The Ramsey Show - App - How to Navigate Baby Step 4 With a Pension Plan (Hour 3)

Episode Date: July 15, 2019

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🎵 Live from the headquarters of Ramsey Solutions, broadcasting from the Dollar Car Rental Studios, it's the Dave Ramsey Show, where debt is dumb, cash is king, and the paid off home mortgage has taken the place of the BMW as the status symbol of choice. I'm Dave Ramsey, your host. Thank you for joining us. Open phones at 888-825-5225. That's 888-825-5225. Jacob starts off this hour in Washington, D.C. Hi, Jacob. Welcome to the Dave Ramsey Show.

How are you doing, Dave? Better than I deserve, sir. How about you? I'm doing good. I just had a quick question for you. So I just graduated from college this past May, and I have about only $11,000, $12,000 in student loans. Good. dollars in student loans good um a family member has gifted me over the years some stock that accumulates up to about 18 to 20 000 just depend on the stock price my question for you is should i use that and go ahead and knock out my student debt um or save it um because i'm getting married next spring and I could save it

and then eventually use that as a down payment on a house within a year or two of being married. Okay. Well, we teach people the data points that we have learned, and that is the shortest distance between where you are and becoming wealthy is to become and stay debt-free. Okay. I would never borrow money on a student loan to buy stock, and in a sense, I know that isn't what happened, but in a sense, it's the same thing, because every day that you don't use this stock to pay off the student loan, it's mathematically as if you borrowed money on the student loan to buy stock.

Does that make sense? Yeah, I can kind of see your point there. Yeah, and so what do you make a year? So I'm actually in the transition of getting a new job potentially to where my pay would be right short of 40 a year. Cool, All right. And so what I would tell you to do is to become debt-free and use the balance of that money to build your emergency fund of three to six months of expenses.

And then at that point, if you wanted to not start investing yet and instead start piling up money for the wedding, the marriage, and the down payment on the house, and spend the next year doing that very aggressively with a budget where you're living on a plan, where your money's being very intentional, then that's going to be okay. Now, if you do not follow through, if you do not live on a plan, if you do not live on a budget and make your money behave, if you do not later start investing, if you don't save some money, instead you spend all your money goofing off over the next year,

and you come into this marriage completely broke with no down payment for a house, and now your wedding is a new debt, and all of those kinds of things, then my advice was bad. But my advice presupposes that you're going to be wise and intentional with money from this day forward. Yes, sir. I plan on it. I've been using every dollar for about four months now. Hey, there you go.

That's exactly what I'm talking about. Perfect. Yeah, so you're making your money behave already, isn't it? It's very enlightening. It shows you what's happening with your life, doesn't it? Yes, it does. Yeah, very cool. Yes, I would cash in the stock and finish up through baby step three.

That's your only debt. Is it the student loan debt? Yes, sir. Perfect. No car debt? No car debt. And as far as I understand, my fiancée is going to be coming out of school with that free as well. Amazing.

Okay. Well, if she's your fiancée fiance then you need to have deeper discussions about that to be very sure so that everyone knows where everyone is and by the way you can tell her you have a fully funded emergency fund and you're debt free and uh now then the person who gave you this gift the grandfather the uncle or the aunt or whoever it was that gave you this stock gift all those years ago, you have honored them by using it wisely to build wealth the fastest. Does that make sense? Yes, sir.

Get after it, man. You're on the right track. James is with us in Omaha, Nebraska. Hi, James. Welcome to the Dave Ramsey Show. Hi. Thanks for taking my call. Sure.

What's up? Well, my wife and I are both teachers, and we're on step six, and we're just paying down the house. We've got about $34,000 left on a $220,000 home. Way to go. Thanks. My question is, we're paying that down and then contributing to our 403Bs and our NIPERS accounts and Roth IRAs, but our dream is to one day retire, hopefully when we're 55, when we're eligible, and move someplace warm. We live in Nebraska, so we're wondering what we should invest in after we've paid off our house

that we could pay off a second home, possibly buy it before we turn 55 and retire. I would not buy your retirement home until you retire. Okay. I would just sell your house and go buy it. You'd have $200,000, $300,000. By then, it'll be more than $200,000. Whatever your personal residence is going to be enough to buy your retirement home, because you're leaving Omaha, right?

Yes, that's the plan. Yeah. 55, sell your house. How old are you now? I just turned 36, and my wife's 38. Okay. All right. Yeah, so your plan is 20 years from now, that $200,000 house will be worth a million dollars.

You'll just sell that million-dollar house and move to wherever you're going to move to and buy a house. No, I would not buy a retirement home prior to that in planning for all of this. But you probably do need to start doing some what we would call bridge investing, back to your question and that would be what you're going to eat off of before 59 and a half because you can't access traditional retirement plans before 59 and a half and so you know you you do want to have some other investments that you build of course when your home is paid for you can do that a lot of different ways i have personally done only two things i've just done mutual funds that are not in a retirement plan. And I typically do low turnover mutual funds, which means they don't sell the stocks inside the mutual fund very often.

And so it doesn't activate any taxes to mount anything until I sell it. And so it grows without any taxes on it, which is really nice and then i buy real estate residential or not residential rental real estate some of its residential that i pay cash for in my immediate area and you might build up a portfolio of real estate um okay the only other thing i would ask you to consider is this um you are planning 20 years from now to leave an area because you don't like it. We just don't like the weather. Our family and stuff's here. Oh, okay.

Your families are there. So what would keep you there? Why would they not keep you there after retirement if your family is there? Well, my sister has moved away. My parents, both of our parents are are still alive and in great health right now but i mean my mom's health starting to go down so being around being near your being near your parents and maybe if you've got kids raising them near their grandparents is more important to you than the weather thing and that makes sense okay that's logical okay

because it just sounded like you were waiting 20 years to live your dream, but right now you've got a different dream and you're planning your second dream. I like that. That's smart. But no, I would not recommend buying a retirement home prior to retirement. I would just get ready to by getting your house paid for and building other wealth. All of that can be used to buy the next house when you take that encore step at 55. Good question, man. thank you for joining us

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Hey, Brian, what's up in your life? Hello, Dave. Thank you for taking my call. Sure. What's up? Okay. I work in law enforcement, and I have a pension plan. And they take away towards the pension 10% of my gross income. So we just got done with Baby Step 2. We are debt-free.

Good. Way to go, man. It's a blessing. Thank you. And I thank God for the ministry that you have done, Dave. It's amazing what you have done. And congratulations on your new building, by the way. Thank you, sir. So when I get to Baby Step 4 and start my retirement, how much of 15% should I do?

15%, 10%, 5% knowing that I have a 10% coming out of my growth? And should I take it out from my net or my growth? Well, I always calculate everything on gross revenue, I mean on gross household income. And it's 15% of your total household income is going into some kind of retirement. And as far as the 10% that's already coming out um because you don't have control of it or access to it until you retire and you don't have control of how it's invested i don't count it completely in other words i don't say okay you are already putting in 10 you only need to put in five percent more i i would probably say you need to put in uh i might count it like half like so count it

count the 10 at like five you see what i'm saying okay and then i'd probably put in a fresh 10 that you've got control of and that would be in roth iras roth 401ks if you got a match in a 401k at the police department in addition to the pension i don't know if you do or not whatever's available to you we have we have we have a 457 and i'm not too hot about that yeah i'd probably go to roth iris first does your wife work outside the home no she doesn't stay at home but i did talk to them vest uh vest a pro and she came down to my house and she walked everything through me and i'm already set with her and we once we get our Baby Step 3 Foundation set, I'm going to hit her up and start the process.

And like you said, do 10% of my growth. All right. Very good. Good for you. Good for you. Thank you for taking my call. Hey, man. Get after it.

That's the answer. Perfect stuff. Chris is with us in Kansas City. Hi, Chris. Welcome to the Dave Ramsey Show. Hi, Dave. How are you doing? Better than I deserve.

How can I help? Okay. Well, I'm a public school teacher. I'm 59. I left a job that I had for 31 years three years ago, took a job in another public school district. It didn't work out. And so I'm still looking for a full-time teaching job. My income source is a state teacher's pension

of about $2,600 a month, plus whatever I can earn substitute teaching. My health insurance is a low premium, very high deductible. It's a short-term policy. But I don't want to stay on this kind of health insurance thing until I'm 65. So I just want to know if I'm on the right track or if there's a better way to handle this health insurance issue.

It's a weird spot. Yeah, I mean, you don't want to to i always try to avoid making my career decisions over long periods of time based on health insurance um right you have sometimes you have unusual situations where you have to particularly on a short term um have you shopped just the open market have you called an insurance broker like a gone to health insurance at davramsey.com and talk to one of them let them shop it for you just as an individual policy no i haven't yeah sometimes some of the states have like blue cross blue shield as an example or others where the individual policies are are um if you're healthy they're not outrageous

the policy i have now is blue cross and it's it's an individual policy i'm just paying for it myself oh i'm sorry so what's wrong with that i misunderstood i thought they were furnishing that no no no no i'm not getting benefits anywhere because substitutes they don't provide benefits for anything like that oh i see and so your your your concern is what then well my concern is long you long, you know, if I come up with, you know, say I get cancer or something, and then I'm stuck, you know, this short-term renewable policy, if I try to renew that, then they're going to say, well, no, you're a pre-existing condition. You're a cancer patient. We won't, they won't, you won't be able to.

No, under the current Obama Act, they have to renew it. Yeah, but if it's private through Blue Cross, won't that... If it's private, they have to renew it. Really? Same thing. Yeah, they have to keep you once you're in. They can't boot you out, because otherwise you would create groups of insurance that only had well people in them, and that's not the plan.

That's not how Obamacare was written up, as I understand it anyway. So double-check with your agent and verify that, because you don't want to take a radio answer from some guy and it'd be wrong. But I think that you're locked in once you're in. I don't think they can boot you out. Now, it is going to go up based on your age, not based on you medically requalifying every year. But to my understanding of the act is that you don't have to medically requalify annually. And they don't have the ability to just kick you out based on insurability.

Now, if you left that policy voluntarily, went to another one, yeah, if you had lost your insurability, that could get you into a real mess. Johnson is with us in Charlotte, North Carolina. Hey, Johnson, welcome to the Dave Ramsey Show. Hey, Dave. My wife and I have a detached garage on our home, and there's 700 square feet above it that's unfinished, but it's kind of like pre-wired, pre-plumbed, ready to go. I'm wondering where in the baby steps would it be appropriate to finish that out?

And then also, are we at risk of overbuilding a neighborhood? We're kind of already on the high end of our neighborhood. I know you say never to overbuild. Um, you know, our house, we, we paid, uh, for 77. We owe about three 90 and it's probably worth around 600 right now and with this addition you know it's going to put us in the one percent of houses in our neighborhood we are in a kind of a unique situation because we're in kind of a historic area of downtown charlotte so we're super close to the city and and homes just can vary wildly and the price is just depending on their age and size. The zoning allows for the separate unit? Yes, sir. Okay. Well, I would finish it only after baby step three,

and I would finish it with cash. Okay. And then as far as overbuilding the neighborhood goes, you might make enough cash flow on the rental to justify the investment even if it didn't increase the value of the home that much. And so let's say, what do you think it'll take to finish it out i'm hoping to do most of the work myself um so i'm guessing 20 to 25 okay say 30 000 bucks as an example sure what would it rent for $12,000 to $1,400. Okay. So $12,000 a year into $30,000.

The third year you're making money, right? Mm-hmm. Mm-hmm. And, I mean, $1,000 net after some expenses on the tenant and some vacancy on the tenant or whatever. So $12,000 a year on a $1,200 or $1,400 rent, $1,000 a month net. $36,000 is three years.

You got $30,000 in it. You made money halfway through the two and a half years. At the 30th month, you made money. And so you might look at it just that way and say, well, we know we're going to be here another decade or so unless something just really weird happens. And so we're going to have about seven and a half years of cash flow to justify this regardless of what it does to the value of the house. Right.

And that would make sense if you want to do it that way. Now, if you think you're going to move inside of 30 months, then it becomes much more of a concern that you would even get your money back out and you wouldn't fool with this. Is that logical? Yes, sir. Thank you very much. Thanks for the call, man. This is The Dave Ramsey Show. Thank you for joining us, America.

This is Common Sense for your dollars and cents, teaching you to live on less than you make, a concept Congress can't grasp. Kevin is with us in Boise, Idaho. Hey, Kevin, welcome to the Dave Ramsey Show. Hello, sir. Thank you. Good. How can I help? What's your feeling on selling a house that's paid for, no debt, and

selling it and carrying the note on it? I have chosen to never do that. And the reason for it is simple. you can make more money on your money than they will pay you more you know current mortgage interest rates are three four percent right and i can you know if they give me my money i can make more than that with a lot less hassle i can make more money just renting that same house, and there's very little difference, other than the fact that a foreclosure is much more difficult than an eviction. So maybe at that point, go ahead and use it as a rental to generate income versus...

Yeah, I mean, you'll make more money renting it than you will selling it on payments. And you can go up every year on your rent. You go up every year. When you sell it on payments, you're locked in, right? Yeah, that's true. I mean, 20 years from now, you're still getting 4%. Gotcha. Yeah.

Okay. I didn't think that part of it through. Yeah. And, you know, here's the thing. If they don't pay, you've got a problem with either situation, right? You've got to evict or you've got to foreclose if they don't pay, right? And in the case of this, a foreclosure is much more difficult in every state than an eviction is. And so I just have chosen not to do it.

I can make more on my money. I get the benefit of the house going up. If I'm going to collect payments on the stupid house i might as well own it that's true so well i guess leave it as a rental and then uh go away would you be the property manager would you be willing to pay somebody eight percent of the rent towards the uh to take care of it for you is it um well i might i might sell it i might not rent it number one depending on your situation okay you may not want to fool with the collecting of payments business but you don't want to fool with collecting payments business but i might sell it if somebody walks up and hands me the money meaning they went and got their own financing

and there was a closing and i walk away with a check you might rather do that for instance if the property's out of town i don't keep, I don't keep rental property out of town. I only have rental property in my city so I can lay eyes on it ever so often. Even if I have a property manager, which in my case I do, my son-in-law, Rachel's husband, Winston, runs all of our real estate. And so it's enough of a portfolio of real estate that it's a full-time job for him and a couple of other people to look over everything when i first started i managed my own i just dealt with the tenant i called the repairman if there was a repair you don't have

to go to the repair yourself and you know if you don't mind having a little bit of hassle in your life that is a good investment and your work but you have to be able to work with the people the good ones and the bad ones and you know work through the process uh of doing all that and if you want to mess with that or not um if you get a great property manager it's still not their property you still have to look over it there is no time that you own something where you can relinquish the responsibility. People will take over and run your stuff for you. The best people in the world will do a good job, but no one watches your stuff like you do. So even if you have a property manager, you still have to make decisions.

You still need to keep your eyes on the property. You still need to keep up with what's going on to make sure that they're doing their job. Now, some of the day-to-day hassles are gone, and you're giving that up for 8%. You don't deal with every repair call. You don't deal with every tenant showing. You don't deal with all that when you pay a property manager. But again, they've got to be doing their job, and you have to be involved enough to ensure that that is happening. Anna is in Dallas, Texas.

Hi, Anna. Welcome to the Dave Ramsey Show. Hello, sir. Hi. What's up? Well, so you're really going to be the deciding factor in this. I am on a diet program and it is a very expensive diet program. It feeds me four meals a day and I just make one meal on my own.

And my husband and I were trying to obviously snowball debt. We're trying to get out debt. And he's telling me I need to give this up. And, of course, I'm terrified of doing it because it's really helping me lose weight. How much have you lost? 30 pounds. Great. How long have you lost? 30 pounds. Great. How long have you been doing it?

Since February. Okay. How much more do you need to lose? 30 more. Okay. So you'll be done by Christmas? Actually, I was hoping I'd be done before then, like maybe October. Yeah.

And how expensive is it? Well, like right now, I can get it at the lowest. It's $2. Yeah. And how expensive is it? Well, like right now, I can get it at the lowest is $2.45, but if I need like a full month's worth of food to, you know, four times a day, then it's about $3.50. Per month? Per month, yes. Yeah. And your household income is what? Let me do the math real quick on that right now between both my husband and i we make uh 5600 a month okay and how old are you i'm 28 okay and you're talking about scheduled to lose 60 pounds what was your start weight uh 200 and so you're going down to 140 i'm trying yes i would like 130 but i'll settle for 140 you said you're how old again 28 okay all right and how long has it been since

you were small uh wow like honestly i'd rather be my high school weight, but that wasn't like the healthiest choice. I would like to be 120 again, but I know that's probably not even physically possible. So it's been since high school? Basically, yes, almost 10 years. I think you ought to stick with it. Okay. I think the benefits to your marriage, to your career, to your your health to the way you feel about yourself your mental health your spiritual walk i think the benefits to all of that i think you're awesome i'm

so proud of you well thank you dave i appreciate that and i think it's worth it in your situation i think it's worth every penny you're spending you're succeeding at it the trick as you know is to keep it off right exactly and like that's the whole point of this program too is for that way you can keep it off it's slowly but surely but the thing is the slower it takes the more it's going to stay off yeah but it's a you know as they all say it's a lifestyle change it's not just a exactly and that's what it's preparing me for. It is a lifestyle change. Yeah. But the financial benefit over the next decade is going to far outweigh the three more months

or four more months of $350. Mm-hmm. Exactly. Just in health care, if nothing else, because the cost of obesity in your health is unbelievable. Yes, exactly. And we have so many health issues in our family. Yeah, the level of energy you have for your career, for your kids, your spouse, for yourself, it changes everything. And so because, I mean, there's a whole lot more going on inside of you right now than simply having shed some pounds.

Am I right? Yes, exactly. Yeah. This is very important. I'm so glad you're doing it. Yes, I would spend this money if I were in your shoes. Okay. Well, thank you so much.

I appreciate your opinion. Thanks. Open phones at 888-825-5225. You jump in. We'll talk about your life and your money. It's a free call. Hey, it's Black Friday in July. Right now in the online store at DaveRamsey.com, you can get up to 69% off life-changing books, classes, and tools, plus free shipping.

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Hurry, Black Friday in July. Sale ends soon. So online at DaveRamsey.com or call the Ramsey Concierge Team at 888-22-PIECE, 888-227-3223 Our Scripture of the Day, Hebrews 4.16 Let us then approach God's throne of grace with confidence, so that we may receive mercy and find grace to help us in our time of need. Our friend Bob Goff says, Stand up like a mountain. Have faith like a rock.

Love like an avalanche. Bob's got a way with words, doesn't he? That's good stuff. Chase is with us in Austin, Texas. Hi, Chase. Welcome to the Dave Ramsey Show. Thank you, sir. How can I help?

I am looking at changing apartments, and I wanted to ask you what's a reasonable percentage of monthly income to get an apartment, to spend on an apartment each month. Well, obviously, the less you spend on rent, the faster you'll move to your other financial goals. Agreed? Yes, sir. And so in rent, we don't ever subscribe to ask someone to be a renter their entire life. So while you're renting, you're doing that to get ready to do something else. Agreed? Yes, sir.

And so what I always just tell people is as cheap as you can because that gets me to the other place faster. But never more than a fourth of your take-home pay. Okay. Because anything else is going gonna just choke you down but obviously i mean if you can find a 250 rental in a garage in a garage apartment out back of a rich old lady's house and you clean her gutters and stuff you know let's do it right uh have you got a family no sir just me yeah and so if i'm in your shoes, dude, I mean, I'm going to camp as cheap as I can camp because it's temporary. Okay.

So what do you make? Make $6,500 a month. Good for you. Cool. And so you're cleaning up debt, or what are you doing? Where are you in your financial goals? I'm officially debt-free as of last year. Yay.

I've been listening to you for about a year now. Okay. It went through a divorce. We had to sell the house, split it, went debt-free. I'm up to three months on my emergency plan building. I'm going to six months. I kind of started on the savings side. Once I hit three months, I started doing the 15% savings while building the emergency fund up at the same time.

How old are you? 28. Okay. So would your goal be to buy yourself a place in the next few years? Well, I've heard you say it's never wise to buy a house when you're single because when you get married, you'll realize you bought the wrong house. Well, it depends on your stage of life and how long you're planning on being single. But, I mean, if you're in a relationship, for sure, you're coming out of a divorce and you're healing and so forth,

it wouldn't be unusual for you to buy a little condo or something a couple years from now. But, yeah, so the whole point still stands. The more we put into rent the less we've got for down payment the less we've got for investing okay whichever one you want to spend it on i don't care but um and so you know you you just you don't want to live in a dump but um and you're recovering from a heartbreaking situation and so forth, and if there's kids involved, you want to be where you can be near them and have a place for them to come also. So all of those things enter into the equation, but it's just a math thing.

It is a finite amount of money you have coming in today, and the more of it that goes back out for housing, the less there is for other things. It's a simple equation. Chris is with us in Orlando. Hi, Chris. Welcome to the Dave Ramsey Show. Hi. Thank you for taking the call.

Sure. How can I help? Well, my question is this. I'm recently divorced after many years, have a home that we had free and clear, and I've decided to keep the home for economical reasons, financial reasons, and because it had no mortgage. And I have only been on my job about a year and a half. So I need to pay my ex-husband his portion of the equity of the home, but I'm having a hard time trying to figure out exactly what's the best way to do that.

I don't really want to dive into my retirement fund if I can avoid it because I don't want to pay the taxes on that. But I can't get a home equity line of credit because I haven't been on the job two years. You should be able to get a mortgage, though. Well, I can, but then by the time I pay the down payment closing costs, would it be comparable to the, not the penalty, but the taxes I would pay? No, not even close. Now, what do you make?

What do you make in your job? Well, this is my first full year, so it'll probably be about $80,000. Okay. All right. You would be hit by in excess of 40%, including penalties and taxes, if you cash out retirement. I would not do that. Well, except I'm 62. Oh.

Okay. So you don't get to hit the penalty. How much is in the nest egg? About $300,000. And how much do you owe X? $130,000. And you make $80,000. And how much do you owe X? $130,000. And you make $80,000. Yuck.

The way I answer questions on this show is what would I do if I woke up in your shoes, okay? Right. I have to take into consideration that you guys were probably married in excess of a couple of decades weren't you yes we were which means this is a really deep wound yes it is how long ago was the final um february of this year how you doing doing okay okay doing okay life's good yeah yeah you're a fighter okay um because here's the thing the the more healed you are from an extremely painful life-altering situation the better this advice is the more broken you are the worse this advice. So I'm just going to tell you, okay?

Okay. I would, in a healthy place, I would cash out enough retirement and pay him today. Okay. And how bad does he need money? Oh, you've got to pay him or you can't keep the house. It's not optional. Well, technically, I was supposed to have paid him a couple of months ago, but he's been gracious and allowed me some money.

There's no negotiating for a lump sum. Okay, yeah, you're just going to, yeah. Here's the thing. If you have a paid-for house and you're 62 and you make 80, you can build wealth. Yes. And we're starting with a base of about 150 because I just used up $150,000 of your $300,000. Yes. And you can do that.

To the extent that you're not healthy from these wounds these wounds um and you don't behave with the income you have coming in that's where this plan gets tenuous does that make sense yes it does but the more discipline is not a problem for me okay all right because that's what you're going to be you're going to be like hardcore because you get your your 150 in 14 years when you years in your 70s will be about 600 plus whatever you add to it. Okay. So you should retire in your early 70s if you played all the way through. If you fully fund 401ks and get matches and do Roths and all that kind of stuff. You should have well over a million dollars, probably closer to two in your nest egg,

if you play through, even though we cashed out half of it now. Okay. But you're able to do that because you don't have to freaking house payment anymore. Correct. And a minute ago, freak out house payment anymore. Correct. And a minute ago, we were talking house payments. Yeah. And I didn't mind doing the home equity line of credit to avoid the 20% tax. Yeah.

But you're not going to, I mean, it's, but then you're back in debt. And, yeah, I'm just going to, I'm going to pay the tax and I'm going to be debt free and I'm going to rebuild the tax, and I'm going to be debt-free, and I'm going to rebuild from here. Okay. Because it sounds like you're disciplined. You're going to play through on this. Yes, very much so. I think you're going to recover and shine. I'm so sorry you went through this.

Such a hard time. But it sounds like you're a strong lady, and you've got your eye on the ball. It's game on. That's what I would do in your shoes. Wow. Thank you for calling in. That puts us out of the Dave Ramsey Show and the books. Our thanks to James Childs, our producer,

Kelly Daniel, our associate producer and phone screener. I am Dave Ramsey, your host. We'll be back before you know it. In the meantime, remember, there's ultimately only one way to financial peace, and that's to walk daily with the Prince of Peace, Christ Jesus. This is James Childs, producer of The Dave Ramsey Show. Did you know you can now listen to The Dave Ramsey Show on Pandora and Spotify? For all the ways to watch and listen, check out our show page

at DaveRamsey.com slash show.