BiggerPockets Money Podcast - 538: Late Start, Early Retirement: The Huge Advantages of Investing Later in Life

Episode Date: June 18, 2024

Are you a late starter who wants to reach retirement (or early retirement)? Then we’ve got just what you need! We’re back with Bill Yount and Jackie Cummings Koski from the Catching Up to FI podcast as we share how to invest for retirement as a “late starter.” Did you know there are some serious advantages to investing later in life? Some of these advantages are so secret that even our hosts didn’t know about them! But today, we’re sharing them with you so you can achieve financial freedom on your terms! From top to bottom, we’re sharing everything you need to retire sooner—from the best retirement accounts to debating 401(k)s vs. Roth IRAs vs. HSAs and more! Worried about healthcare if you retire before you turn sixty-five? DO NOT put your retirement plans on pause because of this! With some smart healthcare saving and investing, you won’t have to worry about visits to the doctor’s office! But before you start investing, we need to get your spending in check. Bill shares how he went from paycheck to paycheck to exploding his savings rate by “downsizing” his spending, which makes reaching financial independence even easier! If you’re ready to retire, stick with us and follow these steps to a tee if you want to be financially free! Missed part one? Listen to it here! Support today's show sponsor, BAM Capital, your path to generational wealth with premier real estate investment opportunities!  In This Episode We Cover How much do you need to retire? Here’s the exact calculations we use The best retirement accounts to invest in that have substantial tax advantages Social Security and whether or not you can plan on receiving it when you retire  The “triple tax benefit” healthcare account that you’ll wish you knew about sooner How to “downsize” your life so you can invest more and retire faster  “Catch up” retirement investing and the investment accounts that late starters must take advantage of 401(k)s vs. Roth IRAs vs. HSAs: Which should you invest in first? And So Much More! Links from the Show BiggerPockets Money Facebook Group Network with Other Investors on The Path to FIRE Through the BiggerPockets Forums Finance Review Guest Onboarding Join BiggerPockets for FREE Mindy on BiggerPockets Scott on BiggePockets Listen to All Your Favorite BiggerPockets Podcasts in One Place Apply to Be a Guest on The Money Show Podcast Talent Search! Find an Investor-Friendly Agent in Your Area Find Investor-Friendly Lenders Property Manager Finder Finance Friday: How to Get to Early Retirement Even Faster BiggerPockets 422 - The Late Starter’s Guide to Financial Independence (Even in Your 50s!) w/Bill Yount BiggerPockets Money 527 - Retired at 49 on an Average Salary after Getting a “Late Start” to FIRE w/Jackie Cummings Koski Want to Be a Guest on the BiggerPockets Money Show? Apply Here Catching Up to FI Podcast HSA – The Ultimate Retirement Account Open Social Security The Shockingly Simple Math Behind Early Retirement 00:00 Intro 01:19 Create a Simple Plan 04:58 How Much Do I Need to Retire? 09:18 What About Social Security?  16:27 Reducing Your Expenses 19:59 Healthcare and HSAs 33:28 Best “Catch Up” Investments  38:31 Roth vs. HSA vs. 401(k)  47:34 Investing Beyond Retirement Accounts  49:38 It’s NEVER Too Late!  Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/money-538 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail] Learn more about your ad choices. Visit megaphone.fm/adchoices

Financial independence is your goal, and you have the foundations down, but you're getting a little bit of a later start. Today, we're going to focus on the advantages you have and how to determine how much you actually need for retirement. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen, and with me, as always, is my old soul co-host, Scott Trench. Bigger Pockets has a goal of creating one million millionaires. You are in the right place if you want to get your financial house in order, because we truly believe financial freedom is a tax. for everyone, no matter when or where you're starting, even if you're getting a later start on your financial journey. We're here today with Jackie and Bill from Catching Up to FI. This is part two

of a two-part series on how to catch up to financial independence, a prescriptive step-by-step guide to doing that. And last time we covered four kind of critical pre-work steps, if you will, to put in together a financial plan. And today we're going to cover the nitty-gritty of actually implementing and putting in place and beginning to implement a financial plan that could move you towards retirement by traditional retirement age, even if you're starting from a late, getting a late start. Jackie Cummings-Coskey and Bill Yowell, welcome back to the Bigger Pockets Money podcast. I'm so excited to talk to you today. Thanks, guys. Well, thanks, Scott. Thanks, Mindy. So look, we left off talking about these steps here, about waking up, understanding that it's time to go and catch up to financial

independence, giving yourself some grace. Most Gen Xers, the average Gen Xer, has $40,000 saved for retirement, so many people are behind on this. You need to then, as the next step here, diagnose your starting point. That means tracking your net worth and creating a budget, understanding where the cash is coming in and coming out of your life. You need to paint a picture what you want retirement to look like. And need to understand the mistakes and the wins and the losses that have led to getting into the current situation. With that pre-work done, now it's time to actually use that to create a serious financial plan that can move you towards retirement. Jackie and Bill, how do we begin that process here of creating this plan once we have completed this pre-work? Like, what's the first step?

And how do you think about it? Well, as I said in the last episode, you've got to have an investor policy statement, but people want to know about the numbers, right? That's where a lot of people start. but in many ways that's the 20%, that's where you really need to finish after you pause, plan, and now pivot. What we did was take away our finances from a dysfunctional financial advisor that was charging us way too much. And I didn't even know how much they were charging us. I didn't know what a net worth was. And then doing so was pretty scary. I had had my sand, my head in the sand for 20 years.

But what we did was just go. to Vanguard and pull all our funds over there after a year or too long education process, a little bit of analysis paralysis. And you do have to jump in and be willing to make some mistakes. But late starters don't have necessarily the time to make big mistakes. And so if you need little help in getting your plan started, finding a good financial advisor, which I'm sure you've talked about in other shows, may be an excellent idea if it's too overwhelming to take this on yourself. But we did a very simple approach, but we didn't get there

right away. We started out with what I call the Paul Merriman approach. We had a tens funds for life, multiple asset classes, difficult to rebalance. And I've worked back to a very simple approach. We buy a total world fund. That's our only equity exposure. Then we have intermediate treasuries, short-term treasuries, and cash. It's really that simple. And, you know, I enjoy that. because you have to plan for your spouse. I may be the CFO of our home, but my wife has to be able to manage this in a simple way when we get to, say, the phase of drawdown. That is such a great point to make, Bill. Not only are you creating this plan, but you have to make it so that your partner who may or may not be as invested in, you know, the concept of investing as you are,

they have to be able to understand it too. And having a super complicated investment strategy is great if you both understand it. If you're, you know, if you're both able to execute it. But if you draw up this super complicated policy and, you know, we're going to do this, and then we're going to do this and this, this, this, this, this. And you're your partner's like, I have no idea how to do any of that. Then it's too complicated and you need to either get somebody to help them understand it or simplify it. But even more so than that, I want to know how do I know how much I need for retirement? I think what resonated with me and what attracted me to the fire community is that they were the first people talking about it in very simple terms is using that 25 times your

expenses. And that is like boiled down to the simplest way to look at it. Now, we know in order to do that, you have to know what your expenses are, right? You have to kind of see what your life costs. So there's plenty of things you might need to do to get there. But to know the big umbrella is 25 times your expenses, not your income. And I think the financial profession likes to focus on your income. Because if you've got a 30% savings rate, 40% savings rate, what? whatever, that's going to make a difference. If your expenses in retirement are going to be less because you paid off your house or things like that. So that is how you figure out how much you need. And the more simple, the better because you're not going to be stuck in your tracks because you think it's too complex. Bill, I don't know if you figured it out a different way, like what you guys needed for retirement. No, exactly the same way. And it works. You know, it's still going to take your time. You've got to read the shockingly simple math. according to Mr. Money Mustache so that you know if I have this savings rate is going to take me

this long to get there. So that helps you figure this out, but 25 times works perfectly well. Yeah, and that's sort of on the front end of that 4% rule. You know, you save 25 times your expenses on the front end. That's your nest egg. And in the back end, you take off 4% of that each year and there's a high likelihood that that nest egg will last you the rest of your life. the 4% rule or guideline or whatever you want to call it, we know that that is not perfect and people's lives aren't perfect and even like that. Every year is going to look a little different. So there's plenty of other ways you can do it, but you need some reference point, some kind of starting point. So thinking it in terms of the 4% guideline in terms of what

you need to take off each year, that's a great starting point. But things will go up and down, especially if you retire a little early. Maybe you have some income that's coming in. Maybe you got a pension. Maybe you got, you know, there's all kind of little variables that will let you sort of make the proper adjustments each year, just like we do in our regular working life, right? What if we get laid off? You know, what if things happen? Well, it doesn't stop happening once you're in retirement.

So you got to start with some kind of guidelines. So 25 times your expenses on the front end to create your nest egg and then 4% taking off your nest egg each year, adjust it for inflation is going to give you a very good idea of where you need to be. Yeah. And this is such a powerful exercise. Once you take control of your budget and your net worth statement, and then you understand, hey, what I need to retire is I need 25 times my annual expenses, right? If I want to spend 40 grand a year, I need a million dollars. If I want to spend 100 grand a year, I need $2.5 million. That's so powerful. It makes the game very achievable, especially when we talk about Social Security, because you can count

on at least some of that in your financial planning. And that is a big boost to this. I want to get back to that one in a little bit here as well. But that, that I think really frees up the game. And I want to call out the most important variable in getting there, if you've been a full-time employee and plan to be one through retirement age, is going to be your expenses. Because every time you reduce your expenses, you both increase the amount of cash you have to invest and pile up your nest egg and you reduce the pressure on yourself to build up an enormous nest egg to fuel retirement, right? If you are, if you're spending 80 grand a year, you need $2 million to retire. Well, if you can reduce that spend gradually to $60 million, now you need $1.5, and you're

accumulating more faster. So that, it is such an incredible mathematical variable, and this exercise is very freeing because you can really begin to back into that. Now, if we had Social Security on top of that, maybe these numbers start to be really. increasingly achievable on that front. Yeah, and not to mention a pension as well. And I have to admit, I don't know, Bill, if you put Social Security into your retirement plan, but I did not.

So when I was in my 30s when I'm sort of, well, I was actually in my 40s when I started really looking at, you know, what I needed. And I did not include Social Security at all. I was the biggest pessimist. I was overly pessimistic. Now, since I retired, you know, I cleaned out the cobwebs, and I said, you know what, I'm really curious about this Social Security piece. You know, usually there's a lot of political undertones about Social Security.

And I'm like, you know, I need to do my own research. So I did my own research. And, you know, there's no way Social Security is going to completely go away and be completely destroyed like I was thinking. However, the actuaries, you know, these are the smart guys, way smarter than us when it comes to the math. But they put out this report every single year. And they clearly will tell you, based on our numbers and our research, here's what the shortfall is going to be if nothing changes. The key word if nothing changes. Congress will change it, but they'll do it literally two days before it's going to blow up, right? So basically, roughly,

if nothing changes in 2034, we can expect to get about 75% of the stated benefits that we see on our statements. So, okay. So I did an example. I'm a nerd like that. But I did an example where I took somebody that retired early. They only worked 10 years. All you need is 10 years to qualify for Social Security. Most of the time, they're talking about 35 years. That is what is calculated off of. That's fine. But if you don't have 35 years, they're going to put zeros. But as long as you have 10 years or 40 quarters is sometimes how it is termed. But I took an example of a person that made 60 grand a year. They worked for 10 years and never worked a day in their life where there's all of your weight. get adjusted for inflation. That's one thing. And then once I did all the math and applied all the right formulas, that person that made roughly $60,000 a year for 10 years and never worked a day in their life, they would still qualify for about $1,000 a month, adjusted for inflation, the rest of their life. And the government can print money. So there will be something, especially as long as you have younger workers paying that FICA attack, that Social Security and Medicare. So that's the

research and the data points I looked at because I really wanted some real numbers. So since I didn't include it in my plans, now I have a little bit more peace of mind because that is my backstop in my older year. So even if you want to think about it as a backstop, it could be a very powerful backstop because hardly nothing else is adjusted for inflation. And of course, nobody else can print money. Yeah. And by the way, that's something that whenever we're talking about these numbers, like the 4% rule and, you know, all these numbers for, they're all. adjusted for inflation. The 4% rule already incorporates inflation adjustments. Social Security already adjust for inflation. And I love what you said about Social Security there. We interviewed

Jeremy Keel on Bigger Pockets Money episode 344. And he came, he had the exact same conclusion. I think it was like 73, 75%. The social security benefits could decrease by as much as that, if nothing changes over the next few decades. And being a skeptic, skeptical millennial, I don't believe I'm going to get any Social Security, but I believe the people who are currently getting Social Security are probably more likely to get even higher percentages of that. But I do think that, again, you do this analysis and then you think about Social Security is a buffer that almost certainly is going to have some benefit. That can be a really freeing exercise.

Now the goal got way more achievable, right? First of saying, I just need $40,000 to get by in retirement. That's my baseline. You can get there in 10 years. if you're smart, make some good bets and make some good decisions over that time period. And you might not even have to get all the way there. Or if you get there, you might have a nice bonus from Social Security that can up that quality of life. Right.

And Scott, to your point, being a millennial, so for our late starters, they're much closer to Social Security age. So it's more likely that whatever changes they make may not impact them or the older generation or mid-generation as much. as the 20-year-olds just coming out of college. So that is something to keep in mind as well. Typically, if they make an adjustment, and this is not the only time in history, but typically if they make an adjustment to something like Social Security, you know, people that age, they are a very important voting bloc and the changes are more likely going to impact the younger generations, the 20-year-olds, maybe the 30-year-old. So that's something good to keep in mind, too. Yes, that is a really important point to note. Your Social Security

is not at risk for the later starters. And when they do make the changes, they make them well in advance, the 20-year-olds who have a longer runway of time to actually save up for their retirement. But to get rid of Social Security or for Social Security to like just fall apart, that would be a congressional act. And there is no politician in America that is going to vote for reducing or removing Social Security on the people who vote now. That is not going to happen. Social Security is part of our plan. And I would encourage people to get very strategic about how they take it, which is really important.

Mike Piper has done a lot of research in this regard. He has a calculator called open, social security.com. And often the higher wage earner is supposed to wait, ideally until 70, for the maximum benefit. And then you can be more strategic about when your spouse should you have one takes it. But there's lots of permutations and combinations. And Mike Piper's calculator allows you for free to help figure this out. Yeah. And let me add, you know, you mentioned spouses.

So even if you are divorced like me, if you were married for at least 10 years, there are some special provisions in the Social Security system and the rules where that may add some additional options to you if you were married for at least. 10 years and you're currently divorced. So don't forget about that. That doesn't get talked about a lot. Typically, people are talking about, you know, all the options you have when you have a current spouse, but there are also options for someone that is divorced if they were married

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in to forming the plan on how to get there. Just a little quick tip since we talked about Social Security before the break. I want to let you know, all you got to do is type in Social Security calculator into Google and the Social Security Administration has put together a tool that can help you calculate the benefits you would receive in Social Security either in today's dollars adjusted for inflation or future inflated dollars downstream. And if you want, you can, of course, knock those down by 70, down to 25% to 75% or 30% to 70% or whatever you want to factor that into your planning. I think that would probably be wise personally as part of that. I want to talk about now thinking about the plan here. And we talked about before the break how important it is to keep your

expenses low, how that helps you generate way more income to invest and reduces the target of total wealth you need to actually retire. And I've long held this thesis that there are three big expenses that are essentially the whole game when it comes to planning your financial future. And those are housing, transportation, and food. Jackie and Bill, if you found that to be true in your journeys, did you have to grab control of those three buckets in order to catch up defy? Or did you do something else?

Well, I completely agree. If I hadn't renovated a house and built a house, we'd be retired. It's really that simple. And then transportation, we bought new cars. We leased cars. It's one of the biggest, according to Rob Berger, who we had on our show, one of the biggest retirement busters out there. I think he listed it as number two. And so as far as food goes, we still eat out a lot.

And that's one of the areas you can really cut back on if you, you know, cook at home, shop prudently, you can make a big difference there as well. So I agree with you completely, Scott, that you've got to take care of the big three rocks. And it's amazing how much of a gap you can find if you do that. It's just hard to do it as a late starter because it's reversing that consumption paycheck-to-paycheck lifestyle. It's not just downsizing your house, but downsizing your life. Bill, all three of all four of us, I believe, made our major progress towards, retirement or early retirement years ago. Do you think that's still true today?

Do you think people with a lock-in effect, maybe they have too much home, but they can't actually downsize reasonably because of that lock-in effect. Is that a little harder now? Have you experienced that in your community? Well, yeah, with interest rates, I imagine it is much harder to do so.

The movement there just isn't happening. And one thing we did, which made a huge difference, but I have to tell you, I'm 58. I'm closer to Social Security. Hey, I'm almost 59 and a half, so I'm really looking forward to that, just in case the whole thing blows up. Well, I don't think Bill looks a day over 45. What do you guys think? I completely agree. I was going to go with 42. Well, I do have something add with the big three. As I was doing, you know, a little bit of my analysis and looking at my own numbers and things like that, I think there's a fourth one people forget about, and that's taxes. A lot of people don't think that they have control over their taxes, but you really do from things.

things like doing a traditional IRA or traditional 401K, that's going to reduce your taxable income, a health savings account. You know, a family contribution is like $8,000 or something like that. That reduces your taxable income. And there's just so many other ways, you know, if you have a small business or if you're self-employed, you know, you can start, you know, making sure, you know, you are, you know, keeping better track of your expenses and bumping them up against your income. So I feel like we, I used to never feel like I had control of taxes.

I would, each year the way I grew up, you know, tax time was a big refund check. And that's what taxes meant to me. But from some smart tax planning, that could be a big line item that can be adjusted. You know, are there any tax credits or additional deductions that you could be getting and things like that. So that could add up. You know, a big question in the early retirement world is how do I think about, health care expense. In the traditional retirement world, we now have Medicare. So do I need to be

fact, how do I think about that expense into my older age there if I'm trying to catch up to five? Yeah. So even if we're getting a little bit late start, a lot of people still will end up getting done in their 50s, maybe their 60s, possibly before Medicare. So they have to do the gap. Maybe the gap is not as long of a period of time. Like if you retire, let's say 59, well, you've got five years so you can get, you know, Medicare. And there's plenty of ways, like you said, you've talked about in the early retirement community. But you are closer to the 65 Medicare age. And that's an important piece to understand as well, because I used to think this. Some people still think Medicare is free. Well, the hospital part, which is part A, I think, yeah, that part is free.

However, for most people, for Part B, which is what we normally think of as health insurance and we're used to when we're working, that part B, there's a cost to that. I think this year it's around $180 a month and it gets suggested for inflation. So you've got that. And then a drug plan, that's a little bit extra that may be, you know, take you to around $200, $250 a month depending on your plan. And then there's all kinds of other options. But you also have to remember that, Medicare doesn't include dental. It doesn't include hearing. It doesn't include vision. So there's still plenty out of pocket that you're going to be paying in addition to the Medicare premium that you have to plan for. And there's some ways to cover for that. But I guess the whole idea is when you are planning, make sure you are using real numbers and you know what to expect. Another thing that it doesn't include as long-term care. And people forget about that. That is a very real probability for most Americans as they age. Does Medicare have co-pays? Yes. Medicare has co-pays. It works very similar to the insurance that you have at work.

And there's some additional plans that you can add on top of the Medicare like Metagap or Advantage or something like that. So you've got to really run your numbers on that. And the starting point would be, you know, the Part B, you know, regular insurance where it does have the co-pays and things like that. And then the drug plan, you want to look at that. And honestly, as we get older, our health care consumption tends to go up. And, you know, things like vision, like, man, I used to always have 20-20. I have to wear glasses now when I'm long distance, you know, my hearing is not what it used to be. I got my volume turned up on my headphones. I never needed to do that. My daughter tells me the TV. is too loud. So all these little things will start to add up when it comes to health and related

things. So we do have to, and I have come to the reality, I feel very lucky that both my daughter and I have been very low consumers. She's an adult now, so she's not on my insurance anymore. But when she was, we were both very low consumers of health care and we hardly spent anything on health care. I know that that's probably not going to be the case post 50, post 60, as I get old You can just look at your older relatives and any older people that you know. A lot of them when you start the conversations, they start telling you about their health problems. And I hope to not be one of those people. I'll keep you in check, Jackie.

But, you know, one thing you can do now that you are, I mean, hopefully we are all going to get older and we are all going to need Medicare. And one of the things you can do now is start contributing to an HSA. You have to have a high deductible plan in order to be able to do this. But your HSA dollars don't have to be spent right now. So if you are older, still in good health, you can cash flow your expenses currently. You can save up those receipts and then cash those in later or use your HSA dollars for your medical expenses down the road. Yeah, that is a great way to use an HSA. And before I even knew what I was doing, we were on an HSA because honestly, like I said, me and my daughter were very low consumers of health care.

So we weren't even meeting the low deductible, like the $500 deductible. So when my company introduced a high deductible plan with an HSA and I knew I could invest in it and they were putting money in it too, that sounded great. But as time goes by, you know, mad scientist, he wrote that amazing article called the health savings account, the ultimate retirement account. I'm like, ooh, I'm doing something right. So I maxed out my HSA for 12 years. I started like it, as soon as my company started offering.

them, 2008. So from 2008 to the year I retired in 2019, that was about 12 years. I maxed. I did the family max. And this is a key. For family, all you need is you and one of the person. So if you're singleton with a kid, that is still considered, you know, family. So maxing that out and I invested it as soon as they would let me. I think I had to keep $2,000 in there. So I stopped contributing to my HSA once I retire because now I'm on a traditional plan. But I continued letting it grow. I just have a straight-up index fund. I think it's like a total stock market index fund that's in there. It's a growth fund. But today, that HSA is now grown to about $200,000. I would have never imagined. And I don't want to die with it necessarily. So, Mindy, to your point, what I've decided to

do with it, I thought a lot about, you know, the drawdown strategy, because when you inherit an HSA, it stops being an HSA. So it's taxable. It's not like a regular retirement account. So what I decided to do is to use my HSA to start drawing down to pay one, my Medicare premiums. You can do it for the Part B and the Part D. And you get a nice annual statement.

So it's super easy. You don't have to track very much. And then on top of that, again, I'm banking on additional expenses and health care costs once I am a little bit older, so I'll use it for out of pocket. I can use it for co-pay. I can use it for vision, dental hearing. So that is my strategy for drawdown with that HSA. And it could be very, very valuable. And for people, I feel like it is a mental shift when you go from paying $5 every time you go to the doctor to now pay, let's say, $82. But when you start to add all the pieces together, your premium is much cheaper. for a high deductible health plan, and you don't have to be on it forever.

You change your health insurance every year. So for me, I had it for 12 years. So even if you have yours for five years, it could create a pretty powerful little nest egg. Yeah, I completely agree with everything Jackie said. We have our HSA, we max it out. It's in a single index fund. And I have to plug one company here because I think Jackie uses it as well. Fidelity has a no-cost HSA and they do a great job with the HSA.

So I would encourage your audience to look at that too. A couple of things here. If I'm zooming back out to the parts of the discussion we just had here and I'm looking, the first thing that we should be doing is saying, can I downsize my house? Because that's going to be the single biggest variable. I think that's going to change the trajectory of finances. That may or may not be reasonable in your situation. then it's what you drive.

Then it's your food budget, right? Then it's tax leakage, but we're going to actually going to probably attack the tax problem with the investment approach, starting with the HSA as we go through our financial planning approach here. And then it's health care, right? And once we've made really good decisions on those other three, if we can get those costs down to reasonable, so we're still living a happy life, but really they have making sure that we're getting the value in those three decisions, you know, the rest of the pie chart is just controlling the expenses.

and making sure that you're getting value out of all of those other things, all these other categories. Control it, watch it, but those big three are going to make, those big three or four are going to make all the difference here. And then I love it. Like the first thing in a financial plan, if I'm starting from zero at age 50 or 55 and trying to catch up to five is max out the HSA and put an index fund. Mindy, of course, has supercharged the returns in her HSA by investing it in Tesla. That's a gamble. We'll get it. We can get into that another time about why we wouldn't, that might not be the best investment in this day. Mindy, Mindy, do you have Tesla in your HSA?

Yes. Wow. Yeah. I mean, I went safe with a growth index fund, but yeah, that's super smart because that's another account where you do want to have high growth assets because when you take it out is tax-free, you know, for medical expenses. Look at that smart girl. Yeah.

And it's not all Tesla, but it is, you know, I want some growth in there. I want that to grow because you put it in tax-free. It grows tax-free. You withdraw it tax-free. They call it triple tax-advantage. And I want to pay all the taxes I have to and none of the taxes I don't have to. Well, if there's one place to take risk, it's in your HSA for maximum growth.

I mean, that, you know, that's what we do too. I'm going to have to revisit my allocation in my HSA. that look, I'm already writing that down. That's a to-do once we're done here. Just a couple of things for folks that are thinking about this HSA, because I agree. Like, this is the first thing. Like, you're thinking about how to catch up to retirement, like max out the HSA. Now, you only can have an HSA if you have a quote-unquote bad health insurance plan, one with a high deductible, a higher out-of-pocket max, and those types of things. So if you're someone who regularly meets your deductible, you may not want the HSA for that, you know,

or are likely to have to meet that deductible over the next two or three years, for whatever reasons. That may be a decision if your employer offers a plan that has better coverage for you. You may not be eligible for an HSA. And then we just move down to the next item in the list from a financial planning perspective and put the cash into that bucket. So that's just one thing to note. And then as you're thinking about the HSA, we want the HSA to grow because it is the

supercharged retirement account, even if we don't invest in Tesla stock inside of it. And we want that money to grow. So you have to make a decision. Am I going to pay my health insurance costs when they do come up with the cash in my HSA? Or am I going to let it grow? And I think a lot of folks that get serious about this make the decision, hey, I'm going to actually pay my co-pay up my doctor and my regular medical bills just with my credit card and my bank account statement because I want that HSA money to grow because it's a really nice security blanket going into retirement. What do you guys think? Is that how you approach it? Absolutely. That's how we approach it. And all the things Jackie said about paying your Medicare costs and co-pays, we've saved, as Mindy said, all of our receipts.

And there have been lots of expenses over time. And you can pull that out tax-free and spend it on anything you want, actually. Yeah, there's no time limit to use those receipts. And, you know, some people don't want to be bothered with the receipts, even if they're digital. That's totally fine, too. But again, I can guarantee you. Your health expenses are going to be a lot more later on in life. So there's probably not going to be a shortage of being able to, you know, spend down that money. And you mentioned the triple tax savings. So that's how most people label it, you know, tax free going in, tax free going out, tax free while it grows. The other little bonus that you get, and again, this is back to taxes, Scott.

So if you have your contributions to your HSA taken through payroll deduction, you don't pay the FICA tax. that's Social Security and Medicare. So that's another little extra piece that you get. So if you have the opportunity to make contributions through your employer, make those contributions, even if the investments that your company is, the company's HSA is sucky or whatever, still go ahead and get it in there because you can always open up, you know, we, you know, Fidelity's one of the most awesome ones that's low fee. But you can have one, you can have more than one HSA and you could certainly move it out if you

want to. So it's not like your 401k or your employer sponsored retirement plan. You can have multiple hs. You don't have to wait until you, you leave the company in order to move it. So you have a lot more flexibility than you would with like what you have with a traditional retirement account. I do want to just throw out here that we are starting this discussion about catching up to retirement from an investment perspective, assuming that folks are going to invest in low fee, low cost, index funds in a variety of vehicles, which include aftertax brokerage accounts, DHSA, retirement accounts, these other types of things. And we're going to talk about the superpowers that folks are catching up to FI have in terms of tax advantages and additional access to

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because privacy by default is their pledge to all customers. Visit Northwest Registeredagent.com slash money-free, and start building something amazing. Get more with Northwest Registered Agent at Northwest Registered Agent at Northwest Registered agent.com slash money free. All right. Welcome back to the show. I really like how Scott said younger folks like myself.

Well, Scott, let's talk about what you don't have access to. I'm 33. I don't have access to some of these, you know, these catch-up opportunities that we're going to talk about, I think, here. So, okay, some of our over-50 superpowers, my favorite one is the over-50 catch-up contributions. You have the regular in 2024, the regular amount that you can contribute to your 401k is $23,000. That's for everybody.

But because I'm over 50, because Bill's over 50, Jackie, are you over 50? Don't ask me that, Mindy. Okay. Jackie, when you become over 50, you will be able to do the $23,000 plus an additional $6,000. That's not small potatoes. And because you're over 50, you probably have the, income to be able to contribute that. But wait, there's more. Your IRAs have a contribution limit of $7,000 this year, Scott. But me and Bill and Jackie, when she turns over 50, will have an

additional $1,000 that we can put into there. And if it's the Roth IRA, that's an additional $1,000 that I've paid taxes on now that grows tax-free. So when I pull it out, after I turn, what, 55 and a half, I think I can reach that money, I pull it out. I pull it out. tax-free. So that's just one of the benefits of our being mature. Yeah, well, there's one more, actually, we forgot, with regards to the HSA, when you're over 55, like moi, you can add another $1,000 to your contribution. Per person that's on your plan. So you and your spouse are allowed the extra $1,000. Is that right, Bill?

I'm not sure about that. Don't quote me. I'll defer to you. You're the CFP. I know. I know. Look, I was just checking your. knowledge a little bit there. But yes, it's a $1,000 per person, but each individual must have their own HSA. Like, you couldn't put an extra $2,000 in your HSA for both of you. The Karen would have to open up her own HSA to get the $1,000 catch up. Oh, oh, hold on, because I got to dive into this. I'm an older mom. I started later. I'm a later start on parenting. So if I have four people on my HSA currently. And I'm over, well, I'm not over 55 yet, but I will be before one of them gets off. So can I contribute $4,000 extra dollars and they just have to have their own HSA plans?

Well, just remember the extra thousand we're talking about is for those over the age of 55. Are your kids over 55? Oh, no. Oh, okay. So only, well, my husband's younger too. Man, I got to trade him in for an older model. But I can't tell you this, Mindy. So your kids are either of them, are they over the age of 18 yet?

Not yet. Okay. So I'm going to mention this for anyone else that might have older, because I had the situation with my daughter. If you have older children, they could be on your health insurance plan until they are 26, but they may not be a tax dependent. So if you are on a high deductible plan with an HSA and you've got your kid on there that's no longer a tax dependent, they can actually have their own HSA.

and contribute the family max. That's a very nice little nuance for people that have adult children. I was able to do that for my daughter for several years before she was mandated by law to not be on my plan anymore. That's a very nice provision. But the key is they can no longer be a tax dependent because technically you can't use your HSA dollars to pay for someone's expenses that is not a tax dependent. So that is their answer to it. I wouldn't call it a loophole, but it is amazing provision. So if you're able to contribute, I think it's like $8,000 this year or close to it,

you're able to do $8,000 and your non-tax dependent adult child that's under 26 that's on your plan can also contribute the family maximum. And you could give them the money to do it. You know, they probably are not. They don't have an eight. Yeah, exactly. So just a little nuance for older people, it may, that situation may happen for at least. least a few years. That is the first time I've heard of that hack. And I'm already behind the eight ball on that one. I got a couple of years where I could do that. There you go. Bill,

you should have asked me. Are you kidding? I didn't even think about that. You should be doing that already. Well, you are my co-host and you are a CFP. Why aren't you edjimicating me? I know. I need to edgimicate you. But we will talk after, but definitely you need to get those. Because once they get old, even if they're in their mid-20s or even late 20s, a lot of times it's hard for them to get traction and, you know, be able to live. We're still sometimes supporting them a little bit. And that's a little something extra you can do for them, especially when it comes to the medical stuff. So, yes, that could be a nice option. These are awesome tips.

But I think we're all aligned that the HSA is a superpower and one of the first vehicles that you should maximize and you should take advantage of it to the maximum extent. there's so many use cases for it, and you're going to need a big bucket of money can never be big enough to fuel health care expenses in retirement later in life. But I want to kind of come back to another question here. Again, we're saying, like, basics of the financial plan are lower expenses as much as possible. I'm starting with the implicit assumption that those listening to this are already maximizing their income or don't really have a means to job hop and make $40,000 more. If that's part of your plan, you should definitely take on that one. We're not going to have a big discussion. But the big decision point, I think from an investment, and then,

you know, cut to your expenses. But the big decision on investment standpoint, I think is for most after the HSA, Roth or 401K. I think it's no contest for someone catching up to FI to FI to FI to put it in the 401K and not into the Roth. And for most people that are trying to catch up to FI. But Jackie, I want to hear your opinion on that as a reaction to that. Do you agree with that or disagree? And if so, why not? Kind of. So I think some people kind of get confused. So your 401k or your employer retirement plan, you have an option to make traditional contributions or Roth. You get your choice. Now, with your IRA, you got the same two choices. You can choose Roth or traditional. So those are two separate things. The biggest chunk, obviously, is going to be your 401K because that's like $23,000. Here's my bottom line. I want people to have a mix of the two to give you as many options as possible. Sometimes you might want to pull traditional because you need to show a little bit of income. Sometimes you might need to pull Roth because

you don't want to show any income. If you do traditional, I love the fact that it reduces your taxable income and because you may be closer to that 59 and a half where you can take it out without a penalty, there's another benefit to that. If you ended up doing Roth, obviously you're not going to get the tax deduction now, but it grows completely tax-free. And when you leave that company, and this is what I did, when I left my company, when I rolled it over, now the contributions that went into my Roth portion, I could get that out, you know, tax penalty-free for anything. And that became very valuable to me because I had a few years before I turned 59. and a half. So, and I hate to always use depend, but those are things you want to think about.

But no matter what, make sure you have a mix. You don't need to have all Roth when you retire, and you don't need to have all traditional. That boxes you in. So have a little bit of both. Let me just push back there because I think someone who is, let me put myself in the shoes of someone who's 50, you know, 55 years old, who is starting from zero and says, I want to catch up as much as possible by retirement age. I make $70,000 a year and the last 10 years I just spent all of it. That's why I have no retirement savings here. I'm going to immediately think about ways to downsize my housing, but it's going to take me six months to a year to enact that. It's going to take me, you know, I need to figure out I'm going to sell my fancy new car and get a,

and get a downsize one there. I'm going to start packing lunch. But like this year, I'm not going to generate $40,000 that I can deploy down, nicely down the capital stack, with a $7,000 HSA contribution, $23,000 to my 401k, and another $6,500 into my Roth here, I have to make a choice. How do I make that choice, the hard choice of which buckets to fill up? Do I just 1,000 into the Roth, 1,000 of the 401k, or how would you advise someone in that position to make that tradeoff, especially in the first year or two before they start ramping their savings rate? If I can chime in quickly, we have a whole episode on this with Sean Mullaney. and he is a 100% advocate for traditional 401K for the late starters.

It's unequivocal. You're at your peak income years and, you know, the tax diversification there, well, it's important. You want to have in the taxable, Roth and traditional 401K type contribution so that you can manage your taxes later, but you can also do Roth conversions later. I don't completely agree with Jackie, and we do all. traditional 401K. We don't do any Roth 401k at this point in time. Well, I think that you're in a different position.

I like the Roth for somebody who has a longer timeline to allow it to grow tax-free. You're a higher income earner, and I'm in this position. You are, I want to reduce my taxable income as much as possible, rather than growing my Roth contributions because they're not going to be as effective. as, you know, tax-free-wise, in my opinion. But, you know, that's always something that somebody can do the math on and send me a spreadsheet that's easy to read. Yeah, it's really going to depend on your situation because then if you factor in things like, what if you have a pension, you know, that's going to be coming. That's going to be taxable. You know, let's factor in

Social Security where already, you know, 85% of your Social Security benefit could be subject to tack. So there's a lot of moving parts. That's why really the only thing I can definitively say is that having a mix of the two, I think the baby boomer, so our predecessors, the Roth was barely available during their working life. So they hardly had any Roth at all. Most of us, me and Bill's age sort of in the middle, we've been doing Roth for quite some time. So we have plenty of Roth. Like, I have plenty of Roth. So I honestly, in my 401K bill, I was doing all. Now, as a As I was learning this and as we're learning, we make a lot of little mistakes. I kept going from like, no, I should be doing traditional.

Then I'm like, no, no, no, no, I should be doing Roth. So I went back and forth until finally I settled on doing traditional 401K. And then I was doing a Roth IRA because for my income, I was right around $80,000 for my income, I still qualified for it. Now, if you're a really high income earner, you can't contribute directly. You can do the back door. It's just going to be, you know, an extra stealth for you. And I guess I may as well come clean, Mindy. I, you know, if anybody does the math, I retired when I was 49, December 2019.

So I am over 50. But the fun thing was that I got to max, I got to still max out my 401K and get the catch-up contribution the year I retired in 2019 because my birthday is in December. So as long as you turn 50 before the last day of the year, you can. So I did do the catch up for one year. I no longer have an employer, obviously, so I can't do that. But I can still contribute to an IRA if I have any income that would allow me to. You know, the way I think about all this is I think that if you think you're going to be earning less in retirement,

you're going to have less taxable income in retirement than you do now. You should go with the 401K. And if you think you're going to have the same or more, you should go with the Roth. And because I'm 33 and have a long investing time horizon ahead of me, I mostly invest in the Roth because I think tax rates are going up. And I think that I'm going to be glad that I have this tax-free growth ahead of me. But I think if I was catching up, unless I have one of these exceptions, like you said, Jackie, like these pensions or whatever, that the 401K would be the place I'd really emphasize before the Roth. like if I had to make the tradeoff there for like that average scenario, I think, in many cases. Do you agree with that one?

Yeah. And I think that's a longstanding debate. Roth or traditional. So there's really, you know, no wrong answer. But I think you're thinking about it the right way, Scott, because people do want to try to come to their own conclusion and they need something to go on. So some of the things you suggested, I think those, you know, totally makes sense. And again, I try to stress to people, you know, with your 401K, within that, you can do Roth or traditional. And then you have the same two choices when it comes to your IRA.

So I ended up deciding to do traditional inside my 401K and then Roth the other way. But yeah, if you think that is one of the components. If you think tax rates are going to go up, more than likely that, you know, historically, you know, long-term tax rates are probably going to go up. So you think about that. But even so, you know, I just, you know, I just defer to the, you know, having some kind of mix. and trying to go through your own checklist of what you have going on. Yeah, and we use the backdoor Roth because we are high-income earners, but don't forget,

you have a spousal contribution as well. People may forget that, so you can do too. Awesome. So we have HSA 401K and or Roth downstream there. What should I do next? What are the next things that I should be doing with my money after I've started investing in those? Yeah, Bill, I think one account that's highly underestimated is a regular taxable, brokerage account and certainly real estate as well, you know, if you have that. But with a brokerage

account, you don't have to worry about the normal restrictions as with a retirement account. So the brokerage account, there's no age limit, there's no contribution limit. And it could give you some additional tax treatment of an investment account that is different from your retirement account, your Roth or your traditional or your HSA. So I think that's something that probably deserves to be in everyone's portfolio or everyone's mix of investments and tax treatment accounts going into retirement. What do you think, Bill? Is there anything else you could think of that probably should be a part of that, too? Yeah, as your cash flows down the waterfall, absolutely is unnatural, and we do that as well. I think it is important because that helps you

bridge the gap if you retire, you know, before Social Security. Yeah. And you know what that we're going on the topic of 401Ks, there's that rule of 55. So for late starters, they're closer to 55 and there's a provision. If you have an employer retirement plan, that would be a 401k, 403B and a thrift savings account. Those will, if you retire the year in which you turn 55, you're able to get money out of that account without paying that 10% penalty. So you got an extra five-year bonus that you can take advantage of. You couldn't do that at 45. You couldn't do that at 32, Scott.

So that's another little extra maneuver that older people can use if they, you know, caught up and decide that, hey, I think I can step away at 55. You have access to that money. You know, we spent a long time talking about all this stuff, but it really boils down to like a very beautiful simplicity, I think, that we've kind of aligned on here. It's like, understand your numbers, slash expenses, if you can, in housing, transportation, food, minimize leakage from taxes using these accounts like the HSA and 401K, invest in index funds, and widen that spread as much as you can over the next five, ten, however many years it's going to take you to get to that goal.

And you just chunk it along. Now, there's a whole bunch of frameworks and jargon and all these accounts and limits and all these other things to cover in there. So I think that kind of leaves us like one last component of the financial plan because that's the essence of the financial plan. Like, it's that simple, right, at the highest level. And that complex is a whole other language if this is your first intro to financial planning here. But I think that that brings me to like a last thing here, which is an unending journey of learning more about investing in money. And I'd love to hear just a quick recap, Jackie and Bill, if that's been true for you guys on your journeys and what that immersion may have looked like, how long it took you to feel comfortable with all this jargon. Well, you just summarized it perfectly.

I mean, it's like a 10-step recovery plan, maybe less. And your summary, you know, definitely that should be the real because that is the bullet point. It is simple. You've got to unload the jargon. I mean, the financial industry wants to make it complicated because they want your money. You know, and if you take over your finances and follow your six, eight step plan, you've got to work through the messy middle. It's going to take time, but you'll get there.

I mean, it's possible. That's what we're trying to tell our audience. Start, start now, and you will get there. It's never too late. Yeah, I think the biggest part is, you know, we'll take time, like Bill said, and you should celebrate your wins along. the way. Like, there are going to be some mistakes like me trying to, you know, pay ping pong back and forth between the traditional and the Roth until I figured it out. That's okay. Once I decided

to do that, you know, that's a win. You know, when I sat down to do my expenses or to look at my investments, that's a win. So celebrate along the way. And this learning does not stop. Bill and I are just learning. Look, Bill didn't know about the HSA and his adult children. Mindy's investing in Tesla in her HSA. Look, I got all kinds of notes just from today. day and I retired in 2019. I'm still learning. Jackie's going to bet on Rivian and her HSA. Exactly. There you go. Look, I need to have, you know, I keep, I'm so happy about how well my Navity has been doing. I do own some single stocks and I'm a very proud owner of

a single stock portfolio, but I'm a nerd like that that enjoy doing the analysis and things like that. So I can't say that after being retired, for five years, nearly five years. My main thing is that I've learned that precision is not required. So I try to go into this as precisely as possible. And I know that I still made some mistakes. Well, even the mistakes that I made or the things where I knew I wasn't optimizing 100%, that was okay. You know, by the time I figured out, oh, Social Security, I didn't even count that. So that's a backstop. And then I would look at, oh, when I retire, my name, net worth was $1.3 million, and five years later, it's $1.8 million right under, you know,

$2 million. And I've been withdrawing from my portfolio. That gives me a little more confidence. I'm like, I shouldn't have been so worried about that, you know. And not that it's not important. You do need to know these numbers. You do need to go through the process. But as you build in buffers, that's going to help you feel comfortable that you won't get thrust into reverse if, something gets messed up or if you make a mistake. So I think sometimes we're a little bit hard on ourselves, especially late starters. And I learned to not be so hard on myself. Just keep learning, keep learning. Keep talking to smart people, you know, like you know, you and Scott and even my co-host, Bill, he's smart sometimes too. Start a podcast. What you got to do is start a podcast. You get to meet

all these smart people and learn from them. Exactly. And Bill, how much have we learned doing a podcast? There's just so much. And it becomes a lot of fun. It becomes a challenge. And you should say, what is going to help me enjoy this? You know, Bill, you're still working. You know, you're a hardworking ER doctor. And I like to say when you're not saving lives at the hospital, you're podcasting with me.

Because you really love it. And so you find that thing that you really enjoy doing, you know, every day all the time. Like, I'm not getting paid anything for doing a podcast. So when I think about working, I hate it to even work 40 hours a week because it just wasn't my true passion. And now I just feel so differently about it. So even if I'm getting three, four hours a week, sometimes more with podcasting, I'm still going to bed with a smile on my face.

Well, guys, this has been so much fun. Thank you so much for a great two-part discussion here on building a financial plan. It starts with acknowledging the problem, understanding the situation. reliving the mistakes, but also coming up with a dream and a vision and a plan, and then translating that into a specific projection model. Projection models much more fancy than what you actually need to do in this process here, but that's what we're doing here. We're estimating out our expenses and income are getting there.

And then, yeah, it'll take years to really optimize this path, and that journey comes alongside hundreds of hours likely of self-education in whatever form works for you. But you can get there and you can make a huge amount of progress, maybe even a million dollars with the progress inside of the next 10 years if you start now. Totally agree. Yeah, you have to because he's right. And you want to connect with other people who are in a similar position to you. So go listen to the Catching Up to FI podcast, join their Facebook group, chat with people who are in a similar position. Don't listen to the people who are telling you you can't do it. I know that you can. Yep. And we all do. And one of the,

Big things I wanted to mention as far as continuing to learn is think about how you learn the best. Are you an auditory learner? Are you a visual learner? Do you like reading books? So find the podcast, find the blog, find the YouTube, and that will continue your learning. Find the community. That was a huge, huge pivotal time for me and a realization that this is the stuff that keeps feeding my brain. Well, Jack and Bill, thank you so much for coming here today on The Bigger It's Money Podcast to talk about this. This is a huge, huge problem for a lot of folks out there. And hopefully we helped a lot of people get inspired and then actually begin the process of formulating a plan. Thank you for having us. Yeah, this has been amazing. Love you guys.

Love you too. And we will talk to you soon. Thanks so much. Okay. I was today years old when I learned that my adult child on my insurance, but not on my taxes, can contribute the family match to their HSA. And you can bet I am. going to be putting that to good use in a couple of years. Perfection is the enemy of good. I think this is a great mantra for people to think and take to their heart and really remember when you're trying to be perfect. Good is really good. I just spoke with Christy Shen from Millennial Revolution and her retirement portfolio over the past 10 years has grown from $1 million to $1.5 million even after withdrawing according to the 4% rule every year for 10 years.

I think that's pretty amazing evidence that the 4% rule really works. That wraps up this episode of the Bigger Pockets Money podcast. He is the Scott Trench. I am Mindy Jensen. And because this is an episode for our later starter friends, I'm going to go all the way back to the beginning of the alphabet and say, see you later, alligator. Bigger Pockets Money was created by Mindy Jensen and Scott Trench.

This episode was produced by Eric Knutson, copywriting by Calico Content. Host production by Exodus Media and Chris Micken. Thanks for listening.