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Mindy: Most financial independence content focuses on getting started, but what about when you’ve already done everything right and still aren’t sure if it’s enough? Today’s story is all about the messy middle from growing up with financial instability, to steadily investing throughout the dotcom crash, the 2008 crisis and COVID, this couple has built over $1 million in retirement assets, paid off a home twice and reached a 50% savings rate at one point. But now with rising expenses, a new mortgage and questions about healthcare, they’re asking the same thing so many people in this same stage are asking. Are we actually on track to be work optional in the next 10 years or do we need to be doing more?
Mindy: Hello, hello, hello and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen and with me as always is my keeping his primary residence co-host, Scott Trench.
Scott: Thanks Mindy, great to be here. You’re always bringing down the house with these intros. Love it. We are so excited to be joined by Carl today uh about this crossroads challenge that he and his wife are in and um we’re excited to talk about how we can help for entertainment purposes only of course. So without further ado, welcome Carl and thanks for the wonderful preparation and putting this this uh personal financial statement together for us.
Guest: Thanks Scott. Thanks Mindy. I’m super excited to be here and have this discussion with you guys.
Mindy: I am too. Like I said in the intro, you have some pretty impressive numbers in your portfolio, so I’m going to read through those numbers right now so our audience knows where you’re sitting at. I see total assets and a total net worth of just over $2 million. I see a nominal amount of debt, 45,000-ish, combined financial portfolio of 1.4 million. Your other property is about 591,000, so that is including your equity in your home. We’ve got a primary residence value of uh just over $500,000 with a home equity of $500,000, leaving a mortgage of just $37,000. We’re going to talk about that. Your liquid financial portfolio cash of $170,000. I’m going to talk to you about that for sure. Traditional IRAs, 350,000, Roth IRAs 842,000. Yay! I love seeing so much in a Roth. I’m sorry that’s Roth accounts, IRAs, 401Ks, etc. HSA, $4,500. Total retirement accounts 1.193 million. That is a pretty good place. After tax stock portfolio, $83,000 and $57,000 in cash flow.
Scott: So what this is saying here is this is taking his liquid financial portfolio and multiplying it by the 4% role. And then we’re also adding anything from the illiquid financial portfolio, which is very common among bigger pockets money listeners to get to what is the quote-unquote cash flow of this portfolio? How much does this portfolio support in spending here? This portfolio is super clean, Carl. Congratulations. It’s a wonderful financial result of years, maybe decades of really hard work, consistent savings and financial sophistication that you bring to your personal financial situation. There’s nothing unusual about it, right? We got a house almost paid off. You can tell that that’s pretty much almost done here and we got our very traditional portfolio here with a pretty solid cash position. This is a really secure position. We’ve got nothing complicating the position. No additional assets, no additional cash flows expected here. so we can just work basically with traditional financial planning rules of thumb like the 4% rule. So we have this calculation here in the personal financial statement you filled out by the way. Anyone listening can go to biggerpocketsmoney.com/resources and you can download this spreadsheet in Google sheets or as a Excel document and and fill it out. We’re showing it here on the YouTube video but we’re also explaining the numbers for those listening along. This 1.4 million dollar financial portfolio should at a 4% rule support something close to $60,000. So it’s technically 57,804 is what we got here for spending. And that’s going to go a pretty long way, I’m going to guess once we pay off this mortgage for your lifestyle. So, that’s what we got on the assets and liabilities. Mindy, you want to walk us through the income and expenses?
Mindy: Yes, income and expenses. I see one job of 125,000, another job of 70,000 for a total of 195,000 in income, minus deferrals, 45,000 for HSAs, 401Ks, etc. The married filing jointly taxes of 32,000, your estimated annual taxable income is 117,000, which is nice. Your estimated annual tax liability is 15,000. Of course, this is for informational purposes only. The IRS is going to tell you exactly how much that is. Or wait, they’re not. They’re going to make you figure that out. But that’s, that’s a ballpark.
Scott: I will also say, by the way, I’m I’m having fun with this. I’m I I’ve literally now for one of the other models, put in every single state’s progressive tax code, and then you need to add in the um standard deductions that differ for for states or whatever. So, a future iteration of this spreadsheet if you check back will have a more precise tax estimate that actually treats all the different taxes and self-employment and all that kind of stuff there. But that’s could probably be a few more weeks, maybe a month or two before I get there. So this is just federal tax and does not include FICA and things in there for now.
Mindy: I’m having fun with this, you can’t tell. I I I’m not, but but this I’m not.
Scott: So this this is just a quick estimate to give us an idea of how much cash is coming into Carl’s life on an annual basis.
Mindy: Yes, total take home pay is 179,000. Net after tax cash generation 134,000. Over on the spending side, you are spending about $96,000 a year or $8,000 a month. I don’t see anything crazy in these expenses. I will say that they all end in zeros and fives. So I just want to make sure that this is actually what you’re spending or rounded up. So that’s a little bit of a homework assignment for you, but with 96,000 in spending and bringing home 134,000, you probably have these numbers pretty dialed in. So the key numbers we’ve got here, total gross income 195,000, annual spending 96,000, total tax liability 15,000. Net cash accumulation for the year, 83,000 $360 and that includes your 401Ks, your HSAs, the pretax stuff, the after tax stuff, etc. We’ve got a savings rate of about 42%. Is that sound about right Carl to you, all these numbers?
Guest: Yeah, yeah, we’re we’re pretty close. I mean, I will say the expenses I rounded up on everything just to account for some of the unknown unknowns. like we’re we’re remodeling a bathroom right now. It didn’t expect to, but there was water between the tub and the liner and it was like, oh, well, might as well do the whole thing.
Mindy: Yeah, that’s how those projects start. Pretty soon the whole house will be remodeled.
Mindy: Okay, so on your debt schedule, I see a primary mortgage of $37,000, a car loan of 8,500 and those are at 5.85 and 6.63% interest and medical debt of 9,000 at 0% interest. But if we go back to these assets and liabilities, you have $169,000 in cash. Just for the annoyance factor, I’d knock out both the mortgage and the car loan because clearly the mortgage is something you do not want to have and why would you have a car loan if you don’t even have a mortgage?
Scott: Carl, you got to be already doing that. That’s already your plan, right?
Guest: Oh, yeah, yeah. So I I am also annoyed by the mortgage and have been. We moved into a new house just less than two years ago and I’ve been aggressive and painted it down. It’s that’s already down to roughly about $4,000, Mindy. I should have it paid off in the next five weeks.
Mindy: Oh great. Okay then. So what do you need our help with?
Guest: There’s a always a battle within. It’s like, am I doing enough and where do I put money to be not only optimized, but optimized for what my goals are and that is to be work optional before the standard dates have been able to withdraw funds from a retirement account because as you showed, most of my funds are tied up in the 401K or the Roth 401K or the IRAs. And so I know there’s rule of 55, there’s the 72T, there’s options out there. I would like to have those not in place and and use just the brokerage for the time period before 59 and a half to live life and also how do I budget the amount of money between when we retire and 65 for medical expenses? because that’s our big unknown. We don’t know how big that cost is going to be and and how to budget for that.
Mindy: Okay. And how old are you right now?
Guest: 42 and 43.
Mindy: Okay. So, you mentioned the 72T and one thing that I think people don’t necessarily realize about a 72T is, yes, you can absolutely access your 401K, that’s awesome. But you’re 42 years old. You have to take that 72T money for five years or until you’re 59 and a half, whichever’s longer.
Scott: Scott, do that math for me. Is that 17 years of 72T?
Mindy: Yeah. And I can see why you’re you’re not happy with that approach here.
Scott: I think there’s a whole bunch of of problems with that in the fire community, but it is one option and it kind of locks you into this path to a large degree. So I think that’s why you’re reluctant to take it and you want to defer that decision at the very least.
Guest: Yeah yeah, that’s absolutely right and we’re just we’re looking to, you know, be able to pull from essentially just from the taxable brokerage before the traditional retirement ages.
Scott: let’s start knocking out some of these questions you have here because you came so prepared with all of this super clear, very clean finance stuff. So you said, how do we how do we plan for medical coverage and early retirement? Right? That’s the first one here. Let’s start with that and let’s knock it out. So basically what you can do here is you can go to this wonderful website at kff.org/interactive/subsidy-calculator, right? I’ll link to that in the show notes here. When you go to KFF, right, you need to put in your zip code and you need to be careful because healthcare premiums vary by county, which is a huge problem if you nerd out about this subject for a long time because some zip codes overlap into multiple counties and building a model that actually does this is a very complicated process. Even KFF’s is not perfect, although it’s the best one I’ve found online. We’re going to put your income in early retirement at like 65, $70,000, which is just more than you’re spending once you pay off the mortgage.
Guest: Yes and no. and and here here’s part of the nuance. So we yes, once the the mortgage is paid off, our spendings going to be somewhere around 65 to 75,000, but in retirement, what we want to do for three months of the year is be snowbird. We don’t want to live here in the winters anymore. It gets cold, it gets snowy, we’re done with it. So for three months of the year, we’re also budgeting living somewhere else, which accounts for basically tackling back in the mortgage amount and covering some of the medical cost here that we’re going to go through.
Scott: Okay, perfect. So I’m I I’ll put in $80,000 in income. What’s great about the early retirement world is you can manage your income, right? Your spending can be different from your income in early retirement. So, I’m going to put this, I’m going to intentionally set this actually a few thousand dollar lower to make sure that we’re below the federal poverty line cliff that I believe will be the case here. So we’re going to have a two-person household. We’re not going to have employer coverage and we’re going to have two adults. We said 42.
Guest: Yeah. when we retire, it’d be about 10 years from now. hopefully, so somewhere around 53 and 54.
Scott: Okay. Great. Okay. So 53, 54. And then we’re going to have no children. Is that right at this point? At that point, correct.
Guest: All right, great. So this is what what we’re looking at. Actually, what I’m going to do first is I’m going to I’m going to increase this number to a high level so we’re not getting the subsidy calculation. This calculator compute the subsidy calculation. If you did not get a subsidy and you chose a bronze plan, right? this calculator you have to kind of know what you’re doing to look through it so you can find the fire related stuff. A bronze plan is going to cost you about 13.81 per month at age 53. right? And this is what troops people up, right? This is the whole thing I’ve been harping on lately is if you guys are 42 and 43 right now, that number’s going to be different here. And you’re going it’s going to be $887, right? Like are those subsidies going to be around in 10 years? I don’t know, but that probably shouldn’t be plan A. So the way to do this right now is you’d literally do that every year and you cut or you know every five years and you kind of build out a model and say, here’s the here’s how much my spending will ramp if I don’t get subsidies for healthcare over this time period. and you also assume maybe no pocket to spend as well going along there. and you buffer that into your fire number. It’s probably going to be like, you know, a few hundred grand, like maybe 100, 150 to 200 grand on top of the 4% role number that you’re targeting with your your core portfolio. So that’s a complicated exercise. I’ve got an article on that that I’ll I’ll I’ll link to here in the show notes as well that talks about how healthcare costs rise sharply in early retirement and I do that for my own family, for example, using the the Obamacare. Now, with this, you know, should we also budget for a year every five years that would be max out of pocket into that as well because you you can take the the payments as far as what you’re going to be paying for insurance every month, but then you also need to factor in what if something happens and how do you budget for that as well?
Scott: My opinion is that like like we want to be realistic, not pessimistic in the fire world. And I think healthcare, I think that a it’s too pessimistic to assume you’re going to hit your out of pocket max every year, but it’s realistic to assume that you’re going to have some kind of hefty insurance premium and you’re going to have some out of pocket max every year. Here’s my article. um I spent forever nerding out about this. Why healthcare costs rise sharply with age and early retirement for anyone listening here. and what I assume here is this is that ramp I’m showing you over the course of your, you know, you’re going to retire somewhere here and you’re going to see this ramp going through this period. A version of that with the two-person household. And then it’s going to, you know, drop substantially once you get on Medicare at age 65, right? That then you have a huge drop off in costs. So you got to bridge this amount and I would ramp both your premiums and your out of pocket average expenses here. The volatility of expenses, you know, do they hit early or late is a risk factor, but in the really advanced mathematics of of withdrawal rates, it’s not that big of a deal to really delay or or be a core part of your your planning process to assume like, hey, you’re going to hit your out of pocket max in the first or second year here and go on there. It can impact it, but it’s not as nasty a variable as I initially assumed in early retirement math. And by the way, Karsten Jeske at early retirement now, big earn, if you want to get your PhD in the that this kind of of stuff here, you go to that site and you can check that out and and get he’ll he’ll defend that particular argument really well world-class world-class analysis over there. But yes, I think I think your base plan should be, I’m going to see my premiums increase and I’m going to see my out of pocket expenses increase as I age until I get on Medicare. The other factor of course is also like, yes, 4% is the standard for a 30-year retirement. With most likely or hopefully a 40 45-year retirement that we’re looking at with trying to retire early, do we use three and a half percent? you know, I I I’ve heard different arguments as far as lowering that the more years that you have in retirement.
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Scott: two of the people I admire most in the community here are Big earn, Karsten Jeske, who I think has done is is the most rigorous analyst on 4% rule withdrawals, maybe in existence, right? Maybe even beaten out Kison at this point, who’s also fantastic. And then there’s Frank Vasquez, right, who has a different argument and different take on the situation is much more aggressive. And I I respect and admire both of those folks, but I think if you’re looking for like what’s the risk off answer, you know, I think you start with big earn and you look at those that that study and say, here are the risk factors that would, you know, yes, encourage you to have a slightly lower than 4% withdrawal rate through that early retirement. And then you counter that with, well, that also leaves me with a pretty high probability of retiring or or or passing away with a a very large estate in many of these cases. So, there’s kind of a push and take there. But I’d argue and I’ll I’ll even reframe it for you, you already are arguably at fire, like within a few months, by the end of 2026, this year, you could have your mortgage paid off and your car paid off. And then you like your portfolio would suggest that you’re at the 4% rule at the end of this year if 10 years pass before you actually retire, this problem is going to be completely negated at that point unless we get a really, really unlucky stretch of market returns here. It doesn’t feel that way.
Mindy: No, it doesn’t because the numbers are so out of touch and they don’t seem real because they’re for retirement. retirement’s in the future. I looked up Michael Kit’s uh 4% withdrawal article specifically to get this one image. This is starting at a million dollars and this is how it grows. One of them grows to $9 million in year 24 after having taken out the 4%. So Michael Kit’s research suggests the traditional 4% rule is often too conservative, frequently leaving retirees with excess capital. Again, these are people who are withdrawing from the 4% and continuing on. There’s a couple that go below the starting value and in year 31, there is one that goes down below zero. One out of all of these, I don’t remember how many of these are, it’s a lot. And that is the year that people retired into a position of incredibly high inflation, late 60s, early 70s, we had high inflation and prolonged high inflation. So we’re in a situation right now where inflation is a little squiggy. So maybe it would be better to pull out at three and a half percent until you can see that yeah, this is going okay. You don’t want to hit the sequence of returns risks where the market is way down right when you retire and you start pulling out. What amount do you have in bonds?
Guest: We just within the past four months started a bond position within our 401Ks. We are typically, I would say 60 to 65% S&P 500 in our 401Ks. Then we have some small caps and mid caps, international, but I think we have like 3% bonds. It’s it’s very low because we just we’re not at the point where we feel like we can retire anytime soon. So it’s like we’re going to start slowly adding into that bond position, but it’s it’s nowhere near what a retirement age person would have.
Mindy: Oh, so you have 350,000 in traditional accounts and 800 almost 850,000 in Roth accounts. You can withdraw the contributions in your RAwth at any time. Does that go for a Roth 401K as well, Mindy?
Guest: It does. I just looked it up because I wasn’t sure. You just the contributions not the gains. The gains would be taxable. I don’t know how you figure that out because I’m not at a position where I’m going to start withdrawing from there. But I mean, if you’re maxing it out every year, that’s pretty easy. You know, $7,500 last year, okay, well, I can take out $7,500 and it’ll be fine. And I can take out the year before that was 7,000. I can take that out too. We switched over, so we used to be Roth IRAs forever in our 20s and our 30s. And then we started adding in the Roth 401K in our 30s as we built up a larger, you know, income, and recently in the past just three years, our income has gone up more than, you know, what we could have imagined. And so we’ve gone more traditional. I would say it’s 75% we put into the traditional now for maxing out 401Ks and only like 25% Roth. So we we’ve made that switch to be able to account for tax efficiencies.
Scott: I think that what’s awesome about this is you are basically on the cusp of financial independence right now and again, I’ll go back to, if you can if you stay invested this way, market could go, you know, any which way or whatever, but if we get anything close to average historitorical returns over the next 10 years, you’re going to see this portfolio more than double adjusted for inflation plus maybe double again, depending on how much you contribute and and add to the the pile on this. you’re gonna have a your paid off house and it’s going to start to be silly money at that point. and then so that this is awesome. This is a this is a great situation. And I think that what the challenges is if you came in and said, I want to retire right now, we’d actually have a fun financial planning challenge at that point. it’s no fun. at that point there’s no fun there because you’re so far beyond it. You just you you have fun. You have to spend more and retrain your brain to spend more at that point in 10 years if we get anything close to historical average returns. But in the current situation, I think there’s a real argument to be made that we have to be a little careful because you can’t quite be totally confident in your fire plan on there. But what’s awesome about your situation is at this like 4% withdrawal rate which you’re right at basically once you pay off that mortgage and the the car loan even with a little bit of snow burning, if you could bring in like 25 or $30,000 in active income in the first few years or in a down year for example, that essentially totally negates the small percentage of situations that either run out of money or begin to see your accounts dwindle as you approach traditional retirement age, which is a big challenge mentally for a a lot of folks that would be for me. That’s one option that’s very realistic for you guys. You guys, I think literally might be able to be in a position where if you wanted to spend this amount of money, you could potentially sustain it for life if you bring in just a little bit of income and you would significantly de-risk your situation. Our goals and our focus is 10 years down the road, mainly because our youngest son should graduate from high school in nineish, 10 years. And so when he graduates, you know, and goes off to college, we’re using that time as our, you know, exploring us time frame, you know, where we snowbird, not, you know, a second home, we’re we plan to bounce around to different locations, you know, explore different parts of the the country, but we want to enjoy that as well and that’s why, yes, right now based off of basic needs and stuff like that, you’re you’re right, we’re probably close to that five number, but we don’t want to live a basic needs life. We want to live to enjoy it. And so that that’s where some of the nuance and why the the anxiety builds up a little bit as far as our spending.
Scott: So it sounds like you have a fire number that’s larger than this. You’re living within your need, your your means now, but your goal is much bigger than that. Do you have any idea what that looks like?
Guest: Yeah, our goal number, you know, is somewhere near a cash flow of between 110 to 125 and you know, that would account for increased in medical costs as we discussed here. It includes, you know, snowbirding for three to four months of the year and being able to to rent a place wherever we want for that time and be able to withstand our current bills and and spending habits, which also includes some inflated costs because we do have two kids in sports and all this other stuff that probably goes away in that time, but I don’t know, so I can’t really plan for it.
Scott: You’re absolutely on track to get to that point. That’s that that implies a $3 million financial portfolio essentially. That will go a lot farther than what you’re spending today. so it’ll feel like a lot more once this mortgage is paid off, for example, that won’t be a part of that and and you’ll you’ll probably be debt-free by the end of this year. So what I’m reading here is, how do you protect what you’ve built while also growing towards that number? Is that the main crux of that question?
Guest: That’s the the main part of that one and also how do I fund the certain assets? Like do I continue to pile in as much as I can to the retirement accounts like the IRA and the 401K or do I now set a bigger portion of that budget into the taxable brokerage, even though it’s not as tax efficient so that I can have that freedom fund, that freedom bucket for those years before those retirement accounts can be withdrawn from.
Mindy: Yeah, I like that option and it isn’t like an all or nothing thing. It isn’t all 401K or all brokerage. You can still, I don’t know if you get any sort of company match, absolutely do whatever you have to do to get the entire company match. But then if you retired in 10 years, so then you’d be 52 and then you’ve only got like a seven-year 72T. So you can start accessing those funds. That’s a much different story. I like the brokerage idea because that is, you don’t have to do anything with that. Those are your funds, you can pull them out anytime you want. You’re only paying taxes on the gain. So if you sell a stock that’s priced at $100 that you bought for 75, you’re only paying taxes on that 25. But you still get the whole $100. So it’s a lot easier to like manipulate that income for tax purposes. So you have a better handle on your taxes. I would personally in your position do what I could to max out the Roth IRA for sure. The Roth 401K gives you a lot of options. You can pull the contributions out at any time, but the after tax stock portfolio gives you like all the gains too. You have access to all the gains. What I really want to, you know, focus on that Roth since 66% of our assets are already in Roth and you know, we we want our spending is going to be a lot lower in retirement than it is currently at our income levels. This is our highest earning income years, the past three years. So I I want to focus on bringing that taxable amount down.
Scott: Here’s what I’m thinking, right? So I’m going through this and I’m saying the 22% bracket for married filing jointly starts goes from 100,000 to 211,000 here, right? After your standard deduction and deferrals, right? You’re going to be in that 22% bracket with a good chunk of this. I think that’s right. Like when we talk about the middle class trap, right, in these other episodes, we’re not talking about your situation, which I think is is Roth heavy and really enviable um here. we’re talking about people who have it all in the pre-tax side of things. and then they get with if they want to access it early, they have to literally stop working to move into a lower tax bracket to begin accessing that money or doing Roth conversions whatever. You don’t have that problem. You did it right the whole way here. You maxed out the Roth while you were in lower income tax brackets for years, decades clearly to get this going. That’s an awesome position and now in the higher income tax bracket, I completely agree, right? We want to balance across these accounts, but in your situation, in your timeline with this Roth balance here, probably a good amount of principle. I would be focusing on this one. I would take your match, 401. I’d be focusing on maxing out the HSA. would love to get that to 100 grand plus by the time you’re hitting that retirement goal. That’ll be a huge boost to you and we’ll it’ll drop you um in there. And then I’d I’d I’d max out this 401K. And what’s great about your situation is you don’t have to choose and sacrifice because watch this. When we knock out this mortgage payment, your spending drops to $66,000 per year. You’re generating 134,000 even with the huge pre tax deferral contribution, you’re still generating $134,000 in, you know, after tax cash generation, you only have to spend $66,000 of that. You’re going to build up your after tax brokerage account anyways even after going through this stack and adding a little bit more to your HSA and your your your 401k. So that’s what I would be doing in this situation. I think it’s very simple and straightforward from order of operations, like very traditional here and it’s because you did it right and didn’t defer for 20 years to have a huge balance here right as you hit your peak earnings years and want that optionality. So I think we can do a very uncontroversial or very straightforward approach in your situation. And the wonderful thing is because once your expenses will be so low after you’ve knocked that out and plus by the way you’re going to have your your vehicle payment down, right? So we can knock this down to like 150. So you’re going to generate even more cash after that. When the mortgage is paid off, we’re going we’re going to put all that into the brokerage, that 2500 a month into the brokerage, so that’s going to build that up. Should we lower that 45,000 in deferrals to a a smaller number to pump even more into that brokerage to be able to float those years before age 60.
Scott: I think if you want to get really technical about it, I’m having a little trouble getting, I’m because it’s very complicated here, but we have the HSA is going to be like 8,500. You’re going to have a match and if you max both of these 401Ks, you’re going to get to something like 49,000 in 2026 or 2027 if the inflation just equivalent. So if you really want to get technical, then I think that it would be hard to argue that you shouldn’t do that for every dollar over the 22% tax bracket. In the 12% tax bracket, then we have a different argument maybe because this this tax estimate needs to be precise because it matters and it’s not yet to the way it needs to be. But we’ve got the one big beautiful bill tax credit for child tax credit, which is going to change your taxable income a little bit as well. There’s a couple of other like nuances in in your tax situation that I haven’t quite nailed in this particular spreadsheet. in terms of how things are are treated in here. But I wouldn’t be surprised if you did a more sophisticated analysis, you were like, I’m going to contribute like somewhere in the 40,000 range to my 401Ks and that coupled with my HSA is going to move my marginal tax rate on the next dollar into the 12% bracket and at that point, I think you’ve got a very strong argument for not contributing that to your 401K and building up your after tax position. And and again, I think the target that we want to build is we want these to be roughly a third, a third, a third by the time we hit retirement, but we don’t mind if the Roth account is by far the biggerly big third. That’s a great situation. So that that’s how I do it. You want a little bit in your HSA as well. That one would be really nice to bump up to 10% of your position if you could. I’ve been using that as kind of like a a payment plan for the the the medical bills and stuff like that. I know it’s not the the the fire thing to do but I that’s where I I put that money in that bucket and that’s the bucket that’s paid for medical expenses.
Guest: I would quibble with you there. It doesn’t it doesn’t really matter because you’re doing everything else right. but but I think that’s a I think it’s a great like you got a great situation here.
Scott: As far as taxes go too, I I will let you know that my my salary is not a salary, it’s it’s commission. I earn what I make. So I put in basically what is expected, but the the variation in the past, let’s just say take the five years, five years ago, our household income was like 125. Last year, it was more like 340. So it varies so much and I mean it just it’s it’s hard to predict where I’m going to land each year.
Guest: What I might consider in that case is wait to contribute to these traditional accounts until closer to the end of the year. So, this is perfect. You implicitly already do this. You have a large cash position that’s going to be almost three years of expenses once you pay off your mortgage, right?
Scott: By the way, I I don’t know why you wouldn’t just pay off your mortgage and your car loan with this cash position right now, that would reduce your expenses.
Guest: Five weeks, Scott. Five weeks.
Scott: Okay. Very enough. Okay. Now we’re sitting there and we’re saying this number is really variable, 125. So if that number’s huge, then you max out the pre tax and you say I’m going to I’m going to hit everything over this, you know, you pick 22, 24 or 32% bracket. I think in your case, I like the 22% bracket, but if you had a huge 401k balance already, I might just pay taxes on that and begin building out something differently, but you did it so right for the last 20 years or whatever that we can do the the classic playbook in this situation. And then I think if it’s lower than that, so let’s say let’s say you have a bad year, it comes in like at 1000, then all of a sudden you’re everything’s going to be in the 12% bracket and you can either you can just max out the I would still max out the Roth in your situation because this accumulation rate is so huge. why not put the Roth contribution to the limit and then put everything else in the after tax brokerage. But I think you can choose and you can do that towards the end of the year when you have a better line of sight into what your what bracket you’re going to be in. And I just do it 100%. like when I did this at work, I would literally have a cash position like yours and I would have 100% of my paycheck going into the whatever retirement account until it was maxed and then I would make the next decision because if you’re going to do it, you might as well put your foot on the gas and do it the whole way. I did that for a couple years. when we didn’t have in between mortgages, when we paid off one house before we started the next, I would basically have a 50, I think it was like 50% of my, you know, income going into the the retirement and I’d max that out by like, I don’t know, April, May, and then have the cash flow to do whatever the rest of the year. But that’s changed with having the mortgage. Do you get a company match?
Mindy: My company has one where it’s a safe harbor. So it doesn’t matter if we put in or not, they automatically put it in. My wife’s, it is based off of yes how much she puts in. so she I think she has to at least put in six or 7% and it’s only if they have a profitable year and they do it all lump sum in January or February or something.
Guest: Okay. I want to just point out to anybody listening who has a company match, make sure you talk to your HR department. Some companies will only match when you’re putting in that paycheck. So you lump sum it in the front and then you miss out on the match towards the end of the year and you might not realize that until after you’ve lumped sum it. So definitely make sure you if your company has a match, you know how they’re matching so that you’re maximizing your match as much as possible. I’ve heard stories of that. I’m like, oh my goodness and you only learned this after you lump some it, so you miss out on the match the whole rest of that year and that’s a expensive lesson. I’ve never worked for a company with a match, so we always just front loaded and just 100% of the salary went into the 401k until it was maxed out. That’s right. Bigger Pockets did not have a a match program because we did a safe hardware.
Scott: Yeah, you did a safe hardware.
Guest: so that’s be a good incentive to sell more because every time you sell more, you also get the 3% more safe harbor. Yep.
Scott: What’s also remarkable is that this has been going on for a while, the sales job?
Guest: No. So after we paid off our first house, that is when I was like, all right, I I have now the the relief of like the stress and stuff like that. I’ve been able to have to pay for this mortgage that I was like, all right, let let’s try this position that, you know, I feel like I could do and that’s when our income, you know, exploded for the last four years and it it’s a great earning avenue for us.
Scott: Okay, so you’re asking so these questions about how are you going to retire with $3 million bucks. I’m an optimist about this, you know, sometimes uh too much, but I think I think in five years, you’re going to be like, well, I’m this is this is dumb. Why am I waiting until 52 for this? Because I have all this optionality right now. I can probably sell some things while snowbirding right now and live a very five version of life in there. But I so that I think that day’s coming sooner than you think based on what I’m seeing here. Maybe you don’t retire but but you know, you just generate a little bit of those sales income that totally de-risks, you know, traditional. And and that is an option that I I have thought about, I’ve discussed and I I generally like my job. It you know, I I like working, I like doing stuff. I like servicing, you know, for people and you know, if that comes with the freedom of being able to live where I want to, then yes, no, I I could see myself working longer than even what the original plan is.
Guest: You mentioned protect what we’ve built. That was your second question when you came in. What does that word protect mean in this context? But we we discussed the optimal portfolio mix in the tax brokerage and various arguments there, but we did not discuss this question.
Scott: It’s a sequence of returns type of question. So we’re here, you know, early to mid 40s now and we we have this 10 year time frame. So it it feels to us, man, this is crunch time. Now we have to get our stuff together. We both started investing in 2001, right as everything was tanking with the dotcom bubble. Then we both lived through 2008. My wife lost her job for eight months. I mean, we were living off of I think in my pay at that time got deducted by 25%. We were living off of $28,000 a year. We we know what these cycles go through and so we’re just like apprehensive like how do we avoid a 50% drop in the next 10 years because to rebuild that back up is is a very daunting task.
Guest: Okay, so so we got severa options here. Now now we’re getting into territory. We don’t provide specific investing advice here. But let me give you some resources because I love this question, right? because you know, here here are other here are risks I’ve been worried about, right? Like cape the cyclically adjusted price to earnings ratio, even when you if you go to Karsten I’ve been going down the big earn rabbit hole in particular lately on this and uh even with his adjustments, it’s at a very high ratio and that is a real threat to 4% withdrawal sequencing. And you know, people will argue that but I think it’s I think he’s done really rigorous research on that. You should definitely check out early retirement now and begin diving into that because that’ll get you more comfortable with these risk profiles. I think that one potential answer to that a rabbit various options to begin exploring to address this concern is one the Paulman website. So we had Paulman on recently. He is fantastic and has done a lot of research around growth portfolios and he’s got a couple of different portfolios. Let me see here. Basically, you can factor tilt your portfolio. So you could say, you know, US, I’m going to tilt to US and international or I’m going to tilt to, I’m going to have 25% in large cap growth like the S&P 500, you know, I’m going to have 25% in small cap value. I’m going to do the same thing 25% in the international equivalents there. and you could do all these different variations of that. That, you know, the whole market can go down, so you can lose big, no matter what you’re investing in here, but you might get a little different flavor of those returns, right? Like the the .com crash, someone who had a 50 50, you know, large cap and small cap uh fund had a very different experience for the next 15 years than someone who was all in the S&P 500 for example, right? There’s tradeoffs, there’s only tradeoffs. There might be, you know, there will be complexity with that. There will be rebalancing and there will be seque you know, there’s still return profiles that’ll be different over that time. But that that’s the rabbit hole to go down if you want to stay invested in growth portfolios for the next 10 years and maybe at least get a different flavor of of return profile than just the S&P 500 for example, if you’re starting to think about this word protect. The other option on the farther extreme is going to be something like Frank Vasquez’s uh risk parity portfolio. So risk parity portfolio is going to have, you know, exposure to a variety of different asset classes and we’re going to try to get very different, you know, ideally things that are totally uncorrelated or even negatively correlated um with the portfolios. The problem with a risk parity portfolio and I think Frank has done wonderful research on this is for someone who is as young as us, right? You’re in your early 40s and I’m in my mid 30s, there’s a real drag on the portfolio returns over the next 50 years that we might, you know, we might live. and So that portfolio might be suboptimal, might not have enough growth tilt depending on how you build it. You can, you know, there’s a a bunch of different favors of risk parity that you can build as well. But those would be the two things I’d I’d point you towards um in terms of optimal portfolio mix, again noting that once we start saying, here’s what to invest in, we begin to get our find ourselves getting into trouble um here on Bigger Pockets Money. Speaking of the risk party uh portfolio. How’s your uh $10,000 portfolio? Mindy uh that you guys did and withdraw what $7 a month or is it 40? It’s $42 a month, which is over the course of a year would be a 5% withdrawal. I started with $10,000. I have withdrawn $42 every single month and my balance right now is $11,015.97. So gold has been my biggest performer. That’s what I’m selling every time I’m selling something trying to rebalance because it just keeps going up and I didn’t want to put gold in there, but Frank told me to, so I did. But yeah, I keep withdrawing and it keeps going up. And this past performance is not indicative of future gains, but it’s it’s been a good one.
Scott: Awesome.
Guest: And it’s only been since July, but it’s it’s been a good performer since July. And we’ve had some up and down uh in the market with the uh war in Iran and the tariffs and then there’s no tariffs and then so the market’s been up and down and up and down and it’s still chugging along. I have more money in there than I started with and I’ve been pulling it out.
Scott: What’s fun about investing is these these three guys who I I really respect all three of them, you know, Frank Vasquez, Paul Meck and uh Karsten uh Jeki from from uh Bigger. All have conflicting opinions on on what’s best here and I think they’re all right in different scenarios for different goals goals and and uh portfolio allocations. So I I think that’s fun and but that that’s the rabbit hole I’d point you down I I’d point you towards. If I had to guess, I would imagine you’ll find Paul Merriman more your current flavor and you’ll find, you know, uh Frank and and and Carsten’s conflicting arguments more appealing once you actually start trying to pull the trigger and live the fire lifestyle. That might be my guess, but I I don’t know what you’ll end up actually doing there. One of the things that I get caught up in all the time since I can, you know, choose my own flavor there is just all the different options whereas the 401K, you only have these options that the company provides for you in the brokerage. I am all over the place. I you know, V QQQ, you know, uh VYM, those those are my stalwarts, but then I’m I get into like read and then you know, small caps, large caps, all this other thing. I I have like 20 25 different options when I know I shouldn’t be in all of those. It it’s just any advice on how to control that urge to just diversify everything?
Mindy: VTSAX diversifies everything. then you own it all. I also kind of struggle with that. We are trying to streamline it a little bit more, but I don’t know that we’re actually going to do very much with it. Why don’t you want to have all of these positions?
Guest: I just think it it’s overkill. I that’s why I said I have those three core funds, you know, the S&P 500, the technology and then a dividend fund, and then the rest are just kind of like supplements. Do you enjoy having them or does it cause you stress?
Scott: No, I enjoy it.
Guest: Then there’s no reason why you shouldn’t.
Scott: I think it’s not optimal like I have like read and stuff like that. It’s like in a taxable brokerage, I know it’s not efficient, but I that’s where I get caught up is like is that the right thing to do?
Guest: I think that a good exercise and something else Mindy and I are working on is an investment philosophy template. So we’ll provide like a starting point of draft of like here are the things that we like at bigger pockets money. um in here and we love index funds and the passive portfolio and we also love the alternative space in there and there’s a role to be played in each of those. And we believe that a lot of people have unique skills or unique interests that make all these alternative plays very appealing for them and the income from those reacts with what the optimal portfolio looks like for them and in the context of more traditional finance, right? So like someone with a rental property may need a different type of traditional assets there. I think that if you write down an investment philosophy and committed to paper and you can write as a draft and sit on it for a year or two and evolve it, but that that might be what the the tool you need to feel comfortable with your approach, but I’d also argue that at this point you’re you’re talking about a very minimal tax drag on your portfolio. If you make this decision right, what we talked about earlier and you have a good thesis for why you are deferring based on your income tax bracket, that’s going to matter far more than 10% of this after tax brokerage position being tax inefficient because it’s in a read instead of having that that income hit in your Roth or your traditional account, right? I mean you have 83 grand in your after tax portfolio. It’s like 5% of your liquid financial portfolio.
Scott: Yes, as of now, and just with my goals, it’s going to start getting bigger as we pay off the house because then it’s I’m going to be funneling a lot more in there. I’d like the idea of making the mistakes while it’s small and then getting more optimal as I grow it.
Guest: The textbook play, I think would look something more like having your income if you have it hitting in your traditional, your growth, long-term growth hitting primarily in your roth and then the the balance of the two hitting in the after tax portfolio, avoiding the active income in your earning years if you can hitting in that after tax position. and that that framework will get you most of the way towards tax efficiency, I think.
Scott: Make sense.
Guest: How we doing? Still still answering your questions here. This is what you’re looking for?
Scott: Yeah, I mean, you’ve you’ve touched on everything that’s that’s the key points here. The the medical, that that’s the the highest, you know, anxiety point that hits me each day. And then the the rest of the rest of it is just like, yes, should I be the 4% or the three and a half percent which we touched on and then how to model that in between the tax deferred, taxable and Roth and and and we touched on that as well. So, yeah, I think we touched on everything.
Guest: I think if you said I want to retire today and never earn another dollar, I would say your friend is bigger over at early retirement now and his more conservative case. And if when you get to your goal, you’re going to be fine at the 4% rule paradoxically, most likely because you’re going to have overshot to a certain degree. and I would also say that you can spend even more than that if you’re willing to earn some active income starting potentially much sooner, which I think is probably where you’ll I would if I had to guess where you’ll land in the next four, five, six years, or just doing something you like or enjoy. And I bet you that if you keep your expenses this your core expenses this low, you’re going to have that feeling of freedom very well justified within five, six years we be my my hope. We’ll see. Uh I would love to you tell me if I’m if we’re wrong in five years. You have to check back in.
Scott: We’ll be here. All right. Carl, thank you so much for sharing your numbers with us and for sharing your time with us today. We really appreciate it and we will talk to you soon.
Guest: All right, thank you Mindy. Thank you Scott.
Mindy: All right, that was Carl and that was his specific financial situation and his specific goals. And Scott and I were answering those questions, but I think there’s a lot of people in our audience who have a very similar situation. Scott, what did you think of Carl’s position and my comment that our audience has a lot of these same problems?
Scott: I think you’re absolutely right. I think it’s a I think it’s a great challenge and I think what’s awesome about this this challenge and what we’re learning about investing and, you know, optimizing for some kind of early retirement is two frameworks, right? One is there’s a very simple path to building wealth. right? We know that right? J L Collins, VTSAX or whatever it is, you know, you know, we can’t say specific funds or whatever but you know, like the S&P 500 boring old old fashion index funds and that’s great. That is an optimal way to passively build long-term wealth. Once we star kind of wanting to move a little more towards protection however, that philosophy breaks down and we need some other version of that and there are multiple schools of thought that I don’t know if I have my my a fully formed framework around yet for myself much less other folks. We have very good opinions from Paul, very good opinions from Frank Vasquez and very good work done by Karsten over at early retirement now. But I think that’s where it gets a little more new. That’s fun. and the second major framework for someone in this position is what should I be doing with my retirement accounts here? And I think that what we do know from from um Cody Garrett and Sean Melani is that the right answer or is some kind of balance, having funds in the taxable account, having funds in the wrath and having funds in the pre-tax and HSA. That approach, when you have that framework in mind, you can begin to kind of move the the needle there. And then and then it’s what tax bracket am I in today and what tax bracket am I going to be in tomorrow? And so it’s always a custom, you know, analysis of what’s the right answer, but if you apply those two frameworks, you can get pretty close I think on your own to getting a a more right answer. It’s always a guess in the end as to what’s optimal, but in his case, I thought that his pre tax balance was light and so there’s an opportunity to defer taxes now. And after he pays off the mortgage and the car, his after tax accumulation will still be huge on an annual basis building up his after tax brokerage position. So that was my flavor on that, but I think plenty of people will disagree and if you do disagree, please leave a comment here on YouTube. We’d love to hear different opinions on it. I think that this is a a a place where smart people can disagree.
Scott: Yes, absolutely. Um I think that you are correct, but also his timeline is about nine or 10 years. He’s got such a great base and I mean he’s two-thirds of the way there. So even if he just lets it grow for 10 years, it’s probably going he’s probably going to get there anyway and that’s actually not something I even thought about until we I’m looking at these numbers right now and and considering his timeline. He’s got a kid who’s not going to graduate high school for about nine more years. And a friend of mine once said, you are only retired, like truly retired when your last kid leaves school. You’re you’re not really early retired even if you’re not working, if you’ve got a kid in school, not homeschooled but in an actual school, you’re location dependent anyway. So I think he’s going to just continue to put money into these accounts. Honestly, does it matter where they go? Not really, he’s going to be in a great position. He’s he will probably get to 10 years from now with $5 million of his $3 million that he wants. I think there’s a good chance he outperforms as well. And I, you know, you know me, I’m I’m always very conservative and cautious about the markets and those types of things, which is why I’m so fascinated by these these different schools of thought with Frank and and and bigger and and uh Kison and Paul Meck and all that. So I I think there’s a really there’s a really fun stuff going on there, but I I also think that he’s so close to being financially independent, you can basically defray so much of the sequence risk if you earn a little bit of money, right? If he earns 30 grand a year, which would be no challenge for him in his sales role on some kind of part-time basis or perhaps some certain clients in there. That’s half his spending, right? You you almost never have to sell a portfolio, you know, if his if his financial portfolio is 1 1.4 million and it generates 2% um yield across that, then he’s got his entire expense set with that with just between those two items there. He he might actually liquidate any part of his equity position in there just off the cash flow between those two things and he’ll be a little tax bracket. So that’s the last piece I think that in situations like this, I would argue many people are much closer to having the version of freedom that they want than they than they think um as they’re approaching this if they if they start putting that into their their minds.
Mindy: I would argue that as well, Scott. I think a lot of people are a lot closer and they’ve got this what if syndrome. What if, what if, what if? Well, you know what? there’s a lot of what if that you can you can throw out there. What if the market crashes by 50%? I read this great quote by Michael J. Fox. It said something like, don’t worry about what about the worst case scenario, it chances are, it’s probably not going to be like that anyway. And even if it is, you’ll just live through it twice. So don’t worry about if the stock market’s going to crash or if, you know, you’re not going to have enough money for retirement if you truly have the 4% rule money. I mean, what did it say? Kiss says everybody’s super conservative and they’re way too conservative and start off at four but then bump it up to 10%. There’s so many different options for people who get themselves to the position of financial independence in the first place. I think they’re really just borrowing trouble. What if I I have almost a million dollars in my Rawth at age 42 and my kid, by the way, did you see that the a 80 grand in the the beneficiary account, which I’m assuming is the uh college fund for his kid who’s nine years away from graduating high school, right? So so I mean, college is funded, we’re all set. What if I could spend the next 10 years doing something I’m really passionate about, easily cover my living expenses and have plenty of extra spending money from the portion of my portfolio that is liquid right now. What if I could do that instead of grinding away for 10 more years and my health, my wellness, and some passion project develops in in an incredible way over those those 10 years? That’s another what if uh as part of this. And that that opportunity is going to pass too. So there’s there’s only only trade-offs in in personal finance. Yeah, and why do we what if the bad but not the good? What if the good too?
Scott: I always what if the good and people complain about me being optimistic on here so
Scott: All right, Scott referred to an article that he wrote on our website about insurance. I am going to include that in next week’s newsletter. So if you’re listening to this episode now and you’re not subscribed to our newsletter, you can rectify that right now by going to biggerpocketsmoney.com/newsletter. Uh and if you want even more financial independence information, you can follow us on Instagram, Facebook and YouTube at Bigger Pockets Money.
Mindy: Also want to put a call out here. I am now starting to get and find myself I I’m loving this. I’m having so much fun building like this this tax analysis for personal financial statements. I want to model out health care costs as they rise. so we can all model this problem on BP money and all that kind of stuff. I’m going to do it over the next year or two, but if anybody out there is interested and is very detail oriented and has a skill set in this stuff, I would love to reach out, happy to attach your name to to it or potentially um we can work out some kind of small payment or whatever. But if anyone in the bigger pockets money audience loves nerding out about this stuff, I could definitely use help making sure painstakingly that these tax brackets are right, updating them every year, trying to figure out how to map health care costs to the right places there. all that kind of stuff. That’s that’s a modeling challenge. It’s very solvable, but it’s a lot of detail work. and if anyone out there is interested in that and wants to help contribute to these free resources, please let me know. Scott at bigger pocketsmoney.com. It will help me speed up the process here which I tackle in in Sparts. All right Scott, should we get out of here?
Scott: Let’s do it.
Scott: All right, that wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench. I am Mindy Jenson saying top top lollipop.
Mindy: When I evaluate debt funds, I look for things like first position loans, personal guarantees, deep experience by the fund operator, low fund leverage, fast liquidity and consistent returns. These are some of the reasons why I’m excited to partner with Pine Financial group. Their fund six offers investors exposure to real estate credit largely for construction and rehab with loans originated by an experienced originator with over $1 billion dollars in origination volume. They offer investors an 8% preferred return paid monthly and a 7030 LP GP split of everything over 10% paid annually. The lockup period is nine months with liquidity available within 90 days after that nine month commitment. The fund is open to accredited investors only. The fund’s minimum investment is typically $100,000. but Pine Financial is able to reduce that minimum for bigger money listeners to a minimum of $25,000. Full disclosure, I am personally invested in this fund through my self-directed IRA. Pine Financial is sponsoring this message and our podcast. Go to biggerpocketsmoney.com/pine P I N E. Please note that returns are not guaranteed and may vary based on fund performance.
