they move separately. The stock market moves really fast.

Real estate moves much slower. So doing things like making sure you're maxing out your employer match, contributing maybe the maximum to a Roth IRA each year. So you're getting of that tax-free wealth that's built. And you will be surprised when you are 60, the clients that I have that have large Roth accounts, it's very, very nice because that doesn't affect other things like the taxability of Social Security. If they want to take $100,000 out and buy a rental property with it, there's no tax on it. So having Roth accounts built up over time is a very good thing. Depends on your own tax situation and everything at the same time. But I don't know that if your goal is to be a real estate investor, I don't know that if your goal is to be a real

estate investor, I don't know that I would wait a full one to two years before you also start looking at real estate. That seems like a long time. That seems like timing the market. You're kind of assuming that things will continue to go down quite a bit for one to two years. As a beginner, it might not be a bad idea to wait one, two, four or five months to see what's happening in your own personal situation, your market, the national market. That's not a bad idea. One to two years, if real estate is part of your long-term financial plan, it seems maybe a little it long, you know, maybe reassess in three to six months to see what it is. But no harm in just waiting a little bit in a time of volatility. If it's something where you're procrastinating on

something in good times, that's a different scenario. But this is a time where there's a lot of uncertainty. So there's no reason to not hunker down just a little bit and see how things play out. Yeah, and I'll just chime in there. If you're buying your first property and you're planning to self-manage and maybe do some DIY repairs and your state is shut down temporarily, maybe you wait until the state opens back up as part of that, right? So there's probably a temporary lack of transaction volume that's going to occur in the coming weeks, you know, relative to what was happening previously, what we'd expect to kind of seasonally in March, April, in general. But I think entering into real estate and investing in the stock market for the long term

do not change for me and probably don't change for most, which seems to be kind of what you're saying. Yes. In general, you just need to have your plan for the long term. What are your goals? You know, the time you want to spend with your family, the time you want to travel, the amount of income you want to have, what you want to give away. That's what dictates what you do during times like this. It's not the times themselves. It's where you want to go that should be dictating your decision making. Oh, that's so perfect. I am going to jump in here and say, I completely agree with you. And Scott, if this is your first property, now is the time to just kind of hang back and keep an eye on the market. Hopefully, if you were thinking about buying something anyway,

you've been watching the market, you know what a good deal is in your market. So now you can recognize when somebody who made a foolish choice a few months ago and has no other exit options, maybe you can capitalize on their mistake, which sounds terrible to recommend. But there are going to be real estate deals coming up on the market because people made foolish choices in the last year when they made their purchase. And so keep an eye on what's going on, but be very hesitant to jump in with both feet. I also want to go back to the cash reserve comment. I really feel very strongly. If you don't have super strong cash reserves right now, you have no business buying real estate, especially if you're inexperienced. But when you say cash reserves,

when you talk about having cash cushion, you're talking about actual cash in a bank account, not in any sort of investment account, not in any sort of anything other than a plain old savings account in a bank. Is that correct? Yes, you're going for maximum boredom. The most, like, you can just sitting there earning nothing, you know, maybe you can get 1.7% if you find a good online savings account, but you want something that you can at a moment's notice. And essentially look at three to six months of what it would take for you to cover all your expenses.

That's what you're looking to have in that bank account boring. You can take your risk with everything else. You have that. Take a lot of risk. Do your 70-30 portfolio. if that's good for your situation, look to do your real estate, but have that as the buffer because you will sleep so much better at night, taking risk for higher return with the other funds if you know that you have this buffer

to weather the storm of, you know, and if you own real estate, to weather the storm of tenants not paying rent for two or three months. You know, do you have, that needs to be a part of your reserves. I'm not just talking about personal living expenses. I'm talking about expenses for your life in general to be able to weather it. Yes, good. Thank you for clarifying that because I do get that question frequently. Oh, well, so where should I put my cash reserves? That goes into a savings account that pays you 0.001% interest, whatever. You need that in a place that you can easily access it. Moving on to another question here, we're getting questions when this one's framed, what are your thoughts on the 4% rule, particularly in light of inflation coming our way? And what does inflation mean going forward for us? And I want to ask, add some context to that where I've seen some folks talk about, hey, I retired using the 4%

rule recently. Am I now unretired? Or does the 4% rule take into account a market drop like this and I'm able to weather the storm going with that? Yeah. Well, the 4% rule, so there's been a lot of research, even from the original research that was done on the 4% rule, people have added to it and redone it over time. But essentially, just to recap, the 4% rule is saying that you can have a portfolio and you can essentially withdraw 4% of that for your retirement life, which in a lot of the studies was 30 years, but a lot of studies show that it's actually, you could actually last longer than that. It's a pretty solid foundation to be able to invest it in a long-term index fund and be able to just take out 4% a year. That does take into account things like this,

these market downturns. The downside is that when that happens right at the beginning of your 4% withdrawal rate retirement, it brings that probability down of you lasting until the end. So say if there's another thing like this or maybe two more within your retirement time frame, you may spend down faster or spend down to nothing. Most of the scenarios that they run with the 4% rule end up with you having, say you started with $2 million. They end up with you having $6 or $7 million at the end because you didn't spend enough. Most of them end up that way. very few end up where you really spend it down. So there's a couple of things with that.

So with my own clients, we usually stick to a similar rule. I usually go a little bit lower just because most clients, I set up the spending for around the 3% mark because invariably people will find something else during the year to spend 1% on. So I just kind of set it up different ahead of time and it turns out to be the 4% rule. But one thing that you can do is if you are worried about a little bit for this year, go down to 3%. Can you dial back your spending for one year or to 3.5%. The less you take out in a down year, it always increases the probability of that scenario. So there's some things that you can do

with that. And do you guys want me to move on to the inflation piece of that? There's a question there about the inflation. I'll kind of unpack that if we want to. Well, I just put to chime in on the 4% rule because I'm seeing hysteria around this in the fire community and people posting about how I am no longer fi or whatever. I mean, what I think people want to understand is the 4% rule takes into account the exact set of circumstances. You're doing this. If you weren't planning on a big crash, you could retire at a 5% or 6% return rate, right? And so the 4% rule is a very, very, very conservative number. And that assumes that all of your wealth is just in that bucket, right? It assumes you have no cash.

no emergency reserve, no alternative streams of income. It does not assume social security income downstream. It does not assume rental properties. It does not assume that you adjust your spending or react to reality in any way, like a lockdown where you have less chance to even spend money, right? It assumes you never earn money again. So this thing about the fire movement coming to an end is humorous to me in a lot of ways because it shows that a lack of understanding around the whole premise around which the 4% rule is constructed. Now, one more thing while I'm on my soapbox here. Another component of this is in spite of that math, almost no one, I polled the FI community a few months back, almost no one, 95% of people who consider those selves FI rely on additional income streams,

cash positions, real estate, in addition to a portfolio in equities and bonds that is capable sustaining the 4% rule. So in spite of the overwhelming math that people, that supports that the 4% rule will last you through a situation like this, everyone is even more conservative than that who actually goes on to retire with a very, very small minority. So these are just some points to consider, guys, before you start thinking that the 4% rule is bogus and that the foundational component of what we're talking about doesn't actually work. Well, and I want to jump in before Kyle answers the inflation part of this to say, I did not believe the 4% rule. So I went and I read William Bagan's study and he wrote it, I want to say he wrote it for Life magazine. I'll find it and I'll link to it in the show notes.

But it is a fascinating study. He went through and he tells you in detail all the things he did, all the things he took into account. He runs the same scenario at 5% at 6%. And he shows you, Oh, you only have a 78% chance of success with this. With the 4% rule, you have a 96% chance of coming to the end of 30 years with money. And like Kyle said, in many cases, you have more money after 30 years than when you started. But he also runs it at 3% and 3.5%. And I want to say, and it's been a few years since I read this, but I want to say at 3.5%, you have a 100% chance of having money at the end of 30 years.

So basically he's saying if you do like Kyle does and go for 3%, 3.5%, you're not going to go broke. It doesn't matter what the market is doing. The market always recovers. I mean, past performance is not indicative of future gains, but it kind of is. I mean, you are, the market goes up into the right. And I mentioned in the article or the episode with Jim Collins that historically, chart, I'll link to that again in the show notes. That's pretty powerful to see as you're going

through 105 years of stock market returns, there's 30 down years. So there's one down year for every three up years. I mean, to see that, that's not a lie. It's on the internet. Well, to piggyback on that, too, is that that study and studies that have followed, he did it in rolling timeframes. So different timeframes included like the Great Depression, you know, the crash in the 80s, you know, hyperinflation, taking people off the gold standard, a lot of these things that really, 9-11, a lot of these things that just impacted the market in such huge ways. And like you said, you know, bringing the withdrawal rate down a little bit, it may bring it up to 100% probability. I'll maybe play devil's advocate here a little bit.

Someone would say, well, this time is different. You might be right, but no one's ever been right that way before in the past. So that's, I'm going to go with what history has shown us. only thing we can do is basically where we're going. So if someone chooses to say, well, we need to dial it way down, do a lot more, that's a personal choice and that's completely fine. And then to comment on the fire movement, Scott, I think this will be a trial by fire for the fire movement. I think it's really, really good. For one thing, the people that have saved up a substantial amount to actually consider the 4% rule for an early retirement, those people are very motivated, high work ethic, smart people that no matter what happens,

they're going to figure out a way to make it work. So that part of the fire movement is going to survive in one way or the other, whether it's called fire or just very successful people. But this will help people judge the emotional capacity that they have to trust in investing for the long term. So there's a couple comments there. And I'll move on to the inflation piece with a 4% rule. It's pretty quick and easy.

It's not very hard. So in the question, something to the light of, particularly in light of inflation, likely coming our way. So I'm going to assume a couple things here in the question that people think inflation is coming because stimulus is being done to the economy, which is often the case. It can take a while to bleed into the economy. You know, a lot of stimulus, government stimulus printing of money went in in the Great Recession. And we actually haven't seen a lot of inflation. There's a lot of different opinions on why that is. but eventually down the road, inflation will happen if things,

if there's just more money supply out there, it's just reality. However, the 4% rule takes that into account. Your assets inflate as inflation goes up. If you own real estate, if you own stocks and bonds, over time with inflation, the underlying assets of those things also inflate. And it's one of the best ways to hedge for inflation. One of the worst ways is to do something like move everything to cash in a time like this.

You're going to just crush yourself from an inflationary standpoint down the road. But I'm not sure exactly what they're asking in the question, but that's kind of, the 4% rule has great capacity to withstand inflation. It's built for that. Yeah, I think you had really good commentary on this earlier, too, where you talked about the advantages of the Roth, right? Where hey, you think there's going to be long-term inflation. And with all this spending, somebody's going to have to foot the bill, whether that's everybody jointly through inflation, or whether that's folks who are saving up for retirement listening to this show, or are going to be well-finding, and therefore higher income earners who are going to pay higher taxes down the road, right?

And so your Roth or Roth 401K seems like a great avenue to invest as a hedge against inflation and against rising tax rates down stream. Yeah, maybe before we jump off this one, since we jump back to the Roth, I was going to mention it earlier. Another good strategy to keep in mind during this time is potentially converting some of your traditional IRA or pre-tax 401K money to Roth money. You got to be careful, and this is different for everyone's situation because every time you do that, it's taxable income to you. So if you convert $10,000 in an IRA to a Roth IRA, you make $50,000 a year, you now make $60,000 this year.

And that has implications for whether if you're qualifying for health insurance subsidies or it goes on to your income. So you need to make sure that that's the right choice. But when the market tanks like it is now, if you can convert to, what is now 35% less in money from taxable in the future to tax-free, pay tax on that lower amount, and then it comes back up. You now, you pay less tax than you would have anyways, and now you have that increasing for you. So it's, it's, the down markets, there's a huge opportunity for Roth conversions if people are willing to do it. Okay. So let's say I want to do that. Who helps me do that? Do I talk to you a financial, a financial,

planner or do I talk to a tax expert? Who's going to help me figure out how the best way to do that is? Mad scientist. The mad scientist. Yes. Definitely. Get on his website. He has great. And he has good stuff about the mega backtor Roth IRA too, you know, some of these other more advanced strategies that you can do. But you can do it on your own. You know, if you'd say, for example, you have an account at Vanguard, an IRA. You can convert it right there to a Roth IRA at Vanguard. Pretty simple. You just want to make sure that you are understanding the tax implications. So maybe talk to your tax preparer and say I'm considering converting some to a Roth IRA, maybe $10,000, maybe $5,000. What is the impact

that that will have on my taxes? I do this for clients all the time too, and I coordinate with their tax preparer. So I'll say, so I just converted $45,000 for a client from his IRA to his Roth IRA. And we did it last year too. And we're kind of doing it over several years. But I email his CPA, say, we're thinking of doing it again. Does he have any other income that potentially might come in that I don't know about that's going to mess with this. She emails back, nope, we're good to go. Convert it. So you can do it on your own. If you have a financial planner going over your financial plans and kind of keeping track of everything, you're not as much of a DIYer. They should be able to coordinate it for you as well. It's a pretty run-of-the-mill thing

for a CFP. But if you're going to do it on your own, just make sure you understand your own taxes or you talk to your tax preparer also. Okay, that's a really interesting tip. Now I've got to go look at my plans and see what I have available. So I have a self-directed solo 401K. Is it worth taking money out of there and putting it into a Roth? Because I'm using that for investing in real estate, investing in syndications, investing in private loans and things like that. But now this is tempting. So now you're getting deep. So the self-directed 401K and investing in real estate, what I would caution people is when you're doing these conversions or even investing in real estate, you need to be careful of some hidden taxes that can show up if you're doing any leverage

inside of those accounts. I'm going to make sure I don't give too much advice on that in this podcast, but it's definitely a possibility. But what I would say is that it has to do more with your tax, your current tax brackets, because basically what you can do is you could convert a certain amount, but what you might find is that it bumps you from the 12% federal bracket into the 22% federal bracket if you convert too much. So there's the taxable income for federal goes up to about 80,000 at 12% and then it jumps to 22%. So usually what I have people do is I'll have them convert up to that 12% mark. So you pay tax at the 12% rate and not convert over that. That's what I just did with this client. They're semi-retired. So their incomes are really low.

So we can convert big chunks and fill up that bracket. But that will dictate a lot of it. I wouldn't just willy-nilly convert it because you might bump yourself into a 22% bracket. and if you're in a state with income tax, make sure you move to another state for a year before you do the conversion. I could jump from Oregon to Washington for a while, do a bunch of conversions before I move back. But coronavirus is worse up there, so I probably won't go. Yeah.

But yeah, those are some, make sure that would be definitely one, run it by your tax preparer and say, this is what I'm thinking of doing? Is there anything that I'm missing that will hurt me in the short term and the long run? There's a couple of individual cases where I think this could be particularly interesting advice that's very helpful. So suppose, yeah, let's use one example. I've got someone who makes $100,000 a year and their real estate portfolio generally produces about $10,000 in taxable income. But this year, they lose a lot of rents, right?

So they actually have a loss of $10,000, $20,000, right? What you're saying is they'll be in the same tax bracket. And it could be a consideration for them to maybe be. begin rolling off some of their 401k and putting that into a Roth through a back door because they're already going to have lower taxable income anyways because they're below the $150,000 limit. Getting very specific and technical at this, right? Yeah. Another example would be someone who owns a small business and has a big loss this year, right?

Well, now you may convert all of your 401k or a huge chunk of it until you get back up to zero in AGI for the year, right? This is what Mitt Romney did famously a few years ago to get a tremendous amount of money into a Roth IRA. So something that's there if you're a small business owner who is taking the loss. You obviously don't want to take a loss, but that's a way to mitigate or take advantage of that situation from the tax perspective. Definitely. Yeah. Every crisis has some sort of opportunity. And the Roth conversion is a huge one for any down market or like you said, loss in business income or if you lose your job for a year, but you have that cash runway that you can live off of. Or if you're not working for half a year, I've had several clients that went back to school for a year to change careers.

So they had basically no income during that year. They had some student loans that they lived on or they lived on reserves. During that year, they converted all their money at very low tax rates. And now it's all Roth money. And now they're making a lot of money as opposed to the year when they didn't make anything. And they used that room they had in their tax brackets to get it into a tax-free account. All right. Let's move on to another question here, which I think we're going to have the answer to from this discussion already.

But let's bring this one up specifically. What are some thoughts on withdrawing Roth IRA contributions at the this point, the removal of maybe my principal invested, for a down payment on a rental property, especially if I have a great work retirement plan. It's not a bad idea. So I'm going to switch gears a little bit of putting all this money into tax-free stuff. It depends on your personal situation. So say you've been doing a lot into your Roth accounts and you have a decent amount in there and you want to diversify. You don't have a real estate property yet. You don't have much of a down payment other than your cash reserves. You can always, with Ross, you can always

take out the contributions that you've put in. If you want to use it as a diversifier, I'm not against it. What I would say is you need to know that you want to be a real estate investor. It's a lot different than investing in the market where you just put it in and you let it go. You need to understand how to analyze a property. I mean, what you guys talk about all the time on your podcast. But just from a complete principal standpoint, I would say it's definitely an option. I've had clients do it and the tax benefits that you get from investing in real estate property are pretty substantial also, even though Roth is very valuable. Ideally, I prefer that you don't, I guess. Maybe that would be the way to go. But if it means that it'll get you started in real estate and

give you some diversification, I think it's okay. Okay. Yeah, I think that you have to really have an eye on what you, like you said, the market conditions in real estate. I would hate to lose the tax-free growth advantages. On the other hand, if your real estate is just going to kill it because you found some smoking hot deal, I still remember two specific deals that I didn't have enough cash for during the last downturn that would have made me a lot of money if I would have just had some extra cash lying around. And I hadn't been funding my Roth for a while, which I regret. It just depends on what your plans are. You know, if your plans are to build a massive real estate portfolio or even so let's say even a small one five say five properties you know

know like not something huge but more than one property and your plan is to give them to your kids when you pass away where they get a step up in basis you know you're essentially going to be able to give that money to them tax free anyways in many regards so at least the way the current tax law is and that could change for real estate or Roth IRAs down the road but the way it sits now you kind can get that also in real estate, but it just depends on what your goals are, or if you continue to 1031 exchange into future properties and do that and have your kids inherit the properties when you pass away. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing.

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988 suicide crisis helpline is funded by the government in Canada. Okay, I think we've sufficiently covered the state of the market right now. Don't sell. Seems to be the overall commentary from everybody or, you know, use this opportunity to transition into a Roth, do the Roth conversion. What is the next big topic on everybody's mind? That's going to be the stimulus check. The CARES Act was passed. So we're recording this show on Thursday, March 26th, which is the Thursday before it came out.

And the CARES Act was passed through the Senate last night. It is expected to pass the House maybe tomorrow, which is Friday, and be signed into law very quickly afterwards. What is a good use for this stimulus check? This is going to be pretty boring. My recommendation, cash reserves, shelter, food, water. I mean, actually, I should put it in different order. Food, water, shelter. And then from there, you know, you go down the line of what your cash reserves look like, your overall financial plan, the strategy that you want to put in place. You just kind of go down the line like any other paycheck

that you would get with your current circumstance. During this time, it wouldn't be bad to have a larger cash reserve if you don't have a very big one. So maybe just putting it as topping off what you already have in savings is. not a bad idea at all. There's no reason that you need to go out and do something with it really quickly. The other thing that I guess I would say is I probably wouldn't recommend that people pay down long-term debts with it right now, like a low-interest rate student loan or a mortgage, unless you have cash just everywhere. And this is just coming in and you've got a year's worth of cash reserves sitting there and you just don't need any more. Then you can do something like

that. But in general, because of the uncertainty right now, I'd wait a little bit. and just keep that in your reserves before you decide exactly what to do with it. Maybe a high interest rate credit card would be on the list. If you have two or three thousand in a high interest rate credit card that you can get rid of, that might not be a bad idea too. Let me ask you this because I think the stimulus package is going to come out. It's going to do what it will to the economy. And everyone might get it.

Many of the listeners may get a check unless you make above the income hurdles, right? But what is there to talk about with that, you know, beyond, hey, do you have an extra $1,000? dollars, what do you do with it in any circumstance? I love this discussion around the debt question, though. There's three options for people that have debt, right? It's pay it off, stockpile cash, or invest according to their strategy. I mean, there's plenty more options than that. They spend on your lifestyle, whatever. But does the math between those buckets of piling up cash, paying down debt, and investing for the long term change? It sounds like it does for you.

How do you walk through that framework? And what is changing from good times to fast? Yeah, so usually in normal times, I would say, not in extremely volatile times like this, I would look at a client situation. And some clients are really debt-averse and really like the feeling of being debt-free. And that's a huge goal for them, whether it's real estate or consumer debt. Consumer debt, you know, where the asset is not paying for the debt and then some, that's bad all around. You know, if you can pay that off, you know, you have a depreciating asset, like a vehicle or no asset, like just a credit card balance where you're financing a hamburger for 30 years. Anything like that, that's not good debt in the long run. So that's a pretty easy discussion in any market.

The long-term 30-year fixed mortgage or the 20-year student loan that are in the 2 to 4% range, very low payment. In a time like this, even my clients that are more inclined to pay those debts off, unless we can eliminate it completely, which means taking that payment out of their monthly cash flow, freeing up the amount that they need each month from their investment accounts or just to live on from other sources. In times like this, I usually recommend to hold on to it. Let's see where things go. Cash in uncertain times is very powerful and a very important thing to have. That's why there are runs on the banks in Depression era times. That's why people tend like when this stimulus comes out, I wouldn't be surprised if a lot of it doesn't flow into the economy initially other than rents.

you know, like people paying for their housing and maybe some food. But for most people, it's probably just going to go right into a savings account because of all the uncertainty, which I think is, depend on what you want to happen with the economy, probably not what they want to help stimulate things, but it's right on a personal level for people. But yes, to answer your question, it does change in a time of uncertainty like this. In normal times, I will present the options to clients and kind of go either way. Because if you pay off debt, and I think you guys actually talked about this recently, you pay off debt, it's a guaranteed return. If your debt's 4%, there's no risk to you in getting that 4%.

Every return that you get has a risk factor to it. When you're paying off debt, there's no, that factor is zero. It's completely risk-free. You get that return to matter what. If you put it in the market, you might get 7 to 12% to pay. Last year, 25% if you're in an aggressive portfolio. But there's risk with that. And you just experienced it right now.

So that's the trade-off. And some clients just want to pay things off. I have a client that we actually paid her house. We took money out of her account last year. paid her house off completely. And so she doesn't have a house payment now. It turns out that it was awesome because the market was up. We didn't do it because of that.

It's because she was so stressed about all the bills she had to pay in her life. And it was a way we could get a guaranteed return. And then now she lives on less than her social security income. So she's fine. And she has no debt payment on her house. So it just depends on your personal situation a little bit. But yeah. I just want to chime in that I completely agree with that.

And I see it as exactly what you described at the end there, a risk-reward problem, right? And in a great booming economy, right, when the market, and it's almost a market timing issue, which we don't like to do, right? But when you have a big boom, you know, like we were in last year, your math is, hey, I've got my low interest debt like my mortgage and my high-interest debt like credit cards. And those are kind of no-brainers for me as a long-term investor. I do not prepay mortgages down early. And I would certainly prioritize a credit card debt as an emergency. But in that gray zone in between, that 5, 6, 7, 8% interest rate stuff, maybe there's a harder decision to think about, do I pay it down or do I invest because I got a spread.

Well, now the value of a cash reserve, the risk-reward value of that, the return, you might get on that in terms of your ability to sleep by night. That's just gone skyrocketing up versus the interest rate in your debt. And same potentially, depending on how you look at things with your long-term returns in investment in the market. So that's where I think the long-term debt repayment is beginning to skew for a lot of people if you're looking for a framework to think about it. Yeah, that's a really good way to put it, that the fact that cash reserves now,

the return on that in your terms saying the ability to sleep at night has gotten higher right now. So it's a lot more valuable than it was last year, I guess. Okay, so Kyle, you touched on estate planning just a few moments ago. How can someone find a good estate planner or estate planning attorney? You know, rock stars refer rock stars. I think I heard David Green say at the Bigger Pockets Conference or somebody. Maybe it was one of you guys and I'm crediting the wrong person. But if you know a good professional in your life, whether it's a CFP, a CPA, a real estate professional, successful business owner that has their act together, ask them who they use for their state planning attorney.

And that I would give them, give them a go. Usually that's the best way to find them rather than just Googling and taking the first one that you come across. Yeah, I think that's probably the best way to go about it. The best recommendation I can give, and you might, if you're looking for a specific area, like if you're kind of real estate heavy, I would look for someone that maybe has more expertise in real estate. Yeah, and I'll just kind of chime in here with a horrible reality of what's going on right now is there will be a lot of untimely deaths potentially going forward. So it's really important, I think, to prioritize this for a lot of people right now and really make sure that those things are lined up because we've all heard on this show that the pain that is caused after death for folks that don't have this set up appropriately. So something to really consider in the next couple of weeks as we're on lockdown.

Never been a better time to get these ducks in a row if you're listening. Yeah, I definitely agree with that. Even as simple as just making sure that the beneficiaries on all of your accounts are updated. You know, it's a pretty simple thing to go through and do that. A lot of times people assume estate planning is something very complicated. But if you can just at least make sure on all your investment accounts and you have a simple will that just kind of dictates where things go, that will alleviate a lot of pressure from your family if something were to happen.

And the last thing that you want is to add on a financial burden or family infighting at a sad time to begin with. Yeah. And the importance of estate planning, we really talked about this in an entire episode with Harry Mix on episode 49. He had the benefit of his mother had cancer so they were able to work together to plan her estate before she passed so that her wishes were carried out. And that's really what estate planning is. It's not really, you know, I think a lot of people don't want to think about dying. They don't want to think, you know, oh, I'm not going to see my kids grow up or, you know,

whatever. But when it's your time, it's your time, which is awful. It sounds so callous. And I don't mean to be that way, but you know, you have to remember that you're planning for your children's future. You're planning for your spouse's future. Or if you've got nobody in your life, you're planning for your money's future. If you want to give it to, you know, the Mindy Jensen Foundation, you're welcome too. But you have to know, you have to put that in writing so that your wishes are carried out. And that's really what's the ultimate goal of estate planning is. You want your money to go where you wanted to go. Because, I mean, what are the consequences of not having your estate planned? You have a bunch of money and now you're dead. What happens to your money?

Who dictates that? The state dictates that. Isn't that correct? Your family will fight over it. Yes, that's correct. Your family will fight over it. The state will say, well, sorry, we're just going to tell you what is going to happen and that's it. And it's your money. It's my money. And I want it now. remember J.G. Wentworth. It's your money. Put it where you want it to be. I think it goes along with being a responsible person. We all have things that we're responsible for, whether it's other people in our lives or things in our lives. If you're a business owner, having something in place, if something happens to you, how does your business run, the clients that you serve, things like that, all of that, it may not be like you said, Mindy, it's not fun to talk about, but it's a responsibility

that we have to make sure that we take care of. And sometimes we do things that may not be fun, but is it responsible and right thing to do. And this is kind of one of those things that you just need to make sure that you get it done. Okay, perfect. All right. Well, on that lovely note, should we move on to how are we going to end the show today?

Are we going to do the famous four again? Are we going to do a variation of that? We've already had you on twice. Yeah, I think that we should definitely do the joke. And even if Kyle isn't prepared, since we did bring questions in from all of our members of our Facebook group, somebody gave us a really great joke, a fairly timely joke. What are the best jokes to tell when you're quarantined?

Inside jokes. Yeah, there you go. Oh, my goodness. Isn't that horrible? It's perfect for the show. Scott loved it and I thought it was terrible. So thank you for that delightful joke. Do you have any books you want to recommend, Kyle?

Oh, man, I'm trying to think. I don't even remember the other ones that I've recommended in the past. I know I recommended Scott's set for life, and I was trying to throw it in here again, you know, and some of these people wondering what to do. It's always good to find a book that kind of outlines things that can walk you through a process rather than just getting all this information that's out there. So anything, any book like that, there's a book called, it's When. I think it's the, I think it's called When by Daniel Pink, the power of perfect timing or something. I'm butchering the title. but Scott, you've made a couple of comments on some of the podcasts I was listening to recently

about during this time making sure that we are not falling into habits that are not going to benefit us when the virus is moved past and the economy starts to roar back to normal, you know, making sure that I'm not sitting here in my office eating casso dip and chips, which I may have been doing. But any, that's a good book that just talks about finding the rhythm that works for you in a work environment. A lot of people are not used to being self-employed or self-motivated. And now we're in a place where a lot of people are working from home.

So you kind of have to find that rhythm. So I would recommend that book. That's just off the top of my head. Okay. And that is called When, The Scientific Secrets of Perfect Timing by Daniel Pink. And of course, we will put these links to these, everything we've talked about today in the show notes,

which can be found at biggerpockets.com slash money show 118. Oh, where can people find out more about you? Yes, we can still talk about that. This was supremely helpful. Same place, Kylemas.com. My firm is clarity. Dot financial.

Again, as in the past, this is not an advertisement for new clients. I still have about a, I'm finally getting to people that have been on my wait list for about 12 months, but I still enjoy hearing from people. So feel free.

There's a little link on the websites. You can email me and reach out. I always like hearing from people. But yeah, those are the best place. I'm on Twitter too, Financial Kyle. But yeah. Awesome. Kyle, this was fantastic. I really appreciate you coming on and helping answer the questions that our listeners have. I know that these are very, I like your word volatile. It's better than scary, but these are very volatile times. And, you know, I heard a quote that I, of course, I'm going to butcher, but don't let your current emotional state derail your long-term financial plans. And this, when you look back in a few years, this will be a blip. I mean, it's a big blip, but it'll be a blip.

on your financial screen. So stay the course that you had in place a month ago, a year ago. Yeah, I like that. There's a quote I often think of, never forget in the bad times what you knew to be true in the good times. And I think those are the times, those are the things that we need to remember right now. Things are barely similar, even though a lot of things are different right now. Things will change back to what we know and are familiar with. Yeah, that's a great, That's a great quote. Wow. So Kyle just always brings a reasonable, long-term professional outlook on these things.

And it's just such a privilege to have him on the show. Yes, I'm super excited that he reached out. It's just nice to keep hearing the same thing. Stay the course, make smart financial decisions. I really liked his, hey, maybe now is a good time to convert some of your traditional IRA, traditional 401K holdings into Roth IRA. holdings. That's a very interesting technique. And I hope that people talk to their tax professionals and their financial planners and see if that's a good choice for them in this time.

Absolutely. Yeah, could not agree more with that if you haven't done that already. That's a good idea to explore. I obviously have, as I stated earlier, have already done that this year because I think it's a good approach for the long term, regardless of market conditions, but this maybe makes it even more so. So yeah, really good stuff there. Just wanted to chime in and mention it again, And hey, we're working to bring you guys, our listeners, as much relevant and helpful content as we possibly can. So please, please send us messages, reach out on the Facebook group, comment. If you have topics that you want us to discuss, problems that you're having, ways that we should be looking at the situation that can be helpful. We appreciate all of the discussion and engagement we're getting in that group, and it's really fun.

And then secondly, want to just kind of talk about, hey, as a company, bigger pockets is really trying to react. to help make sure that all of our users are in good position from this. So if you are a real estate investor, you know, on our website, we're working with experts to produce really in-depth analysis of what the economic impacts of the situation are likely to be for real estate investors. Jay Scott had a phenomenal post on our blog, if you haven't checked that out. Brandon Turner, one of our hosts of the Bigger Pockets Real Estate podcast, has come out with some really good content on how to manage tenants who are not paying rent. We've got about a letter that he's drafted that you're free to use and look at. That's posted to both our

YouTube channel and is available on our blog. You can check out the social meet. However you choose to consume it, just know that Bigger Pockets is there and that if you want to join our platform on BiggerPockets with one of our free memberships, you can get access to all that in an easy and convenient way. And like I said, please reach out to us with any feedback that you might have for how to improve the show. Yep, and you can reach us at Scott at biggerpockets.com or Mindy at biggerpockets.com or through the Facebook group or all over Bigger Pockets itself. Okay, from episode 118 of the Bigger Pockets Money podcast, he is Scott Trench. I am Indy Jensen. We thank you for listening and we will talk to you next week.