BiggerPockets Money Podcast - Is Your FIRE Strategy Wrong? The Middle Class Trap Debate with Brad Barrett

Episode Date: June 20, 2025

Buying a house, maxing out your 401(k), and leveraging real estate are considered the gold standard for building wealth, but what if these strategies are actually sabotaging your early retirement? Today, we're diving into the controversial "middle-class trap" debate with Brad Barrett from the ChooseFI podcast! Welcome back to the BiggerPockets Money podcast! Is your net worth locked up in home equity and retirement accounts you can't access? Brad, Mindy, and Scott are having a friendly but fierce debate about whether this middle-class trap is real or just financial fear-mongering, breaking down strategies to avoid it and revealing the ideal portfolio for early retirees. In this episode, you'll learn: If the Middle Class Trap is real or not! The difference between your Net Worth vs. FI Number The Psychological Barriers to Financial Freedom And SO Much More! Learn more about your ad choices. Visit megaphone.fm/adchoices

A topic we talk about a lot on the podcast is the middle class trap. You've been making money on paper. You've been making smart financial decisions on paper. But you can't tap into your hard-earned money before retirement age. But is this an overhyped phenomenon? That's what we're going to debate today with Brad Barrett from Choose Five. And welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen.

And with me as always is my middle class co-host, Scott Trench. Thanks, Minnie, as always, coming in with a mean intro. Bigger Pockets is a goal of creating one million millionaires and actually freeing them mentally from the dependence on their week-to-week paycheck or month-to-month paycheck here. You are 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 as long as you can actually spend the wealth that you accumulate. We are so excited to be joined once again by the one and only Brad Barrett. You know him from Choose FI and I can't wait to debate this topic with him today. I think you've got some very strong feelings on this and does not believe in the middle class trap. And we are very privileged to get that perspective here today on the Bigger Pockets Money podcast.

Brad, how'd I do? Welcome to the show. And did I preview the discussion reasonably there? You nailed it. So yeah, good to be here. Good to see you, Scott. Good to see you, Mindy, as always. And we're great friends here.

This is going to be fun. But like you said, we do have strong opinions. And I think that's important. I know I've been coined the nicest guy of Fahe, maybe to my detriment. but anybody who knows me knows I have extremely strong opinions. And yeah, not planning on holding back today. So it should be fun. Well, you can simultaneously be nice and have strong opinions.

I don't want somebody who's like, yeah, Mindy, I totally agree with everything you say. Don't worry. That's not happening today. Let's set the stage here, right? So at Bigger Pockets Money, we did not invent this term, by the way. I think you gave us credit for inventing this. I don't know who invented it. We didn't invent it.

We just, like, at some point, that was what it was called. And somehow this got attributed to Bigger Pockets money. but the middle class trap as our audience understands it and as we discuss it here, Mindy and I on the show is this concept of somebody with the borderline phi level of net worth. Let's call it $1.5 to $2.5 million, which seems to be about the lower to approaching midpoint of what most of people who listen to the show think of as a phi number. And that wealth is in the middle class trap trapped, quote unquote, in home equity. You know, let's say someone has an $800,000 home with a $400,000 mortgage. That makes up a chunk of that wealth. Maybe there's a million or $1,000 in

retirement accounts spread across tax deferred and post-tax accounts like traditional and Roth IRAs. And let's say there's another maybe, because we're bigger pockets, you know, $400,000 in one to two rental properties that don't really produce any cash flow that they can rely on. And so this person feels like they cannot leave their job without tapping into their home equity, which feels inaccessible without putting into place a very long-term ladder to withdraw or Roth convert their 401k. And they're not really able to count yet on that rental property equity until the property is paid down or rents having a couple more years to go up with inflation. That's the stage. Brad, do you agree with that description of the middle class trap? Are we talking about

the same thing here? Yeah, I would say so. I definitely attributed this term to you. So I apologize to whoever actually coined it. But I'm going to probably continue to say it was you guys. But that is clearly how you've set this up. So a significant amount of your net worth is in some type of real estate equity and some type of retirement account. So very clearly, that's how it's defined. We're on the same page. Awesome. So people seem to feel like they're stuck in this portfolio. And you're saying, I call BS. I don't think it's true. What's your thoughts on this? There's a bunch of different issues. It's hard to focus it on one in particular. But this person, you said it would they have roughly two million of net worth, Scott, somewhere that I've been sending?

Let's put our fictional person with 500K in home equity, 1 million in retirement accounts, and 500K and two rental properties of equity. And the rental properties are leveraged. We probably should have built this person more specifically before get into it. But that's fair. And that's easy to, that's easy to remember. So do we have a sense of what their expenses are each year? Midpoint for Bigger Pockets money listeners is 2.5 million for their FI number.

So that would imply $80,000 to $100,000 in annual spending. So this person that we're talking about in particular, I guess I would even just, question the fundamental premise of are they phi? And I don't think this person is even close to five. So let's just say very simply, they have a $2 million net worth, right? As we've said, 500K equity in their home, 500K in a rental property that has no cash flow. So we're assuming $0 of net income just as a back of the envelope. And they have about $1 million in retirement accounts. Okay. So the $2 million net worth would normally suggest that at 4% rule, and we'll use that rule of thumb. Their FI number is 80,000, right? So we'll use that. Okay, 80,000 is expenses.

But I would say in this case, this person has $1 million in equity that I would not count towards their actual FI number. They have $1 million of investable assets. Okay. So that one million of investable assets happens to be in their retirement accounts. But I think, frankly, it really doesn't even matter because they're halfway to FI. It's funny because we conflate net worth and FI number. often a lot of people do but i think most people who understand fai say it's investable assets so this person has one million dollars of investable assets times 0.04 they can cover 40,000 dollars so their annual expenses are 80,000 dollars they're halfway to five but people make choices right so it's interesting scy and your bigger pockets yada yada yada yada we have to talk you know rental properties

right but they've made a conscious choice to put five $500,000, a quarter of their net worth in a rental property that is essentially sitting there. Of course, they're paying down the mortgage. Of course, there might be some appreciation, but appreciation is speculation. So I'm not really counting that. Why is it speculation in real estate, but not in a stock portfolio inside a 401K? Well, okay, then let's even take that back. What is, what would we say as an average appreciation?

2%. I would say the average historical appreciation of housing stock, existing housing stock in the United States per the K-Shiller index will be about 3.4% a year. for both property prices and rents over long time horizons. Okay, fair. So that asset is appreciating. And at some point, it will be worth more than the $500,000 based on appreciation. And they are paying down the mortgage.

But today, that $500,000 is essentially inert as far as their five numbers concerned. So they've made a decision, and that's perfectly fine. If that's their strategy, which, again, real estate is a wonderful strategy. It really is, as you guys know, much better than I do. But let's be clear, it is a choice. Okay. So had they put that in equities, I think it would more immediately impact their actual fine number.

Let's say they sold that rental property, okay, and stuck it in the market. So then they have $1.5 million in investable assets. Okay. Well, now you're three quarters of the way to buy because now you have 1.5 times .04 is $60,000, right? But their actual needs are $80,000. So they're not at FI yet. And that's fine. They still have a ways to go.

So now they have 1.5 in investable assets. They need another 500,000. Now that can either come from savings or they could just coast on in and let it grow. Hopefully at a 6, 7, 8, 9% growth. They'll get there in just three or four years. And then they'll be at 5. But I think what's happening in a lot of cases in Mindy on episode 543 of Choose at 5.5, you gave four examples.

And most of these people, they were nowhere near FI. They were doing great. But they were just nowhere near FI and that's fine. But like, I don't want people like sitting there thinking they've done something wrong when they haven't. They're just not at five. I think that's a really important point. Something that came up on that episode is that your home equity is part of your net worth, but it is not part of your fine number. And I think for so long, people have just said your phi number and assumed that fine number and net worth are the same.

So I think there's a need for people to shift their thinking a little bit. Yes, I still believe that you should count your. equity in your net worth, but your net worth and your phi number just are not the same number. And Brad, you said something just a moment ago. You said most people who understand FI will say investable assets. I'm going to push back on that and say most people who, you said understand FI, I'm saying most people in the FI community are just equating these two numbers. And I think that we need to do a better job of separating those numbers. So your FI number is not equal to your net worth, unless you are planning to sell your house and travel the world and use that money as part of your

spending money. And there's a lot of people in this community who like to travel. But I'm not one of them. If you're going to keep your house or if you're going to, you know, downsize and need the different house, you're still going to need to pull some of that money out of your FI number and just have it in your net worth instead. We have to take a quick break. But if you enjoyed today's episode and you're looking for more money content, please hop on over to our YouTube channel at YouTube.com slash bigger pockets money. We'll be right back 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

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slash BP money. All right, you're trapped. I mean, you're back here at Bigger Pockets Money. I would love to just kind of jump in here and say, I'll meet you halfway on this argument. I think you're absolutely right to totally exclude the home equity from the FI number. Most people do not plan to sell their home, harvest the equity from that home sale, deploy it in investments, and live off the cash. flow from that. A small minority of people, you post about this on LinkedIn or whatever, two people

out of 100 will say, oh, I do plan to do that. Okay, then count the portion of the downsize in there. Like, if you live in a million dollar home and you plan to downsize to a $600,000 home, if you count the 400, count 400 towards your five number, because it's part of the plan here. But most people just don't plan to do that, or it's so far off that it would be foolish of you to consider that as part of your phi number. Yes, it's part of your net worth. It's not part of your five number. There are exceptions that are reasonable. You know if that exception like that applies to you.

The rental property piece, I think there's a more fundamental issue, and we're starting to circle around it here, which is you threw it out instinctively. You said the rental property is not part of your FI number. And why is that, right? It's because it's hard to liquidate the property in chunks or pieces and then actually spend down or deploy it. And so the feeling of its contribution to FI will either come in lumps as you exit that portfolio. or over a lengthy period of time, like 10 years down the road, as that mortgage stays flat, but the rents grow with inflation, yielding more and more cash flow, and then the big payoff, the big lump in cash flow, once it actually is completely paid off, right?

And that's the challenge with rental property investing. That leverage inflates your returns. That's why we do it. That's why we think we have a shot at the 15 to 17 percent returns, especially in those first years while it's highly levered, but don't get the cash flow. You can't count on that cash flow in the same way until later. on when it actually underperforms a stock market. That comes back to, you know, that same mental problem that you're articulating that you

immediately instinctively throw out. And I think a lot of people agree with you and do that the same thing with their portfolios. I think it also applies to that retirement account, million bucks as part of that five number. I think as many or more people will have that same block of dismissing that money, that million bucks in the retirement account, that you take for granted as part of that five number. And I think that's the fun psychological issue with the middle class trap. It's a real problem for folks because it's a psychological problem, right?

There's no real mechanical issue. Like, as a real estate investor, I can't access the 500K in that purchase, either tax advantaged or in a reasonably fast way, 30, 60, 90 days, depending on how I price the property and sell it. And there's no real reason I can't access the million bucks in the retirement accounts as somebody who's been a student of financial independence for the last 10 years. But people don't. They can't.

It's just out of their grasp. What's your reaction to that? Just like on most of this stuff, we agree on 90% of this easily. This is a psychological issue. I had multiple points. I think at least three to respond to there. And all of it does come down to psychology. I think that's the biggest thing we can agree on.

And that's what we're here to do is to help educate people. That's the most important part is most of the people, whether you think you're trapped or fell into a trap, however you define the middle class trap. In this case, this person with the $2 million net worth, you're doing wonderfully. You're doing absolutely wonderfully. I think we all need to take a real deep breath. This doesn't mitigate the fact that we can still have this wonderful conversation and we can talk about the minutia.

But you need to take a deep breath, okay? You're doing great. You have options. You are making decisions. And I think even by virtue of not making a decision in some cases, you're actually making a decision, right? So it's opportunity costs in the sense that I think the rental property is got that you talked about.

Like that's a decision to do that. But that decision, especially when there's not cash flow, that impacts your phi date. It just does. But you're doing that with eyes wide open. Because like you said, with leverage, you expect, I think the numbers you said, 15, 17 percent annual return is not impossible. Hopefully I'm not putting words in your mouth. You should be averaging that in the first few years of a 30-year hold with rental

property real estate investing in average conditions. Now, you might get a lot of lucky. If you're not expecting higher than average returns, what do you do it? Absolutely. And I think, and that's the cool part, right? So like these people, we're all making decisions. But we need to understand they come with tradeoffs sometimes. Now, clearly, if you are getting 15 to 17 percent,

you're going to get to five pretty darn quickly, I would imagine. But these first years, when your cash flow is minimal, it is what it is. But I think people just need to understand the nuts and bolts, right? So like I had, and I'm in the process of selling, but I had two rental properties in Georgia, and they were paid off. I was netting. I think it was like $1,500 a month. Okay?

So about $18,000 a year, pure net income. And we'll use me as this proxy example of this $2 million. These are not my numbers in any way. But in that case, okay, my life costs $80,000, but I have $18,000 coming in. Okay? So in this case, I had $80,000. I have $18,000 coming in. I just simply subtract.

So in that case, I would need $62,000 from my investable assets, okay, because I have this cash flow. It's akin to a pension. People ask like, oh, I have a pension. How do I analyze that? How do I figure out what it's worth? Like, in most cases, there isn't a lump sum value for a pension. It's just this is what my pension is bringing in every year.

This is wonderful. There's nothing to stress about. You just take what is my life cost minus what my pension is. Okay. That's then what's remaining. And that then you multiply by 25 to figure out what are the investable assets I need. In this case, I would need $62,000. So I'd need a little more than what, 1.5 and a little bit of change million to reach FI.

But that's the beautiful part. But I'm making a decision. In my case, I didn't leverage Sky. I just paid these things off. they were super inexpensive. There was just a decision I made. And I did that knowing I'm going to get probably suboptimal return. I could have done better, I suppose.

But that passed the sleep well at night test for me. So that was why I made that decision. But I made it with eyes wide open. These are fundamental concepts. Okay. And you might think you're trapped because that's the other, Scott, your actual question was, okay, you've got all this money sitting in retirement accounts. Like, is that trapped?

Like, we all know it isn't trapped. That doesn't mean we don't have a sense. There's this important distinction between the felt sense. and the psychological response to something versus the actual reality. And it would be very flippant of me to say, like, oh, the felt sense doesn't matter. Because frankly, I've spent eight and a half years on Chuzziah's saying the nuts and bolts of money are about five or 10% of the game. And the psychology is about 90 to 95% of the game.

Okay. So the psychology is critical. And I think that is why I'm thrilled you guys hit on this middle class trap thing, whether you invented or not, is irrelevant. here, but because people have this felt sense. It's not our job, and I'm not putting words in your guys' mouth, because you might genuinely believe that this is an actual problem. I do not believe this an actual problem. I know this is not an actual problem. But people still have that sense, because you're getting emails mini by the 100, or 103, as it may be, as the last count,

I suspect it's higher than that after our episode. And I know people who I met at FI events, who came up to me and said, Brad, I heard this episode on Bigger Pockets Money. I feel like I have the middle class trap too. And then I show them episode 475 of Chusify with Sean Mullini on all the myriad ways to take money out before you're 59 and a half. Because I think that's, Scott, that's your question, right? So this person has a million bucks in retirement accounts. And all they've heard, not from Chusify, and certainly I would imagine not from bigger bucks money, but all they've heard in real life is you can't get that money out until 59.5.

But the three of us know there are a handful of ways to get. it out. The three of us know that even worst case scenario, when you have somebody like Brandon the Medfcientists who I think is brilliant, most people think are brilliant, and he comes up with his surprising conclusion on his how to access money, he basically said the first thing is even if you don't want to mess with the advanced strategies, like the Roth IRA conversion ladder or the SEP distribution, the 72T, it still makes sense to max out your pre-retirement accounts and then just pay the early withdrawal penalty. So Brandon the Matt Fientist, who most people consider one of the most brilliant minds in the fight community has said, not only are you not trapped,

even under the worst case scenario of paying the early withdrawal penalty, you still come out ahead other than having put it in a taxable brokerage account. Now, that's not to say taxable brokerage accounts are bad. I think a lot of us, because our money spills over because we've filled up our retirement accounts and HSAs and things, we're going to put money in taxable brokerage, obviously, because we have money left over. But anybody who thinks that they're trapped in the, their retirement accounts. Like, you don't have to take my word for it. Take Brandon's word for it. Take when I brought this and, you know, I had Sean Malini, Cody Garrett, Chris Mamula, who are three really brilliant people, two CFPs and a CPA. Like, they've run all the scenarios. And when they

come up with it, the effective tax rate on pulling your money out early is, I think on Sean's examples, it was between four and nine percent. So it's minuscule. Brandon saying the worst case scenario is you just pay the penalty, you still come out ahead. So again, the three of our jobs, it's not to stoke fear. And obviously, I'm not saying you guys are doing that in any way, shape, or form. You're wonderful. You're two of great friends of mine. But it's not to stoke fear.

It's to say, like, okay, look, you have this felt sense that your money is stuck. It's not. It's simply not. You're doing great. You have plenty of ways to access this money. And that is, I think, the point that we had originally wanted to make, because we have so many people in this community who are so reluctant, to sell their stocks in retirement. They're so reluctant to believe that the 4% rule works. No,

it's too high. You have to go lower because our timelines longer. Yada, yada, yada, yada. This felt sense that you're talking about is very real to a lot of people. There's a lot of people who agree with what we're saying. We have this perception that we are trapped because we don't want to pay that 10% penalty. I love how you just flippantly say, oh, you just pay the 10% penalty. I don't want to pay one percent penalty. Well, sure, but that's an emotional response. Well, there's a lot of emotions around money. It's like the people who don't want to pay their taxes. It's like suck it up. You live in a society. Like you can think whatever you want to think no matter how stupid or intelligent it is. But like, you know, I don't want to, I don't want to give

my money away. But like it's similar to like social security. Like could I do better with my 15.3% that it goes into it on both sides. Like, yeah, of course I could. But I understand I live in a society. right and like this is the best for society like I don't want to pay the penalty but my option isn't like cry in my blankets that I don't want to pay it or pay it my options are okay I can put it in my taxable brokerage from up front and not get the tax deduction or I can do what a lot of people think is optimal and put it in my tax deferred accounts and then worst case scenario Mindy you know I'm not saying I want to do this obviously just like you don't want to do it of course like but that's the worst case scenario and again

I didn't do the analysis. So I'm not trying to stand up here on a hilltop and say, look at how brilliant I am. I'm deferring to people who I think are smarter than me, frankly. And, you know, Brandon's analysis was even under the worst case scenario, you're still coming outhead. So again, I'm going to defer to him. Of course, if you want to bring him on, that would be brilliant. I'm not trying to stand here as the expert on the numbers. Here's my challenge to that.

Because I completely agree. The math is the math. There is no doubt. There is no arguing, right? There are ways to access this money. It's there. It is not a real, if you want to call it, in a sense that there's no true barrier to doing this that is not psychological. Now, let's talk about that psychological barrier because Mindy has never sold an investment position for personal consumption. I have never sold an investment position for personal consumption.

We had Big Earn on this podcast a few weeks ago, thought leader and theorist in this space. He has never sold a investment position for consumption. 81% of Bigger Pockets Money listeners for a YouTube poll have never sold for consumption. I understand that a large chunk of those people are in the accumulation phase and will one day potentially. So I ask that question. We had Bill Bangan twice on this show. We've had Michael Kitsis. We've had you.

We've had Big Earn. We've had J.L. Collins. We had the guys who actually did the fundamental research behind all of this and built the models with their bare hands or bare spreadsheets, whatever the appropriate phrase is there. people can't do it and I can't do it and Mindy can't do it. Brad, have you done it? Have you sold an investment position and use the proceeds of it for personal consumption in your life? No, I definitely have not. And I'd love to talk about that. But I think there's a fundamental distinction between camped and haven't yet, right? And I think there's also somewhat of a selection bias in terms of bigger pockets, listeners. And if we're talking cash flow, clearly selection bias does come into that.

So I think, again, everything comes down to choice this guy, right? So if we need cash flow, then or those, the 68% of people who said that, like, they might need to redefine FI for them. And I think the other critical part, right, about psychology and FI and personal finance generally is like, you have to understand yourself. Okay. So if you don't believe that you're going to be able to sell assets at some point, that they're just essentially going to accumulate forever until hopefully you pass away.

way, let's say, north of 100, and it's just going to, you know, tens of millions of dollars are going to go to your errors. Like, what's the opportunity cost of that? That they worked many years for more additional to get the cash flow to cover their assets when they had millions and millions of dollars in investable assets because they couldn't bear to sell it. Like, that just seems silly to me. But silly or not, it's irrelevant.

Don't invest then. And just get real estate. Find things by businesses that have cash flow. Like, make a, if you don't genuinely believe that you can sell assets, the fundamental underpinning of the financial independence as most people define it. And it's not everyone, of course, because Sky, and many of you of course know this. Like, there's no one path to fight. There's a million paths to fly. If you wanted to have zero dollars in the stock market and just have businesses that you own or rental real estate, that's wonderful. Do it.

Laugh all the way to the bank. Laugh all the way to five, however long or short that is for you. That's great. I'm thrilled for you. I'm not just. trying to say one way is right. And that's the polar opposite of what I'm trying to say. I'm just saying if you don't genuinely believe, like the fundamental underpinning of your entire saving and investing strategy over 10 to 15 years is actually going to work for you because you can't bear to sell something, then you're probably on the wrong path. You probably have done something fundamentally wrong for your own psychology. And that's fine. That's the next piece. Why is that a problem? Right? Because these people have accumulated millions

of dollars for the most part. They're approaching that two and a half million mark on the medium point if they're having this problem. That's a good thing, right? The more I learn about this, the more I talk to hundreds of people in this community, the more I think that the 4% rule is the beginning of the end. How do I really want to think about this next wave here? And that's when the things open up. But to actually enjoy Tuesday, we at Bigger Pockets Money, have to do something else on top of that in essentially 100% of situations for us to actually fulfill our purpose here on the podcast and actually give people that freedom, that sense of freedom. So for full purpose, tell me more about that, Scott.

I believe that bigger pockets money, our job, Mindy and I, is to help people build a, at least one, but now we're circling around this $2.5 million net worth number, and then actually use that wealth to leave their job and do the next thing. That is, that's meaningful to them. They can stay at the job, whatever, but actually feel that freedom piece. And I feel like we're doing an increasing goodly good job of helping people actually achieve the numerical goal. And yet there's so many people that are just stuck despite having achieved that. That's the thing that's fascinating me and why we're talking about this today. Isn't that sad? Like words matter. And that's why like it does somewhat concern me that we're pointing this like a trap. Because again, like these

people aren't trapped. They have investable assets. They have multiple ways to pull them out early before $15.9.5. Or if they have assets in a taxable brokerage account, they could just sell that also at any time they want. And the actual issue here is the psychology, guys, right? Like, why are people not feeling good about this? And I see this all the time. People build layer upon layer upon layer of conservatism into their numbers,

and they're still scared. And this is the last I heard. So you heard him more recently. And I'm setting these up as hypotheticals. Biggeron says 3.25% is the safe withdrawal rate that's essentially almost zombie apocalypse proof. Well, I don't believe Big Earn. I'm going to do 3% safe withdrawal, right? Like, my expenses are actually $60,000. Well, I don't believe that either. I'm going to gross it up 33% and make it 80,000, right? Like, Social Security, every rational expert says, even in a worst case scenario, it's going to be 60 or 70% of payouts. I don't believe any of those experts. I'm going to count it as zero. It's like we're doing stupid thing upon stupid thing and then still working extra year. years. Like the only resource that we have that actually matters is our time because we can't get it back.

So we're building conservative upon conservative, upon conservative. And then we're still working more. It's like it's the height of lunacy. This is what frustrates me. And like I don't know I put out 700 episodes. You guys have put out many, many, many hundreds of episodes probably bordering on that number or maybe higher. What are we missing? I've spent most of my time on the psychology, not on the nuts and bolts of money. And still people are worried. We need to understand why. Is it just like, Humans are scarce, we're worried about scarcity. Like, that's what it is. I don't know, but it's frustrating.

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Thanks for sticking with us. Brad, I'm going to ask you a personal question. Did you grow up financially secure in your young formative years? Secure, yes. We certainly were nowhere near wealthy, but absolutely secure. Never questioned that you were going to have food on the table. It was never a question of, oh, is my electricity going to be on when I get home from school today? I think there's a lot of people who grew up differently than, and all three of us grew up the same way.

I didn't realize that there were some portions of my childhood where money was so tight we might have had to move in with my grandparents. But there were times like that. My parents never let me feel insecure financially. And I think that, unfortunately, there's a lot of people who grew up very financially insecure. And there's no amount of reassurance and math and numbers and experts that we can give them that will overcome the financial insecurity that they grew up with that is such a deep part of themselves. They can't get over. And I certainly get that and I'm deeply empathetic to it. Anybody who's listened to me on the podcast knows that I'm not someone who just flippantly dismisses

people's backgrounds, the sense of where they are with their money or their own psychology. I'd like to believe people understand that for me. So anyone believes otherwise based on the last 30-some-odd minutes, that is certainly not the case. And Mindy, I deeply understand that. I think that speaks to a portion. But, you know, Scott and the numbers we're seeing is like, this is the vast majority of people are worried that they're not going to be able to sell or that they're going to have to do something else and have to, have to being the operative word there, right? And Scott, I love the mission, obviously. That's the same mission that I have. The same mission we all have, which is to help people feel secure. First off, the nuts and bolts to get to that, whatever that

number is, we'll say 2.5 million is what you guys are having people shoot for, then to feel confident to do what they want with their remaining precious life. Hopefully, it can mean earning money. And if you earn money, then that's wonderful. Be happy with that. But the nice thing is you don't need to. And I think that opens up options for people. that enables them to live a great life. So my kind of take on the whole thing is what I want people to do is to live into a wonderful life, to design a future that they want to live into. And I hope that people aren't unnecessarily getting stuck in a job that isn't serving them

because they are under the basically misunderstanding that their money is trapped or they believe they're never going to be able to sell their assets. It's like, what are you doing this for them? Like find a different asset allocation, which again is wonderful. Get real estate that kicks off income. Buy businesses that you'll get dividends from or net income as a business owner. But don't keep plowing money into like many, you know, you said on our episode, like just because I heard J.L. Collins or I read a book that said put it all on VTSAX.

You have to know yourself, right? Like that's the most important part of life is understanding yourself. Like if you believe that you will never be able to sell your assets, then you have to have a problem from the outset here in terms of reaching five because you're always going to need income probably from a job forevermore. Or you're going to get so wealthy that the one and a half percent dividend from VOL covers your expenses, right? That actually seems to be the solution that some percentage of people who face a situation actually go on ending up to achieve because it's, you know, after you double twice more, after your five number, it becomes, you know, that happens by

definition. Right, but that's 18 years down the road. Doubling twice more, you're 18 years down the road in most cases. If you're talking like an 8% return using Rule of 72, right? And it's like, that's a lot of time. If we're lucky, we get eight, nine, maybe 10 decades with advances in health, like on this planet to throw 18 of those years, that seems, that's a bad trade to me. Here's how I frame it. Like, if I take this to the problem here, right, and I say, okay, let's, let's try to math this psychology, which doesn't really work. But let's, let's try it for a second here. We have the 4% rule as the premise for our calculation. Has anybody actually retired with the 4% rule?

Then we get an answer from somebody and they're like, oh, yeah, I also got a rental property and I also got this, and I'm Wi-Fi at the same time. You know, so, okay, you're not really like, that's not really the 4% rule here. Come on, guy. We'll occasionally get close, but we never really find that mythical this person retired early in their 30s or 40s using the 4% rule with basically nothing else. We really, we haven't found that person. Maybe you have, Brad.

I know one person, precisely one. There you go, right? So it may exist, but they're so rare. out there. And typically they even go on to then earn more money with something after three, four years go by. So, okay, so we have that premise. We have the fact that I want to acknowledge the mathematical validity of selling equities instead of harvesting cash flow, right? So it is more efficient for the companies of the SMP 500, for example, to reinvest their own cash flows in growth or buyback shares or pay down debt that are on their balance sheets than to distribute

it as a dividend to the holders of that. And that is your cash flow. It is an owner. It is still inside the pool of corporate equity in America or whatever index you're investing in. It's not like it is not being distributed to you. It's not if that value is not going to. It is there and is retained probably more efficiently than if it had been kicked out in a dividend. And yet, we also know that people just can't bring themselves to sell down these equities. And so I think that that comes back down. I agree with your conclusion here. How do you think about it? You build a portfolio that you will access early in life. I will not sell VTSAX at 35 and live off of the proceeds in there. I can't do it. I can't

mentally bring myself to do it. You know, that's part of the reason. There's other reasons in there that this year I sold chunks of it and I bought paid off rental properties in there because I'll spend some fraction of the cash flow a little bit more than half of the cash flow. generated by my rental property portfolio before I would actually liquidate even my post-tax holdings in there. I don't have this 401k problem because I'm relatively young and I haven't had the extra decade of contributions to go by and have a double once or twice inside my tax advantage accounts. But I think that's the answer. I think it's got to build your portfolio. And that portfolio, I think, involves a hefty cash position. I think it will involve a paid off primary home,

then exclude from your buy number, but include in your net worth statement. And I think it will include a smattering of a diversified portfolio of assets, which for a lot of people will include real estate. Some people will include private lending. A lot of people, almost everyone listening to this will include some allocation to stocks. And then I think that there's a creative element to it. It's like we have a couple who trains horses and sells them or whatever. But like everyone's got this like unique little thing that's relevant to their situation, a former house or a piece in a small business or that pension from the military or whatever. But it seems like everyone talked to has one ace in the hole that they work towards over some people.

at a time. That's a little bit quirkier or unique. Yeah, Scott, and I think that's fine. Absolutely. Whatever works for you is what you have to figure out. That's where we spent the last 15 minutes talking about, certainly. But I do want to take a step back and just kind of give a little plus one for just the standard method. Again, people are less inclined to sell equities because frankly, most of us have been saving. We are savers. We have been saving for our entire career. And it is mentally challenging to sell. Well, there are plenty of things that are mentally challenging life that you just get over because you're an adult and you've set a plan and this is part of the deal.

Okay. And I think one of the cool parts, like there are advanced five strategies that we all have spent nearly a decade talking about on our podcast that I think should not be overlooked. So we've been kind of saying like, okay, well, you don't feel like putting money in your retirement accounts. You don't have to. And that's true. You don't have to.

But what I think is really cool is, okay, if you do decide to put a lot of money to, let's say, max out your 401k, max out your HSA, max out whatever pre-tax accounts you can, what you've done is you've gotten a tax deduction in the current year. Okay. So in essence, that income that would have been income and taxed at your highest marginal rate is now 0% and $0 in tax, right? Currently. Now, the way that accounts like for traditional 401k's and IRA's work is when you pull that money out at some point down the line, that is a taxable event, dollar for dollar, what you've pulled out goes on your income tax return as taxable income in that current year. But I think some of the cool things about the five community. So,

all right, let's look at somebody, like you said, Scott, they've got a paid off mortgage, right? If you have a paid off mortgage, you have paid off cars, most people's lives don't cost that much, right? So the real neat thing is, let's say your life costs this $80,000. okay and we now have just purely $2 million in in investable assets all in IRAs okay or 401k just for the ease of this example we'll say they're 59 and a half and and they can take it out without the penalty but but we can we can adjudicate that for sure they pull out 80,000 and I know that's not the premise of early retirement but just I'm just trying to set up this as a simple example so they pull out 80,000 from their IRA their traditional IRA right so 80, so 80,000

dollars goes on their tax return as ordinary income. But let's say this is a married couple and they just get the normal standard deduction. So they pulled out $80,000 and now that would go as taxable income on their tax return. But in this day and age, you get this massive standard deduction, right? So $30,000 for a married filing joint couple. So $30,000 of that is just $0 in tax. Okay. Then we talk about the 10% bracket is the next almost 24,000. This isn't 2025. It's 23,850. And then the remainder of that money gets taxed at 12%. So they had a full three-eighths, 37.5% of that is taxed at zero. And then the remainder is taxed at 10 or 12%. So where I'm just making this up off the top of my head, but that's probably about a 7% effective tax rate. So

effective tax rate is just the total tax paid divided by the total income amount. this case. Okay. So whatever that tax amount would come out to divided by 80,000, that's probably somewhere in the vicinity of 7% if I'm doing my mental math right. That's not too shabby, guys. That's not too shabby at all. We got our tax deduction at our highest marginal rate when we were putting the money in. And we just did the worst case scenario. A full $80,000. I think, frankly, most people who have $80,000 of annual expenses in their normal lives, once they paid us to their mortgage, that goes down a bit. They paid off their cars. That goes down a little bit. I don't think frankly, most people, after you exclude all those other things that most people's lives aren't

costing $80,000 in the fight community, but that's neither here nor there. Because, you know, frankly, I think just the fundamental premise of like, okay, even somebody making $200,000, well, they're at their highest marginal rate. They're paying a significant amount in taxes to get to FI in 15 years or thereabouts. You have to save about 50% of your income. So just doing the real simple math. Like, your expenses by definition can't be much. more than 80,000 on a roughly $200,000 income if you're getting to fine 15 years. It's just simple math. And people don't really think about that.

They just think, oh, my income's so high. Like, of course my expenses are a lot. But like the math doesn't math, right? Like if you've gotten to fine 15 years, you had to save 50% of your income and you have taxes on top. So, you know, just really simply like, I think their expenses are actually going to be dramatically lower than that. But even just saying it's that high.

The worst case scenario is like a 7% effective tax rate. And that jives with Sean Malini's actual numbers that. he did. And this is somebody who's making 200 grand. They'd be probably what in the 24, 32% effective bracket, the tax bracket on the front side. They just made out like bandits, absolute bandits. Guys, this is what we wanted the fight community. We're really smart. We're really good at this. We're good at life. Like, you just have to sell. Like, you're doing great. You're not trapped. You are flying high. You're doing wonderfully. I promise you. I think our community just needs to realize that it will cost you something to,

to access all of this money that it didn't cost you anything to put away in the first place. Deferred means, I looked up the definition, put off an action or event to a later time, postpone. It does not mean avoid altogether. And an effective 7% tax rate is higher than the 0% that we want to pay, but it's way lower than it was when you were putting it in there in the first place. I think that there's just a lot of reluctance, hesitancy, The outright refusal to pay taxes or penalties on this money that they have put away, we as the educators, the content providers, need to be doing a better job of saying, you know, you are going to have some tax burden in retirement.

And it's okay because it's going to be a lot less than you would have if you paid all the taxes when you were making the money. I think that's really well put in many. I set up this worst case scenario. I think in most cases, people are going to pay zero percent on the way out or pretty darn close to zero because again, this is the worst case that I could come up with just off the top of my head. But let's be clear. Most people who reach five, and it's funny, Scott, because you alluded to this before. People listening sometimes get it. Like, we are talking to literally hundreds of thousands

of people. And when I say, like, declaratively, like, most people are virtually all. Like, that doesn't mean in your anecdotal little case that, like, you're wrong if you don't fit into what I'm saying most people. Like, that happens. That's life. Right. But when I say, like, the vast majority of people, I think legitimately 90 plus percent of people are going to fall into this. Like, if you have a high enough savings rate that you've reached FI in 15 years, I think just looking at Mr. Money Mustache is shockingly simple math article, somewhere in the order of 50%. So 14 to 17 years is your path to FI.

In most cases, in the vast majority of cases, you're going to have assets in taxable brokerage accounts or in cash or cash equivalence. So this example, this worst case scenario of having all of your money, every dollar supposedly quote unquote trapped in your retirement accounts. I just don't think that's practical for for most people, the vast majority of people. We don't get any perfect examples out there, but we got hundreds of people talking about the spirit of that, like something along that ballpark of that, you know, two million would probably be in the little bit of the upper range of that of what we got in there. But, but that two million net worth with 500, 500 and a million, 500 in home equity,

500 rentals, a million in advertising. I hear you, Scott. And let's come back to that in a minute, because that's important. But just to, to, to, to, to, to, round up my example. It's like, I think in this case, so they need, they need to cover 80,000, right? And we've said they get $30,000 just free. Okay. You don't want to pay your taxes? That's great. The government just handed you $30,000 of free taxable income every year. Okay. And then most people have some money in taxable brokerages. They put some money maybe into Roth IRAs along the way. They have tax diversification. Most people do. Then that's again, advanced five strategies. This is not a trap. This is winning. Okay. So you have multiple different

ways like we know you can tax gain harvest so i had cody garrett on the podcast to talk about tax gain harvesting because the government again in their infinite kindness to people like us and investors they've given a zero percent long-term capital gains tax bracket up to i think in 2024 it was 94 thousand 50 dollars so it's probably been adjusted by maybe a couple thousand dollars in 2025 it you know we can look that up but it's it's largely irrelevant but that's your taxable income up to 94,000, you pay 0% on long-term capital gains tax. Okay. That's on the gain, guys. This is the critical part. Let's say you bought securities for $20,000 and it has risen in value to $70,000. Okay. So when you sell that, you had a $50,000 unrealized capital gain. Now, if you've held it for

more, 365 days or more, it's long term. Okay. And then you get these preferential rates. So again, the government showers benefits on investors, wonderfully for us. So this person had a $50,000 unrealized capital gain. So the current fair market value of $70,000, less the basis that they purchase it for of $20,000. Okay. So the delta there, the difference is $50,000. Now, when they sell that, they sold $70,000 from their taxable brokerage that had

that $50,000 unrealized capital gain and they took $10,000 out of their traditional IRA. Normally, these are taxable events, right? You're telling the government. please tax me. I just took $10,000 out of my IRA. Please tax me. I have a $50,000 capital gain. Please tax me. Okay. Now, I have $80,000 to cover my life expenses because I got the 70,000 proceeds and I got the $10,000 from the IRA distribution. Okay, so I can cover my life for this year. Now I have 60,000 that goes on my tax return as taxable income, right? Because I have the $10,000 and I have the $50,000 long-term capital gains that I have realized. They went from unrealized to realize. We just did a great episode on this.

with Mark Livingston, who provided a very detailed spreadsheet and presentation on marginal taxes and how until you get into the $20 million net worth and the implied distributions of that, the marginal taxes, it almost doesn't change the math at all on this front. So the tax problem is not really the issue. I think it's more, again, the psychology of selling assets and harvesting the liquidity in some sense. And it shouldn't be. And that's the thing.

In that case, this person, again, they have $60,000 of taxable income, supposedly on their tax return. Their tax liability is zero. because again, we get showered with benefits. So we need to look at this and say, guys, we're doing great. We have all these strategies. You are winning at life.

But in order to do that, you have to sell some assets. I don't understand why we set a plan in motion for 15 years and then chicken out at the very end. Scott, to your point, that is, that's the issue. But we can't then further double down

and tell them they're trapped. And like Susie Orman style, like we're coming up with some bull. You're not trapped. You've just decided to be trapped for some psychological reason that's unbeknownst to anyone. Like, you have won. You set a plan. You paid zero dollars in tax on the front side. You have won. You should be dancing daily from the time you wake up. You've won.

We are at time here. Brad, that's a great parting remark there for this. Where can people find out more about you? If you want to follow me, I have a podcast, choose, like make a choice, choose FI. And yeah, I put out an episode every Monday. And Mindy, you were kind enough to plug my newsletter on my own podcast, which is great because I do a terrible job of this. So choose a vetto-com slash subscribe, or I think choose a vet.com slash newsletter, whatever you want to get you there. I put it out every Tuesday. I personally write it. And yeah, it's pretty good. Yeah, it's great. I will again take over for the promotion because you stink at that. Brad, like, oh, it's pretty good. No, it's great. It's my favorite newsletter. I read it every single time it comes out. I sometimes will respond.

Brad, here's a response to your thing. And you always answer me. And it's not just because it's Mindy. we've known each other forever, but you respond to everybody that sends you an email, which I think is really awesome. Thank you, many. I just subscribed. I wasn't subscribed before. I'm embarrassed to admit. Well, now you've got the best email on the planet. I'm going to send you lengthy arguments once a week, Brad.

Hey, do it, my friend. I love it. I love it. Anytime. You know that. Awesome. Well, thank you so much for coming on today. Really appreciate it.

True privilege to talk to you. I think it's about the third or fourth time now you've been on Bigger Pockets money. Yeah, it's been a while. So thank you guys for having me on. You know, I love you both. I love being here. So, yeah, this is fun. This is awesome, Brad.

Thank you so much for your time today. And we absolutely will talk to you soon. All right. That was Brad Barrett from Choose FI. Mindy, what did you think? I always love talking to Brad. I appreciate him talking about the felt sense, the idea that even if this isn't actually the huge problem that, you know, the word trap kind of indicates it is, it doesn't matter

if that's what you're feeling. And that's what I am seeing in the community as people are feeling. trapped. So I appreciate Brad coming in and sharing his point of view, but I still feel like we need to do a better job as a community of giving back with more information about your options. The 72T episode that we just released last week with John Bowen is episode 649. That's kind of a masterclass in 72Ts. And after recording that episode, I was so excited about the concept of potentially doing a 72T, even though right now. I don't actually need to. That was an option for me when I was trying to fund a house build

and I was really looking into that. Now I know that that's an option and it's not really that scary. It's not going to be this in perpetuity thing. You only have to do it for five years or until you turn 59 and a half. With that said, we also just recorded an episode that's coming out in a couple of weeks with John Bowen again about the Roth layer cake. And I would love for people who are feeling trapped to really listen to both of these episodes and see how those ideas can play into their financial strategy. Scott, that was kind of an advertisement for other episodes. What did you think of this episode with Brad? I remain convinced that this is a real psychological issue facing our audience, facing the people

in the bigger pockets money community and the financial independence space in a general sense. I believe that the typical person who pursues fire is a saver, is a producer, produces far more than they consume, does that for such a long period of time that their brain and their personality and their sense of self is identified with that aspect and they will have a tremendous amount of difficulty selling off for harvesting assets. I believe that the remedy for that solution is not more math or get over it and go and sell your stocks. I believe it is to build a portfolio that you can mentally actually draw down on. At some point, this is all mental, right? There is no real need in a lot of ways to spend more than $5,000 or $10,000 a year. If you want to live in a very rural area, be self-sufficient on there. And most people want more than that, and that's totally fine.

We live in 2025. Let's enjoy the benefits of 2025 in order to get there, which for most people will include a nice home and plenty of discretionary spending to eat how they want, including out a few times a week, and travel on a regular basis. Some people don't want that. Most people do. You have to get to a certain level of comfort with your portfolio. And that means accessing it and spending it in a way that that you can stomach. I do not think that more math and the more restatements of the 4% rule are actually going to get people over that hump. I think that that will get them more and more comfortable that that's the beginning of the end. And from there, it's totally okay to start a

business, do the extra side hustle work or build a portfolio that's not quote unquote textbook in there, the stock bond portfolio that people, again, like Brad, think is the only, not the right answer, but it's like, it's so ingrained that that's the fire portfolio to the point where he even dismissed the real estate equity. Like, that's a common thing for financial assets to not be in there. I think the community has to accept these alternatives and these other types of business, real estate and private lending or alternative assets that can actually enable financial independence. And I think that's what I'm going to explore for the next year here. That's how I feel personally. My portfolio has got to

generate the cash flow for me to feel truly comfortable spending it. I think that's an important point, Scott. I am a little more familiar with your financial situation than most people, and you're still not comfortable spending. That's an interesting take, and I don't think that's unusual at all. I'm comfortable spending. I spend a good amount. I'm just not comfortable selling off portions of my portfolio and using the principle to then spend on my lifestyle, and I don't meet a lot of people who are. I don't think you're an outlier in this space. You save and invest to get here, and now flipping the switch to spending and drawing down is huge. Remember when I was having a hard time spending money? Now you're selling stocks and you're selling your nest egg. You are presumably making

your nest egg smaller and spending that. I can see how that would give people a lot of anxiety. And this is a common problem in financial planning circles. This is not new to you if you're listening to this and having trouble with that. You are in the majority where at least two thirds of bigger pockets money listeners believe that they will have trouble or have to find out when they get there to see if they can actually sell off equity positions to fund lifestyle and consumption on there, especially, and I think it's going to be a more acute problem for early retirees than it is with even more traditional retirees. So I think it's a real problem. I remain unconvinced that this is get over it, answer to it and that the mentality is there. I think the portfolio and specifically

your liquidity position and the amount of cash flow your portfolio generates is what it will take to free mentally the minds of many people in this community, including myself. All right, Scott, on that note, should we get out of here? Let's do it. That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Indy Jensen saying, later, skater.