You’ve heard it over and over, the 4% rule. But what if you could safely withdraw 5% instead, and not run out of money?
Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me as always is my cash-flowing co-host, Scott Trench.
Mindy, it’s been great to accumulate a large amount of financial knowledge and then decumulate that with our audience over these last six, seven years. And today, we are super excited to be joined by Frank Vasquez, host of the Risk Parity Podcast and a former lawyer turned retirement strategist. Frank challenges conventional wisdom and today, he’s gonna walk us through how a portfolio designed for risk parity might support a higher withdrawal rate without increasing your chances of failure. Failure defined as running out of money at any point in your life. Frank, welcome to the show.
Thank you. It’s good to be here.
Frank, first, you say that the average retiree, the FIRE community can really spend up to 5% with the right portfolio. What is that? Second, I would like to ask you about a couple of contradictions I observe in the FIRE community, right? One is an observance, almost a religious adherence to the Boglehead philosophy of investing in low-fee index funds with 100% of the portfolio and the incongruity of that — I, again, I’m using the word religious — adherence to this philosophy with withdrawing at something higher than the 4%, even the 4% rule or higher. Um, the second one would be in our world at BiggerPockets with real estate investing, it it’s a little harder to wrap my head around, at least, the idea of selling off my rental properties and harvesting that equity to spend, whereas it’s not a challenge at all to spend a reasonable approximation of the cash flow generated by those portfolios, which could be four, five, even a little bit higher from a percentage point perspective. And that’s one of the reasons why I made some changes in my portfolio towards real estate. So could you answer those three concepts or address those three concepts in the next few minutes. One, what is that portfolio? Are there these incongruities in the fire community that you’re observing? And how does real estate play in?
What is the portfolio? The the portfolio needs to be more diversified. And here’s some general guidelines as to a portfolio with a highest, with the highest safe withdrawal rates. This portfolio will have somewhere between about 40% and 70% in equities. Bill Bengen says 55% is the sweet spot, but it’s somewhere in that range. If you go to 35 or 75, you’re getting kind of outside of the, of the range.
What does equities mean?
Stock funds.
These are US-based, domestic, international? How do you, how do you think about that?
Could be any. You wanna divide those into half growth and half value, whe, and whether they’re international or domestic, half growth and half value. So you need at least two funds.
Does a market cap weighted index fund like a Vang, you know, VTSAX or VTI, um, address that?
That holding can be your growth holding, though. Okay. You, you could, you could either use like a total market fund or S&P 500 fund or uh, like a large cap growth fund for that.
And what would be an example of that value component?
You could have a small cap value one or a um, like VIOV or AVUV, or you could even go large cap value. You could hold something like SCHD which is actually labeled as a dividend fund from Schwab that’s popular. But it’s, it’s a large cap value fund is what it is. And, uh, um, and you could, you could hold something like that. Um, you can hold, you can hold more than, more than uh, two things. Um, but I would divide them into growth and value because what you will find is that when the market crashes like it did in 2022, the growth thing may be down 30%, 40%, something like that. The value thing may be up, or it may be down less than 10%. Gives you a chance to rebalance those two things. They work really well in tandem like that. Um, and so if you think about that division most prominently, the only thing you should stay away from on the stock side of things is small cap growth. So if you were going to hold small cap funds, you are better off holding small cap value than say total small cap or uh small cap blend because you really don’t want the small cap growth, um, stuff. Um, it, it has a a much higher variance even though it could potentially have a higher return. I got this all from Paul Merriman, so it’s, you know, his boys have beaten this to death. Um, but, but that, so that’s, that’s where you are on the stocks, 40 to 70% divided into growth and value.
So what’s next after the stock component or the equity component?
Uh, bonds.
Okay, bonds.
So you need to decide what kind of bonds you want to hold. What you are trying to do with these bonds and that’s where people get confused about bonds is they don’t know why they’re holding them. Somebody said I should hold some bonds. Or they get fixated on the returns that bonds generate, the the interest rate paid. That’s not a reason to hold bonds in a, in a well-diversified portfolio. Your stocks are really the return drivers of the portfolio. So what is the purpose of the bonds in this portfolio? The purpose of the bonds is to be a recession insurance essentially. You want some bonds that will go up in capital value when there’s a recession, when there’s a 2020, when there’s a 2008. Those bonds are treasury bonds and you’re typically looking at intermediate and long-term treasury bonds. Um, so, you want between 15 and 30% of the portfolio in intermediate and or long-term treasury bonds. Fortunately, Vanguard has nice funds that are right there for you. VGIT is Vanguard’s intermediate treasury bond fund. VGLT is Vanguard’s um, long-term treasury bond fund. They’re cheap, they’re easy, anybody can buy them.
What you do want to, the common thing that people would use though is a total bond fund, you don’t wanna use that in, if you’re trying to maximize, um, your safe withdrawal rate. because you don’t want any corporate bonds and you don’t wanna be having to hold 40% in bonds. You you want to keep this, this, um, amount, basically, how much insurance do you, how much recession insurance do you need? Because that’s what this is doing. It’s not there for returns, it’s not there for any other purpose. It’s there so when you get 2008, your long-term Treasury bonds go up 20% in capital value, your stocks go into the, into the toilet. Um, you get out the brush, then you um, you you you sell the bonds, you buy the stocks.
Perfect.
Sell high, buy low. That’s what you do with those.
You know, you’re giving ranges here, but if I take the midpoint of the two ranges you gave us, right, 55%, that’s between 40 and 70% in the equity component, and then I take another 22.50. I’m at, what is that, 77 uh and a half percent, right? Uh, so what is the remaining chunk of the portfolio built on um, after we’ve addressed the stock and bond portfolios?
You want alternative assets that are between 10 and 25% of the portfolio. And those can be gold, managed futures, something that is uncorrelated to both stocks and bonds. That is the definition of an alternative asset we’re u, we’re using here.
What is your answer to those alternatives?
Oh, I use both of uh, gold and and managed futures.
What does managed futures mean?
It is a um, a type of fund that it, it, it, it follows trends, but it will follow, it would typically a broad-based managed futures fund will have an exposure to commodities in it, an exposure to currencies in it, an exposure to interest rates in it, and an exposure to um, stock markets around the world. But it is set up a typically a mechanical strategy where it picks up a trend. So, in a year like 2022, there was a huge trended interest rates when the Fed started raising its rates. And a typical managed futures fund was up 20 to 30% in a year like that. And that is why you’re holding one of those things. It tends to perform well in weird environments that are either higher inflation or deflation. It’s very well uncorrelated with both stocks and bonds.
And how much of a portfolio are you saying one might consider allocating to a managed futures fund like this?
Well, it depends on what else you have. If you’re going to hold gold usually between 10 and 15% would be allocated to that. Um, and then you might hold 10% in managed futures if you wanted to hold those. There are other things you could use in that spot, including things like REITs or utilities funds or some kinds of international stocks if they’re, if they’re sufficiently diversified from both stocks and bonds is really what you’re talking about with respect to that. So there’s, there’s, there’s a lot of flexibility in this part of the portfolio, but you’re really trying to get something that has a chance of a good performance in years like 2022.
Okay, so that’s the answer to that and, and, and and there’s a lot more depth clearly that we can get into on this topic.
There’s one more feature. Um, and and we’ve known this since the um 1990s when Bill Bengen did his first studies. You need to keep the cash amount, I’m talking short, uh, short-term bonds that are a year, a year or less or savings accounts or CDs or whatever. That should be 10% or less. If it goes above 10%, you’re going to start deteriorating or detracting from your safe withdrawal rate, because it becomes a cash drag in the long term. And this is this is probably the number one thing that people do that detracts from their safe withdrawal rate.
But is that true during periods specifically where the yield curve is inverted? So I think one of the problems that people have buying bond funds right now of any type, um, especially longer duration ones is they get a higher yield in their money market account than what you can get on the long-term bond fund. So that’s a really, that’s a really interesting insurance policy I think for folks in today’s environment on it, but can you convince folks why that, why they need to make that shift?
Yeah, because you’re not holding these things for their return, Scott. You’re just not. You’re not holding them for returns. You’re not holding bonds for returns. If you’re going to hold something for higher returns long term, you would hold more stocks. And so holding, we’re not thinking about, you know, a two-year period here, we’re thinking about decades. So the holding too much in cash over decades detracts from your long-term safe withdrawal rate.
I completely agree with that.
And we’re not market timing here either. We’re not jumping up and down the yield curve. There’s an odd feature that um, amateur investors who recognize they can’t time the stock market all think they’re experts in timing the bond market. Oh, I can predict interest rates. I know when they’re gonna go up, I know when they’re gonna go down. I’m just gonna jump up and down the yield curve. No, no, you’re not. If you could time interest rates, really time them, you’d be fabulously wealthy within a few years. You just trade on levers and futures contracts. You can’t do that. So stop trying to do it. That that is this one thing that I see over and over again. Oh, I’m going to hold it in money markets now because bonds aren’t paying as much when did you become an expert in timing interest rates? Recognize that you don’t have that skill and and stop with it because you’re not, you’re not improving your returns in any meaningful manner. Um, that that is not why you’re holding those things. The only reason you’re holding cash is for liquidity, that you you need to have some cash to spend. The only question is how much do you want to hold of it? The the more you hold, the lower your overall returns are going to be and the lower your overall safe withdrawal rate’s gonna be because while cash has a zero correlation to stocks or anything else it’s denominated in, it it it doesn’t, it it will not go up in value like a bond will in a, like a treasury bond will in a recession. It’s not going to outperform ever.
Perfect. I completely agree with that and that’s why I hold long-term bonds. I need to maybe shift some of my holdings based on this conversation out of uh my, you know, I’m in a uh broad-based broad market bond fund. Um, so I, I will actually reconsider part of that that portion of my portfolio specifically as a part of this conversation here.
I would probably reduce the number you’re holding and then just only hold the ones you want to hold for. Because it is possible to hold bonds for other reasons. You could hold them to generate income, but that that is not a typical DIYer doesn’t need or desire to do that. That’s those are advanced strategies that, you know, are done by professionals and hedge funds and insurance companies and…
I hold bonds exactly as you say, right, as insurance against the next deflationary recession.
I…
When you’re ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business address, website, phone number, operating agreement, free guides and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC servicer in the US with over 1,600 corporate guides. These are real people who know your local laws and can help you and your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email, and phone number stay private. Don’t pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com/moneyfree and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/moneyfree.
When spring hits, some people suddenly just want to declutter the garage, clean out the closets, and get everything all organized. Whether or not that hits you, Monarch will do your financial spring cleaning for you. One dashboard gets your entire financial life organized. No more clutter, no more mess, no more scattered logins, just accounts, investments, property, and more all in one place. One of my favorite parts is the Sankey diagram. Every month I open it up and literally watch the flow of money. It shows exactly where every dollar is going from income to all of my spending categories. It makes it so much easier to spot what’s working and what needs tweaking. Get your first year of Monarch for half off, just $50, with the promo code POCKETS. Use the code POCKETS at monarch.com to get your first year half off at just 50 bucks. That’s 50% off your first year at monarch.com with the code P O C K E T S.
I’m skeptical of a lot of financial products but life insurance isn’t one of them, at least not term life. For the vast majority of you listening, term life is simply the right answer, and the smartest way to buy it isn’t one big policy, it’s a ladder. Your need for coverage isn’t flat, it declines over time. You’ve got a 30-year mortgage, a couple of young kids, maybe a spouse mid-career. In 15 years, the mortgage is going to be smaller and the kids are almost launched so, instead of buying one giant 30-year policy you’ll overpay for, you stack a few, say a 10-year, a 20-year, and a 30-year layer so your total coverage steps down as your actual obligations step down. You only pay for what you actually need when you need it. Ethos is a platform that helps you find life insurance 100% online. You can get a quote in seconds and apply in minutes. There’s no medical exam, you just answer a few health questions online. You can get up to $3 million in coverage, some policies are as low as $30 a month. That makes building a ladder genuinely fast. Get your free quote at ethos.com/bpmoney. That’s E T H O S.com/bpmoney. Application times may vary and rates may vary.
I have a question about your portfolio. So, 40 to 70 in equities, 15 to 30 in bonds, the remaining in alternative assets. At what age or how far from retirement should you be moving towards this portfolio?
Whether it’s this retirement portfolio or a some other retirement portfolio, um, it’s all about how close are you to your FI number?
Okay.
Once you are, you know, get to be like 80% there, I would start thinking about moving it depending on what your timing is for retiring. Uh, you don’t want to get in a situation where you’re holding your accumulation portfolio all the way up to the end because that’s, that’s what you’re really worried about is having a big crash right at the end. from William Bernstein, he says, “Once you’ve won the game, you’re supposed to stop playing.” In this context, it means once you’ve won the accumulation game, you actually have accumulated enough, you need to define what that number is, then you can transition your portfolio, or at least that part of the portfolio that you expect to be your retirement portfolio because it’s possible you’re going to keep working and keep accumulating and maybe you want to take some more risk with that, maybe you want to put it in cash and take a big vacation. Um, but whatever you feel like you need for your retirement portfolio, once you get to around 80%, that’s when I’d start thinking about moving it. Usually this is also within about five years of retirement because the other thing you also want to do is you wanna make your transition when your current portfolio is at or near an all-time high. So you, like this year, you right now would be a good time, if, if you’re, you know, you’re close to getting there and the stock market is at or near an all-time high and you’ve been riding stocks, this is a good time to transition. What you don’t want to happen is there’s a crash and then you say, ‘Oh, I should have been, I should have made my move earlier.’ Because unfortunately, that’s frequently what happens. It’s, you get this, people get greedy, and they want to ride that pony and keep riding it. Um, and so the, uh, they have a hard time, um, making the transition, knowing you’re go, you’re specifically going to a portfolio that is going to have a lower uh, rate of return over the very long term, but a lot less volatility. And so you’ll be able to spend more out of it. Um, but that, when you’re when your current portfolio is at or near an all time high and when you are getting close to your FI number, that’s when you can and should transition and it doesn’t have anything to do with your age really.
I completely agree with that and empathize very strongly with what you’re suggesting here, um, for a variety of reasons. Uh, on on this topic, the Boglehead community, right, this this concept of invest in low-cost, broad-based S&P 500 largely, but there’s also a smattering of VTSAX or or broad-based total market index funds. That is, is that still the right answer for this accumulation phase to go essentially 100% in a portfolio like that until we reach that 80% of the way towards this this retirement goal? Um, and then there’s a switch that needs to happen at some point right around that 80% or five year out mark? Is that is that how we should think about it?
Yeah, yeah, the the best portfolio to hold for accumulation would be 100% equities. Um, the only issue is, is if you have trouble stomaching it because you have to know yourself enough to know am I gonna panic if this thing drops 50% like it could and and sell out? because that’s that’s the, the the worst case scenario is you hold something that is too risky for your personality, it drops 50%, you panic and sell it at the wrong time. So that kind of person would be better off not holding 100% equities in the first place just because, but, but assuming you don’t have that issue, assuming you’re just ready to to ride it up, yeah, just hold 100% equities. And whether that’s in one fund, you can do it with one to four funds. I think people obsess too much about what is the best combination of of index funds to hold. If you want to hold something simple that you could transition to a retirement portfolio easily with, you would hold um, a total stock market fund or a large cap growth fund in a small cap value fund, because that would make it easier for you to transition when you get there, um, as opposed to having to sell all of this large cap and large cap growth stuff when you get to retirement and you need to diversify the stock portion of your portfolio. So if you’re thinking ahead you can basically hold something similar to what you plan to hold as your stock portion in retirement as your accumulation portfolio, whatever you uh think that needs to be.
I’m trying to mentally wrap my head around this switch, right? The goal is, or the plan, the, the, you know, the, the recommendation, the, the, the theory here is I’m gonna accumulate for a dozen, two dozen years, and I’m gonna build a portfolio, the midpoint for the FIRE number for the BiggerPockets Money audience is two and a half million. So I’m gonna build my two and a half million dollar FIRE portfolio which is essentially gonna be 100% concentrated in broad-based index funds. This is going to have an enormous amount of capital gains associated with it because I’m gonna make that reallocation five years out or 80% of the way there at the peak valuation, the V-peak valuation um, of that of those holdings. Mechanically, what should I be thinking through at this point in time when I make that switch. How do I, for example, what how does tax strategy uh, come into play as I make this pivot from a accumulation to a FIRE portfolio?
Well, you do most of it in your retirement accounts. There are no tax consequences there. There’s no capital gains, there’s no issue there. So what you’re what you’re talking now about is, is, is, but that is one of the reasons why I would suggest that if that, that you think about, you think about your retirement portfolio in advance and at least the stock portion of that, if you start accumulating in that, then you’ll have less transactions to do later. But when it comes to retirement and building out what you call tax location, putting the right assets in the right accounts to minimize your taxes, generally you’re just leaving that um, that brokerage account alone for the most part, trying not to sell too many things out of it, making most of your transaction in your IRAs and Roths um, and and creating the, because you’re looking at this as one big portfolio. That’s one thing you do not want to do is make each account a version of the portfolio, because that’s very, it’s very inefficient as as you can as you can tell.
So, we’ve talked about the, the portfolio, which I’m gonna rehash here as the there are four pieces to this FIRE portfolio that you think is the, the, the has the best risk parity, right? That that allows you to withdraw up to 5%.
It’s the highest safe withdrawal rates what we’re talking about.
And that’s gonna have the big chunk be in stocks with value and growth components. There’s gonna be the next big chunk in bonds. The next big chunk in some alternative like gold. The next big chunk in managed futures or some other alt could be REITs or real estate, I’m, I’m inferring from this conversation.
Or you might, you might, you might just have one alternative. I mean, you could just have stocks and some bonds and one alternative.
And the Bogleheads are completely correct in the sense that that’s a great way to accumulate wealth is just to invest in broad-based 100% equity, stock market index funds that are low fee and passively managed. And that’s a great accumulation phase, but, and then they’re right until they’re not, which is it’s not the best play anymore if you actually want to spend.
So right, those portfolios do not have the highest safe withdrawal rates.
Perfect.
And, uh, that’s, that’s partially what Bill Bengen’s new book is about that’s coming out next month that uh, hold a better portfolio and you have you can have a better safe withdrawal rate. For for whatever reason, there’s a lot of resistance from people who don’t want to accept that. I don’t know where that all comes from.
I think there’s a religion behind the Boglehead.
Yes, I, I agree. It’s a club.
There’s a ferocity for against challenges to to the component and we’re we’re here saying that’s a great, it’s a great approach. It’s one of the best ways to accumulate wealth. It’s just not the best way to spend your wealth.
The other thing is the Bogleheads don’t spend their money. They’re, they’re they’re hoarders, they’re underspenders. That that that that that is part of that philosophy is you you they’re not spending their money. Of course they can keep holding whatever it is because if you’re, if they’re spending less than 3%, that’s fine. What, what you find, what you find is they have so much money they’re off, you know, constructing 30 year TIPS ladders on the side just to, you know, flex. Um. The hoarder flex, the TIPS ladder, anybody that’s got a 30 year TIPS ladder they have too much money.
Let’s talk about one other component, because we’re BiggerPockets, right? A third of the people listening to this show own rental real estate that they directly own and and operate. So how does that fit into the theory and the portfolio construction here if that’s you?
I would consider that as a business, um, for first of all. Um, so it doesn’t necessarily need to be real estate. Um, it’s a business and it has some cash flows coming out of it. So the easiest way to account for it just on a simplistic basis is assuming you’re not going to sell the business or sell pieces of the business, you are just looking at the cash flows taking that off your gross expenses every year and then your portfolio needs to cover a much lesser amount or a much lesser uh, part of something. The real questions have to do is, well, what are you, what is going to be the future of your real estate business? I mean, are you gonna keep it forever? Are you gonna sell a part of it? Or are you gonna get rid of the whole thing? That that’s more personal preferences than anything else, um, because some people really enjoy having real estate, probably a lot of your listeners do. Um, we have one rental property and I would never have another one, um, because I don’t like dealing with the with the, with, the tenant is fine, he’s been there for like eight years and, um, but, uh, it that, that becomes a personal preference about whether you want to continue to run that kind of a business or not. Um, it’s obviously very helpful to have it because it, it’s like a pension. It d-decreases the amount you need to cover with a portfolio. but yeah, there’s, there’s no, there’s no specific rule about how to deal with that other than the easiest way to account for it is simply to treat it like another cash flow coming in until unless or until you decide you want to start selling pieces of that because then it becomes liquid and can go into the portfolio in some respect.
I think there’s a whole other episode here where I’d like to dive into that. For example, what if I’m using leverage, I’m not getting cash flow on that, on that portfolio right now, but it will drive a lot of cash flows in several years? How do I think about that as part of the portfolio, bridging from the accumulation to the decumulation phase? But so there’s a number of components on that. But at the highest level, that’s how I treat it with my paid-off portion of my portfolio, exactly as you say.
If the business requires you to put money into it, it’s an expense at that point. That that that’s how I I would treat it. If if you’re getting negative cash flow off of your real estate investment, it is an expense as far as the rest of, as far as the rest of your life is concerned. And so that needs to be covered by your portfolio as long as you want to hold that business.
I think a good chunk of our of the people listening will say I got a rental. It’s sure it cash flows, but I can’t really count on those cash flows at least not yet, um, to actually fuel my lifestyle. That day is coming down the road. I built equity, I’m not putting cash in. Maybe I’m technically getting a few thousand bucks of cash flow out a year, but I’m not, I’m not it’s not a reliable income stream with the current leverage position, which I think a lot of people are stuck in that situation right now.
I don’t know that much about investing in a real estate, but I do know that, you know, it’s it’s a it’s a it’s a learning curve and and some people do very well with it and some people don’t. um, depending on the kind of risks they took or the knowledge they had when they were going into it. and you guys do real well with it.
Another issue here on real estate, I’ve got a I’ve got a home here, right? Um, how do I think about my home equity in the context of this 5% withdrawal rate on your portfolio?
It’s not, you can’t live off that. That’s an expense. That’s not um, when I’m talking about the 5% safe withdrawal rate or any any safe withdrawal rate, that is out of your invested assets available to live on. As long as your primary reference, reference, primary residence um, is illiquid and you’re not planning on selling it, it ends up just being an expense and not an asset. Once you decide you’re going to sell it, then you may have some extra money that you could count if you’re going to downsize for example, um, or something like that. But, but yeah, you you certainly anything that is an illiquid asset that cannot be used immediately for living on should not be included as part of your retirement pot of money.
Love that answer.
I get an A.
A+.
It’s net worth versus FIRE number is how we would describe it, right? There’s your net worth which you include your home in, and then there’s your FIRE number.
Your retirement portfolio which you don’t include your home, you don’t include your cars.
Those are two different things. It’s it’s your, your invested portfolio is your source of paying your uh, annual expenses and if it’s not available, it’s not liquid. And that is the, when you’re thinking about your assets in retirement, I mean, liquidity is key because if you have an illiquid asset like a rental property, you want that thing to be generating positive cash flow. If you have or you just have liquid assets like a portfolio. But if you have an illiquid asset not generating cash flow like your residents, it’s more of an expense and a burden than it is an asset for the purpose of living on. Um, because it, it it creates another expense that has to be covered um, whether it’s your taxes, insurance, maintenance, whatever it is.
When you’re ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business address, website, phone number, operating agreement, free guides and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC servicer in the US with over 1600 corporate guides. These are real people who know your local laws and can help you and your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email, and phone number stay private. Don’t pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com/moneyfree and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/moneyfree.
When the change in season hits, some people suddenly just want to declutter the garage, clean out the closets, and get everything all organized, and that’s great. If that’s you, or if it’s not you, either way, let Monarch do the financial spring cleaning this year for you. One dashboard gets your entire financial life organized. No more clutter, no more mess, no more scattered logins, just accounts, investments, property, and more all in one place. Another feature I love about Monarch is the weekly AI recap. It catches spending spikes before they become problems and flags big net worth shifts or upcoming expenses. It’s like having a quick personal check in every week so nothing sneaks up on me. Get your first year of Monarch for half off. Just 50 bucks with the promo code POCKETS. Use the code POCKETS at monarch.com to get your first year half-off at just $50. That’s 50% off your first year at monarch.com with the code POCKETS, P O C K E T S.
If you’ve been putting off life insurance, I get it. The old process was miserable. Phone calls with an agent, a nurse coming to your house for a blood draw, then waiting weeks to find out what you’d pay for it. That friction is exactly why so many people who should have coverage don’t. Here’s what I believe. Most BP money listeners need term life, and the right move is to build a ladder. A few term policies of different lengths stacked together, so your coverage steps down as your mortgage shrinks and your kids get closer to being financially independent or you get closer to hitting your financial independence number. The thing that makes that practical now is Ethos, a platform that helps you find life insurance all 100% online. Same-day coverage, no medical exam, you just answer a few health questions online. Up to $3 million in coverage, some policies as low as $30 a month. So building a two or three-layer ladder that used to take a month of appointments is something you can knock out before your coffee gets cold. Get your free quote at ethos.com/bpmoney. That is E T H O S.com/bpmoney. Application times may vary and rates may vary.
Two other topics I’d like to cover here are, one, you have the theory, how often do you spot the people following a theory like this in the wild, uh, in in as part of the FIRE community? and how do we get more people to embrace this theory and actually make these portfolio changes to spend at that level? What is that, what is that one-two punch there?
The people that listen to my podcast are the ones that do this. That’s why they’re there. They want to spend more money in retirement. Um, I do think that there is, what Morgan Housel calls frugality inertia, in a person is also a problem in a community of people. Th-there is a lot of resistance in the FIRE community or portions of the FIRE community to actually spending money or wanting to spend money or thinking it’s a good thing. There are a significant people, number of people who think that not spending much money is the way to go, under-spending their portfolio is the way to go, and I don’t know if you’re gonna be able to convince them that that’s not the right thing. I do find that people often justify that by wagging their finger at people that are spending more money or telling them they can’t do it or coming up with, the, it only works for 30 years. Anytime you hear somebody say, ‘Oh, it only works for 30 years.’ They’re either, they’re either just completely unfamiliar with the, the math and and the calculations or they are really defending hoarding is what they’re doing. That’s what, a lot of times is going on, the objections that are continually raised can be solved if you actually went off and did the calculation or looked at some research or tried to solve the problem. A lot of people are not trying, not looking, not knowing. It it’s a form of what, um, psychologists call learned helplessness. That, that yes, if you want to, if you want to be fearful of something, you can make up all reasons, all kinds of reasons to do that and also assiduously avoid learning about how to solve the problem. And I, and I think that that, that is what is a lot of times going on in communities of, of people because the, if you ask somebody who’s an under-spending, an underspender what they do and they explain it to you, um, and then if you ask them, ‘Well, couldn’t you spend more money?’ They would come back with you with, ‘Oh well, you know, it’s more than 30 years and uh, uh, I don’t know what’s gonna happen and,’ th-the th-they’re th-the, the excuses would, would come up like that. And that’s th-a lot of these kinds of excuses just get bandied back and forth, um, and I mean, I, I always have a question, well, do you actually want to spend more money or not? Because I think a lot of people don’t.
You know, can I ask you another question? This is this is the second part of the question here and this is a challenge I want to do very respectfully on this, but the way, the way that you kind of uh present this, I’m guilty of this plenty of times here, it’s almost like, it’s almost like, uh an attack. It’s almost like these people who don’t want to spend three percent or less or want to spend less and and accumulate wealth, um, have an inferior mindset. Is that, I don’t think that’s what you’re intending, but that’s that’s kind of how sometimes I’m like, ‘Oh, am I, am I in that group? How am I feeling about that?’ uh on that component. Is, is, is do you believe that it’s it’s a it’s a problem to that extent or should it be, like how am I doing? Am I am I am I, I don’t feel like that’s your intent, but what is that how it’s sometimes people say it comes across to you or…
I’m sure it does. I mean, I’m a lawyer by training. So…
I am not hearing that, Scott.
When I when I go after an idea, I’m, I’m gonna I’m gonna load up and go after it. To me, it’s just, it’s just arguing, it’s not, I don’t I don’t place any personal feelings uh in, in the arg-the arguments itself. I do think, I mean, a couple of things. I I don’t mind people not wanting to spend money. What I do mind is people who don’t want to spend money telling other people they can’t.
That I think is great. Yeah.
That’s what I object to, is this people making up reasons to not spend money that are often spurious, whether it’s the 30-year thing or uh, something about valuations or something about, whatever panic thing they’ve got uh uh going on that is a reason not to spend money. often or a refusal to look at any kind of portfolio other than a two or three fund portfolio. That’s another that’s another red flag to me. Well, I have to hold this portfolio, therefore I can’t spend more money. It’s like, well, you don’t have to hold that if you don’t want to. Do you really want to or not? But I don’t, I I don’t, I don’t mind if when people don’t want to spend money. What I what I mind because I think it’s misinformation to be telling people that they can’t. That this, that and to me, that is the exact opposite of the FIRE movement that I grew up in. I’m really old in this. I go back to 2009. But the little community we had there were a bunch of creative misfits. We were not about to let people tell us what we could and could not do and that we couldn’t solve problems. Yes, we can solve these problems. Um, I don’t, what I’m fighting against is this kind of learned helplessness where let’s let’s make up reasons why we can’t spend money as opposed to looking for solutions. Um, and that, to me that is antithetical to what FIRE is all about.
I completely agree. And you know, I I follow a lot of your stuff and was completely respect the way you think about all all these types of things. I just wanted to ask that, um, and maybe I maybe I wasn’t uh, I wanted to phrase that very carefully because I I I think it’s an important issue.
I’m abrasive. I’m abrasive, Scott. I know that.
Me too, me too. But I’m getting to the age, see this gray hair where…
I want to share with you, a a quick data set here and uh sorry if this played in the background as I was pulling it up on it. But, you know, we we ask, this is the FIRE community, right? I mean, and yes, we we have folks that are in real estate or slightly slightly different than the the traditional, you know, uh uh uh uh outlets out there like ChooseFI. But the goal is 55% Tuesday, right? And if you’re if you’re, if you say this is your top goal, right? what is your overarching financial goal, why do you listen to or watch BP Money, it’s Tuesday. I want to spend Tuesdays doing exactly what I want. The answer to how much you should spend is much more like what Frank is talking about and much less like a Boglehead portfolio, um, or philosophy there. It may or may not involve real estate or other assets, but you know, this is, but I think that there’s nuance here because about 11% of the people here want to get real rich, about 12% want to pass on a large estate and about 22% just want to get started going and building some financial healthy financial habits. And I don’t think I you know, this this isn’t like a weighted item here, but I imagine that even the people who are in these buckets who say Tuesday, they also have some desire to do these other other items here, um, like leave on a large estate. And I think all of those things are are conflicting emotions that we feel in this community about what we want our money to do for us. Yeah, we want fire. That’s, that’s really important is to make sure that I’m set and that I’m not gonna be a burden on my children or, you know, create problems on there and I’m not gonna be, you know, uh uh um, and a really, and there is that fear component that you love to talk about very rightfully so. But there’s also this hope and, hmm, you know, can how much, what can I do uh downstream? And I think that those are all emotions that people go through as they’re building these portfolios, which lead to more, to to nuanced answers.
These are conflicting goals. And if you look at those two, those two in the middle, I want to get seriously rich and I want to pass on a largest state. Those are traditional retirement goals that I would associate more with people in the Bogleheads. If you went to the, if you went to their convention and and they’re mostly like 60s and 70s now, those are some of the goals that they have. Um, and and that’s fine if, if that’s what your, if you’ve consciously thought through that and that’s what you want to do, that’s that’s fine. Um, the, um, but it does conflict with spending more money now. And then another question arises as to what are we trying to maximize in this second half of life? And I would like in my heart of hearts that the FIRE community would move towards this more expansive idea of let’s maximize life and not maximize money after we’ve got enough money. And how do you do that? I mean, that that’s where we start reading books like Daniel Crosby’s Soul of Wealth, which is sitting on my floor right here right now.
Oh, I listened to your your last podcast and you’re like, ‘Well, if you don’t wanna change any of these things and you don’t listen to these books in six months, what are you doing?’ You listed off like five books. I’m like, okay, well I got some, I got some reading to do here.
Yeah, well, sometimes people say they want to change and they but they don’t want to put in the effort. and to change a a a mindset or a habit, it it takes some effort. Um, and but I think at some point, you need to stop reading more books about personal finance, the numbers and the saving and stuff, and start reading books about wellbeing, you know, how, how do we live our best life? I mean, I would start with the five regrets of the dying because that’s, that’s where I started, Bronnie Ware’s famous book. Um, that in order to, if you want to live your best life, you just invert that. You do a Charlie Munger on that. Well, how do I avoid having the five regrets of the dying? Uh and they all, they don’t relate to money or careers, they relate to relationships and self-expression, uh is what they relate to. Um, so then the question becomes, well how can I convert now the money I’ve accumulated into this kind of better living, better relationships, better experiences, um, uh, uh work avoidance and not having to clean the house. Um, and, uh, and, and and frankly giving the money away. Um, the uh, one and one of the, there I mean, there’re there are basically three ways to give money away and I, and I, the, um, one is give it to your heirs. They’re going to get, they’re going to get some of it anyway. It would be better if they got some of it along the way while you are alive and you can teach them to manage it than getting a big pile of money when they’re 60 years old because that is what’s happening in this country. People are not, um, communicating with their adult children about their money, um, hoarding it, and then leaving this big pot of money to the some 58-year-old or 60-year-old who doesn’t know what to do with it and then and then they get, you know, taken by some variable annuity salesmen or something like that. And it’s it’s really, um, it’s it’s really sad, um, that if you have sufficient money that you think you’re going to leave an inheritance, start giving that to your adult children especially along the way. For us, the easiest thing to do is fund their Roth IRAs because it encourages them to work, encourages them to make money, um, and then you get to teach them how to invest using small amounts of money to begin with. Um, you can, you can also spend it on, you know, weddings, trips, um, other things that will make your family life uh better when you have grandchildren, spend it on them. Um, all that, all that sort of stuff is a a good way to spend money. The next, the next one is traditional charities. Um, I’m on the board of a charity, um, called the Father McKenna Center that supports hungry and homeless people in Washington D. C. I used my podcast to raise money for that. And the uh, and that, but that gives me a whole another set of relationships with people that are not hoarders and we’s not, that grounds me very well in the world outside of FIREland, which I think is, um, important to do. And and then you can just spend it on friends and family. I we I support my parents, um, and uh, and so, but I, you know, in my druthers, I would like every FI, every FI person to be thinking about spending 1% on giving money away in some way or another, whether it’s spending it on their children, heirs, giving it away to a charity or some other, um, mechanism. Um, to me, that would be a a, um, an expression of abundance if you will. Um, because that’s that’s kind of where we are. If we look at all of our spending, we’re spending about 5% of invested assets. About 1% of that is essentially spent on other people or charities. Um, and that’s a great place to be too because obviously if we did have a problem, we could, we could cut back on that. It’s like, you kids, you’re not, we’re not giving you any I-R-A money this year. I got to spend it on this water heater.
I love it. And I think I think that comes down to what ought the goal to be and I think that this this journey needs to begin far in advance of FIRE. I don’t think a lot of people start it until they’re way past FIRE, hitting at that 3% rule, um, you know, three, three percent distribution rate with, with a very low spending on a huge portfolio. um, but it, it’s I also do think, we’ve observed this in the past, there’s a little bit of a privilege here in once folks achieve FIRE or build wealth, then the ability to really invest yourself in figuring out this philosophy does seem to emerge and that’s a great thing to do. It’s what you, what you ought to do and it’s the privilege that you build towards all those years of grinding it out and accumulating this wealth in the first place is to be able to be able to have to develop this philosophical sense. I’m at the very beginning stages of that journey. You’re, you’re very, you you are a master clearly at this. You list off all I’ve read some of the books you cite and not others in there. It’s clear you’re just a a well read auto-didact autodi-autodidactic individual with a tremendous amount of mental frameworks um on there. and it’s, it’s awesome. That’s, I aspire to be like that one day. So…
Well, it’s I mean, it’s important to remember we are very privileged as people sitting around this for this, this thing here. Even just, just in other things. I I have two disabled siblings. Uh well, one one’s no longer alive, but they didn’t get to have careers. There are a lot of people that that do not get the opportunity to even have this experience. And so if you are capable of becoming FIRE you know, maybe you should be thinking about what what, what can I do with this in an expansive way as opposed to, I got mine, now I’m gonna sit here and wag my finger at other people about spending money. Um, the uh, um, but that’s and this also does go to, you know, picking good role models for retirement. Um, whenever, I mentioned this, maybe on that podcast you listened to. If you want to spot a hoarder, uh ask them who their retirement role model is. If they say Warren Buffet, they’re a hoarder. Um, because that that is not a good role model for retirement, um, unless you, unless your idea is to keep working forever, but you are not going to acquire Warren Buffett’s talents by adopting Warren Buffett’s habits. And if you read that book Snowball, you know his interpersonal relationships are not that great, they’re not, they’re not desirable or worth emulating. And you, but you look at somebody like, who is Warren Buffett’s hero, is a guy named Chuck Feeney who died recently. He accumulated several billion dollars over the first half of his life and then gave it all away in the second half of his life, um, and so it was, you know, funding hospitals and all sorts of other uh charitable endeavors. Um, and he was very frugal. He used to, you know, carry around his stuff in a, you know, a shopping bag. Um, but but that’s what I think about is, well, you know, who are good role models to have? And I think a lot of people haven’t really thought about that, that a your retirement role model is probably not somebody who’s good at accumulating, it’s probably not somebody who is out of the world of personal finance or finance itself. It’s going to be somebody else who knows how to sort of maximize life.
Love it. Whenever I talk to you, Frank, uh on our Facebook chats, you give me an unbelievable amount of homework. And the same thing is true on your podcast. It’s like, “Oh, okay. Hey, if you’re interested in this topic, here’s this, here’s this two hour video and four more things that you should read as well.” uh out there. So, so it’s, it’s awesome. I love, I I love all of those things.
I get excited about this stuff. Um, that uh, you know, that that that question of what how do we live our best life? Um, money’s only one part of it. When you become FI you’ve solved the money part, now what about the rest of it?
At your suggestion, I read Snowball and it’s exactly as you say, a brilliant, wonderful, talented uh uh uh capitalist in Warren Buffett. Parts of it, not the way if I want to emulate.
Yeah, I mean, is that a family life you want to have? Probably not.
Not the goal there. There’s nobody perfect on this. A better example perhaps of a retirement is Ben Franklin’s journey, if you do it through that lens and how he, you know, gave half of his company away and let let them them on that and then went on and invented electricity.
Well, he’s engaged in all kinds of endeavors including, you know, on of the most interesting one to be is founding the the first like real modern prison.
There are certain things that you do not, you do not admire about Ben Franklin in his whole life.
No, you can take tours of it. It’s it’s it’s an interesting place um because it’s uh it’s closed now, it’s in Philadelphia. Um and uh Al Capone was a was a resident there at one point, but um, but no, he was, he was involved in all kinds of community endeavors um later in life or throughout his life and I think that that that is a good role model for something to uh emulate or aspire to, that that uh, um, he certainly wasn’t, he he, I mean he was about, you know, earning money early in his life and he gave that kind of advice, but later, later in life, you know, he’s doing all kinds of things and lives to what a ripe old age of 90 or something, which was very rare then, but part of, part of the reason he lived that long and so successfully is because he he did have all these interests and endeavors. Um, I have a, I have a 94 year old aunt who still works two days a week.
On this note of homework though, there is some homework I think that folks listening to this should uh consider. The first is, where can we go to learn more about the portfolio you just shared and really immerse ourselves in that?
Well, thankfully uh uh Paula Pant did my work for me. She created this kind of cheat sheet or blueprint describing this portfolio and uh I will give you the link to that um, that podcast. So you can listen to that uh, and then, but she created, she created the thing. You can also come to my my website, um, and my podcast. I’ve been, I’m up to like episode 436 now. If you’re going to start listening to my podcast, I would start at the beginning, listen to episodes 1, 3, 5, 7, and 9 because these days I’m mostly just answering lots and lots of questions from from listeners. Um, and it’s kind of like walking into a dive bar where the patrons have been standing around talking about something for three or six months and and you just showed up. Um, so that I mean that is a little daunting there. One of my um listeners is helping me revamp the website to, um, I’m famously lazy about creating resources or resource pages. Uh, I always people say, ‘Why don’t you do this?’ And I’m like, ‘You know, I don’t think I’d like another job. Um, like from office space. Um, but, uh, but so, yeah, get that resource that I that Paula just created. Um, I I would you know, start listening to my podcast, start with 1, 3, 5, 7 and 9 if you if you want to listen to those things. Um, but then, you know, I I did uh, I did provide a list of books in that last, um, in the show notes for my last podcast, number 436, which are about these kind of well-being books because people have been writing these books for many years now, um, the you know sort of the second half of life idea. um and for FIRE people it it’s still the same thing but you’re starting earlier or you just, you may have a multi-chapter life but either way it’s sort of like at some point you do kind of have to go back and reset and and look at the habits or that you’ve created for your past life and decide which ones of those are worth continuing and which ones do I want to change um moving into my next stage of life. so yeah books like the The Soul of Wealth by Daniel Crosby. I’m hoping that we get more FIRE people reading books like that and at least once they when they get to FIRE and putting down the the um the how do you accumulate stuff and how do you invest and and and all those sorts of things that that uh I think I think those horses have been largely beaten to death um and what we should be talking about is what do we do in our next life um beyond just continuing to accumulate more money.
We will link to a variety of these in the show notes, including the resource that Paula developed for this, each of the five books you referenced on episode 436 of the Risk Parity Radio podcast, which is a great one to go check out. Um, the first time, I I got to admit that I a Frank was like, “Yeah, you should listen to episodes 1, 3, 9, 7, uh 132, 164.” I was like, I I I’m gonna go down. I I’m going to get get two or three hours of good stuff from um because there’s so much out there and that that you do that’s great on there. But to go check those out, and and I think that sounds like the priority would be this resource that Paula just created and the Soul of Money would be the first two places you’d recommend to go and check out as well as 436, episode 436.
Yeah, yeah, I I that that’s a great place to start um because uh yeah, I mean um I’m I was laughing at Paula, I said, ‘Yeah, I’ve Tom Sawyer’d you. I’ve got you to paint the fence for me.’
Frank, thank you so much for coming on. Thank you for addressing some really hard issues, uh, really good, really good challenges. This was really fun. I learn a lot from you all the time, uh, around Facebook groups, uh, again, various episodes of your podcast. That’s definitely one that’s highest up on my list, uh, that I go and check out. And thank you, thank you for coming on today and and talking about this with us.
Well, you’re quite welcome. Nice to see you, Mindy.
Nice to see you too, Frank. and we’ll talk to you soon.
Alright, that was Frank Vasquez and that was a really, really fun conversation to be part of. Scott, what did you think of Frank?
I love everything that Frank does. I think his philosophy is fantastic. I think that Frank has really embraced fire for a very long period of time and used a lot of that time to really hone his philosophy, the way he thinks about life and money to an elite degree. and he’s he’s just such a master. as again, I he he’s really somebody whose philosophical depth I would like to emulate over the years, and it’s going to take me many years of study and lots of lots of additional books to get to that point. But I really respected it and and liked it. I do need to digest or think through how his philosophy and his approach works with a rental property portfolio, which I think certainly ought to be a major part of my personal portfolio construction and that for many investors who are listening to BiggerPockets who have experience in real estate. I really enjoyed the episode. I look forward to next week or I guess Friday’s episode.
Yeah, that’ll be a lot of fun where we construct the portfolio. I am really excited to jump into some of these books that Frank rattled off that I had never heard of before. Most pressing is Soul of Wealth by Daniel Crosby. That one is already in my Amazon box on its way to my house. That one sounds like a really interesting and really helpful for me personally, learning how to spend the money that I have accumulated now. I felt very, uh, seen during this conversation with Frank.
I think there is one more point for us to just touch on very briefly here as we close up this episode, which is what is the goal? And I think that Frank’s theory, Frank’s philosophy and his portfolio construction map really well to this goal of spend at a much higher level, spend that portfolio, this wealth that you’ve accumulated. And I think that is highly congruent with a lot of people’s goals. But I think that there’s a lot of people who also may want that portfolio to continue to grow and they do want to leave a large nest egg to their heirs. and I think there’s a balancing act here between I want to be a billionaire at the time of death and I would like my portfolio to definitely grow pretty substantially between now and then while supporting a a strong lifestyle. And I think a lot of FIRE people who experience one more year syndrome may actually have that option. And I don’t know if there’s anything wrong with that goal and I don’t know how that changes the ideal portfolio construction in light of this discussion. What do you think, Mindy?
I think having a real conversation with yourself. Frank brought up, what is your goal? Is to have the most money you can possibly accumulate to be able to live off of your portfolio and draw it down over the course of the rest of your life. I think a lot of people aren’t really honest with themselves with what their true goal is. Carl quit his job and he now is living his best life. I am still a real estate agent and I foresee myself selling real estate in some capacity for the rest of my life. It’s something that I really enjoy. It doesn’t feel like a job. So I think that if your goal is to just amass the most money that you can, that’s a valid goal. That’s your goal. Frank said personal finance is first finance, but it’s also personal. And if that is your goal, then just be honest with yourself what your actual goal is. And I think that a lot of people come into the FIRE community and think this will be great, but then they don’t actually ever retire. And if you’re not planning on retiring, then that’s fine too.
I think a lot of people don’t know what the what the goal is to your point. I think that that poll I showed during our conversation with Frank, I don’t think it’s binary. I don’t think people have the goal of Tuesday and do not have the other goals. I think that there are components of all of those that people really want. And few are all binary in one category. Few people want to say, “Yes, I want to die with the maximum possible amount of net worth.” And few people say, “I want to leave nothing to my heirs.” And I think that there’s going to be a lot of room in the middle and I think that’s totally okay. Just be clear you can get on your goals. The more you can document them, the easier all this will be.
Exactly. Just write down your goals. And if they change, they change. That’s okay too. I don’t think that people need to be beholden to the goal that they set 10 years ago. Your life has changed in 10 years. Maybe your goals have too. But as your goals change, update them on your goal sheet so that you are currently working towards the goal that you have in mind.
Well, great. Let’s get out of here, Mindy.
Alright, that wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench. I am Mindy Jensen saying, “I’m out, trout!”
When you’re ready to start your business, Northwest Registered Agent helps you do more than just file paperwork. You get all the tools to build a real business identity from day one. A business address, website, phone number, operating agreement, free guides and more at no extra cost. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC servicer in the US with over 1600 corporate guides. These are real people who know your local laws and can help you and your business every step of the way. With Northwest, your business is set up to stand on its own from day one. That means your home address, personal email, and phone number stay private. Don’t pay hundreds or thousands of dollars for what you can get from Northwest for free. Visit northwestregisteredagent.com/moneyfree and start using free resources to build something amazing. Get more with Northwest Registered Agent at northwestregisteredagent.com/moneyfree.
