RPF-0046-What_Do_I_Do_With_a_Stinky

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00:00:29.640 | Radical Personal Finance, episode 46.

00:00:32.640 | Welcome to the Radical Personal Finance podcast for today, Friday, August 22, 2014.

00:00:55.640 | It's Friday. I thank you for being here with me today. I am excited about today's show.

00:01:02.640 | We're going to be doing a Q&A show, but I'm going to be answering one question in depth.

00:01:07.640 | And it's going to take us through the entire world of financial planning.

00:01:12.640 | But I think it'll be useful. I hope you like it. Stay with me.

00:01:21.640 | It feels really good to be back in the seat after being out of town last Friday, traveling.

00:01:26.640 | So I'm back now, back to my own home office, back to my normal microphone, able to get some stuff done.

00:01:32.640 | And I'm excited about today's show. It's going to be fun.

00:01:35.640 | I'm going to answer a listener question. This is a detailed question.

00:01:38.640 | And as I got this question, there were so many good things that came out of this question.

00:01:43.640 | That I said, "This is going to be a great way to kind of, in some ways, aggregate everything that there is to know about financial planning

00:01:52.640 | and show how it's incredibly simple, but incredibly complex."

00:01:57.640 | Now, that may sound like a bit of a confusing introduction, but stay with me.

00:02:03.640 | Listen to today's show, and I think you'll understand.

00:02:06.640 | So today we're going to be answering an email that I received from Jason in California.

00:02:11.640 | And Jason was very kind. He sent me an email. And I'm going to read that email to you.

00:02:15.640 | And then we're going to go through it step by step.

00:02:19.640 | And you'll see it's going to provide us some really great opportunities to talk about a lot of valuable financial planning topics.

00:02:27.640 | Jason's email goes like this.

00:02:29.640 | "Joshua, I don't consider myself a financial expert by any means.

00:02:33.640 | But I have it figured out, figured, that I would like to have a decent retirement with an annual income of around $80,000 a year minimum.

00:02:41.640 | About two years ago, I started investing heavily into my 401(k) account.

00:02:46.640 | In 2012, I contributed $10,000.

00:02:49.640 | Last year, I maxed it out.

00:02:51.640 | And I plan on doing the same this year with already around $11,000 contributed.

00:02:56.640 | My account balance is currently $50,000 as I write this email.

00:03:00.640 | My employer uses One America, and I am very unsatisfied with the program,

00:03:05.640 | as nearly all of their investment options have expense ratios over 1%.

00:03:10.640 | I've talked to my boss and HR, and they aren't going to change a thing.

00:03:14.640 | There is also no fiduciary.

00:03:16.640 | So I doubt these expensive funds and such are in my best interest.

00:03:20.640 | Starting this year, however, they have started giving everyone an automatic 4% contribution no matter what.

00:03:26.640 | I also enjoy getting taxed less as I contribute roughly $680 a check biweekly.

00:03:32.640 | Something makes me think I'm just wasting my money by contributing so much into the 401(k) though.

00:03:37.640 | About 10 months ago, I joined Sigfig.com.

00:03:41.640 | If you've never heard of it, they invest your money for you based on your tolerance level.

00:03:45.640 | In those 10 months, I have contributed $4,600 to it.

00:03:50.640 | They use Ameritrade to purchase funds and such, and use mainly Vanguard mutual funds with exceptionally low expense ratios.

00:03:57.640 | They charge nothing for their service unless you have an account of about $10,000,

00:04:02.640 | and then it's just a flat charge of $10 a month.

00:04:05.640 | Anyway, I've made roughly $250 in those 10 months.

00:04:09.640 | While this isn't a lot of money, I feel that it can grow quicker than in my 401(k).

00:04:14.640 | My next goal is to be able to buy a house, flip it, and repeat.

00:04:18.640 | My ultimate goal is to be able to purchase land and build a state-of-the-art mini storage business,

00:04:23.640 | as they are a gold mine with very little effort to run once established.

00:04:28.640 | I guess I'd like to know where should I keep my focus.

00:04:31.640 | Should I contribute so heavily to my 401(k)?

00:04:33.640 | Should I spread what little assets I have?

00:04:36.640 | If so, where?

00:04:37.640 | Should I take a risky step and pull out the $50,000 in my 401(k) account,

00:04:41.640 | take the 10% hit, and then try to buy that first fixer-upper?

00:04:45.640 | I'm very interested in what you have to say.

00:04:47.640 | I forgot to mention that 4% is off of my base pay of $30 an hour,

00:04:51.640 | so that's a company contribution of $2,496 annually.

00:04:55.640 | I am "maxed out," as they say, so that won't be increasing.

00:04:59.640 | I haven't even gotten a raise in three years, but I can't complain.

00:05:02.640 | I know I make more than the average working adult.

00:05:05.640 | Thank you.

00:05:06.640 | Jason in California.

00:05:08.640 | Jason, thanks so much for writing the email.

00:05:10.640 | And I want to start just with a quick comment to you specifically.

00:05:14.640 | Don't be offended at anything I say in my answer.

00:05:17.640 | I'm going to be very direct in my responses,

00:05:20.640 | and I may be completely wrong on something simply because I don't know you.

00:05:24.640 | I don't know anything about you other than what you've written to me here in this email.

00:05:28.640 | And probably, if you're anything like me, I often will sit down and kind of quickly dash out an email.

00:05:34.640 | So I'm going to use some of the words that you've written, some of the sentences,

00:05:38.640 | but maybe you just quickly wrote it out, and maybe I'm reading too much into it,

00:05:41.640 | or maybe I'm not taking something seriously enough.

00:05:44.640 | But I'm going to use this as a teaching tool for the audience.

00:05:47.640 | And I'm going to comment on some things, and so just don't be offended at anything I say.

00:05:53.640 | I'm going to give you straight answers.

00:05:55.640 | You might like some of them.

00:05:56.640 | You might not like some of them.

00:05:59.640 | But I'm not going to give a specific answer to any of your questions.

00:06:03.640 | But I'm going to be very specific.

00:06:05.640 | But I'm not going to give a specific answer to any of your questions,

00:06:08.640 | and there are a few reasons for that.

00:06:10.640 | Number one, I really don't have enough information.

00:06:12.640 | So I have an email, and so I could have emailed you back and said, "What about this?

00:06:17.640 | What about that?"

00:06:18.640 | But that's not going to be helpful.

00:06:20.640 | I don't have enough information,

00:06:22.640 | and obviously we can't do an individualized financial plan for you here on the radio,

00:06:27.640 | or I guess the podcast or the Internet, whatever this is.

00:06:29.640 | And it would even be problematic for me to give you a specific answer

00:06:33.640 | because of all the restrictions on what is and what isn't financial advice.

00:06:37.640 | So I have to be very careful not to give financial advice.

00:06:40.640 | And there's a difference between my teaching and my talking about financial topics

00:06:44.640 | and me giving a specific answer to you and saying, "Here's specifically what you should do."

00:06:50.640 | So I'm very careful about that.

00:06:52.640 | What I'm going to do is I'm going to tell you how I would think through your problem.

00:06:56.640 | And frankly, I think that will be the most useful thing for you

00:06:59.640 | because the key is for you to develop a plan that's customized for you,

00:07:05.640 | and the key is for you to think through your problem.

00:07:09.640 | And also I think it will be the most helpful thing for the audience

00:07:12.640 | to hear how I would think through the problem

00:07:14.640 | because then instead of my giving you an answer and saying,

00:07:17.640 | "Jason, you should do this, you should do that,"

00:07:19.640 | which would be arrogant and ridiculous

00:07:21.640 | because I don't know what you should do with your life or with your money,

00:07:24.640 | all I can do is help you think through the options.

00:07:27.640 | And even if you had hired me as a financial advisor,

00:07:30.640 | I still can't tell you what you should do with your money.

00:07:33.640 | I can only lay out for you, here are the options,

00:07:36.640 | and then at the end of the day, it's your money.

00:07:39.640 | You could hire me for specific services,

00:07:41.640 | but I could never tell somebody what they should do with their money

00:07:45.640 | because all of us are different.

00:07:47.640 | So I'm going to start with sentence one.

00:07:49.640 | You said in your very first sentence,

00:07:51.640 | "I don't consider myself a financial expert by any means."

00:07:55.640 | And here's where--open up your ears and don't get offended by what I'm going to say

00:08:00.640 | because I think this is just such an interesting place to start.

00:08:04.640 | You are a financial expert in one way and you're not in another.

00:08:09.640 | But here's why. You are a financial expert.

00:08:12.640 | It's your money and you've earned it.

00:08:14.640 | So therefore, you are a financial expert.

00:08:16.640 | You're an expert at earning money and saving money.

00:08:18.640 | And you've saved, even if I ignore any of your other assets that you may have,

00:08:23.640 | and I just look at your 401(k) account,

00:08:25.640 | you've saved $50,000 in your 401(k).

00:08:30.640 | Do you understand how uncommon that is?

00:08:33.640 | I don't know how old you are. I don't care.

00:08:35.640 | Do you understand how uncommon it is in our society for you to have $50,000 in your 401(k)?

00:08:40.640 | That is awesome.

00:08:43.640 | You are a financial expert.

00:08:46.640 | But I understand what you mean.

00:08:48.640 | It's a confusing world.

00:08:50.640 | There are so many opinions.

00:08:52.640 | There's so much advice that you hear out there.

00:08:54.640 | And it's a major problem.

00:08:56.640 | So here would be another thing for you, another response for you.

00:09:00.640 | And this is where it's going to sound harsh.

00:09:02.640 | Why are you doing anything with money when you're not an expert in it?

00:09:07.640 | Why is your money invested if you're not an expert?

00:09:10.640 | Why did you hire the 401(k) plan provider to manage your money?

00:09:14.640 | Why did you hire SigFig, whoever they are, to manage your money if you're not an expert at it?

00:09:20.640 | Now, I'm not being harsh because I did this myself.

00:09:24.640 | I remember starting my Roth IRA when I was 18 years old.

00:09:28.640 | And I went out and I bought a bunch of mutual funds.

00:09:30.640 | I never read the prospectus.

00:09:32.640 | I didn't know anything about it.

00:09:34.640 | USAA said, "Hey, this is a good mutual fund, and it will take a low minimum amount as long as you invest $25 a month."

00:09:40.640 | And I said, "Okay, I'll do it."

00:09:42.640 | But my goodness, why do we own mutual funds?

00:09:45.640 | Why do you own?

00:09:46.640 | You probably own, between your accounts, maybe 20 different mutual funds.

00:09:49.640 | I'm just guessing.

00:09:50.640 | It could be 10, it could be 5, it could be 1, it could be 30.

00:09:53.640 | But let's just--okay, let's say 10.

00:09:54.640 | I'm going to cut my number in half.

00:09:56.640 | Question, did you read your prospectus?

00:10:02.640 | Most people don't.

00:10:04.640 | Why would you invest your money in something where you haven't--if, indeed, you haven't--

00:10:08.640 | why would you invest your money into something where you haven't read the prospectus?

00:10:12.640 | Simplest thing to start with.

00:10:15.640 | Go read your prospectuses.

00:10:18.640 | Read them for each and every one of your funds.

00:10:20.640 | If you're not an expert at your money, you've got to be an expert at your money.

00:10:25.640 | Now, I think we need to change this because you and I both have done this,

00:10:29.640 | and I've just learned this, that we've got to change this thing about trusting other people

00:10:32.640 | and not becoming an expert in it ourselves.

00:10:35.640 | If we could do that, everyone would be happier.

00:10:37.640 | I'm a former financial advisor.

00:10:38.640 | I wish all of my clients were experts with money

00:10:41.640 | because then they could hire me for what I do and not hire me for what I don't do.

00:10:45.640 | Don't do anything with money that you don't understand.

00:10:48.640 | If you don't clearly understand how things work with money, don't do it.

00:10:53.640 | Start with becoming an expert.

00:10:55.640 | We've got to learn a whole new skill set about learning about money.

00:10:59.640 | We've got to relearn how to learn about subjects that actually matter.

00:11:03.640 | I get so angered sometimes about our schooling system.

00:11:07.640 | There's nothing useful that you learn in school.

00:11:10.640 | Now, that's an extreme statement.

00:11:12.640 | I should modify that.

00:11:13.640 | There's almost nothing useful that we learn in school,

00:11:16.640 | except we think we're highly educated.

00:11:18.640 | We think that we know what's going on,

00:11:20.640 | but in reality all that's happened is we've learned just enough to think we're highly educated

00:11:25.640 | and think we know what we're talking about, and usually we're wrong and we're delusional.

00:11:28.640 | What practical knowledge do you get in your schooling system?

00:11:32.640 | So I applaud you for asking the question, and I thank you for being here to listen to my show.

00:11:36.640 | That's why my show is here.

00:11:38.640 | I'm here to share with you everything that I've learned about money

00:11:41.640 | and then continue to learn with you everything else that I want to learn in the future.

00:11:45.640 | I'm an expert in some things, and I'm a total novice when it comes to other things.

00:11:49.640 | So I applaud you for asking the question and for listening to my show.

00:11:52.640 | That shows me that even though you don't consider yourself an expert,

00:11:55.640 | A, you are more than you probably think, and B, you will become it

00:11:59.640 | because you're listening to a show like mine and you're writing me an email.

00:12:03.640 | So just consider those things.

00:12:06.640 | I would say don't do anything unless you're an expert in it

00:12:09.640 | or at least unless you know enough to know what you should be looking out for.

00:12:14.640 | Continuing on, I would like to have a decent retirement

00:12:17.640 | with an annual income of around $80,000 a year minimum.

00:12:20.640 | Now, let's talk through that.

00:12:22.640 | And I'm going to use this as an opportunity to talk about some financial planning stuff.

00:12:25.640 | I'm going to go through some numbers, and don't--just listen to the numbers.

00:12:30.640 | I'm doing this prior to teaching any shows on how to do these calculations.

00:12:35.640 | So if you're not familiar with how to run these retirement calculations

00:12:39.640 | and things that I'm going to go through, feel free just to let this kind of wash past.

00:12:43.640 | But listen to the big idea.

00:12:44.640 | I'm going to do some shows on how to calculate this for myself.

00:12:47.640 | But I can't--excuse me--I can't do any specific calculations for you

00:12:51.640 | because I don't--first of all, I don't even know how old you are,

00:12:54.640 | and I don't know how long you want to retire.

00:12:56.640 | So you say I want an annual income of around $80,000 a year minimum.

00:13:00.640 | I can't do anything necessarily specifically for you,

00:13:03.640 | which, again, I wouldn't do it on the radio like this, even if that were the case,

00:13:07.640 | because you're going to find out in just a second here how crazy these numbers are going to be

00:13:12.640 | and how all across the board, depending on what assumptions we use.

00:13:15.640 | But I made up some assumptions, and I pretend that--for the sake of my example,

00:13:22.640 | I assume--let's pretend that you're a 35-year-old guy, and you want to retire at 65,

00:13:27.640 | and you're going to plan on a life expectancy.

00:13:31.640 | Now, first of all, this is where we get into numbers.

00:13:34.640 | Retiring at 65 and planning for a life expectancy of 80

00:13:38.640 | is very different than retiring at 55 and planning for a life expectancy of 95.

00:13:43.640 | Major difference.

00:13:46.640 | So I'm going to show you how these numbers work,

00:13:49.640 | and you can see why I can't answer a question

00:13:51.640 | and why no financial guru can ever answer a question like this on the radio

00:13:55.640 | because there's a gazillion and one assumptions.

00:13:57.640 | So I would first start with figuring out what are you trying to buy with $80,000?

00:14:02.640 | Now, if you're like anything like many people,

00:14:04.640 | that $80,000 just simply represents an approximation

00:14:07.640 | of about the kind of lifestyle that you're spending now.

00:14:10.640 | But I'm actually not so sure because it doesn't sound like you're making $80,000.

00:14:15.640 | You said your base pay is $30 an hour.

00:14:17.640 | $30 an hour is basically $60,000 a year.

00:14:20.640 | Now, your spouse may be working.

00:14:21.640 | You may be married.

00:14:22.640 | You may not be married.

00:14:23.640 | I don't know.

00:14:24.640 | But it sounds to me like you might be wanting to spend more money in retirement

00:14:27.640 | than you're making now, and that's problematic.

00:14:29.640 | It's very challenging to do that one.

00:14:31.640 | But let's use the $80,000.

00:14:33.640 | The first thing I would want to do is I would want to figure out

00:14:35.640 | how much capital I need to maintain this $80,000 number.

00:14:40.640 | Now, for the sake of this podcast,

00:14:43.640 | let's start with what you hear everywhere in the financial planning--

00:14:46.640 | in the financial online world.

00:14:48.640 | Let's use the 4% safe withdrawal rate from the Trinity study,

00:14:53.640 | and let's compare that to using the 25 times income formula.

00:14:58.640 | Now, this is grossly imperfect, but it's a good place to start.

00:15:03.640 | So the way this math works is that there's a study called the Trinity study.

00:15:06.640 | It's very famous.

00:15:07.640 | You'll read this all over the place.

00:15:08.640 | There's a gazillion and one problems with it,

00:15:10.640 | and there's a gazillion and one good things about it.

00:15:12.640 | But basically what it says is what would you need to do to maintain a retirement

00:15:16.640 | over a 30-year period of times if you have reasonable investment amounts?

00:15:19.640 | How much of your portfolio can you withdraw from--

00:15:23.640 | what percentage of your portfolio can you withdraw

00:15:25.640 | without destroying the portfolio too early with a fairly high degree of success?

00:15:29.640 | That's a very generalized version of what the study basically says.

00:15:32.640 | But out of that, we can come up with a 4% withdrawal rule.

00:15:36.640 | And so if we have 4%, now we know that we need basically 25 times income.

00:15:42.640 | So the place you could start is you could simply say,

00:15:44.640 | "Okay, if I need 25 times income, then I want to have an $80,000 a year retirement plan.

00:15:50.640 | $80,000 times 25 equals $2 million."

00:15:53.640 | So you can do a quick calculation to see if you're on track.

00:15:56.640 | So let's say that you say, "I need to accumulate $2 million."

00:16:01.640 | Look at what you're making.

00:16:02.640 | Look at how much you're contributing to portfolio.

00:16:04.640 | Look at your expected rate of return and figure out if you're on track.

00:16:07.640 | So let's, for example, let's assume that you are 35 years old.

00:16:10.640 | You want to retire at 65.

00:16:12.640 | And you said you're maxing out your account.

00:16:14.640 | Let's assume that you're maxing it out at $17,500 per year.

00:16:19.640 | Now, I know that you're getting an employer match,

00:16:21.640 | but let's just start with the easy numbers that people will be able to grasp on the radio.

00:16:24.640 | So we'll run this in the quick financial calculator.

00:16:26.640 | We'll put in a $50,000 present value.

00:16:29.640 | So we'll clear the register.

00:16:31.640 | $50,000, switch that to a negative number, put that in for our present value.

00:16:35.640 | Let's use a 30-year period of time.

00:16:37.640 | 30 goes in for N.

00:16:39.640 | Let's put in--let's go with 6% rate of return.

00:16:42.640 | I don't know.

00:16:43.640 | I don't know what number to use.

00:16:44.640 | Let's just use 6%.

00:16:45.640 | And let's put in a $17,500 annual payment.

00:16:49.640 | So we'll turn the $17,500 negative, put that into the payment,

00:16:53.640 | and we click the FV button to give us our future value.

00:16:56.640 | So if you are 35 years old and you're going to invest for 30 years putting $17,500 in,

00:17:03.640 | if we get a 6% rate of return on the money, then you're going to have $1,753,703.91.

00:17:11.640 | We'll call it $1,753,704.

00:17:14.640 | I'll round it a little bit.

00:17:15.640 | So, okay, now we're in about a reasonable range.

00:17:18.640 | So we know, okay, if you keep maxing out your 401(k) over the next 30 years,

00:17:22.640 | you're going to be pretty close to that $2 million amount.

00:17:25.640 | Now, I'm ignored for the sake of this.

00:17:26.640 | I ignored the $2,500 that your boss is putting in for you.

00:17:30.640 | I ignored you starting to do catch-up contributions at the age of 50.

00:17:32.640 | I just know you're about in a reasonable range.

00:17:35.640 | I put a 6% return.

00:17:36.640 | I don't know if that's accurate or not.

00:17:37.640 | We'll come back to that in a moment.

00:17:39.640 | So let's tighten up those calculations, though,

00:17:41.640 | because that's actually a misleading calculation.

00:17:45.640 | The reason it's misleading is because we didn't account for any kind of inflation.

00:17:49.640 | Now, maybe you are, and if you are, that's fine.

00:17:51.640 | So let's say that you're currently spending $40,000,

00:17:53.640 | and you've calculated that under a normal inflation rate

00:17:56.640 | or whatever you've decided is an inflation rate that you need to plan for,

00:18:00.640 | that $40,000 of expenses is going to grow to $80,000 of expenses,

00:18:04.640 | and so that's where you gave me that $80,000 number.

00:18:06.640 | But my guess is that's probably not the case.

00:18:08.640 | My guess is you probably said $80,000 because that's what you want to spend.

00:18:13.640 | But we've got to do some calculations for inflation.

00:18:15.640 | So a quick financial lesson for you.

00:18:17.640 | Here's how we do this calculation.

00:18:19.640 | So when we're doing a retirement calculation,

00:18:22.640 | it's a three-step formula that we use just to do it with a simple financial calculator.

00:18:27.640 | So no software, no financial planning software, no inflation returns,

00:18:32.640 | just the three-step formula, and there are three steps to it.

00:18:35.640 | I'm going to do them all in the calculator for you.

00:18:37.640 | So number one is we start with solving for the income that we need the first year of retirement.

00:18:43.640 | And what we want to do is we want to use our inflation rate

00:18:46.640 | and figure out in the first year of retirement how much money do we need coming in.

00:18:51.640 | So let's start with $80,000,

00:18:52.640 | and I'm going to use a 3.5% inflation rate over a 30-year period of time.

00:18:57.640 | So we punch $80,000.

00:18:59.640 | Let's clear the register.

00:19:00.640 | Anytime you're starting, let's clear the register.

00:19:01.640 | So let's put in $80,000, and we're going to start,

00:19:04.640 | and that's going to be because that's a cash inflow that we need.

00:19:06.640 | We're going to put that in as a negative number.

00:19:08.640 | So we click $80,000 for the present value.

00:19:11.640 | N is 30. Punch that in.

00:19:13.640 | And let's use a 3.5% annualized number,

00:19:16.640 | so we'll put in 3.5% for our interest rate, put in a zero for our payment,

00:19:20.640 | and let's click future value.

00:19:22.640 | So we push the future value button,

00:19:23.640 | and the answer that we get is $224,543.50.

00:19:29.640 | So what that means is that if you are planning on $80,000 a year in today's dollars,

00:19:34.640 | in 30 years you're going to need $224,543 in that first year of retirement

00:19:40.640 | to keep pace with your need for expenses.

00:19:44.640 | So we want to make a note of that number

00:19:45.640 | because that's the number we're going to solve for

00:19:47.640 | is that first year of retirement expenses.

00:19:50.640 | Next, step two, is we need to calculate the amount of the portfolio

00:19:54.640 | that we need at retirement

00:19:56.640 | to maintain inflation-adjusted distributions over time.

00:20:02.640 | So here I want to introduce to you the concept of an inflation-adjusted return.

00:20:05.640 | So all financial planning numbers depend on the formula,

00:20:08.640 | depend on the numbers that we use.

00:20:10.640 | So, for example, if I tell you I want to assume a 6% investment return,

00:20:15.640 | the immediate thing that you should say is, "Well, what is that 6%?"

00:20:18.640 | Is that a 6% nominal return, which would be a flat return?

00:20:22.640 | Is that a 6% real return, inflation-adjusted return?

00:20:25.640 | Is that 6% gross of expenses or net of expenses?

00:20:29.640 | Is that 6% gross of fees or net of fees?

00:20:33.640 | And the answers to those numbers are going to vary the amounts dramatically.

00:20:37.640 | So if you are paying a 1%--let's say that you're paying 1% expenses,

00:20:42.640 | well, look at your number and your return number.

00:20:45.640 | Is that net of expenses or gross of expenses?

00:20:47.640 | If you're paying, let's say, an advisory fee--

00:20:49.640 | if I were a financial advisor and you're paying me 1% to run your portfolio,

00:20:52.640 | then you've got to take that out of your returns.

00:20:54.640 | That's coming out of your returns.

00:20:56.640 | So let's just assume, in my example here, for the sake of some simple math,

00:21:00.640 | let's assume we're using a 6% nominal return,

00:21:04.640 | net of fees and investment expenses,

00:21:07.640 | and a 3.5% inflation number.

00:21:09.640 | So now we need to solve for an inflation-adjusted return.

00:21:12.640 | Now you might think that all you need to do

00:21:15.640 | is just simply subtract the inflation rate from the investment rate,

00:21:18.640 | but that's not actually true.

00:21:20.640 | So a key tip for you, if you're a financial planning student

00:21:23.640 | or if you're a financial planner planning to sit for the CFP exam,

00:21:27.640 | you always need to solve for the inflation-adjusted return.

00:21:30.640 | And there's a formula for that.

00:21:31.640 | So you can't just say 6% minus 3.5% is 2.5%.

00:21:35.640 | Now you're not going to be dramatically wrong if you do that.

00:21:37.640 | You're going to mess up the answers on the CFP exam,

00:21:39.640 | but for general purpose,

00:21:40.640 | if you don't know how to do an inflation-adjusted return,

00:21:42.640 | you're not going to be dramatically wrong,

00:21:44.640 | but you are going to be a little bit wrong.

00:21:45.640 | So here's the formula.

00:21:46.640 | The formula for inflation-adjusted return is

00:21:51.640 | 1 plus the after-tax return

00:21:55.640 | divided by 1 plus the inflation rate

00:21:59.640 | minus 1 times 100.

00:22:02.640 | So if we're going to use my 6% investment return

00:22:05.640 | and my 3.5% inflation number,

00:22:07.640 | then here's how we do it.

00:22:08.640 | We would say 1 plus the after-tax return,

00:22:12.640 | which would be 6%, 1.06,

00:22:14.640 | divided by 1 plus the inflation rate,

00:22:17.640 | so 1 plus 3.5 should be 1.035,

00:22:22.640 | divide those two together,

00:22:24.640 | minus 1 times 100,

00:22:27.640 | and the answer that we get is 2.415%.

00:22:29.640 | I'm going to use 2.42% for my numbers.

00:22:32.640 | So we now know our inflation-adjusted return is 2.42%.

00:22:37.640 | So now we're here in step two.

00:22:39.640 | We're trying to calculate the portfolio

00:22:40.640 | that we need at retirement

00:22:41.640 | to maintain the inflation-adjusted withdrawals.

00:22:44.640 | So what we do is we next solve

00:22:45.640 | for the present value of an annuity

00:22:48.640 | based upon the number of years

00:22:50.640 | that we're going to use

00:22:52.640 | for our life expectancy formula.

00:22:54.640 | And I'm sorry if those words don't make sense.

00:22:56.640 | I'm trying to make this as clear as possible,

00:22:58.640 | but just stick with me if you don't get this stuff.

00:23:01.640 | So we're going to use an N of 30,

00:23:04.640 | assuming a life expectancy to 95,

00:23:06.640 | so from 65 to 95.

00:23:08.640 | We're going to use an inflation rate of 2.42%,

00:23:12.640 | and then we're going to put in our payments

00:23:15.640 | of $224,543.50,

00:23:19.640 | and we're going to put in zero for our future value,

00:23:21.640 | and we're going to solve for the present value.

00:23:23.640 | Now, in this situation,

00:23:24.640 | because we're now using an inflation-adjusted return,

00:23:27.640 | I don't need to worry about growing

00:23:29.640 | that payment number by the rate of inflation.

00:23:32.640 | All I need to know is what that initial number is.

00:23:35.640 | So we're going to put 30 in for the N,

00:23:37.640 | 2.42 for the I.

00:23:39.640 | We're going to put in $224,543.50 for our payment.

00:23:46.640 | We need to turn that negative

00:23:47.640 | because that's going to be a cash flow in for us,

00:23:49.640 | and we're going to put in zero for our future value

00:23:51.640 | because we're doing an annuity calculation.

00:23:53.640 | We're going to wind up with zero,

00:23:55.640 | and we're going to solve for the present value.

00:23:57.640 | And the present value that we're going to get

00:23:59.640 | is going to be $4,865,243.

00:24:08.640 | So that's the portfolio that we need

00:24:10.640 | at the first year of retirement

00:24:14.640 | in order to be able to maintain

00:24:16.640 | that spending rate throughout retirement.

00:24:19.640 | Now, the third step of this calculation

00:24:21.640 | is we're going to back up,

00:24:23.640 | and we're going to calculate

00:24:25.640 | for the amount that we need at retirement.

00:24:29.640 | So let's solve for the necessary annual payments

00:24:31.640 | to get to the just under 5 million bucks

00:24:33.640 | that we need for the future value.

00:24:35.640 | So you have $50,000 currently.

00:24:37.640 | So let's put in $50,000.

00:24:40.640 | We're going to put in $50,000.

00:24:42.640 | We're going to turn that negative as our present value.

00:24:44.640 | Oops, forgot to clear the register.

00:24:45.640 | So $50,000, change that out,

00:24:47.640 | put that in for our present value.

00:24:49.640 | So minus $50,000 goes in as our present value.

00:24:51.640 | Our future value, we're going to put in $4,865,243.

00:24:54.640 | $4,865,243 for our future value.

00:24:59.640 | Now we're going to go ahead and use our 6% interest rate.

00:25:02.640 | We don't need to use the inflation-adjusted rate

00:25:04.640 | because we already have our inflation-adjusted future value.

00:25:07.640 | So we're just going to put in the 6%,

00:25:09.640 | and then we're going to put in an N of 30,

00:25:12.640 | and we're going to solve for the annual payments.

00:25:14.640 | So under this scenario,

00:25:16.640 | the annual payments are $54,629.79.

00:25:21.640 | I'm going to make a note of that in my notes.

00:25:24.640 | $54,629.79.

00:25:27.640 | So you need to be saving--

00:25:30.640 | under that scenario, you now need to be saving $54,000 per year.

00:25:35.640 | And you would say, "What?"

00:25:37.640 | I assume you would say-- most people would say, "What?

00:25:40.640 | "How is it possible that you need to be saving that much money?"

00:25:43.640 | Well, that's what the math would say you need to be saving.

00:25:46.640 | Now, why are those numbers so different

00:25:50.640 | between the $2 million and the $4.8 million?

00:25:53.640 | Well, there's a ton of reasons.

00:25:55.640 | So first was we were worrying about today's dollars instead of future dollars.

00:26:00.640 | And there's a ton of disparities in my numbers.

00:26:03.640 | So inflation rate-- look at the rate of return I used.

00:26:06.640 | I used a 6% rate of return and a 3.5% inflation rate.

00:26:10.640 | So a real rate of return was 2.42%.

00:26:12.640 | Now here's the question.

00:26:14.640 | Is this an accurate number for you?

00:26:17.640 | Now, I don't know if this is an accurate number for you or not.

00:26:19.640 | And this is why these discussions are in some ways so valuable,

00:26:27.640 | but in other ways they're really hard to work through.

00:26:32.640 | So I don't know what's right for you or what's not right for you

00:26:35.640 | until you actually look at your situation.

00:26:37.640 | So financial planning-- you have to go back

00:26:40.640 | and look through a bunch of these issues.

00:26:44.640 | So for example, should we use that real rate of return of 2.42%

00:26:49.640 | and the nominal return of 6%?

00:26:51.640 | Well, the long-term rate of return of the general stock market is about 10%.

00:26:55.640 | So if I use a 10% number, that number changes hugely.

00:26:59.640 | If I rerun the calculations, then in a 10% number and a 3.5% inflation rate,

00:27:06.640 | now my inflation-adjusted return is 6.28%.

00:27:10.640 | So if I solve for the $224,000 of annual income--

00:27:14.640 | put this in here-- N of 30, 6.28 for the interest rate.

00:27:20.640 | Let's use $224,543.50 as our payment.

00:27:25.640 | Future value is zero, and we solve for the present value.

00:27:29.640 | So now I need $3,188,788 at retirement.

00:27:35.640 | Big difference between $3,188,788 and $4,865,243.

00:27:44.640 | Let's call that 3.2 versus 4.8.

00:27:46.640 | That's a $1.6 million difference in the amount of money that you need.

00:27:51.640 | So if I were to back that out-- let me use that now.

00:27:53.640 | Let me use a 10% return, and let's figure out what our annual savings--

00:27:57.640 | so now I'm just redoing steps two and three of the formula.

00:28:00.640 | I don't have to redo step one.

00:28:02.640 | I'm just doing steps two and three of the formula.

00:28:04.640 | So let's run 30 years to save.

00:28:06.640 | We've got a 6.28% inflation-adjusted return.

00:28:12.640 | Hang on a second.

00:28:14.640 | We shouldn't be-- I need to put a 10.

00:28:16.640 | Okay, so we can use a 10% rate of return now.

00:28:19.640 | So we put in an N of 30 and a 10% rate of return,

00:28:24.640 | and we put in $3,188,755.73 for our future value.

00:28:31.640 | Our present value is minus $50,000,

00:28:35.640 | and so our annual payments that we need now are $12,801.16.

00:28:43.640 | Big difference.

00:28:45.640 | Now, I'm being a little bit sloppy with the math.

00:28:47.640 | There are a ton of problems with this example that I've set out,

00:28:52.640 | but yet mathematically it should be accurate.

00:28:54.640 | Unless I've screwed something up just in my calculator keystrokes while recording this,

00:28:58.640 | mathematically it should be about right.

00:29:02.640 | But the difference is that what is your actual portfolio?

00:29:06.640 | What is the actual makeup?

00:29:07.640 | What's the expected return of the portfolio?

00:29:09.640 | What's your expected Social Security return?

00:29:11.640 | What's the actual amount?

00:29:12.640 | Are your expenses going to inflate at 3.5% or are they not?

00:29:15.640 | I'll give you an example.

00:29:16.640 | Are you going to live in the house that you're currently living in?

00:29:18.640 | Well, in that case, the mortgage isn't going to inflate

00:29:20.640 | unless you refinance it and take cash out of it or something like that.

00:29:25.640 | So the mortgage isn't going to inflate, but the rest of your expenses may inflate.

00:29:36.640 | So, okay, now if you're maxing out your 401(k), you're on track for that retirement age if you are there at 35.

00:29:44.640 | But now here's the other question.

00:29:46.640 | What are you doing as an investor?

00:29:48.640 | So the average investor actually has a rate of return of just over 2%.

00:29:57.640 | There was a chart that made the rounds this last week on social media, on Twitter,

00:30:07.640 | and this chart was put out by RBA Advisors, and I'll link to it in the show notes as far as the PDF of it.

00:30:17.640 | And what he did is there's a company called Dalbar, and Dalbar figures out what the average rate of return is for the average investor.

00:30:24.640 | And they do this based upon mutual fund sales, redemptions, and exchanges each month,

00:30:29.640 | and they use that to try to calculate what the rate of return is for the average investor.

00:30:34.640 | Now, there's some flaws with the--there's flaws with everything in finance that you see.

00:30:38.640 | Don't get--learn--you have to--when it gets to finance, you have to figure out what the data is that's being used,

00:30:45.640 | and you have to just work with it and notice the flaws and not put too much stock in one thing.

00:30:51.640 | But they ran out this chart, and they released this chart of the asset class returns versus the average investor

00:30:55.640 | for the 20 years from December 31, 1993 to December 31, 2013.

00:31:02.640 | The highest asset class rate of return was energy, north of 12%.

00:31:06.640 | Health care was second, north of 12%.

00:31:09.640 | Infotech was about 11%.

00:31:12.640 | Consumer staples was number four, about 10.5%, looks like.

00:31:16.640 | And it goes all the way across. Look for it in the show notes.

00:31:19.640 | All the way over to the other end, and Japan's rate of return was about, you know, looks like 6/10 of a--60 basis points, 6/10 of a percent.

00:31:26.640 | Inflation was just over--excuse me, I had that wrong. It was 1 point something percent.

00:31:30.640 | Inflation was just over 2%.

00:31:32.640 | The fourth worst rate of return was the average investor, getting just over 2% rate of return on their investments.

00:31:38.640 | So are you getting 10% or are you the average investor that's getting about 2 point something percent of real rate of return?

00:31:47.640 | The average investor will never retire, period.

00:31:53.640 | Period.

00:31:54.640 | And that's why, in my opinion, what the reason why you should consider hiring a good financial advisor.

00:31:58.640 | But that's a conversation for another day.

00:32:00.640 | The average investor is just screwed, basically.

00:32:02.640 | So that's the math for you.

00:32:05.640 | That's the process of the way that you would figure it out.

00:32:08.640 | But the reason I went through that is to show you where all the holes are.

00:32:11.640 | So I'm using a 30-year lifespan. That's a huge number.

00:32:13.640 | Are you going to die at 80 or are you going to die at 100?

00:32:16.640 | I'm using a 3.5% inflation rate. What's it going to be?

00:32:18.640 | Is it going to be 7.5, 11.5, or 1.5?

00:32:22.640 | We're doing a level withdrawal. Do you need to do a level withdrawal?

00:32:24.640 | Do you need the same amount of money coming in at 95 as you do at 65?

00:32:30.640 | I've ignored investment expenses and taxes for the most part.

00:32:33.640 | I'm using a number net of that.

00:32:35.640 | So what are your actual investment expenses and tax numbers?

00:32:37.640 | There's lots of massive holes in my numbers, but this is how you have to do the calculations.

00:32:41.640 | So if you're trying to figure out what you need to do,

00:32:44.640 | you need to do these calculations is what you need to do.

00:32:47.640 | If you don't know how, again, I'll do a soul show where I go a lot slower through this stuff

00:32:51.640 | to try to talk you through how to actually do those calculations.

00:32:56.640 | But you need to do those calculations.

00:32:58.640 | You need to find a good financial planner if you don't have one

00:33:00.640 | and sit down and kind of look at your actual situation.

00:33:03.640 | So that's part one answer to what you asked me there.

00:33:07.640 | Now let's go on.

00:33:08.640 | "My employer uses One America, and I'm very unsatisfied with the program

00:33:12.640 | as nearly all of their investment options have expense ratios over 1%.

00:33:16.640 | I've talked to my boss and HR, and they aren't going to change a thing.

00:33:19.640 | There's also no fiduciary, so I doubt these expensive funds and such are in my best interest."

00:33:25.640 | So here again I'm going to give you something of a nuanced answer.

00:33:29.640 | So first, 1%, is that expensive?

00:33:32.640 | Depends who you ask.

00:33:33.640 | There are lots of funds that are way cheaper than 1%.

00:33:39.640 | I mean you could buy some index funds with Vanguard where the fees are--

00:33:43.640 | I don't even remember what they're--16 basis points if my memory is correct,

00:33:46.640 | 17 basis points, 0.17%.

00:33:49.640 | So the massive--I don't even remember what the lowest fees are on some of their index funds.

00:33:54.640 | So you could cut that 1% expense ratio to basically nothing.

00:33:57.640 | You can cut it to nothing if you'll take over your management of your portfolio

00:34:00.640 | and start managing your investments yourself and buy individual stocks,

00:34:05.640 | and then you just have a trading fee, but you have a expense ratio of zero.

00:34:11.640 | So the reason why it's 1%--well, that's going to have to do with two things.

00:34:15.640 | First, One America is an insurance company, so this is probably--

00:34:18.640 | your 401(k) is probably funded with a group annuity contract,

00:34:22.640 | a group variable annuity contract.

00:34:24.640 | Contrary to what many people say, this is standard practice.

00:34:26.640 | Just about all 403(b)s are annuity contracts.

00:34:30.640 | This is very standard.

00:34:32.640 | Doesn't make it wrong, doesn't make it bad,

00:34:34.640 | but you're going to have--in an annuity contract, you're going to have the cost of insurance.

00:34:38.640 | So look and see, are you actually getting the annuity contract

00:34:41.640 | and are you paying the cost of insurance in that?

00:34:44.640 | Number two, look at the funds.

00:34:46.640 | So the management fee that the advisor on the fund is getting paid

00:34:49.640 | is going to be based upon the fund.

00:34:51.640 | So I bet you there's a difference in some of your funds.

00:34:54.640 | 1% is not the end of the world.

00:34:56.640 | Now, I know that I am very sympathetic to keeping low expenses.

00:35:01.640 | I think keeping low expenses is helpful.

00:35:04.640 | Every academic study that has been done--that I have read, excuse me--

00:35:07.640 | every academic study that I have seen or that I have read

00:35:10.640 | has talked about one of the major predictors of success is lowering expenses.

00:35:16.640 | So this is definitely a major, major benefit.

00:35:22.640 | However, even today, the average mutual fund is higher than a 1% expense ratio.

00:35:27.640 | So this doesn't necessarily mean that somehow your fiduciary on your plan

00:35:31.640 | is breaking their fiduciary duty by having a 1% average expense ratio.

00:35:36.640 | You're probably in a smallish company, and here's where you get into the importance of perspective.

00:35:43.640 | So I'm going to talk about perspective for a moment.

00:35:45.640 | What I mean by perspective is, am I working with you as my client or the company as my client?

00:35:51.640 | So the 401(k) is not a right to you.

00:35:55.640 | If I'm talking to you as an employee, the 401(k) is not a right.

00:35:58.640 | It's a privilege.

00:36:00.640 | It's something that your employer is offering for you,

00:36:03.640 | and it's supposed to be an incentive for you.

00:36:07.640 | They're not required to offer it.

00:36:09.640 | They're offering it as part of their compensation package

00:36:11.640 | because it's supposed to be an incentive for you.

00:36:14.640 | It's supposed to be an incentive for you to work with them for a longer period of time.

00:36:17.640 | It's called golden handcuffs.

00:36:19.640 | They're trying to get you to work with them.

00:36:21.640 | A 401(k) is a type of profit-sharing plan.

00:36:24.640 | So the employer is deciding to offer you a profit-sharing plan with 401(k) provisions,

00:36:29.640 | allowing you to contribute some of your money into it.

00:36:32.640 | And they're paying for the cost of the administration of the plan.

00:36:35.640 | They're paying for the fees.

00:36:36.640 | They're paying for all of the TPA costs.

00:36:39.640 | They are subsidizing the plan, and it's money out of their pocket.

00:36:42.640 | Now, clearly, it's not incentivizing you.

00:36:45.640 | So it's not working, and that's fine.

00:36:47.640 | But you don't somehow have this right to--in my opinion--

00:36:53.640 | you don't somehow have this right to march in and say, "Your plan stinks.

00:36:56.640 | What's wrong with you guys?

00:36:58.640 | I'm just going to go ahead and give you all these problems."

00:37:00.640 | Now, again, you don't necessarily have that tone in your email.

00:37:03.640 | I'm just using it as a point to say that if it's not incentivizing you,

00:37:07.640 | just go somewhere else.

00:37:09.640 | My suggestion to you is take the money they give you for free

00:37:12.640 | and just simply recognize the fact that you're not going to be there for very long--

00:37:15.640 | for much longer.

00:37:17.640 | Here's what I would do.

00:37:18.640 | Number one, if you're worried about the fees, contribute up to the match.

00:37:21.640 | And it sounds like if they're putting a 4% contribution into your account

00:37:24.640 | without you having to make any additional contributions,

00:37:26.640 | take that 4% and then go use an IRA for everything else.

00:37:29.640 | There's zero benefit--except for any matching contributions--

00:37:32.640 | there's zero benefit to you for using a 401(k) instead of an IRA.

00:37:37.640 | Same tax deduction, same everything, as long as you're under the income limits

00:37:40.640 | and you are based upon what you said as far as your income.

00:37:43.640 | So go and use an IRA and put your $5,000 into your IRA.

00:37:47.640 | Set up an automatic contribution to that account,

00:37:49.640 | and set up an automatic contribution to that account

00:37:52.640 | that every payday goes into that account,

00:37:54.640 | and it's just as automatic as it is going into the 401(k).

00:37:57.640 | It's exactly the same.

00:37:59.640 | The only difference would be--let me be careful here--

00:38:01.640 | the only difference would be if in your state--

00:38:03.640 | and I don't know the state law of California--

00:38:05.640 | but if in your state the bankruptcy protection of pension plans

00:38:11.640 | is different from the bankruptcy protection of IRAs.

00:38:13.640 | In my state, Florida legislative law applies the same protection to IRAs

00:38:18.640 | as it does to 401(k) plans.

00:38:20.640 | However, I don't know California laws.

00:38:22.640 | That would be just the one thing that would come to mind right now.

00:38:25.640 | Here would be another plan that you could do.

00:38:27.640 | So plan A--my suggestion is for how to get around this

00:38:29.640 | and how to fix your fee issue--

00:38:31.640 | is contribute up to the match and then use IRAs for everything else.

00:38:36.640 | Set up the automatic contributions.

00:38:38.640 | Number two, figure out how to use the funds in your asset allocation

00:38:40.640 | that they offer that would be the most advantageous.

00:38:43.640 | So, for example, you may in your asset allocation--

00:38:46.640 | you may decide that, well, you know what, large-cap U.S. stocks,

00:38:49.640 | index funds are going to be the way to go.

00:38:51.640 | But, you know, emerging markets--I'm not so sure that I'm going to go

00:38:53.640 | with an index fund over there because maybe you are of the belief

00:38:57.640 | that an active portfolio manager may have a little bit of a better results

00:39:02.640 | for you in emerging markets.

00:39:05.640 | Or maybe you're not. I don't know.

00:39:07.640 | But if that were the case and you don't have an index fund available to you

00:39:11.640 | that would cut your expenses down below that 1%,

00:39:14.640 | then choose the mutual fund in the 401(k)

00:39:19.640 | and put your international funds in the 401(k)

00:39:21.640 | and buy your index fund in your IRA.

00:39:23.640 | Just go straight to Vanguard and buy it there

00:39:25.640 | or whatever it is that you're going to do.

00:39:27.640 | But figure out which of the funds that is available to you in your 401(k)

00:39:30.640 | would be the best--the lowest fees or the best expenses--

00:39:33.640 | and look at your asset allocation across all of your accounts.

00:39:35.640 | Now, I know this is a little bit advanced.

00:39:37.640 | And you said I'm not a financial expert.

00:39:39.640 | So hopefully this makes sense.

00:39:41.640 | If it doesn't, keep listening, and it will make more sense as time goes on.

00:39:45.640 | Next thing I would say, just don't worry too much about the fees.

00:39:47.640 | You're probably not going to be there for very long.

00:39:50.640 | A, you haven't gotten a raise in three years.

00:39:52.640 | B, you said you want to do something in real estate.

00:39:54.640 | And C, you don't like the plan.

00:39:56.640 | So I'm not predicting that they're going to fire you,

00:39:58.640 | but you're probably not going to want to stay there for very long.

00:40:00.640 | So suck it up. Take the fee for a few years.

00:40:02.640 | Recognize the fact that they're giving you an additional 4% of your compensation.

00:40:05.640 | And then if you leave in two years, roll it out, and you're done and gone.

00:40:09.640 | There is a fiduciary in your plan, I promise.

00:40:11.640 | All ERISA plans have a fiduciary.

00:40:14.640 | That doesn't necessarily mean that your human resource coordinator knows who it is.

00:40:18.640 | The ERISA legislation is crazy complicated,

00:40:21.640 | and no one actually knows anything of what it says unless they're really good.

00:40:25.640 | But there is a fiduciary in your plan.

00:40:28.640 | All you have to do is go and ask for your summary plan description.

00:40:32.640 | And by law, ERISA law, they're required to give it to you.

00:40:35.640 | Ask for your summary plan description, and it should list in there who the fiduciary is.

00:40:42.640 | And the fiduciary is probably simply the company,

00:40:44.640 | or they may have hired what's called a TPA, a third-party administrator, to administer it.

00:40:48.640 | Just kind of find out. There's a bunch of ways that it can work.

00:40:51.640 | 1% fees is not necessarily a breach of fiduciary duty.

00:40:55.640 | You can't necessarily apply that and say, well, somehow there's something wrong with the company

00:40:59.640 | because of a 1% expense ratio.

00:41:02.640 | Again, I'm not defending the 1% expense ratio, just trying to be realistic about this.

00:41:07.640 | Organize your fellow employees to ask for better. Here's my next idea.

00:41:10.640 | So if there are a lot of you and you do want a better plan,

00:41:13.640 | then organize and just say, hey, this would be a big deal.

00:41:16.640 | This is a big deal to more of us,

00:41:18.640 | and maybe you would have a little bit more leverage than just you going.

00:41:21.640 | Another thing I would say is, is there another type of plan or another plan available to you?

00:41:24.640 | So, for example, do they have some kind of ESOP set up that you can use instead of the 401(k)?

00:41:30.640 | Are you married? Does your spouse have a 401(k) that you can contribute to?

00:41:34.640 | So maybe you've decided how much of your expenses that you are going to--

00:41:39.640 | or how much of your income you want to put into retirement plans, and then do that.

00:41:44.640 | Change companies if their compensation plan isn't working for you.

00:41:47.640 | So remember, this is supposed to be an incentive for you to want to stay with them.

00:41:50.640 | If your company offers this bad plan, move. Go find another company with a better plan.

00:41:55.640 | And here's the other thing. If you're making $60,000, your tax rate really isn't that high.

00:41:59.640 | I mean, all things considered, you are squarely middle class,

00:42:02.640 | and middle class tax rates are not egregious at the moment.

00:42:06.640 | So look at what you're actually saving.

00:42:08.640 | Maybe you're better off with making Roth contributions at this point in time,

00:42:11.640 | and this is where it would be highly individualized.

00:42:14.640 | But if you're making $60,000 and you expect your income to increase over time,

00:42:17.640 | maybe it is a better move for you to do a Roth at this point in time.

00:42:20.640 | So you can just say, "I'll go ahead and pay the tax now,"

00:42:23.640 | use a Roth account, and do that with Roth IRAs.

00:42:27.640 | A couple more comments on this.

00:42:29.640 | "Starting this year, however, they've started giving everyone

00:42:32.640 | an automatic 4% contribution no matter what."

00:42:35.640 | So I just say, "First, there's no reason to contribute first to the 401(k) plan.

00:42:38.640 | Take the 4% and go on. Consider the bankruptcy thing

00:42:41.640 | and consider what overall amounts you're putting into the account."

00:42:44.640 | "I also enjoy getting taxed less as I contribute roughly $680 a check biweekly."

00:42:49.640 | You can achieve it another way. Set up an IRA, set up an HSA.

00:42:52.640 | So there's a logical fallacy there that, yes, getting taxed less is good,

00:42:58.640 | but the 401(k) is not the only way to accomplish it.

00:43:01.640 | "Something makes me think I'm just wasting my money

00:43:04.640 | by contributing so much into the 401(k) though.

00:43:06.640 | About 10 months ago, I joined sigfig.com.

00:43:09.640 | If you've never heard of it, they invest your money for you

00:43:11.640 | based on your tolerance level.

00:43:13.640 | In 10 months, I've contributed $4,600 to it.

00:43:16.640 | They use Ameritrade to purchase funds and such

00:43:18.640 | and use mainly Vanguard mutual funds with exceptionally low expense ratios.

00:43:21.640 | They charge nothing for their service unless you have an account of about $10,000

00:43:25.640 | and it's just $10 a month.

00:43:26.640 | Some, anyway, have made about $250 in those 10 months.

00:43:29.640 | While it's not a lot of money, I feel it can grow quicker than in my 401(k).

00:43:32.640 | Don't know anything about sigfig. Did a quick look at their website.

00:43:35.640 | Looks to me just like a robo-advisor, just like Wealthfront and Betterment

00:43:38.640 | and some of the other guys just setting up a robo-advisory firm

00:43:42.640 | under that scenario and using an allocation.

00:43:44.640 | That's what it looks like to me. I don't see anything special about it.

00:43:47.640 | Nothing wrong with that approach, by the way.

00:43:49.640 | Just what it looks to me.

00:43:50.640 | The big thing I would just point out to you

00:43:52.640 | is there's a logical fallacy in your statement here.

00:43:57.640 | The performance of your accounts,

00:44:02.640 | one is not going to be better than another

00:44:04.640 | unless the mutual funds that you own within the accounts are different.

00:44:09.640 | So, based upon the funds that you would see in your 401(k),

00:44:14.640 | if those funds do better than sigfig's funds,

00:44:18.640 | the vanguard funds that sigfig is buying for you through Ameritrade,

00:44:21.640 | then your 401(k) account is going to be doing more.

00:44:23.640 | But there's nothing that you can't do.

00:44:25.640 | The 401(k) is limited to a certain number of funds,

00:44:28.640 | but you could put the same funds that you have in sigfig.

00:44:30.640 | So, you have a logical fallacy here in this either/or.

00:44:35.640 | Each account is being run independently

00:44:37.640 | and it's just based upon the investment return of that specific account.

00:44:41.640 | $250 gain with an account that's grown to be about $4,600

00:44:45.640 | doesn't give me much to write home about over the last 10 months.

00:44:49.640 | I didn't run the exact chart to see what the S&P has returned,

00:44:51.640 | but it looked about flat for, what, six months?

00:44:55.640 | Which one was I looking at?

00:44:56.640 | I'll just skip that right now.

00:44:58.640 | I was looking at the chart to see--

00:45:01.640 | It was year to date.

00:45:05.640 | I was looking at some--

00:45:07.640 | I was trying to get to your 10-month number

00:45:09.640 | and compare it just to what the S&P had returned.

00:45:11.640 | And I was trying to see if I could figure out

00:45:13.640 | how your account could be basically flat,

00:45:15.640 | which is what I would call a $250 increase.

00:45:17.640 | And I couldn't quite figure out how it was basically flat.

00:45:21.640 | Let me skip past that because I'm getting myself into problems

00:45:23.640 | without more information.

00:45:26.640 | So, just notice-- Learn more about investing.

00:45:29.640 | And there's a logical fallacy here between those accounts.

00:45:31.640 | I want to make that clear to you.

00:45:33.640 | Here's what I really wanted to talk to you about.

00:45:35.640 | Here's where these things all work together.

00:45:38.640 | Quote, "My next goal is to be able to buy a house,

00:45:41.640 | flip it, and repeat.

00:45:44.640 | My ultimate goal is to be able to purchase land

00:45:46.640 | and build a state-of-the-art mini storage business

00:45:48.640 | as they're a gold mine with very little effort to run

00:45:50.640 | once established.

00:45:53.640 | I guess I'd like to know where should I keep my focus on.

00:45:55.640 | Should I contribute so heavily to my 401(k)?

00:45:57.640 | Should I spread what little assets I have?

00:45:59.640 | If so, where?

00:46:00.640 | Should I take a risky step and pull the 50k

00:46:02.640 | out of my 401(k) and then take the 10% hit

00:46:05.640 | and then try to buy that first fixer-upper?"

00:46:08.640 | This would be where I would focus.

00:46:10.640 | And I know I got heavy into the numbers,

00:46:12.640 | and the reason I'm using your letter is because,

00:46:15.640 | A, it's a great question,

00:46:17.640 | and I want to help you with the answer to it.

00:46:19.640 | But, B, it just shows how--

00:46:21.640 | to me, it's an ideal example of how comprehensive

00:46:24.640 | we need to think about our situations,

00:46:26.640 | how comprehensively we need to think about our situations.

00:46:30.640 | All the money that you're putting into your 401(k)

00:46:32.640 | is money that you're not going to have available

00:46:34.640 | to buy a house and flip it.

00:46:37.640 | So the major question I would say is,

00:46:39.640 | "What do you want to do?"

00:46:40.640 | Do you want the money in your 401(k)?

00:46:42.640 | Do you want to own real estate?

00:46:44.640 | These two things are maybe compatible.

00:46:47.640 | You may say, "I want to own real estate,

00:46:48.640 | but I want to spread my--

00:46:49.640 | I want to keep some of the money in my 401(k),

00:46:51.640 | but I want to own real estate."

00:46:52.640 | If you want to own real estate

00:46:54.640 | and you want to start a mini storage business,

00:46:56.640 | that's dramatically different than if you want to retire

00:46:58.640 | with $80,000 of income coming in from your 401(k)

00:47:01.640 | and you run the other calculations.

00:47:03.640 | Now, realistically--and I'm not picking on you

00:47:05.640 | because this is the same problem that we all face,

00:47:07.640 | and this is my--this is why I'm doing this show,

00:47:11.640 | because these questions are not simple and easy to answer,

00:47:13.640 | and it's going to be different for you,

00:47:14.640 | and it's going to be different for me.

00:47:15.640 | I don't want to own a mini storage business,

00:47:17.640 | if it were that easy to run.

00:47:19.640 | I don't want to own individual rental houses, but you may.

00:47:22.640 | So we've got to look at what the individual situation is.

00:47:26.640 | So I would say, when do you want to start

00:47:28.640 | this real estate business?

00:47:30.640 | How much money are you going to need?

00:47:31.640 | You need cash and you need credit to be in real estate.

00:47:36.640 | So when do you want to do this?

00:47:37.640 | Is this that you read a book or saw an infomercial

00:47:39.640 | and it was easy to get rich in real estate,

00:47:41.640 | or is this a serious plan?

00:47:42.640 | I'm assuming it's a serious plan.

00:47:44.640 | And so what I would say is you need money.

00:47:47.640 | You need cash.

00:47:48.640 | I don't know--I mean, real estate's not cheap in California.

00:47:51.640 | I don't know if you're going to be investing in California,

00:47:53.640 | but if you're buying $200,000 properties,

00:47:56.640 | you need $20,000, $30,000, $40,000, $50,000 in the bank

00:47:58.640 | to be able to put your down payments to get deals.

00:48:01.640 | Can you do no money down deals?

00:48:02.640 | Probably, but most of that just seems like pure hype to me

00:48:07.640 | to sell books on nothing down.

00:48:09.640 | You need cash and you need credit.

00:48:10.640 | I think every real estate investor that I've worked with--

00:48:13.640 | I mean, they all have money and they all have credit.

00:48:15.640 | So you need to be focusing less on how much money is in the 401(k)

00:48:19.640 | and more on how much money is in the bank.

00:48:21.640 | You need to save money, and you need to save money out of the 401(k).

00:48:24.640 | So this would be where I would look at it,

00:48:25.640 | and I would say exactly like you're looking at.

00:48:27.640 | Maybe the Roth IRA is a better strategy for you,

00:48:30.640 | and here's how maybe you could do a hedging strategy.

00:48:32.640 | Take the free money, the 4% they put in the 401(k).

00:48:35.640 | Put the balance of your money into a Roth IRA.

00:48:38.640 | Max those out for you and your--I don't know if you're married or not.

00:48:41.640 | And then if you decide 3 years from now that you want to buy money,

00:48:44.640 | take your contributions out of the Roth and put it into real estate.

00:48:48.640 | Now, that would be dangerous because it would expose you to the risk

00:48:51.640 | of your investments declining in value.

00:48:54.640 | So maybe you put $15,000 into a Roth, and now they can only sell for $12,000.

00:48:58.640 | You've got a steal of a deal on a piece of real estate.

00:49:01.640 | Well, now that was not good.

00:49:03.640 | So if you're serious about cash, I would just put it in the bank.

00:49:06.640 | But here would be a few other ideas of how I would think about it.

00:49:11.640 | It doesn't sound like you're too thrilled about your job,

00:49:13.640 | and I'm just picking that up not because of anything you said about the job,

00:49:17.640 | but you said, "I guess I make enough money," and I--

00:49:20.640 | let me go back to what you said.

00:49:22.640 | What did you say at the end here?

00:49:23.640 | You said, "I'm making $30 an hour, and I haven't gotten a raise in 3 years,

00:49:29.640 | but I can't complain.

00:49:30.640 | I know I make more than the average working adult."

00:49:33.640 | First of all, I don't care about average.

00:49:35.640 | This is the radical--this is the radical personal finance show,

00:49:39.640 | not the average personal finance show.

00:49:41.640 | There's average personal finance shows all over the place.

00:49:44.640 | So I don't care about average.

00:49:45.640 | I do care about the fact that it just doesn't sound--

00:49:47.640 | I mean, you didn't sound too excited about your job.

00:49:49.640 | So I'd tell you this.

00:49:50.640 | Why not just quit your job and go switch to working in real estate?

00:49:54.640 | If you're maxing out--if you're making $60K and you're putting--

00:49:57.640 | and you're maxing out a $401K and then making contributions

00:50:00.640 | to that other SIGFIG account, then why not--

00:50:04.640 | you only need $40,000 to live on if those are the numbers.

00:50:07.640 | So why not just quit your job and go switch to a real estate industry?

00:50:10.640 | Are you learning anything in your job?

00:50:12.640 | I'd rather make $40,000 in working as a manager of a rental house

00:50:18.640 | or apartment rentals or working in a property management company

00:50:21.640 | or something like that.

00:50:22.640 | I'd rather make $40,000 where I'm learning something

00:50:24.640 | that's going to move me towards my goals than $60,000

00:50:26.640 | at something where it's kind of a dead-end thing

00:50:28.640 | and I'm just funding a 401(k).

00:50:29.640 | Now, if you're good at what you're doing,

00:50:31.640 | you should be able to make far more than $60,000.

00:50:33.640 | I would bet working as a manager of a self-storage complex

00:50:35.640 | or find somebody else that's already doing it

00:50:37.640 | and start managing the whole chain.

00:50:39.640 | You're going to need to work into it.

00:50:40.640 | But I'll bet you that you can make a lot more than $60,000

00:50:43.640 | if you can become really skilled in real estate.

00:50:45.640 | And if you're going to work a job

00:50:47.640 | while you're saving money to build your stake

00:50:49.640 | so you can get started with real estate investment,

00:50:52.640 | then why not go and work in a business that you're going to start with?

00:50:58.640 | Start with--I would say--and I don't--

00:51:01.640 | again, this would be where--and I'm glad it's an email

00:51:04.640 | because then I can tell you how to think

00:51:06.640 | without us going back and forth

00:51:07.640 | and me trying to specifically solve your specific thing.

00:51:11.640 | But here's what I'd say.

00:51:12.640 | If you're actually interested in real estate investment,

00:51:14.640 | start with learning.

00:51:15.640 | Start with books, reading.

00:51:16.640 | If it were me, the best book I've ever found on the subject to get started

00:51:20.640 | would be a book written by the author named John T. Reid,

00:51:23.640 | and his book is entitled "How to Get Started in Real Estate Investment."

00:51:26.640 | You can't buy it on Amazon.

00:51:28.640 | It's not available anywhere except his own website.

00:51:30.640 | He self-publishes everything.

00:51:31.640 | It's at johntreed.com,

00:51:36.640 | and look for his real estate books

00:51:37.640 | and read his book called "How to Get Started in Real Estate Investment."

00:51:40.640 | It's going to be $30, $40, something like that.

00:51:42.640 | Link in the show notes.

00:51:43.640 | It's really great.

00:51:44.640 | I would consider reading everything that Reid has written.

00:51:46.640 | He's the best author that I have found about writing about real estate,

00:51:51.640 | and he's very, very good.

00:51:53.640 | I would--second, the authors that I've benefited the most from,

00:51:57.640 | for me myself, would be the books of John Schaub.

00:52:00.640 | The author's name is Schaub.

00:52:06.640 | He's written a couple of books that are super useful,

00:52:09.640 | more accessible maybe than John Reid's books,

00:52:12.640 | for kind of a book to get you excited about it.

00:52:14.640 | If you're interested in self-storage--I mean, I just did a quick Google search.

00:52:17.640 | Here's what I would start.

00:52:18.640 | Join the Self-Storage Association.

00:52:20.640 | So go and find--here's their website.

00:52:22.640 | It's selfstorage.org.

00:52:25.640 | So go to selfstorage.org and make sure you join this association.

00:52:29.640 | Membership and benefits.

00:52:30.640 | Let's look.

00:52:31.640 | Categories and dues.

00:52:32.640 | So if we look at categories here, let's see how much this will cost you.

00:52:36.640 | Live and real time.

00:52:37.640 | Level 1, prospective owner.

00:52:39.640 | So that would probably be you, $545 a year.

00:52:42.640 | I'd go spend $545 on that in an instant to be a member of that.

00:52:46.640 | So $545 a year to be an owner.

00:52:49.640 | They've got level 1, level 2, level 3.

00:52:51.640 | But a prospective owner, that would be classified as an individual

00:52:54.640 | or entity that does not own an existing self-storage facility

00:52:57.640 | or a facility under construction, but is a prospective developer

00:53:01.640 | or purchaser of a self-storage facility.

00:53:03.640 | That would be you.

00:53:05.640 | Non-voting membership class.

00:53:07.640 | So I would join the Self-Storage Association if this is what you're interested in.

00:53:11.640 | I noticed right when I went here that there is a SSA Fall Conference and Trade Show coming up,

00:53:17.640 | September 9th through the 12th, 2014, at Caesars Palace, Las Vegas.

00:53:21.640 | I'd go to that thing.

00:53:22.640 | That's next month.

00:53:24.640 | So in a couple of weeks.

00:53:25.640 | Take a week off from work and drive to Las Vegas and go to their association

00:53:30.640 | and start meeting people.

00:53:32.640 | I noticed here--let me look here.

00:53:34.640 | Education and events.

00:53:35.640 | So if you click on their website, Education and Events, they have a Fall Conference.

00:53:39.640 | That's what clearly is coming up.

00:53:41.640 | Online university and certification.

00:53:43.640 | So I would start right here, and I would say webcasts, education to go.

00:53:48.640 | They've got a manager certification program.

00:53:50.640 | So the SSA Certified Self-Storage Manager designation.

00:53:54.640 | That would be a good idea to start right there.

00:53:56.640 | Go through their course.

00:53:57.640 | I don't know how much it is.

00:53:58.640 | It looks like--here, $600 for the full package for new certifications.

00:54:02.640 | $600 to get their manager designation so you can go work in self-storage.

00:54:08.640 | Don't save a million bucks to try to go and build a self-storage account

00:54:13.640 | before you've gone and worked in it and learned what it's actually like from an inside view.

00:54:17.640 | Once you're working in the industry, the world would open up to you.

00:54:21.640 | You could have people that you could talk to everywhere--owners, mentors,

00:54:23.640 | so I don't know, maybe there's a local association, a local part of this organization.

00:54:35.640 | Maybe there's a local real estate investors club.

00:54:37.640 | So you need to figure out who are all the people in your area that are doing this.

00:54:41.640 | Figure out what county you live in.

00:54:43.640 | Go to the SSA website.

00:54:45.640 | I'm sure they have here--they have a facility locator.

00:54:48.640 | And if I just click on--I don't see any way here.

00:54:52.640 | So let's just--yeah, let's put in California.

00:54:54.640 | Here's how I would do it.

00:54:56.640 | I would click on California, zero records returned.

00:54:59.640 | Strange.

00:55:01.640 | Okay, so I have to get logged in.

00:55:03.640 | Okay, so I'm not a member, so I'm not logged in.

00:55:06.640 | So what you need to do is you need to join, and then you have this facility locator

00:55:11.640 | of self-storage associations.

00:55:14.640 | And I would put in California or start with your county or your zip code

00:55:18.640 | and just start with closest to you.

00:55:20.640 | Make a list of all of the self-storage locations that are near you

00:55:24.640 | and call up the owners and ask them to take them to lunch.

00:55:28.640 | Tell them you're interested in the business.

00:55:30.640 | I don't know if you're young or old.

00:55:32.640 | I don't know, but if it were me, I would say, "Hey, listen, I'm a young guy.

00:55:35.640 | I'm really interested in the business.

00:55:37.640 | I don't have anything yet.

00:55:38.640 | I'm working in this completely unrelated industry, but I'm trying to do some research.

00:55:42.640 | Would you be willing to take me out?

00:55:45.640 | Can I take you out to lunch and just chat with you?"

00:55:47.640 | And most of them, I bet, would accept that.

00:55:49.640 | Now, if they're in your local area, maybe they would be threatened,

00:55:51.640 | so maybe you need to go across town to another place.

00:55:55.640 | I would start a blog.

00:55:57.640 | I would start a blog or a podcast.

00:55:59.640 | There's probably a self-storage podcast, or if there's not, start one.

00:56:03.640 | And instead of making it being like I'm the expert, just make it,

00:56:06.640 | "This is my journey to learning."

00:56:08.640 | That gives you a really good excuse to call people and talk with people.

00:56:11.640 | Start a blog about that and interview these people

00:56:14.640 | and start some kind of research project of some kind.

00:56:17.640 | Maybe there's a university in your area that has some kind of real estate degree

00:56:25.640 | that you can go and you can audit classes and you can write a paper.

00:56:28.640 | Now that gives you a really easy excuse to call the people who are running the self-storage clubs

00:56:32.640 | and say, "Listen, can I interview you for my thesis that I'm working on?"

00:56:38.640 | You could probably be a little shady and just make it up that you're doing that.

00:56:41.640 | You don't have to be shady.

00:56:43.640 | Just join the association and write for their magazine.

00:56:46.640 | Let's see, publications.

00:56:48.640 | Look, they've got the Globe magazine.

00:56:51.640 | I'm making this up on the spot. I hope it's helpful.

00:56:54.640 | The Globe magazine, "Welcome to SSA Globe, the only not-for-profit magazine

00:56:57.640 | serving the self-storage industry.

00:56:59.640 | What started five years ago as a newsletter for association members

00:57:02.640 | has evolved into a robust magazine featuring information about the SSA's activities,

00:57:06.640 | news, and features."

00:57:07.640 | Here's what I would do.

00:57:09.640 | You need to start writing columns for that magazine

00:57:12.640 | about your journey into the self-storage industry.

00:57:15.640 | Then when you call the owners of the stuff, you can tell them,

00:57:19.640 | "I'm writing articles for the Globe magazine about my journey into self-storage."

00:57:24.640 | Now you have an opportunity to call them, take them out to lunch,

00:57:28.640 | and learn, and ask them all the questions, and find out what would you do differently

00:57:34.640 | if you were going to do something differently.

00:57:36.640 | Now that you've got that, you've got to design a plan.

00:57:38.640 | Whatever the plan is that's good for you.

00:57:40.640 | I'm making this mine up on the spot.

00:57:42.640 | It's crazy for you, but this is helpful to somebody else.

00:57:45.640 | But here's how I would consider it.

00:57:47.640 | I would look to say, "How can I learn?"

00:57:50.640 | I am sure that if you--let's say you're investing $20,000 a year right now.

00:57:56.640 | If it were me, I would take their $3,000 that they'll put into the account for you,

00:58:01.640 | toss in anything you needed to do to get their match,

00:58:04.640 | put $10,000 into Roth IRAs, and spend the rest of the money on switching industries.

00:58:09.640 | Frankly, if you're serious about investing in real estate,

00:58:11.640 | you probably should quit investing at all in the 401(k) or the IRA,

00:58:14.640 | and you should build up your real estate assets.

00:58:19.640 | Now, I didn't want to jump too quick to self-storage.

00:58:23.640 | You said, "My next goal is to be able to buy a house, flip it, and repeat."

00:58:27.640 | Awesome.

00:58:28.640 | So start with John Reed's book and figure out what real estate strategy are you going to want to do.

00:58:35.640 | I'm going to read--it's one page from his book, and this is a great book.

00:58:39.640 | And I'm going to read a list of real estate investment profit opportunities

00:58:44.640 | that he writes about in his books and that he has covered.

00:58:47.640 | And these are the legitimate various ways that you can invest in real estate.

00:58:52.640 | Now, I'm familiar with some of these.

00:58:54.640 | I'm not familiar with others of them.

00:58:56.640 | He writes a monthly newsletter, by the way, which is well worth subscribing to.

00:59:01.640 | It would be the first thing I'd do.

00:59:03.640 | I think it's $250 a year or something like that.

00:59:04.640 | It's not that much.

00:59:06.640 | I would go and subscribe to his newsletter and learn about that.

00:59:09.640 | But listen to all of these different specialties that you could do with real estate.

00:59:17.640 | You know what?

00:59:18.640 | I'm not going to read the whole thing because I bet that would probably be a little bit--this is a good list.

00:59:22.640 | So I'm going to read the first column here.

00:59:25.640 | And these are listed alphabetically, and there is one, two, three--

00:59:28.640 | there are basically three or four columns depending on how I define column.

00:59:32.640 | So here are some strategies.

00:59:34.640 | Adverse possession.

00:59:35.640 | Alcoholic and drug addict sellers.

00:59:37.640 | Asbestos overreaction.

00:59:39.640 | Assembly.

00:59:40.640 | Assessment district sales.

00:59:41.640 | Bankruptcy.

00:59:42.640 | Bargain lots at lenders' auctions.

00:59:44.640 | Builder auctions.

00:59:45.640 | Builder leftover lots.

00:59:47.640 | Building houses.

00:59:48.640 | Change address.

00:59:49.640 | Change way of measuring square footage.

00:59:51.640 | Condemned property.

00:59:53.640 | Condo conversion.

00:59:54.640 | Condo reconversion.

00:59:55.640 | Converting duplex to single family.

00:59:57.640 | Corporate surplus real estate.

00:59:59.640 | Cosmetic renovation.

01:00:01.640 | Deed mistakes.

01:00:02.640 | Delinquent subdivision mortgages.

01:00:04.640 | Delinquent tax sales.

01:00:06.640 | Development-ready lots.

01:00:07.640 | Discount lien releases.

01:00:09.640 | Discounted notes.

01:00:10.640 | Distressed builder auctions.

01:00:11.640 | Distressed owner.

01:00:12.640 | Divorce.

01:00:13.640 | "Divorcing" partners.

01:00:15.640 | Easements to liberate landlocked land.

01:00:18.640 | Easy come, easy go sellers.

01:00:19.640 | Excess land.

01:00:20.640 | Executive suite sandwich lease.

01:00:22.640 | Existing options.

01:00:23.640 | Failed vacation subdivision lots.

01:00:25.640 | FHA repos.

01:00:28.640 | Fire-damaged buildings.

01:00:30.640 | Fixers.

01:00:31.640 | Flipping.

01:00:32.640 | Foreclosure auction.

01:00:33.640 | Foreclosure redemptions.

01:00:35.640 | For sale by owners.

01:00:36.640 | Foundations that are defective.

01:00:38.640 | Home builder leftover houses.

01:00:39.640 | Houses that smell.

01:00:41.640 | HUD repos.

01:00:42.640 | Industrial net leases.

01:00:43.640 | And there's a whole other column and a half of them.

01:00:47.640 | So these are all specific profit strategies that he has identified that you could find to exploit.

01:00:53.640 | And so if you start learning about real estate and you start investing in your education,

01:00:57.640 | then you may be able to figure out what strategy is going to be the best for you.

01:01:00.640 | And it may be storage units.

01:01:02.640 | That's actually one of his -- that's one of his profit strategies listed on here.

01:01:06.640 | Let me find it again.

01:01:07.640 | I just closed it.

01:01:08.640 | So -- where is it?

01:01:11.640 | So storage units -- here we go.

01:01:13.640 | Storage units.

01:01:14.640 | Storage units.

01:01:18.640 | It's on here.

01:01:19.640 | One of them.

01:01:20.640 | So that may be one specific way of doing it.

01:01:23.640 | But you also may pursue recreational vehicle parks.

01:01:26.640 | Maybe that's better where you are.

01:01:28.640 | So you would research these certain things and you would develop a plan for yourself that's going to be good for you.

01:01:36.640 | So once you figure out your plan, what type of strategy you want to do, then, again, consider how you can learn about it.

01:01:43.640 | So should you switch and go and learn construction?

01:01:46.640 | Maybe what you're doing is a job that's an office job.

01:01:49.640 | In reality, you would be better served by going and learning construction.

01:01:52.640 | And maybe you can be an owner builder and build property and rent it out.

01:01:56.640 | Maybe you don't have the money for that.

01:01:57.640 | So that's not a good plan.

01:01:58.640 | Maybe you should go into property maintenance.

01:02:00.640 | Maybe you can adjust your living situation and become a tenant property supervisor where you lower your living costs.

01:02:08.640 | That allows you to save more money.

01:02:10.640 | You manage a building and you get experience with that.

01:02:12.640 | Maybe you should start a property management company.

01:02:14.640 | Maybe you should become a real estate agent.

01:02:16.640 | Maybe you should become a mortgage broker.

01:02:18.640 | I don't know.

01:02:19.640 | But maybe -- can you get closer to it?

01:02:21.640 | So here's what I would say.

01:02:22.640 | Start slow and start fast.

01:02:24.640 | Don't take money from your 401(k) and cash it out and pay a 10% penalty if this real estate thing is just a kind of a gamble.

01:02:34.640 | Maybe I'm interested in it, so let me go.

01:02:36.640 | But, I mean, that's a great way to just destroy your money because all of a sudden you take 50 grand out.

01:02:40.640 | You buy 50 -- A, you pay a bunch of tax and penalty.

01:02:43.640 | B, you invest it and you do a stupid investment.

01:02:46.640 | And now you've just completely destroyed your 50 grand, and that was your stake to get started.

01:02:51.640 | But on the other hand, if you've worked a plan, you're an expert, you see an opportunity.

01:02:56.640 | And if you see an opportunity where you're going to do a flip and you know because you are now an expert,

01:03:02.640 | you know that this flip is going to double your money in 90 days,

01:03:06.640 | and you need 30 grand more than you have saved outside your 401(k),

01:03:10.640 | and if you are really confident and you know what you're doing and this is not just kind of a middle of the night idea,

01:03:16.640 | absolutely, take the money, pay the penalty, and do it.

01:03:19.640 | But you better be sure.

01:03:21.640 | This whole idea that we don't take money from 401(k)s, it's a mathematical calculation.

01:03:27.640 | Calculate the taxes, calculate the penalties, and calculate the lost growth on the money that's in the 401(k)

01:03:32.640 | and calculate what your expected return is from your investment.

01:03:35.640 | Be conservative and be careful.

01:03:37.640 | Now, most people take money out of their 401(k) to buy a car, you know, or just because they do,

01:03:42.640 | or because, you know, their brother-in-law's cousin is pitching them on something cool

01:03:46.640 | and they haven't done any research and they go and do it.

01:03:49.640 | So it's not that you never take money from a 401(k), but start with, you know, stopping contributing.

01:03:53.640 | Slow down. So that's what I mean. Slow down, start fast.

01:03:57.640 | So start slow, start fast.

01:03:59.640 | They're both important and there's no answer, no specific answer.

01:04:04.640 | Just go back to paragraph one or minute one and become an expert.

01:04:10.640 | So if you really want to get into something like real estate investment, that's awesome.

01:04:15.640 | Now, your job is just a funding mechanism, which is basically giving you cash to build your stake,

01:04:21.640 | your kitty, your funds.

01:04:24.640 | Then you've got to go out and visit it and invest it.

01:04:29.640 | Work hard to become a real expert and then figure out where the best place is for you to apply your expertise.

01:04:40.640 | And remember, if you do start a self-storage company, you can always set up a 401(k)

01:04:45.640 | and you can set it up with a--you can get the cheapest funds out there,

01:04:50.640 | you can get the cheapest TPA, you can do it on the cheap.

01:04:53.640 | And I would--I love people doing things on the cheap.

01:05:00.640 | I think that's most of what I wanted to get across to you today.

01:05:04.640 | And I think it is. I had one other thing on my list, but I think this show has been long enough.

01:05:10.640 | I was going to go over a comment from a listener on my Walmart show, which was a very good comment.

01:05:16.640 | And it was good stuff, but I'm out of time.

01:05:20.640 | I hope this has been helpful.

01:05:24.640 | You know, Jason, when I saw your email and I just figured this was a good way for me

01:05:29.640 | to kind of talk you through how I would think about it.

01:05:32.640 | And I hope that my point has come across today, that what ticks me off about the investment world

01:05:39.640 | is people are focusing sometimes--you get this myopic field of vision

01:05:46.640 | where you say, you know, expense ratio is the only thing that matters.

01:05:50.640 | Listen, expense ratio matters, but expense ratio is such a tiny part of an overall financial plan

01:05:57.640 | that it's a very important part, but it's a tiny part.

01:06:01.640 | Expense ratio doesn't matter if we hate our job, you know,

01:06:04.640 | and that money is better spent on taking a year off and backpacking around Europe,

01:06:08.640 | because that's going to allow us to get some zest and vitality back in life.

01:06:13.640 | 401(k) is important, but a 401(k) is not so important if we're going to have to go through 30 years of doom

01:06:21.640 | and hating life to get through it.

01:06:24.640 | Now, again, not everyone hates their jobs.

01:06:27.640 | My wife is always encouraging me, "Listen, Joshua, not everyone is as crazy as you are.

01:06:31.640 | Not everyone is as extreme as you are."

01:06:33.640 | And she's 100% right.

01:06:36.640 | But my point is that all of these things are important,

01:06:40.640 | and it's not as simple as a five-minute answer.

01:06:42.640 | So I'm going to close on Friday with two things here,

01:06:46.640 | and instead of sighing like that, I should start with,

01:06:51.640 | I'm going to close on Friday with two things here.

01:06:54.640 | One is I listened to a video this morning.

01:06:57.640 | It's two minutes long, and this is by Darren Hardy.

01:07:00.640 | And Darren Hardy is the publisher of Success Magazine,

01:07:03.640 | and he's doing something awesome.

01:07:06.640 | He's doing this thing where he does this Darren Daily,

01:07:11.640 | and it's his daily mentoring where every morning you get an email from Darren

01:07:15.640 | with a two-minute video, a quick audio thing, a quick exercise.

01:07:20.640 | It's awesome.

01:07:21.640 | It's five minutes a day, but it's all about a growth plan.

01:07:24.640 | And so today was entitled "My 1-1-5-3-1-30-35 Plan,"

01:07:30.640 | and this was a really great reminder.

01:07:32.640 | And I just thought--I had never heard him talk about this plan,

01:07:35.640 | but basically it's how he approaches personal success and self-development,

01:07:39.640 | and I thought it was a really great way to approach it.

01:07:43.640 | So I'm going to play this two-minute video for you,

01:07:45.640 | and then I'm going to come back and close with a poem

01:07:47.640 | and get you out of here for the weekend.

01:07:49.640 | [music]

01:07:56.640 | So I'm going to give you my 1-1-5-3-1-30-35 plan.

01:08:01.640 | Number one is take your number one goal, whatever your number one goal is.

01:08:06.640 | What is the one skill that is going to determine the most

01:08:11.640 | to you accomplishing that goal?

01:08:13.640 | And then next, take five books on the topic

01:08:17.640 | and go immediately to Amazon and order them.

01:08:19.640 | This is what I do.

01:08:20.640 | I pick the skill, buy five books, go buy three DVD or CD programs,

01:08:28.640 | and then pick one seminar and go to it on that skill.

01:08:32.640 | One time for me it was relationships.

01:08:34.640 | My number one goal was creating more intimacy in my marriage.

01:08:37.640 | So I bought the top five books, I bought the top three CD and DVD programs,

01:08:40.640 | and I went to a seminar.

01:08:42.640 | And then this is how you consume it.

01:08:44.640 | It's a lot easier than you think.

01:08:46.640 | So this is my 30-30 plan.

01:08:48.640 | In the morning when I first get up, first thing I do,

01:08:50.640 | put my iPhone on 30 minutes and I just read for 30 minutes.

01:08:54.640 | I'm going to get through those five books over a period of a month or two.

01:08:58.640 | And then I listen to the instructional audio for 30 minutes each day

01:09:02.640 | while I'm driving around, working out, or walking the dogs.

01:09:05.640 | That's it.

01:09:07.640 | That's my personal development plan.

01:09:09.640 | The reason why you create extraordinary results

01:09:11.640 | is the consistency of that small discipline compounded over time.

01:09:15.640 | And then this is the five-step study program that I go through.

01:09:18.640 | As I'm going through that material,

01:09:20.640 | I'm studying that material, focusing on that one skill.

01:09:24.640 | Then I'm extracting the three best ideas.

01:09:27.640 | It could be a 300-page book, but I'm only looking for three ideas

01:09:30.640 | because if there are 100 ideas, there are no ideas.

01:09:34.640 | So just get three.

01:09:36.640 | Number three is act.

01:09:37.640 | I implement one idea right now, this week.

01:09:39.640 | As soon as I get the idea, right now, this week, and I practice it.

01:09:43.640 | And then I measure the improvement over a period of 30 days.

01:09:49.640 | And then I do this plan to review, where I review it, I adjust, and I do it again.

01:09:56.640 | [music]

01:09:59.640 | And that's his plan.

01:10:01.640 | When I heard that this morning--it was early this morning--

01:10:03.640 | I tried to take a quick look at my email,

01:10:07.640 | and I like to see his stuff because they're so short,

01:10:09.640 | and it's really fun to watch.

01:10:11.640 | And when I heard his plan, I just thought, "What a great way to organize it."

01:10:15.640 | So Jason, consider that.

01:10:17.640 | Set out a 1-1-5-3-1-30-35 plan.

01:10:21.640 | So remember, again, just to refresh, number one is what's your number one goal?

01:10:25.640 | Now, it may not be becoming a real estate tycoon.

01:10:30.640 | If it's not, then focus on something else.

01:10:32.640 | But if your number one goal is, "I want to build financial independence,"

01:10:39.640 | then what's the number one skill that's going to get you there?

01:10:42.640 | Well, my number one skill that's going to get me there

01:10:44.640 | is I need to learn the skill of being a real estate investor.

01:10:47.640 | What are the five books to start with?

01:10:49.640 | Well, I would start with John T. Reed's beginning book.

01:10:53.640 | And I would start with--so if it were me,

01:10:56.640 | I would start with his "How to Get Started in Real Estate Investment."

01:10:59.640 | I would read his "Guru Ratings," which, by the way, is a treasure trove.

01:11:03.640 | If you want to find out where to go to avoid those who are idiots in the real estate world

01:11:14.640 | and complete scam artists, then I would recommend to you John T. Reed's "Guru Ratings."

01:11:19.640 | If you want to find out why I don't recommend Robert Kiyosaki books, be careful.

01:11:25.640 | It's going to have the most scathing and accurate destruction of Robert Kiyosaki.

01:11:33.640 | So I'm just warning you that it's there.

01:11:35.640 | If you're a big Robert Kiyosaki fan, then be careful when you're there.

01:11:38.640 | But pick out the five books.

01:11:40.640 | So I would say John T. Reed's "How to Get Started."

01:11:42.640 | He has a list and a reading--he has a recommended reading list

01:11:47.640 | as far as what way that he recommends people get started with real estate.

01:11:55.640 | So his "How to Get Started" would be a good place to start.

01:11:59.640 | And then that will lead you into some of his other books where he'll talk about strategies.

01:12:04.640 | So if you wanted to get through some other strategies,

01:12:07.640 | you might start next with distressed real estate

01:12:10.640 | or how to buy real estate for at least 20% below market value

01:12:13.640 | or how to increase the value of real estate.

01:12:16.640 | You may read Lee Robinson's book on landlording, which is wonderful.

01:12:20.640 | Best book I've ever seen on landlording.

01:12:22.640 | It's called "Landlording," and the author's name is Lee Robinson.

01:12:26.640 | And you might pick up John Shavs' books and get five of them and get started with that.

01:12:32.640 | You might choose three CDs or DVDs.

01:12:35.640 | Now, I don't know what great real estate ones--where I would go for that is I would go over to Bigger Pockets,

01:12:39.640 | which is a really thriving real estate online community.

01:12:42.640 | They've got a great podcast. I would listen to all their podcast episodes.

01:12:45.640 | I would find a real estate seminar, and I would join that.

01:12:48.640 | And then read for 30 minutes a day in that field.

01:12:52.640 | Listen for 30 minutes a day.

01:12:54.640 | And then as you're reading and listening, look for what's the three best ideas.

01:13:00.640 | What can you implement right now?

01:13:01.640 | What are the skills, just like he talks about?

01:13:04.640 | What can you measure, and then what can you improve?

01:13:06.640 | So I commend that to you as a good place to start.

01:13:10.640 | I'm going to close today, wrap up here, with a poem.

01:13:16.640 | This is a poem by Jesse B. Rittenhouse, one of my favorites.

01:13:19.640 | As we go into this weekend, remember this.

01:13:22.640 | "I bargained with life for a penny, and life would pay no more.

01:13:27.640 | However, I begged that evening when I counted my scanty store.

01:13:32.640 | For life is just an employer. He gives you what you ask.

01:13:36.640 | But once you have set the wages, why, you must bear the task.

01:13:42.640 | I worked for a menial's hire, only to learn, dismayed,

01:13:46.640 | that any wage I had asked of life, life would have paid."

01:13:52.640 | It's Friday afternoon.

01:13:54.640 | I hope that you all have a wonderful weekend.

01:13:57.640 | I hope that this was useful.

01:13:59.640 | Jason, I hope you still like me after my response to you.

01:14:05.640 | Thank you all so much for listening today.

01:14:07.640 | I really appreciate it.

01:14:08.640 | As we go here, remember--

01:14:10.640 | I've got to start doing my disclaimers.

01:14:12.640 | Remember that nothing in today's show is intended to be personal financial advice,

01:14:15.640 | and you should additionally concede the services of a competent professional

01:14:18.640 | to apply to your specific plan.

01:14:20.640 | There, disclaimer done.

01:14:23.640 | Thank you for the ratings on iTunes and Stitcher.

01:14:25.640 | I appreciate that.

01:14:26.640 | I would be thrilled if you could take a moment,

01:14:28.640 | if you like today's show, it would be so helpful.

01:14:30.640 | Take a moment, right on your phone, right now.

01:14:32.640 | I'll be done in a second.

01:14:33.640 | Take a moment and click over to iTunes right on your phone or Stitcher or whatever you do.

01:14:37.640 | If you would leave a rating and a review for the show, I would be thrilled.

01:14:40.640 | Thank you so much for listening.

01:14:42.640 | I hope you all have a wonderful weekend.

01:14:44.640 | [music]

01:15:13.640 | [music]

01:15:27.640 | I bargained with life for a penny, and life would pay no more.

01:15:31.640 | However, I begged that evening when I counted my scanty store.

01:15:35.640 | For life is just an employer.

01:15:37.640 | He gives you what you ask.

01:15:39.640 | But once you have set the wages, why, you must bear the task.

01:15:44.640 | I worked for a menial's hire, only to learn, dismayed,

01:15:49.640 | that any wage I had asked of life, life would have paid.

01:15:54.640 | Hey parents, join the LA Kings on Saturday, November 25th,

01:15:57.640 | for an unforgettable kids day presented by Pear Deck.

01:16:00.640 | Family fun, giveaways, and exciting Kings hockey awaits.

01:16:03.640 | Get your tickets now at lakings.com/promotions

01:16:06.640 | and create lasting memories with your little ones.

RPF-0046-What_Do_I_Do_With_a_Stinky_401k