BiggerPockets Money Podcast - Finance Friday: Signs You’re Saving TOO Much for Retirement

Episode Date: November 1, 2024

Are you saving TOO much for retirement (or early retirement)? Could you retire years sooner than you think? Will retirement expenses be even less than what you spend now, allowing you to reach FIRE faster with a smaller nest egg? Today, we’re getting into that exact question as Finance Friday guest Ethan asks how he can ensure he’s on the right track for early retirement by age fifty-five. And if you’re like Ethan, you could retire RIGHT NOW…but should you? Ethan is spending a LOT of money every month. He’s got two kids in private school, extracurricular sports fees, pricey car payments, and a mortgage. The good news? He’s raking in cash at his high-paying tech job! His current expenses cost him nearly $20,000 per month, but this number could be cut in half (if not more) once his kids leave the house. This means that his FIRE number might be a fraction of what he thinks it has to be to retire early. Speaking of early retirement, is it wise to leave such a high-paying career to sit on the beach all day? Ethan has the skills and the energy to make a sizable income, so what should he do instead of full-time work once he reaches early retirement? Should he transition to part-time consulting, focus more on rental property investing, or buy a business? In This Episode We Cover Why your FIRE number may be WAY off from what you need to retire early  The retirement expenses that disappear once your kids are out of the house  Making money in retirement and whether buying a hands-off business is your best bet Planning for future weddings and how much you should set aside for your kid’s big day  Limiting your taxes by qualifying for real estate professional status (REPS) Whether or not you’re keeping too much cash on hand (is the bank account interest worth it?) And So Much More! Links from the Show Mindy on BiggerPockets Scott on BiggerPockets Listen to All Your Favorite BiggerPockets Podcasts in One Place Join BiggerPockets for FREE Email Mindy: [e-mail] Email Scott: [e-mail] BiggerPockets Money Facebook Group Support Today’s Show Sponsor, Connect Invest, the Alternative Way to Earn Passive Income Through Real Estate Get on the Path to Early Retirement with “Set for Life” Property Manager Finder Dude ACTUALLY Withdraws From His 401(k) and Retires at 47 w/Eric Cooper (00:00) Intro (04:27) Money Snapsho (12:44) Current Net Worth (15:11) Work Less, Travel More? (21:10) Early Retirement Expenses (27:02) Buy Rentals for Retirement Income (33:59) Paying Too Much in Taxes (38:22) Downsizing Houses and Next Steps (44:40) Saving for Future Weddings (48:52) How Much Do You NEED to Retire? Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/money-577 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

Today's Finance Friday guest is hoping to retire by the age of 55. But will he be able to, given how much of his current portfolio is tied up in retirement accounts and three rental properties? Let's see what's possible today. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen. And with me, as always, is my blueberry-loving co-host, Scott Trench. Thanks, Mindy. Great to be here with a very good intro.

Bigger Pockets has a goal of creating 1 million millionaires. You're in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you're starting. Today, we're going to discuss can Ethan retire in 6 to 8 years? How does he know if he has enough saved? And how can Ethan unlock wealth from his current portfolio before he hits traditional retirement age?

This episode is brought to you by Connect Invest, real estate investing, simplified and within your reach. Now, back to the show. Ethan, welcome to the Bigger Pockets Money podcast. We are so excited to have you here today. I'm happy to be here. Thanks for having me. Awesome. Would you mind maybe opening up with a quick overview of your money story to let us know how you got to the current position? So I'm a 48-year-old tech entrepreneur, husband and father of two teenagers. When I was in college, it was a founder of a tech startup during the end of the dot-com boom. That company that

I founded in college ended up getting acquired by the company I work at right now. So the majority of my career has been working in technology and working for a company where I've more or less been an executive leader. So that's been the last 23 years, roughly. Along that way, I've also done some real estate investing. I did house hacking when I was right out of college, my first house, I had extra rooms in the house, and so I rented those out to tenants up until the point in time I got married, and my wife didn't think that that was such a smart idea for me to have random people living in the house when she was there as well. So that ended that piece. So I also picked up a rental property from my grandparents when they were needed to move into retirement housing. So I've been, I fixed up that house that they built in 1966 and have been renting it out for the last 24 years, roughly. In addition to that, I've been doing just sort of normal investments in the stock market.

Every year, probably for about 10 years when I would get my tax refund back, I would invest that in a brokerage account. and buying stocks of companies, mostly that I knew what their reputations were from working in technology. And then I read a book, I think I may have gotten it off this podcast

about creating wealth and I started investing on a monthly basis in sort of VTSAX sort of following the standard sort of index fund investing rather than trying to pick my

pick my stocks. So, you know, that sort of brings me to where we are today. We've been, we've been doing that. My wife and I both work full time. The majority of our income comes from W-2 income, and we have three rental properties, two homes in a condo. And what is your family, it looks like you have a, based on the expenses we saw here, because you give us a preview of your kids and how old they are and what they like to do? Yeah, so my wife and I, we have two beautiful young girls. Our oldest is a freshman in high school, and our youngest is a seventh grader, so she's in middle school. Both kids are swimmers, so extracurricular activities. I think that if I add up their expenses between child care and the activities that they do, I think that that's more than

our mortgage. It is. I just added them all up. for you. We'll talk about that in the second year. Yeah. Well, fantastic. Mindy, do you want to give a quick rundown of the numbers here? And then I have a couple of places I'd love to ask some questions just to get more context around this as we kind of dive into the plan and your goals here. Okay. So I see a very paltry income of 34,354 a month. That's not a year. That's a month. So that, nice job. Doing well there. No suggestions for increasing that. I see expenses of $20,000. And at first glance, I'm like, how are you spending $20,000 a month? But then we've got a primary mortgage of $2,300. Again,

awesome on that. We've got in your expenses, I see savings, rental mortgages, IRAs, rental expenses, and investment accounts that I don't really consider to be. expenses. They might be money coming out of your pocket, but those aren't traditionally expenses. So I take that out and I see a total of $14,000 for monthly expenses. Ethan, do you do zero-based budgeting? In business, I'm used to just doing inflows and outflows. So my budget or what I used to share the numbers with you was just based off of looking at everything that leaves our checking accounts every month. And that is an outflow. And then looking at the deposits that come in from being it as inflows. So that's probably why it looks

that way. I see all these things petting out. So I consider them part of the budget. And I just want to chime in with this here before Mindy gets to the assets section because there's two important callouts here. One is $6,500 of that is really going to savings or investments. And another $7,300, which I want to get into, is expenses that I do not believe you would have in traditional retirement in six to eight years. And I think that those are two really critical numbers for us to zero it on as the conversation goes through. And those include things like tuition for private school. That will maybe get bigger when college comes around. But it is not something you have to plan your retirement around as a monthly outflow. Same thing with college

savings accounts, swimming in piano, child care, and a couple of two other categories in your car payments potentially if we're smart. So does that sound right in terms of the buckets of expenses and how I'm thinking about them? It does, and I'm hoping that some of those go away, and that's sort of why the time period, my question about time period is marked there. That should be the point in time where both kids are in college and no longer, you know, at least in high school. Yeah, so we'll definitely dive back into those. We need to take a quick break, but more from Ethan and whether or not he'll be able to retire and say goodbye to his W2 right after this. Tax season is one of the only times all year when most people actually look at their full

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$1,300 for college savings accounts, $1,500 for swimming and piano, $1,300 for rental mortgage number 2,000 for child care, 900 for car 1, $650 for car number 2, 600 groceries, 600 shopping, $541 for IRA, $1,500 for entertainment and travel. We're going to talk about that one, too. $600 for auto and property insurance, $400 for utilities, $250 for rental expenses, $240 for gas, $155 for phone, internet, and cable, $250 for household maintenance, $150 for church, and $500 for an investment account. Some of those, like I said before, I don't consider to be personal expenses, those are business expenses, the business of your rental properties, or your investments.

And maybe we should have a discussion about that sometimes, Scott, about where the investments should go in your mindset. Because, yeah, it is money coming out of your pocket, but it's not really an expense. It's like saving for the future. So when we pull out those expenses that I removed, we've got $6,500 out. So now instead of $20,000 of expenses, you've got. got $14,000 of expenses against a $34,000 income, I think you're doing okay there. And you know, we still need to get to net worth, but while you're pulling that up, I'll just

preview where my mind is immediately jumping. This could be wrong as we get into the conversation. But I think that planning for your early retirement revolves around, first, excluding the amount you invest from your expenses. You don't need to plan on that. Second, planning for all of these major line items, the, what is it, one, two, three, four, five, six, seven, the college savings account, the private school tuition, the swimming and piano lessons, the child care, and both car payments, just going away after your kids graduate or begin going to college and pulling those out. And if I pull both of those out, you spend $6,800 a month. And if you pull out your P&I on top of that, now you're at how much?

Right. So on the primary mortgage, let me make sure I look at the right one. Yeah, the principal payment per month is $717. And the interest payment is $712. Okay, so 14. So now you're at 5300. So we, like the reason this is important is because I can back into how much you need to retire by pulling out those and saying, okay, your actual monthly expenses, if nothing changes

in the next couple of years, inflation adjusted, right? Or, you know, in today's dollars is about $5,500 a month. And the asset base needed to generate $5,500 a month in income is $5,500 times 12 times 25 or $1.6 million. dollars. The asset base needed to sustain the $20,000 headline number for expenses is 4.2, or, you know, after pulling out the $6,500 of non-expenses, $13,000 you spend every month is $4.2 million. So we have a huge difference once we go through that exercise of unloading the pressure on your financial position to generate a position for early retirement. And I think that that leads really nicely into the net worth conversations. So Mindy, could you maybe go walk through some of the net worth members here?

will, but first I want to say his rental properties bring in $6,021 a month. So what was that $5,500 amount, Scott? That was the total amount of expenses that Ethan would have on a monthly basis per this spreadsheet. If there was no principal and interest on the mortgage, if he just paid off his mortgage, if there was no private school tuition, if there's no college savings that need to be done, if there's no swimming or piano lessons that need to be paid, if there's no childcare that needs to be paid, and if there's no car, payments inside of the position, right? And all of those should go away over the next eight years, I believe. So hopefully that's a comforting observation. Ethan, have you thought about that before in doing this exercise? Yeah, I had not thought about the mortgage payment going away in the next eight years. So I'd like to hear about how that's going to happen. That's an asset allocation decision. We may not choose to do that, but that just says, okay, this is super achievable. The numbers support

this right now in some ways. And now we can begin working around what's the way to fine-tune it and add in plenty of padding to make that as comfortable as possible. You do not necessarily need to pay off your 3% mortgage. I'm just saying that that's an option we have. And with the headline number of how do we generate 20 grand a month in expenses to help you retire is really hard. How do we help you generate $5,500 or $6,800 in income? Oh, way easier with where we're at. Well, with 5,500, we just generate that with the 6,000 that he's making out of the rental property. And then we've got 521 left over. The 6,800 that he might need, that's a different story.

But let's go in and look at this net worth statement. So I see cash sitting at about $150,000, give or take. Why do you have so much money in cash? I think that that was another one of those books that I read, It said you should have three months worth of expenses or more on hand. So it started there, and then it was just a habit. So we just continue to put money there and it grows. And lately, the interest on the savings accounts are pretty good.

So that's just been growing. Okay. So 20 times three is 60, and this is 142. So you're at six months plus, actually you're at seven months. How does that feel having seven months of expenses in your cash? What if you dropped it down to 60 or what if you dropped it down to six months? And that's like a thought conversation to have with your partner. But wait, there's more.

Not only do we have 150 in cash, 142 in cash. We have $921,000 in a 401k. Yay, good job. Did it right. But I look at that and I'm like, oh, is he in the middle class trap where your net worth, the bulk of your net worth is in your primary residence and your retirement accounts? Nope. Again, 137 in a Roth IRA, $509,000 in a brokerage account. I see rental property asset value of $913,000, mortgages against those properties of $313,000 to give you approximately $600,000 in equity.

Your primary residence is worth $743,000 and your mortgage is $297,000. So I see some pretty good numbers here. My math shows a grand total of 2.7 in net worth. So $2.7 million and you're making $34,000 a month. What do you want for me? What can I help you with today, Ethan? Or does Scott kind of spoil everything by saying, you know, pull all these expenses out of your expenses and look, you're already fine. Well, I think that's the big issue. Well, go ahead. Ethan, how can we, how can we best help you?

Am I on the right track or am I jumping to conclusions too quickly? Well, I mean, there's one thing sort of theorizing that it is possible. There's another thing, you know, getting to the, getting to the brass tax of it, right? So I would not assume that the current budget is exactly what a retirement budget would look like. And I'm not even sure that I want to completely retire. My wife and I have used this term called pre-tire very loosely. And I think our goal is to just be more free to travel and do other things as soon as our kids are in college. don't need us on a day-to-day basis. But not necessarily, you know, without doing any, you know,

I thought about maybe doing some consulting. I thought about maybe buying a business that I can operate on an absentee basis. I thought about, you know, lots of different ways to do that. Because right now we don't, you know, we go on a family vacation maybe once a year. But my wife and I have ideals of maybe traveling, I don't know, a third of the year. you know, being, you know, and that's not inexpensive, although I think there are ways to do it to sort of minimize costs. So I think some expenses potentially would increase, but not this. I don't think that they would increase to offset all of the child-related expenses that exist. I'm not sure

what college will mean in terms of the amount of money that we need to be able to come up with in order to pay for college. We live in Georgia and they have the Hope Scholarship and the Zell-Mell-Mell Scholarship, so good students, if they go to in-state schools, essentially get free tuition. We're encouraging our kids to continue to do well in school and potentially go to an in-state school. but my wife and I both went to private schools for college that were very expensive. And I don't think we're in a position where we would shut that down, you know, if they got into a really good school and they really wanted to go there. And then I've got the blessing of having two girls. And at least at this point in time, I think that they'll both want to get married at some point.

And I have no idea how much we should be, you know, saving for that. It does concern me to have some pretty large expenses that could pop up right around the same time that we're talking about, you know, sort of checking out from the 9 to 5. Well, that's great. And, yeah, we'll have to plan around all those. I was jumping to conclusions. I apologize there. I just look at numbers.

Five. Okay, great. We'll reframe a couple of those things around this and go on that track. I did want to ask one other question real quick. based in your questions, are we missing an asset or maybe several things that could, at least one important one in private company equity that could come into play? And is there anything else like that, like a pension or anything else that we should be considering? Right. So no pensions. Neither my current company nor my wife's current company have pension plans. The company that

acquired the business that I started in college, has issued stock options to a number of the executive team members. But it is a private company. As far as I know, there are no plans to take it public. And there are currently no plans to actuate, you know, a sell of any sort, especially not necessarily on the timeframe that we're talking about. So I don't know how to think about that. You know, there are options. So I would have to purchase them at the time of a transaction in order to net any sort of proceeds. But given all of that, I'm still struggling with how I should feel about, you know,

sticking around longer or potentially working out something to where maybe I'm working part-time after that time frame, just so that I can. continue to hold on to those options, should there be a transaction to be part of. Can you give us a little bit of a sense for if things continue to go the way they're going, would this be worth a lot of money or a little? You know, is there a way to kind of get some directional sense of this in terms of a magnitude component? And for the record, I would value them as zero in your net worth.

But if they're likely to be worth something, I would not ignore that potential. either. And that's that you know statements of the obvious, but it'd be helpful to under me. Yeah, I would say that the transaction value, you know, maybe the tens to hundreds of thousand, but not in the, you know, I wouldn't say it's going to be $200, $300,000 or $500,000 transaction value. If there was a transaction given the current trajectory of the business, that being said, I guess that's partially in my control, right? Like if we increase the value of the business, then obviously the value of those shares are higher. Okay, so this is a boost, but we're not talking about more than potentially 10% of your net worth in most likely scenarios for this.

So something to consider and factor in, have the back of our minds, but not the way you would plan your life around the realization of any of these things. Stay tuned for one final break to hear what investment vehicles might be. a good fit for Ethan's goals and financial timeline right after this. 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. And if you're like most folks, it can be a little eye-opening. That's why I like Monarch. It helps you see exactly where your money is going and more importantly where your tax refund can make the biggest impact. Because the goal isn't just to look backward. It's to actually make progress. Simplify your

finances with Monarch. Monarch is the all-in-one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth, and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch's subscription with the code Pockes. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals, and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good with Monarch, the all-in-one tool that makes money management simple. Use the code Pockets at

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slash money free. Let's jump back in with Ethan. So I want to comment on a couple of things you said. You said I wouldn't assume that the current budget will be the same as our retirement budget. And I think this is a really smart way to think about it. I think there's a lot of people who are like, well, I spend $40,000 now. That's what I need to retire.

I'm not even going to consider anything else. And your expenses are going to be lumpy. Some months you are going to come in way under budget, but a lot of months you're going to come over budget because your tire blows or it's time to go to the dentist and oops, you have a cavity because you don't floss. There's all sorts of weird things that you can't really plan for. And assuming that your current budget will be the same forever is a mistake that I see a lot of people making. So I love that thought. You said you would potentially buy a small business.

Would that be so that you are putting the money into it and then getting money back without having to work there? Like you're hiring somebody to run the business for you? Or even as a, you know, a partial like, you know, something that I can do remotely, something that, you know, I just need to keep an eye on versus something that I need. I don't, I don't want to buy a job. You know, that would be the last thing I want to do. Stay in this current one. If you're just buying a job because this current one's pretty sweet. Yeah. But one of the things that I thought about is health care expenses, right? So what I thought, well, maybe if we did have, either if I was working part-time or we did have a company that the company could provide the health insurance

benefits, especially in the first, you know, up until Medicare ages or whatever, I don't, I don't remember exactly what I think it's 65 that you qualify for that. So yeah, so if we retire or if we pre-tire in our 50s, I've been doing some bit of research and it looks like health care expenses can be quite expensive. What do you think that they'll be if you're to buy them in exchange, for example? The last bit of research that I looked at for my wife and I, and I don't even know if, I'm assuming I would continue to have to cover my kids as well since they'd be in college. So probably, you know, 1,200 a month, probably. Yeah, I think that's a good estimate. Yeah, so that would definitely, you know, that would be a put back into my earlier math for sure. That's going to have to go back

in there. But I still think, actually, let me, let me flip this. Do you think, do you agree with, am I approaching the problem from the right standpoint of saying, here are the expenses that are going on today? We have to figure out what you want to spend in this early retirement phase. to some degree. And the way that I'm trying to back into that number, because it's absolutely essential to everything else that we're trying to discuss, is by cutting out all the things that we possibly can from the budget, and then we can layer back in 1,200 bucks a month in healthcare, which that's only going to be for four or five years, right, at most. And that will begin going down as child 1 presumably gets a job and has their own health care, and child 2 eventually

phases out of that as well. And then saying, okay, we want more for traveling, we want more for entertainment, we want more for all the fun stuff. But we want to basically get to the lowest possible number and then build it back up, I think, in order in constructing the portfolio here. Do you like that approach? I do. And there's probably another spreadsheet I should have shared with you guys. I took a stab at that. But, you know, building it back up and including health care, if I don't count the cost of the rental property, like the mortgages on the rental properties, you know, conservatively I came up with roughly double what we, what you're talking about. So close to, close to 10,000 a month. But that was assuming that we continue to

have, like we didn't pay off our cars and we, you know, we decided to get new cars and, you know, continued sort of that run rate. I'd rather be conservative about it and know that I can trim back things and be too tight and then all of a sudden I'm asking for my job back. Well, either way, we're pretty darn close. You're at $2.7 million right now and to generate 120K reliably, $10,000 a month, you need an asset base of about $3 million. So I think it's about fine-tuning it and giving as much margin of safety as we possibly can over the next six to eight years because you're going to like, you could just put it in cash and you'll be way ahead in terms the 4% rule for this. But that's not what, you know, we got six years. Let's maximize the opportunity

to the maximum possible extent. And then, you know, the way my brain works is I always like to put in as much margin of safety there. Because once you get, once you get close to that point in six to eight years, you want the biggest possible asset base. And I like to think about financial independence. And I have a heavy bias towards moving away from the math at that point, the maximizing returns, and to keeping the expenses as low as possible to reduce the amount of income that you need to realize and pay taxes on to support that lifestyle. And that's where the math of paying off the mortgage at the end of that might make sense to some degree. Mindy and I had a big debate about this a while back because you need so much more income or so much more assets to pay that. It just gets a lot easier when that numbers goes from $10,000 to $8,500 in terms of what you need to pull from the portfolio.

We're not going to do that right now because you've got eight years left. Why would you pay off the mortgage right now when you have eight years of investment potential to earn in other areas? But when you get there, that might be a time where you say, I'm actually going to put this in the stock market and I'm going to reallocate to the mortgage at that point. Or in the last two years, I'm going to put all the extra cash flows toward that mortgage. That could be good fire math, even though it will result in lower long-term net worth. Those are the things that are jumping into my mind. Ethan, what's your comfort with the rental properties? Do you want to buy more or do you want to buy, like what do you want to do from an investment standpoint?

I don't mind buying more as long as the properties are relatively low maintenance properties. Like I understand how to do that. I'm not afraid of, you know, having to talk to contractors or even doing some of the repairs myself. So that is certainly a possibility. At one point in time, I thought that maybe we should, you know, my wife and I talked about, well, maybe we should have 10 rentals. And at that point, that should be enough cash. you know for for a nice retirement and then I also thought about okay well maybe it's at

some point we decide to sell the rentals but we hold the notes instead of selling them outright and then use that as an income you know as a retirement income rather than just taking all that as a as a lump sum and trying to invest it so but I think of I've I've tried to think about multiple different ways, and that's where I get stuck just, you know, in the analysis paralysis of it all. How about this one? What feels better to you between these two approaches? One is taking on as much risk. You're taking on more risk and driving the mathematically optimal approach for the next eight years. Or saying, I'm going to get there by a huge margin no matter what, or most likely no matter what, with all of these buffers. and spending that time de-risking the situation over the next eight years. Would you rather have a go for more or would you rather go for safer? I think that I'm probably leaning towards de-risking at this juncture.

Like, tried and true things I'm willing to do. But taking on a bunch of, well, I guess it depends on what you mean by risk. If you're talking about taking on mortgage loans against rental properties, I don't consider that a bunch of risk. But, you know, I would, I'm not sure about the risk profile of, like, buying a company where there's actually no assets and it's all service delivery. And then, you know, the people that are delivering the service decide that they want to go out and do something else.

And all of a sudden, I've got an asset that I need, you know, I bought myself a new job if I want to get my money back out of it. So what type of risks are you thinking about? Well, I think I was asking if you're comfortable levering up on more rental properties or you want to put it all into stocks or if you want to just pay everything off and say, I'm done. Good and gone. I think you're much more along the, I would like to take on a little bit more risk than that spectrum based on your response there.

You're thinking about buying a business, continuing to invest in not aggressive, but levered real estate. along these lines to continue building out the portfolio is what I'm hearing. Yeah, yeah. I don't mind doing those things. And in six to eight years, you know, I don't want to be sitting on the beach all the time, right? Like, I like to have things to keep me busy. I think that, I think that's healthy. But I want the freedom to be able to, you know, to go places and do things and not say,

well, I only get two weeks of vacation or three weeks of vacation because it's, you know, because it's tied to the normal job. Have you thought about specifics with regards to what types of businesses you're thinking about buying? So I did evaluations in the last year or so on two different rental property businesses where people were trying to sell their portfolio of rental property assets that they were managing. Neither one of those penciled for me. Like the risk was too high that either there was a lot of concentration with like one owner in a bunch of properties versus or. or properties that seemed problematic and more of a more of a headache than than a true business. So I've looked at that.

I've listened to a couple of your podcasts where you've had people on talking about the fact that there are a lot of boomers retiring and trying to offload their businesses. I'm interested in that in concept. I've been running businesses. I've been running a business for the most part, you know, for the last 20-something year. So I think I understand how to operate, you know, a relatively simple business. But I just don't want to get stuck actually doing more than operating it, right? Ethan, what is your what is your proclivity to buy this business while you're working your current job?

I had been operating an assumption this would be after you left your job. But is that, you just said you've reviewed two recently. Are you contemplating doing that sooner? I'd be open to it as long as it was a situation where I thought absenteenth. you know, like oversight was all I would need to do outside of transacting, right, the purchase. If I felt like I needed to be there, you know, 10, 10, 20 hours a week, that's sort of a non-starter for a period of now. You know, I think what's making this conversation so hard for me is you're super rich,

super competent and super successful in all these areas. And so you have like all these options in front of you, right? You provide what is clearly a. an awesome, you and your partner, like, awesome life for your girls. They're well set up. You're thinking ahead for all of these things. You will have no trouble retiring. And these options are just like, like, it's, it's kind of around like that,

what do you want question around it? Because you have, you will get there regardless of which path you take, whether it's rental property investing, you can buy them cash. You can buy 10, you can get to 10 properties in cash over the next eight years, potentially with a number. maybe not 10 properties, but you can get, you can get to five properties paid off if you want to do it. You can get to 10 easily if you want to take on a couple more mortgages and notes there. You're clearly skilled at managing these things.

They're producing great cash flow and performing really well. You told us about a home run deal before the show here on this. You can run a business. You can do that today. You've got clearly a great job in her, you know, killing it at the current profession, haven't run a business for 20 years with some equity and some options there. And I think that's why I'm struggling here to give direction is because all of those sound good. And you should be successful with all of them as long as you remain conservative relative to your overall situation here.

And so, you know, I guess that's the question is what sounds more fun? What sounds like more you over the next couple of years? Is it just passively accumulated in assets and stocks? Is it building that rental property portfolio or is it running a business? Or is it doing all three? Because you can do all three in your situation. Well, let me ask you this. Maybe you can provide some guidance on this. What are your thoughts on what puts me in a better tax advantaged position? So there's that zero percent interest credit card that, you know, I had to come out of pocket to pay, you know, more than $10,000 worth of taxes this past year.

Every time I do that, it hurts because we're paying. taxes on our W-2 income already and then they turn around and have to pay taxes after that. You know, I'm all for paying my fair share, but I feel like I feel like I'm giving blood when tax time comes around. So I've been contemplating positions that put us in a better tax position as part of the calculus. Well, I think I think that your tax problem is related to the fact that you're in 412. $12,000 a year, right? So that, I mean, that's, that's a great problem to have. And so you just are going to pay tax on that. And that's where, you know, if we go back to what I was saying earlier, if you can chunk down those expenses that I just listed in a very meaningful way

and max out the 401k, you know, all those different types of things, now you don't need to realize, you have to realize $14,000 a month after tax right now to fuel your lifestyle. That is the biggest problem here and you can do things that are tax efficient, but it's going to be really hard as a W2 employee with the current portfolio that you set up here. So if you wanted to say, how do I get serious about reducing my tax bill? Well, I think that by the time you retire, if you only need to realize 5,500 in income, you may pay no tax at that point in time from your rental portfolio. Who'd we have on recently, Mindy, the guy with the, I think we've titled the episode, dude actually withdrawals from this 401K early.

Eric Cooper. Yeah, Eric Cooper, you know, that guy has a couple of properties, you know, a handful of rental properties and a little bit of passive income. And he generates $97,000 a year in cash flow. But his tax bill is like 20, his AGI is 24,000. So that's something to think about when you're planning around this is, and that's why I always begin with the expense side. Because if you need to realize 10 grand a month to fuel your lifestyle, you're going to need to

think about how to do that efficiently. If you were to go down that route that you described earlier of buying a property management business and managing properties, you'd probably get licensed as a broker in the pursuit of that. And now you're a real estate professional. Okay. Now we've got something interesting going on there where there's probably a world where there's more rental properties in the picture. And there's maybe even some syndications that provide those passive losses. And because you're a full-time business owner doing real estate related activities, as a property manager.

Now we've got something really fun to begin working with from a tax perspective. But I think that the fundamental problem with building a tax strat, and we can talk about this more, but I think you're going to have a hard time realizing the 80, 20 of those benefits

with the current job setup, which is not really that big of a problem because it pays so well. But how's that for a reaction? Any idea that sparks to start thinking through? Yeah, yeah. So maybe that is a good transition idea to actually do the property

management business as a, you know, try to start building it up while I'm doing this where it doesn't take a lot of effort. And I have thought about becoming a real estate professional in order to change our ability to realize depreciation and other and other write-offs related to real estate. So I would lean towards that. I think that to me that feels like something that I know how to do and that is not a far departure from what we're doing already. And I'm, you know, one of my, one of the rental properties is out of region already. Like I don't, I don't have to be there in order for it to, to operate. So I feel comfortable with, you know, being out of the country for two months and, you know,

only checking emails and, you know, place and phone calls to help manage that kind of stuff. So I think that that is possible. We talked about home equity a little bit. I touched on it. Best way to free it up is to remove the P&I payment. In my opinion, one of the best ways to free it up, if you are going to stay put after they're going to college, when it's paid off, you no longer have to realize the income.

So I won't go back into that point. The other one is to sell it. And the last option is to pull out a HELOC or refi it, which could be an option for you if you decide you want to go into the business world, but you're going to lose your cushy mortgage, with the low interest rate right now and for something higher rate or at a higher rate

or you're going to take out a pretty expensive variable rate on the HELOC. So you need to have high conviction in that business, but that would allow you to have a lower cash position or not have to diversify away from other assets. Did you have a more specific question on the home equity piece?

Well, the home that we're in is great. You know, right now that we have kids. Like we've got plenty of room and all that kind of stuff. We actually probably have more house than we need because when we first built it, we had family coming to visit all the time. So we wanted to make sure we had a place for everybody.

But fortunately, a lot of our families moved to this, you know, nearby us. So we don't really have all that many out of town long-term visitors anymore. So we will likely downsize in the size of property once the kids are gone. on. That probably is not right when they go to college. It might be a little shocking. But, you know, in retirement, I'd like to sell the current property and hopefully be able to buy the following property, you know, outright and not have to take a mortgage out of it.

That's it. I love that. That's, that will make life way easier on a lot of fronts in terms of planning around your retirement expenses. So I think that's a great plan. That's, that's the best way to use the home equity in my view. So one thing to consider with regards to buying another, buying a business, do you think you can make more money than you're making now at your current job? No, and I'm not looking to buy a business before the kids go to college, like to replace my current income. I would only be looking to buy a business that I could transition into managing on a fractional basis after they get into school. So after they start college, that is. And the property management, I'm wondering if it doesn't even make sense to buy one. I'm wondering if it makes more

sense to try to slowly manage my own properties as a property management business and just grow into that and try to expand the portfolio rather than turning it into like a, you know, taking more risk and trying to buy a portfolio of assets that somebody else is managing. I think that the reps, so the question I think comes back to the tax strategy that you want to implement. And I think that when you get to there in practice and you leave your job in a couple of years and kids are out of college and you have these lower expenses, you'll find that this portfolio in seven years will double roughly. Right. I mean, there we put and takes, but that's a rule of 72, right? It'll double every 7.2 years. So good chance of that

happening certainly could not around that, but that puts you at 5.4 million before we talk about all the additional cash flows that you invest over the next several years from your, the spread between your income and expenses right now, which will, by the way, diminish. The expenses will diminish naturally over that time. So you'll actually be accumulating more and you probably get a raise or two. You might even realize this equity. So I would pay your nominal. net worth at six to six, between six and seven million by the time you make that decision at that point. And then it's going to come down to how much do you want to spend on a regular basis? And what's the most tax efficient way to generate that amount of income? And if you want to

spend a lot at that point, then I think we're talking about, okay, how do I make money on a, how do I make active income from reps? And how do I depreciate it with rental properties and play and play all of those different types of games. But I think there's also a good chance where you'll find you don't really need to change that much. Your real estate income at that point will naturally be very tax advantaged because it's rental property income. And if you buy a few more of them, lightly levered properties like you've been doing, you may find that you're able to just like Eric Cooper generate close to 100K with a pretty low nominal AGI without having to do that business side project.

And that's just a bonus. Then you can just say, okay, well, I don't really have to worry about the tax angle because the rental property income is already fairly passive. And I've got enough in my 401k to easily type me over when I get to traditional retirement. And by the way, I've only got to bridge this for 10 years before we can start collecting Social Security. So I think that that's one, like a perspective, I don't know, the doubling and the compounding nature are so fantastic now that you're at this level.

of wealth that, I don't know, is that, is that a, is that a fresh angle or a new way to think about it at all? Yeah, no, no, no. That's actually very comforting. It means that, you know, that, uh, essentially you stay on, stay on the existing path, let the assets grow. And then the part-time job is just managing the rental properties that, that we currently have.

And I don't have to. Yeah. And it certainly could not happen that way. You definitely want to be conservative, but you already are conservative with all this stuff. But if that happens, that would be very, very, historically average for for from a portfolio design standpoint will give you great options. Then yeah, you could buy that business, but it's just because you like running the business

and getting some more extra MoBox money. It's not because it's really necessary to tide you over in that in that world. I'll have to figure out what the put back is for inflation adjustments. So that's definitely an angle, an angle to pursue on this one one other note. And this is I'm just jumping around here a little bit here. And what do you think is reasonable for weddings? How do you even think about that? I have a daughter actually some news.

We have another one on the way in April. So like what is like the number you should be thinking about on that front? Well, congratulations on having another one on the way. And the short answer is I have no idea. I know with inflation has got to be, you know, more than double what my wife and I spend on our wedding. So my guess is $100,000. Okay.

So 200, 200 for two? I don't know, Mindy's gawking there. I don't know, Mindy. What do you think is a wedding budget? Well, I don't know if you know this, but I'm a little frugal. My wedding budget was $5,000. And my parents gave me a check for $10,000 and said, however much you choose to spend on your wedding is however much you choose to spend on your wedding. And this is our contribution. So if you want to spend $100,000, you have to come up with the 90. You want to spend $5,000, then you get an extra $5,000. And that was their gift. My wife is more frugal than I am.

So that $100,000 will likely get... She's going to listen to this and say, what? Yeah, but I don't know, you know, it's one of those things where, you know, when it's your kids, you want to do what you can. So I'd like to know that we could have. do I think that that's a wise way to spend money to be out $100,000 in a single day? No. I'm with Ethan, Mindy, I think on this one, though. Like, I think, like, what are you going to do in this situation?

But bumping up against $3 million in net worth, good job. Kids are almost out of the house. There's not really a world where he's going to leave his job in the near term unless he buys a business, in which case is going to keep working on that. why wouldn't you plan on $200,000 weddings in terms of the way you're projecting out the model over the next couple of years? And then it probably won't actually come to that. And then the way you do that, I think, is you just build the net worth pile as large as possible in the context of your overall relatively conservative plan. And it's there if you need it.

And you don't have to spend it if that doesn't happen. So I think in this situation, I'd be doing the same thing. I have a lot of trouble saying no to the next applesau for my two-year-old. I don't know how I would say no to a wedding if that was the dream. you know, 20 years or now. But we'll see. We'll see. Ethan, has this been helpful?

It has been helpful. I think so. I think you're sort of talking through it and having some, somebody to confirm assumptions. I start looking at this and I'm like, okay, well, maybe we're almost there. But then again, maybe we're not. So this helps to clarify that. And I think that the answer is, yes, we're almost there. Stay on the path.

You know, if some opportunities, present themselves so be it but we don't have to drastically change anything and we should be able to to comfortably step step back from at least full-time work in in the next six to eight years. I think a lot of people are struggling with the same questions you are and it's awesome because you have done such a good job here and it's just about finishing the play over the next couple of years and I think you're thinking about all the right things got to pick an option but you have no real bad options on this front. You can be successful with any of the three courses in stocks, real estate or business, and because you're clearly skilled in all of those areas around personal finance.

So congratulations. Thank you. Thank you. And thanks for your time today. Thanks for walking through this with me. This is very good. Thank you for sharing your story with us. I really appreciate it. And I agree with everything, Scott said. I think you're doing fantastically. And, you know, know, this is part of that, that slog that you're like, well, am I there yet? Am I there yet? You could be if you changed a bunch of your spending, but you also have kids at home. So you don't have to change a bunch of your spending and you, I have every confidence that you will still get there. All right. That was Ethan. And that was a really fun series of events. I really liked what Scott said about pulling out some of these expenses that you

won't have in retirement. And, you know, I was, I was joking at the beginning. I'm like, oh, you've got all this money. What do you need me for? But actually, this particular problem pops up a lot. You get in your head that you need X number of dollars for your retirement. And it can be very easy to overlook the fact that you're not going to have babysitters in retirement, most likely. You're not going to need to be paying for high school expenses and daycare expenses and all of these other expenses that you currently have. And I really appreciated that Scott pulled some of those other expenses out besides the ones that I had pulled out when I said,

you know, these rental property expenses are not your personal expenses, those should go through your business. But I really, really appreciate Ethan sharing his story today because while his outlook is fantastic, kind of changing your mindset and looking at things a little bit differently, is absolutely the reason why we do shows like this. So we would love to talk to you as well. If you have a financial situation, you would like us to comment on, please email Mindy at BiggerPockets.com or Scott at BiggerPockets.com. And we will love to review your finances with you.

That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench and I am Mindy Jensen saying goodbye, Butterfly.