RPF0098-FridayQandA
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00:00:30.100 | Friday Q&A today.
00:00:32.100 | Here are the questions we're going to cover.
00:00:34.100 | I almost doubled my income.
00:00:36.300 | Saving a bunch of money, what do I do with the difference now?
00:00:40.900 | Number two, my parents don't have much money, just a little bit of home equity.
00:00:44.900 | How do we figure out a retirement plan for them?
00:00:47.700 | Number three, is insurance a good investment?
00:00:51.700 | Number four, how do I figure out an appropriate withdrawal strategy
00:00:55.900 | to leave a certain amount of money behind?
00:00:58.700 | Number five, 26 years old, make a bunch of money but don't know what to do.
00:01:02.900 | Is it okay just to keep money in cash or do I need to have it invested?
00:01:07.300 | Next, how do I allocate and diversify my bond portfolio?
00:01:13.100 | Should I pay extra on my mortgage in a lump sum or in a little bit over time?
00:01:17.900 | And if we have time, how do I get out of credit card debt?
00:01:22.500 | ♪
00:01:38.700 | Welcome to the Radical Personal Finance Podcast.
00:01:41.100 | My name is Joshua Sheets and I'm your host.
00:01:42.900 | Today is Friday, November 7, 2014.
00:01:47.500 | It's Friday, time for Q&A.
00:01:49.100 | Those are the eight questions I've got lined up.
00:01:51.500 | Of course, the question is will we get even past number one or number two?
00:01:56.700 | I really don't even know.
00:01:58.900 | This is episode 98 of the show.
00:02:00.500 | I hope you enjoy it.
00:02:01.900 | ♪
00:02:10.900 | So you all responded to my – was it a plea?
00:02:14.100 | I'm not sure if it was a plea or my request for more questions last week.
00:02:17.300 | So I had a bunch of questions sent in which is awesome.
00:02:19.700 | I've got those eight that I mentioned in the intro lined up here ready to go.
00:02:23.700 | I'm not sure how many I'm going to get through.
00:02:25.500 | I'm going to try to actually answer them a little bit more quickly than sometimes
00:02:29.500 | and I'm going to linger on a few different points.
00:02:32.100 | So as just a quick up front, I may in some of these questions answer them in a more cursory manner
00:02:37.500 | or just pick on a couple of the topics that seem pertinent and interesting to me
00:02:42.500 | rather than trying to give such a detailed, exhaustive answer for each of these.
00:02:46.300 | So I hope you enjoy.
00:02:47.300 | I'm going to shoot for right about an hour and when I get to an hour,
00:02:49.500 | I'll finish whatever question I'm on and I will flip the recorder off.
00:02:52.900 | So we're going to keep today to an hour and then I'll keep the questions for future shows lined up in the backlog.
00:03:00.500 | Real quick before I get started on the questions,
00:03:02.900 | I want to just give you a quick heads up since I forgot to do it last Friday.
00:03:06.300 | I've been interviewed over the last two weeks on two different podcasts and both of those are now out.
00:03:11.500 | I will put links in today's show and then also tomorrow I will put out a blog post on the blog.
00:03:17.500 | For part two of my interview with Eric Hemingway on the Family Adventure podcast,
00:03:21.900 | we talked about strategies for saving money toward things like family adventure and long-term travel.
00:03:28.900 | And then also I was interviewed by Rob Berger on his Dole Roller podcast.
00:03:34.100 | And that show was a lot about the business of financial planning,
00:03:37.300 | what it's actually like from a business side and he got some personal details out about me.
00:03:42.500 | He got some of those things from me.
00:03:44.700 | So I hope you enjoy that and check those out.
00:03:46.900 | Links in today's show and go ahead and check those shows out if you are interested in that.
00:03:53.300 | Also next week, I'm going to be running through a few different things next week.
00:03:57.100 | I'll share that schedule with you at the end of the show.
00:03:59.900 | So first off, we're going to begin with a voicemail question.
00:04:04.100 | And if you would like me to answer your voicemail questions,
00:04:06.500 | I prefer voicemail questions because it helps the audience to hear your voice.
00:04:10.300 | I really like those.
00:04:11.500 | So I will give priority to a good question asked in voicemail versus a question that was emailed to me.
00:04:16.500 | But let's kick it off with a question here from Joel.
00:04:20.300 | Hey, Joshua, excellent work.
00:04:21.900 | This is the best financial podcast out there.
00:04:24.500 | You're a gifted thinker and a talented communicator.
00:04:27.500 | Keep up the good work.
00:04:28.500 | Thank you.
00:04:29.500 | Need your advice.
00:04:30.500 | Brainstorming on how to manage a big jump in income.
00:04:33.500 | This year we went from $100,000 to $190,000 from my promotion and my wife's second job.
00:04:41.500 | Our living expenses are $30,000 thanks to a paid off house.
00:04:45.500 | And we give to many causes and to our local church for a total of $25,000.
00:04:51.500 | We maxed out my 401(k) and started an individual 401(k) for her.
00:04:56.500 | She's an independent contractor on one of her two jobs making $14,000.
00:05:01.500 | We also maxed out an HSA for $6,000.
00:05:05.500 | Our assets are $250,000 in mutual funds with maybe 10% of it in company stocks.
00:05:12.500 | Home is worth $160,000.
00:05:15.500 | No debts, no kids for college.
00:05:17.500 | We need ideas on where else to invest.
00:05:19.500 | It leaves us around $500,000 a month.
00:05:22.500 | Should we put it all into taxable accounts and buy more mutual funds?
00:05:27.500 | With careful asset allocation and with momentum upgrading, I would expect 10% return.
00:05:34.500 | Or should we buy rental properties?
00:05:36.500 | I manage a friend's rental house, and I'm a great handyman.
00:05:40.500 | Also, we could upgrade to another home and build equity and get a mortgage deduction.
00:05:45.500 | But one problem in Texas is high property tax.
00:05:49.500 | So we need ideas.
00:05:50.500 | Ultimately, our goal is semi-retirement in 5 to 10 years by our late 40s or early 50s
00:05:57.500 | so that we could volunteer for different causes and spend time traveling.
00:06:03.500 | Thanks, Joshua. Bye-bye.
00:06:05.500 | What a cool question, huh?
00:06:07.500 | How exciting to be in that position.
00:06:09.500 | What an awesome opportunity to be making almost $200,000 a year,
00:06:13.500 | and you only need about $30,000 to live on,
00:06:16.500 | and then basically to almost practically double your income.
00:06:19.500 | That is awesome.
00:06:20.500 | So, Joel, what an exciting, exciting situation to be in.
00:06:28.500 | I've got a few thoughts for you, and I'll just tell you kind of how I would think about it.
00:06:32.500 | But I hope you find a few of these things helpful.
00:06:35.500 | First of all, a couple of bits of info for you as far as that I picked up in his voicemail,
00:06:41.500 | two terms you may not be familiar with.
00:06:43.500 | He mentioned choosing a portfolio of mutual funds using momentum upgrading.
00:06:48.500 | So that would indicate to me that he is using a momentum investing strategy.
00:06:54.500 | And momentum investing is basically you try to ride the macro wave.
00:06:58.500 | So you try to get out when things are going down and get in when things are going up.
00:07:02.500 | But you're not trying to buy it.
00:07:04.500 | You're not trying to time it perfectly.
00:07:06.500 | You're trying to essentially ride the trend.
00:07:09.500 | And since he used the term "upgrading," to the best of my knowledge,
00:07:12.500 | I could be mistaken about that, but I think that term is primarily associated with one newsletter.
00:07:19.500 | I think it's called the No Load Fundex Newsletter, something like that.
00:07:24.500 | That might be the proper name for it.
00:07:27.500 | But if you're interested in that, my library carries that newsletter.
00:07:30.500 | I read it off and on every now and then.
00:07:32.500 | But that's probably what he is doing for his investment strategy.
00:07:36.500 | It's kind of an interesting strategy.
00:07:38.500 | There's a compelling sales copy on it, and I know many people who have done well with it.
00:07:43.500 | And it's an interesting newsletter.
00:07:44.500 | I like to read it.
00:07:45.500 | And basically the idea is you buy or sell certain no-load mutual funds,
00:07:49.500 | trying to ride the general trend of the market.
00:07:53.500 | And so in this newsletter they'll publish every month.
00:07:56.500 | They'll publish the funds that are a buy, the funds that are a hold, and the funds that are a sell.
00:08:01.500 | And so it's an interesting newsletter, interesting strategy.
00:08:05.500 | So that's what he probably is referring to when he mentions the two key words are "momentum" and "upgrading."
00:08:11.500 | So the other thing is he mentioned he's got about $500,000 a month.
00:08:14.500 | My guess is that he meant $5,000 a month.
00:08:17.500 | So that would be about right.
00:08:19.500 | If you were to run his expenses, just to give you an update on the numbers,
00:08:22.500 | if you were to say, "Okay, $190,000, and let's ignore tax for a moment.
00:08:26.500 | Let's just take out expenses.
00:08:28.500 | Let's take out $30,000 of a paid-for house.
00:08:31.500 | Take out," he says, "max is 401(k)."
00:08:34.500 | So let's just put $18,000 in there.
00:08:36.500 | It's just under that.
00:08:37.500 | So $18,000 for his 401(k).
00:08:39.500 | He says his wife makes $14,000, and he's putting that into an individual 401(k).
00:08:43.500 | So let's just assume she puts all of her money in there.
00:08:45.500 | $6,000 for the HSA.
00:08:47.500 | And then the $25,000 of money given away.
00:08:54.500 | So that leaves us with about $97,000.
00:08:57.500 | So my guess is that he meant about $5,000 a month, which would be $6,000,
00:09:02.500 | and he's paying $30,000 a year of taxes,
00:09:05.500 | $37,000 maybe in my math of employment taxes and income taxes.
00:09:11.500 | So the question is primarily basically, "What do we do with $5,000 a month
00:09:15.500 | when we need only $30,000 to live on and we're making $190,000?"
00:09:19.500 | What a cool, cool scenario to be in.
00:09:22.500 | So first thing I would do in this situation is I would just run some numbers.
00:09:26.500 | And he already has $250,000 in mutual funds and a house that's worth $160,000.
00:09:32.500 | But if we just quickly run $30,000 and divide that into $190,000,
00:09:38.500 | we wind up with basically a 16% expenses versus income ratio.
00:09:45.500 | So essentially he's able to save about 85% of his income.
00:09:50.500 | Now it's not going to be quite that high because we've got to take employment taxes out,
00:09:52.500 | which is going to be 7.5%.
00:09:54.500 | And then we also have to take out income taxes.
00:09:57.500 | But he's basically north of 75% of a savings ratio.
00:10:01.500 | So we know from the charts behind this ratio that he says our primary goal is
00:10:07.500 | semi-retirement in 5 to 10 years in our late 40s or early 50s.
00:10:10.500 | We know that as long as we can keep up that household income of $190,000,
00:10:14.500 | even if we didn't have any money, we could be financially independent in 5 to 10 years.
00:10:18.500 | So I love situations like this. It's exciting.
00:10:21.500 | So what would I do?
00:10:23.500 | You mentioned a couple of key phrases that to me I think make your answer fairly clear.
00:10:30.500 | You said, "I'm pretty handy and I manage a friend's rental house
00:10:36.500 | and I put all this money into 401(k)s and things like that."
00:10:39.500 | Now you will have to test this, but if it were me,
00:10:43.500 | I would go in the direction of real estate. I really would.
00:10:46.500 | Now advantages and disadvantages, why?
00:10:49.500 | Well, first of all, you said you're pretty handy
00:10:51.500 | and you said you're going to be looking for some kind of semi-retirement.
00:10:55.500 | So managing a portfolio of real estate and a portfolio of rental houses,
00:10:59.500 | in my mind, that is an awesome semi-retirement pursuit.
00:11:03.500 | And if you're fairly handy, you may enjoy working on those.
00:11:06.500 | You may enjoy that as a creative outlet or an opportunity to do some work.
00:11:11.500 | And if you've had good experience managing your friends, you're comfortable with it.
00:11:15.500 | And this would be a great place to focus some of your time and attention.
00:11:20.500 | The advantage that I would see with going in that direction would be
00:11:25.500 | it's going to move you out of having all of your assets in paper assets.
00:11:30.500 | So I'm not particularly concerned about having only a well-diversified
00:11:36.500 | portfolio of mutual funds, but it does expose you to certain risks.
00:11:41.500 | So you're still exposed to market risks.
00:11:43.500 | You're still exposed to currency risks,
00:11:46.500 | assuming that all of your mutual funds are denominated in dollars.
00:11:49.500 | And also with the heavy focus on retirement accounts,
00:11:53.500 | you're exposed to extra tax risks that are sitting there.
00:11:57.500 | I think that's a good place to start, but if you've got this amount of money
00:12:00.500 | that you're expecting to have coming in, then I would start to consider about
00:12:05.500 | can I hedge against some of those risks.
00:12:07.500 | And if you don't mind investing in real estate as far as the work involved,
00:12:11.500 | something like that, to me that would be an awesome way to go.
00:12:15.500 | The cool thing about it is you're going to have so much cash flow.
00:12:18.500 | Let's say my numbers are right and what you meant was $5,000 a month,
00:12:22.500 | and that gives you $60,000 a year to invest.
00:12:26.500 | Think about let's say you work for another five years.
00:12:28.500 | Just buy one property each year for the next five years.
00:12:32.500 | If you buy one property each year for the next five years, it's up to you.
00:12:36.500 | If you have a strong conviction of a reason to do it debt-free,
00:12:40.500 | that would be fine at the moment.
00:12:42.500 | I would probably put a mortgage on it, and with $60,000 of excess cash flow,
00:12:46.500 | you would be able to finance that property fairly easily.
00:12:51.500 | You would still have a really strong cash cushion underneath you.
00:12:56.500 | And with $60,000 a year to invest with your down payment
00:12:59.500 | and then as surplus or reserves to handle vacancies, repairs, things like that,
00:13:06.500 | and assuming if your job is the type that allows you the time
00:13:09.500 | where you could go and do that, I would feel really good about that.
00:13:12.500 | You're still going to be putting, let's just call it $40,000 a year into 401(k)s.
00:13:20.500 | You didn't mention Roth IRAs.
00:13:22.500 | You're going to be over the limit at $190 depending on how you work the income
00:13:29.500 | from your wife's contracting business.
00:13:31.500 | So you might be able to go ahead and participate in Roth IRAs,
00:13:35.500 | which would be probably the simplest account for you to go ahead and also fund.
00:13:38.500 | But you're quickly getting out of the easy tax-deferred accounts.
00:13:44.500 | Once you've taken care of 401(k), self-directed 401(k) for your wife,
00:13:50.500 | IRAs, HSAs, those are the easy ones.
00:13:53.500 | Then you've got to get into individual plans.
00:13:56.500 | You would have to get into the world of non-qualified deferred comp.
00:14:00.500 | It just gets more complicated.
00:14:03.500 | So to me, I mean, just those two things you said,
00:14:05.500 | manage a friend's rental house and I'm a great handyman,
00:14:08.500 | I would consider buy a house a year for the next five years,
00:14:12.500 | maybe two if you're good at it.
00:14:14.500 | Put mortgages on them, let the tenants pay the mortgages,
00:14:16.500 | keep a bunch of cash and reserves,
00:14:18.500 | and then that gives you all the options in the world five years from now
00:14:22.500 | in semi-retirement.
00:14:24.500 | The only other thought I would have is that you mentioned giving a large amount
00:14:27.500 | of money to your church and to causes that you feel strongly about.
00:14:35.500 | And you also mentioned in that scenario, you mentioned we would go
00:14:38.500 | and we would volunteer.
00:14:39.500 | So my question would be this.
00:14:41.500 | Do you see a need in something locally that you could invest your money into
00:14:46.500 | that would really make an impact from the perspective of really helping
00:14:50.500 | people locally?
00:14:52.500 | Clearly you're concerned about charity and helping those around you.
00:14:58.500 | I think sometimes some of the things I think a lot about personally for me
00:15:01.500 | is how can I build a business that has a dual mandate that is kind of,
00:15:07.500 | I guess the term that we've come up with for this would be social
00:15:10.500 | entrepreneurship where we're working to solve a need that we have in the
00:15:13.500 | community that is in addition to where we're trying to make money but we're
00:15:22.500 | also trying to make a difference for this specific need in the community.
00:15:26.500 | And could you use some of your money and funnel it into something like that,
00:15:30.500 | knowing that it's not necessarily going to be the most profitable scenario
00:15:34.500 | but that it's going to take care of you from an excellent perspective?
00:15:39.500 | Give that some thought.
00:15:40.500 | Now, I don't know what your job is.
00:15:42.500 | Maybe you're able to do that type of thing in your job successfully.
00:15:46.500 | But I'll give you an idea.
00:15:48.500 | I heard of a story in the past.
00:15:52.500 | I heard of a story.
00:15:53.500 | And this business person and a group of business people,
00:15:56.500 | they had a scenario where they started landscaping jobs in the inner city,
00:16:02.500 | landscaping businesses in the inner city.
00:16:06.500 | And these men would work on these businesses every Saturday.
00:16:09.500 | And what they would do is they had this landscaping business,
00:16:11.500 | and they would go in and they would recruit teenagers in the inner city to
00:16:15.500 | work with them in their landscaping business.
00:16:18.500 | And they would pay excellent wages, and they did this every single Saturday.
00:16:22.500 | But basically the goal was to have an opportunity to pay inner city youth,
00:16:28.500 | pay them for hard work and to teach them job skills and business skills from
00:16:34.500 | the perspective of work, of hard work.
00:16:41.500 | And that idea really inspired me because I thought that is a really valuable scenario.
00:16:48.500 | If you could go and if there's a neighborhood nearby where you see a need like
00:16:53.500 | that, that you can go ahead and pay people a wage so that they actually have
00:16:58.500 | an opportunity to work, there's something maybe better and more valuable than
00:17:02.500 | retail, then they have an opportunity to do hard work.
00:17:05.500 | You can teach them business skills.
00:17:07.500 | Could you invest in something like that?
00:17:09.500 | If these numbers are accurate and you're north of a 75% savings rate,
00:17:13.500 | there's no possible way that you're going to be -- you're not going to be poor.
00:17:19.500 | You're going to be financially independent, so you're going to hit that goal.
00:17:23.500 | So now that gives you the financial base where you can say,
00:17:25.500 | "What impact do I really want to make on the world?
00:17:29.500 | How do I want to allocate this capital, and what's the best way to allocate it?"
00:17:34.500 | Again, for me, I don't know what it is for you.
00:17:36.500 | Maybe it's not landscaping business, working Saturdays with people like that,
00:17:40.500 | but maybe there's some business that you can take some of this wonderful excess
00:17:45.500 | income that you have and invest it in a way that's not just a straight
00:17:49.500 | charitable contribution, but you can go ahead and use a business as a launching
00:17:53.500 | platform to help in some need that you see locally.
00:17:58.500 | I would love to see you consider investing in something like that.
00:18:02.500 | And that gives you a multitude of advantages because, again,
00:18:06.500 | assuming you have the time -- you may not have the time,
00:18:08.500 | depending on how constricting your job is,
00:18:11.500 | but what I would look for is think then you can add on your social benefit
00:18:18.500 | that you're trying to accomplish with your charitable giving and with your
00:18:21.500 | volunteering and with your travel.
00:18:23.500 | You can complement that with your business benefit that if you start a
00:18:29.500 | business like that and if you can find an idea, the goal should be to make a profit.
00:18:33.500 | But let's say that you need to invest into infrastructure.
00:18:37.500 | Well, that investment into infrastructure may help you to offset your
00:18:41.500 | increase in income.
00:18:43.500 | Let's say that you have a business that you design it,
00:18:45.500 | and it's going to be profitable, but there's a heavy investment in
00:18:48.500 | infrastructure in the first few years.
00:18:50.500 | Well, now those losses, if you structure it appropriately,
00:18:53.500 | those losses can help you to discount against your income the increases in
00:18:58.500 | your income right now over the next few years.
00:19:00.500 | Then you can transition over to that new business,
00:19:04.500 | and then at that point in time, hopefully the business is more profitable.
00:19:07.500 | Now you transition away from the job that you have that maybe you don't love
00:19:11.500 | doing so much, and then you're able now to have a business that's providing
00:19:17.500 | you a living wage, also providing you social benefit, and then along the way,
00:19:21.500 | you can still do exactly as your wife has done with running her own
00:19:25.500 | consulting company, contracting company, and an individual 401(k).
00:19:28.500 | You can go ahead and use that within the business for the benefits of tax deferral.
00:19:32.500 | There's no reason why you can't do one or all of those ideas.
00:19:37.500 | You may choose that if you've got $60,000 of cash flow,
00:19:41.500 | again, you're investing heavily already into a quality portfolio of mutual
00:19:46.500 | funds, that gives you a tremendous amount of exposure.
00:19:49.500 | You clearly have done your research and have chosen your momentum investing
00:19:53.500 | strategy, so that gives you exposure.
00:19:57.500 | Assuming your 10% per year returns are there, you're going to be wealthy.
00:20:02.500 | So build the lifestyle that you wish to build.
00:20:06.500 | As far as the upgrade to another home, I don't know.
00:20:10.500 | Do you want one?
00:20:11.500 | You can obviously afford it if you want to upgrade.
00:20:14.500 | If you and your wife would like to have a fancier house for some reason,
00:20:17.500 | then go for it.
00:20:19.500 | If you need to adjust your living situation, make sure that you are where you
00:20:22.500 | want to be for the long term or that you're planning where you want to be for
00:20:25.500 | the long term.
00:20:26.500 | You mentioned Texas.
00:20:27.500 | If you're living in Texas and that's where you want to be, build it.
00:20:30.500 | Build the real estate empire if valuations are good near you,
00:20:34.500 | but plan that long-term lifestyle.
00:20:36.500 | What I love about getting to this point, and at least just the people I've
00:20:40.500 | worked with, what I've learned is that it kind of gives you that ability to
00:20:43.500 | dream a little bit.
00:20:44.500 | And then you get out of this idea of everything depends upon the dollars,
00:20:48.500 | and you can focus on how do I build the lifestyle and make the impact that I
00:20:52.500 | want to make in my community.
00:20:54.500 | So, man, that is exciting.
00:20:56.500 | I'm so thrilled that you're listening to the show.
00:21:00.500 | I hope some of those ideas would be helpful.
00:21:02.500 | I would love to see you, and I'd love to see other people in the audience.
00:21:06.500 | This is a big deal to me.
00:21:07.500 | I don't know exactly how I'm going to do this,
00:21:08.500 | but I would love to see a lot of us who have a little bit of business
00:21:12.500 | experience stop just giving money and go start creating and solving problems
00:21:17.500 | that we have in our community.
00:21:19.500 | And use the money that you have.
00:21:21.500 | Use that money.
00:21:22.500 | And you said you give to your church, so I'll quote Scripture on you.
00:21:26.500 | The Scripture says, "Use this unrighteous money to buy for yourself friends."
00:21:31.500 | That's the verse.
00:21:32.500 | Go check it out.
00:21:33.500 | That's what I would say.
00:21:34.500 | So use the money and invest it for something that's going to last and that's
00:21:36.500 | going to make a difference.
00:21:38.500 | And much as I love mutual funds, and, hey, that's cool,
00:21:41.500 | but the only point of the money is to put it to use.
00:21:45.500 | And I would consider it--me personally.
00:21:48.500 | Now, you may not, but I would consider it an abject failure of my life.
00:21:51.500 | If I arrived at the end of my life with millions of dollars,
00:21:55.500 | that I should have been responsible to allocate better and to invest now
00:21:59.500 | for something that is going to last.
00:22:01.500 | And so you may need to continue investing.
00:22:04.500 | Get the 401(k)s and the real estate may bring an opportunity.
00:22:08.500 | So let's say that you're pretty handy.
00:22:10.500 | Now, using my inner city youth example, you can bring in some people
00:22:14.500 | and you can hire them to work on your houses.
00:22:16.500 | That gives you an opportunity to mentor them and build some relationships
00:22:20.500 | and help them to build some employment skills.
00:22:23.500 | I would consider that and some of those strategies.
00:22:26.500 | Hopefully that will help you.
00:22:28.500 | But what I was saying about I would consider it a total failure to die rich.
00:22:33.500 | So figure out what that number is, and if you need $30,000, set that aside,
00:22:38.500 | and maybe you account for that with the mutual funds and a little bit of real estate.
00:22:42.500 | But then consider investing that money for something that really matters to you.
00:22:46.500 | I hope that's helpful. Thanks for the question.
00:22:49.500 | Next question is an email from Justin.
00:22:52.500 | Justin says, "My parents are facing retirement soon,
00:22:55.500 | and they haven't really put much of anything away.
00:22:58.500 | They have $150,000 of equity in their current home and Social Security to rely on.
00:23:03.500 | My father is 60, and my mom is 55.
00:23:06.500 | They have time to sock away some money, but they aren't really high-income earners.
00:23:10.500 | They want to live a job-free retirement, so no part-time work.
00:23:15.500 | They are weighing the option of living in Texas, which would be closer to family,
00:23:19.500 | versus Louisiana, which would be closer to friends and also a big savings on property tax."
00:23:23.500 | Interesting. That's two questions in a row that talk about property taxes in Texas.
00:23:28.500 | "They're into gardening, fishing, hunting, woodwork, etc.
00:23:32.500 | What should I recommend that they do?"
00:23:37.500 | Now, Justin, this is an interesting question,
00:23:40.500 | and I was glad to get this one because this describes a massive portion of our population.
00:23:47.500 | It fits into this scenario.
00:23:49.500 | Sixty and fifty-five, baby boomers, money and equity in their house and Social Security,
00:23:54.500 | but not really any other money.
00:23:56.500 | So I'm going to give you a few answers.
00:23:58.500 | Some of it you'll like, some of it you won't like.
00:24:00.500 | But the advantage of me doing a podcast is that I can be blunt, and I'm going to be blunt,
00:24:06.500 | but I'm using it also clearly as a scenario to teach other people.
00:24:10.500 | But there are some realities of this, and I could be mistaken in any of the details
00:24:15.500 | because of more info that you have.
00:24:18.500 | So take it with a grain of salt, but I'm going to be blunt.
00:24:20.500 | Your parents are not going to be able to retire.
00:24:24.500 | I don't think--unless, A, this question is not coming from them, it's coming from you,
00:24:28.500 | which means that you're observing and you're concerned, but they're probably not concerned.
00:24:33.500 | But there are some things in here that give me that information.
00:24:36.500 | So how do I know they're not going to be able to retire?
00:24:38.500 | Well, number one, they don't have any money other than the equity in their home.
00:24:41.500 | So they have a little bit of, I would guess, forced savings, but they don't have any money.
00:24:45.500 | So unless they had a stroke of bad luck, maybe an illness, business loss, bankruptcy,
00:24:51.500 | death of a family member, they were caring for parents, something like that,
00:24:54.500 | where they were careful savers previously.
00:24:58.500 | They're not savers, and savers really are not going to be able to be financially independent.
00:25:04.500 | And so thankfully they've got the money and the equity in their house,
00:25:08.500 | but they're not going to be able to retire because they're not going to be able to adjust their income.
00:25:12.500 | Unless over the next 10 years they can actually proactively adjust their expenses--
00:25:17.500 | excuse me, I meant to say expenses--unless they can adjust their expenses down
00:25:21.500 | and create a difference between what they're earning now and what they're spending,
00:25:27.500 | there's no possible way for them to retire.
00:25:30.500 | And it's really tough for people who are 60 and 55 years old for them to change a lifetime of habits.
00:25:36.500 | Again, the exception to this would be if they had a stroke of bad luck
00:25:40.500 | or just something really unfortunate happened to them.
00:25:42.500 | But if they don't have any money, which they don't,
00:25:44.500 | they just have a little bit of equity in their house and Social Security,
00:25:47.500 | they're not going to be able to change anything.
00:25:50.500 | Most of the time it would be a rare 60-year-old male and 55-year-old female that would be able to change.
00:25:59.500 | The second thing that gives me that indication is it says they want to live a job-free retirement.
00:26:05.500 | Well, I've never met somebody--I've rarely met somebody--
00:26:10.500 | who wants to live a job-free retirement who doesn't have any money,
00:26:14.500 | who hasn't planned for it, that they're really ever going to be able to do it.
00:26:17.500 | There's a reason why you see more and more old people working,
00:26:22.500 | and you see this all over the place in our society.
00:26:25.500 | It's because the people who had the ability and they saved earlier in life,
00:26:31.500 | then they were already financially independent and they're not working--
00:26:35.500 | I'm getting mixed up here.
00:26:37.500 | They were already financially independent because of their diligence and frugality.
00:26:42.500 | And so they don't wind up at the age of 60 still wanting to not be working.
00:26:46.500 | Either they're early retirees and they've figured out a lifestyle that works for them
00:26:49.500 | and they already fixed it, or they'll never retire.
00:26:54.500 | And your parents are going to probably never retire in that sense, scenario.
00:27:00.500 | Now, the final problem is that--and here's the issue with that--
00:27:04.500 | it doesn't really matter what they want to do as far as whether they want to work or not.
00:27:09.500 | They're going to deal with what they can do.
00:27:12.500 | So I'm going to give you my financial planner answer.
00:27:15.500 | But the majority of people who are in this situation will just simply--
00:27:19.500 | they'll spend the $150,000, they'll buy another house, they may have it mortgage-free,
00:27:24.500 | and then they'll hope to live on Social Security and they'll work some side jobs.
00:27:28.500 | Many people go ahead and spend the $150,000, and what will happen is often
00:27:33.500 | there will be a medical situation later at the end of life,
00:27:36.500 | which 10, 15, 20 years down the road forces the sale of the house
00:27:40.500 | to get the money out of that to pay for the medical situation.
00:27:43.500 | So I'm going to give the answers to it, but I do just want to start from that perspective,
00:27:49.500 | is that bluntly a fact pattern like you just presented,
00:27:53.500 | there's not a lot of hope for actual retirement,
00:27:55.500 | but that doesn't mean that you can't do certain things.
00:27:57.500 | So here's what you can do.
00:28:01.500 | There are three problems in their scenario that they've got to fix.
00:28:04.500 | Number one, what are they going to live on? How much?
00:28:06.500 | Number two, what are they going to live on after one of them dies?
00:28:09.500 | And then number three, what are they going to live on when one of them needs medical care?
00:28:13.500 | Because these are the big factors in retirement planning that most people don't think about.
00:28:17.500 | I can't actually plan--if the $150,000 of equity is all we have,
00:28:23.500 | that's almost no money to work from to actually build a scenario and build a lifestyle.
00:28:28.500 | The $150,000 would be gone in one long-term care event.
00:28:32.500 | I mean, I don't know what costs are in Texas, but across the nation,
00:28:35.500 | costs for long-term care average somewhere about $200 a day.
00:28:40.500 | $200 a day comes out to about $6,000 a month.
00:28:44.500 | And ignoring any interest calculations, $150,000 equals 25 months of long-term care.
00:28:52.500 | And so, one, your dad has a stroke, your mom has a stroke, something like that,
00:28:59.500 | early-onset dementia or Alzheimer's, which is what I worked with with my grandfather,
00:29:04.500 | or something like that, that $150,000 can be gone in no time.
00:29:08.500 | Plus, more importantly, if that's the only savings that they have,
00:29:12.500 | you still have to look at the balance of how are they going to live their lives.
00:29:18.500 | So if they need a car, what are they going to pay for the car?
00:29:20.500 | How are they going to keep a buffer account?
00:29:22.500 | They're going to want to spend some money on--your dad's going to want to buy a new gun
00:29:26.500 | or a new bass boat or something like that, so they're always going to be spending the money.
00:29:30.500 | So in essence, in my mind, I kind of set the $150,000 aside
00:29:34.500 | because that $150,000 is just barely enough of a buffer account.
00:29:38.500 | And here's the problem with what they're facing.
00:29:41.500 | They're planning to live on Social Security,
00:29:44.500 | but Social Security is not going to replace 100% of their income.
00:29:48.500 | It's going to replace a much lower percentage.
00:29:50.500 | But given the fact, if they don't have any other savings, they can't live on that lower percentage.
00:29:55.500 | Now, they may move to Texas, may move to Louisiana, and then they can figure out how to live on it,
00:29:59.500 | but until they can actually prove they can live on it, they can't really live on it.
00:30:03.500 | And then the bigger problem is that even if they could figure out their budget based upon the Social Security--
00:30:09.500 | so let's say their Social Security between them is going to be $2,500 a month between the two of them.
00:30:14.500 | You said they're relatively low-income earners, so I don't know what the actual number is,
00:30:17.500 | but pull the statements and look at it.
00:30:19.500 | Even if they can live on the $2,500 a month, what happens when Dad dies?
00:30:23.500 | He's five years older, and statistically he's going to die at a younger age.
00:30:28.500 | So what happens when he dies?
00:30:30.500 | Well, now all of a sudden, now Mom has dropped either his original benefit or her own benefit,
00:30:35.500 | if that amount number is higher, depending on what benefit she's pooling on.
00:30:39.500 | And that's going to be less than the $2,500, so they're going to have to completely renegotiate everything.
00:30:43.500 | So I'm being a real downer with the answer to this question, but they've got to face reality.
00:30:49.500 | They're not going to be able to retire.
00:30:51.500 | Now, what should they do then?
00:30:52.500 | Well, first of all, they've got to actually run some numbers on their situation
00:30:56.500 | and calculate what their actual life expectancy is.
00:30:58.500 | By the way, I'm going to interrupt myself again.
00:31:01.500 | It's not just me saying this.
00:31:03.500 | If you go and you look at what the AARP is doing, you will see a dramatic change in their messaging
00:31:10.500 | from the traditional idea of retirement to now they're doing life reimagined and retirement reimagined,
00:31:16.500 | and that includes some kind of part-time work.
00:31:18.500 | And in my opinion, that's probably a good thing.
00:31:20.500 | That is a good thing, and I'll get to how I would fix this is where I'm going.
00:31:25.500 | But this is the reality that so many people in this generation face,
00:31:28.500 | and the idea that I'm going to be able to live just on Social Security and be able to make that work,
00:31:33.500 | it just simply doesn't really work, and it especially doesn't work if one spouse dies,
00:31:37.500 | and that's what you've got to plan on.
00:31:39.500 | So they need to actually understand what their life expectancy is.
00:31:42.500 | In my experience, very few people actually have an accurate understanding of what their life expectancy is.
00:31:51.500 | So if I just simply use a simple Social Security administration calculator,
00:31:56.500 | and I did this, and I'll put a link to it in the show notes,
00:31:58.500 | but for a 60-year-old male today, 60-year-old male on average can expect to live an additional 23 1/2 years
00:32:05.500 | to the age of 83 1/2, and your mom at 55 years old today can expect to live another 30 years to the age of 85 1/2.
00:32:14.500 | Now that's the average, which means that they may die sooner or they may die later, hopefully later.
00:32:20.500 | Again, all my grandparents died in their mid-90s, and my grandmother just celebrated her 100th birthday,
00:32:25.500 | so hopefully later.
00:32:26.500 | But what that means is that if they're going to try to live on Social Security and on the $150,000,
00:32:32.500 | in reference to a 30-year retirement, the $150,000 is a relatively meaningless number, relatively speaking.
00:32:42.500 | Now, I'll cash the check if you send me $150,000.
00:32:44.500 | I'm being a little bit extreme just to make the point, but it's a relatively meaningless number,
00:32:48.500 | especially when you take into account the fact that they're a couple, and so therefore,
00:32:54.500 | your dad, he needs to make sure that he's taking care of your mom, and your mom,
00:32:58.500 | they need to plan for what happens if one of them is dead.
00:33:00.500 | That's a big deal, and they're past the age where insurance is as easy as a solution as at a younger age.
00:33:08.500 | So what would I do?
00:33:09.500 | Well, number one, the best investment that they can make right now is in Social Security.
00:33:14.500 | So they and you should spend some serious time considering how to create a brilliant Social Security strategy,
00:33:21.500 | and let me give you some numbers.
00:33:23.500 | They don't have any investments.
00:33:26.500 | They have a house, and they may or may not--I'll get to that in just a second--but they don't have any numbers.
00:33:30.500 | They have income, and so what they need to do is they need to get that Social Security income as high as possible.
00:33:36.500 | So here would be some simple numbers, and I've got all kinds of shows planned on Social Security.
00:33:42.500 | It's far too complicated for me to do in a Friday Q&A show, but here are the numbers,
00:33:47.500 | and you need to be aware of these.
00:33:49.500 | So let's assume that we just use a middle-of-the-road Social Security recipient,
00:33:52.500 | average income, middle-of-the-road, and assume that their full retirement age is 66 years old
00:33:57.500 | and that their monthly benefit at that point in time would be $2,180 a month of benefit, $2,180 a month.
00:34:06.500 | If your dad is 60 and he has his eye on not working in retirement, he may be thinking,
00:34:10.500 | "Hey, at 62 I can take that retirement income."
00:34:13.500 | If that example recipient were to take their retirement, their Social Security income at 62,
00:34:19.500 | that amount would be $1,623 per month.
00:34:25.500 | So we go from $2,180 a month to $1,623 per month.
00:34:33.500 | So that would be a 26% decrease in their benefit just by taking it early.
00:34:48.500 | That is a massive number, and here's the important thing about that.
00:34:52.500 | That number is a guaranteed indexed-for-inflation number.
00:34:57.500 | So that reduction of benefit from $2,180 down to $1,623, that's a $557 per month reduction of benefit.
00:35:06.500 | Pretend we were using the 4% rule that we often refer to on the show.
00:35:11.500 | Multiply that times 300.
00:35:13.500 | That would be the equivalent of $167,000 in an investment portfolio in value,
00:35:18.500 | but would actually be more than that because that's a guaranteed lifetime annuity
00:35:23.500 | that is indexed with inflation that's backed by the full faith and credit of the United States government,
00:35:28.500 | which is a whole other total joke, but in their situation we've got to count on that.
00:35:35.500 | So that's worth $167,000 in an investment account plus.
00:35:40.500 | I would give it a lot higher because if you were to go out and buy a commercial annuity
00:35:43.500 | that was going to provide that monthly income, it's going to cost you more than $167,000.
00:35:48.500 | That's a huge benefit.
00:35:50.500 | Now, let's say that we can go to age 70.
00:35:53.500 | So at age 70--and he keeps working and he retires at 70 according to Social Security and takes his income--
00:36:00.500 | that monthly amount is $2,880 per month.
00:36:06.500 | So we went up from age 62 to 70 from $1,623 to $2,880 per month.
00:36:14.500 | $2,880 per month is $1,257 per month more than at age 62.
00:36:22.500 | The important thing why he needs to--your dad especially because he's older--needs to focus on this,
00:36:27.500 | and I don't know which earnings record is higher.
00:36:30.500 | In many couples of this age, the husband's earnings record will be higher,
00:36:35.500 | and so his amount will be the higher, so we'll usually judge based upon that.
00:36:39.500 | The reason why that's a big deal is because that's the benefit that's ultimately indexed for inflation after they retire,
00:36:46.500 | and that's the benefit upon which the spouse will benefit when he dies is based.
00:36:51.500 | So if we could get it up to that $3,000 per month,
00:36:55.500 | now we're at a scenario where there's a lot more wiggle room than at $1,623 per month.
00:37:01.500 | So it's a huge deal.
00:37:05.500 | And what's the value of that if we take that monthly difference between--
00:37:08.500 | so we do $2,880 minus $1,623, so that equals $1,257.
00:37:14.500 | Just using 300 times that, that's an investment--that's equal to--it's actually much more than this,
00:37:20.500 | but that's equal to an investment account worth $377,000.
00:37:26.500 | So the best investment they can possibly make is not to retire
00:37:30.500 | and just simply to keep working, keep contributing to Social Security,
00:37:34.500 | and take the higher income at the age of 70.
00:37:38.500 | That is a huge, huge deal.
00:37:42.500 | Now, you need to do some careful Social Security planning.
00:37:45.500 | You need to look at his earnings record.
00:37:47.500 | So, for example, pull his earnings record and look and see, you know,
00:37:50.500 | was he not making much money in the beginning such that his higher income now
00:37:54.500 | could dramatically affect the earnings record,
00:37:57.500 | which drives a number that's called his primary insurance amount,
00:38:00.500 | which is what all of these numbers are calculated based upon.
00:38:04.500 | You want to look and see what is his actual scenario.
00:38:07.500 | Now, at the end of the day, if he just wants to retire and he just says,
00:38:11.500 | "I'm done at 60, I'm done at 61, 62," or whatever, he can do that.
00:38:16.500 | It just really dooms your mom, and that's the big deal in this situation.
00:38:19.500 | You've got to think about your mom, and so she needs to do the same benefit as well.
00:38:25.500 | So the best investment they're going to make is going to be in Social Security,
00:38:28.500 | keeping on working.
00:38:30.500 | Now, is this really so bad?
00:38:32.500 | Well, if they're working jobs they hate,
00:38:35.500 | then use it as an opportunity to quit working jobs they hate and go work jobs they love,
00:38:39.500 | but still keep working.
00:38:40.500 | Because the other thing is that if you can eliminate the need on that portfolio
00:38:44.500 | of the $150,000 for another 10 years or so,
00:38:48.500 | that could give them a massive amount of time to actually save some money,
00:38:51.500 | to establish a lifestyle.
00:38:53.500 | So think about what their lifestyle planning would be.
00:38:56.500 | Invest you and invest in them.
00:38:59.500 | Invest into doing some good Social Security planning.
00:39:03.500 | The best book that I've found so far of the books that I've looked at
00:39:06.500 | is a book entitled "Social Security Strategies" by William Reichenstein and William Meyer.
00:39:12.500 | I'll put a link in the show notes.
00:39:14.500 | This is the best one that I've been able to find so far,
00:39:17.500 | which will help you to actually look through their situation.
00:39:20.500 | And Social Security planning is tough because it's so detailed,
00:39:24.500 | but there are a bunch of strategies that you can do,
00:39:26.500 | depending on whether his record is higher, whether her record is higher,
00:39:29.500 | whether they're comparable, dramatically disproportionate, things like that,
00:39:33.500 | to try to figure out what the best timing is.
00:39:36.500 | But my bet is that it's going to be better for him to defer to 70 if he can.
00:39:41.500 | So I would say start with a scenario where they're actually going to keep on working
00:39:50.500 | and have him get a job that he loves, which I'll come to in just a second.
00:39:54.500 | Now, let's say he doesn't want to do any of that, and he says,
00:39:57.500 | "Joshua, I'm going to retire. By golly, I deserve it. I'm done. I've got to retire."
00:40:03.500 | Well, he can't afford it, but the only way that he's going to be able to afford it
00:40:06.500 | is if he can live on Social Security at a diminished number
00:40:09.500 | and also if we can turn that $150,000 into something useful.
00:40:13.500 | So we have to turn it into income, and when we're turning it into income,
00:40:18.500 | in their scenario, that's going to mean we need a higher amount of actual predictable income.
00:40:27.500 | So we can't just live off of it.
00:40:30.500 | When we're right on the cusp of being able to survive versus not,
00:40:34.500 | we can't just toss it all into a portfolio of mutual funds and pull money off of it
00:40:38.500 | because we're so near the wire that if we get a 20% correction in the portfolio, they're doomed.
00:40:45.500 | They just can't afford to take that risk.
00:40:48.500 | They can't take the risk.
00:40:50.500 | So if they had lots of money, then okay, yeah, we can toss it into mutual funds.
00:40:54.500 | We'll just pull back. We've got plenty of money,
00:40:56.500 | but they're going to be right at the poverty line, basically, so they can't take the risk.
00:41:00.500 | So they've got to do it into something that's going to be a little bit better for them.
00:41:03.500 | Now, if your dad is into hunting and fishing and gardening, which is what their hobbies are,
00:41:07.500 | maybe he's somewhat handy.
00:41:08.500 | I would say go take it and buy a duplex or a triplex.
00:41:12.500 | Maybe if they can buy a duplex and they live in one unit,
00:41:15.500 | they can turn the other unit into some sort of rental income
00:41:19.500 | and put that thing on a long-term fixed-rate mortgage,
00:41:23.500 | which they could cover off their Social Security.
00:41:26.500 | And then as long as they keep the other unit rented out,
00:41:29.500 | then maybe that will give them some extra cushion of the income
00:41:33.500 | and put a minimal down payment onto it so they don't have a bunch of equity tied up in the house.
00:41:38.500 | It would be what I would look for.
00:41:39.500 | Or maybe they can, with that money, they can buy a couple of rental houses in Texas.
00:41:45.500 | I mean, the things are pretty cheap in Texas, depending on what part, or Louisiana probably too.
00:41:49.500 | Maybe they can buy a couple of rental houses that he can manage for his part-time job.
00:41:53.500 | And with him managing the rental houses for his part-time job,
00:41:56.500 | he gets out of the job of working for the man that he's got to retire from,
00:42:01.500 | and then maybe they can rent a mobile home or something like that
00:42:05.500 | where they can keep their expenses really low.
00:42:08.500 | But the best way to handle this is really to think about, flip the tail on its head,
00:42:15.500 | because with $150,000 of equity and Social Security,
00:42:21.500 | the only answer is if they can live on half of what Social Security pays them
00:42:25.500 | so that they're okay if mom is in that scenario.
00:42:27.500 | Or if you've got deep enough pockets to help them out
00:42:29.500 | and you guys have committed as part of your family unit,
00:42:32.500 | "Hey, if you die, Dad, we'll take care of mom. We'll sell things and kind of move on."
00:42:36.500 | And that's perfectly fine too.
00:42:38.500 | I'm kind of giving you the answers that don't incorporate those outside scenarios.
00:42:42.500 | But you've got to keep that money--they've got to keep that money in reserve
00:42:47.500 | just in case of normal scenarios.
00:42:50.500 | The vast majority--here are the last two things,
00:42:52.500 | and I know I've gone on a long time on the question, but here are the last two things.
00:42:56.500 | If they retire now, what are they going to do for health insurance coverage?
00:42:59.500 | They will impoverish themselves utterly trying to get to Medicare if they retire early.
00:43:06.500 | So they're going to impoverish themselves when they're already impoverished.
00:43:10.500 | And B, the other thing is that the majority of retirees
00:43:12.500 | underestimate the cost of medical expenses in retirement.
00:43:17.500 | So if they only have the $150,000, they almost can't even take the plan of retiring,
00:43:25.500 | and they can't invest the money practically because they need the money for medical expenses.
00:43:32.500 | I mean, do the research on this.
00:43:33.500 | The cost of medical expenses is dramatically higher than many people expect.
00:43:38.500 | And then with long-term care, they can't afford long-term care insurance
00:43:41.500 | because they don't have any money, but yet they'll be wiped out if they have long-term care insurance.
00:43:45.500 | So I hope that that--I'm not sure if this answer is useful or not,
00:43:50.500 | but in summary, as I move on to the next question--excuse me.
00:43:54.500 | In summary, I would say they can't retire,
00:43:57.500 | and the only thing they've got to do is they've got to sit down
00:43:59.500 | and they've got to calculate it out for themselves.
00:44:01.500 | And they can't afford to retire, but maybe they can set up an ideal lifestyle.
00:44:07.500 | And if they can work for another 10 years and get out to age 70,
00:44:12.500 | that eliminates a massive pool on that $150,000.
00:44:16.500 | And then if they can just go set up a lifestyle for themselves that they love--
00:44:20.500 | your dad and your mom, they can buy a triplex, put a nice down payment on it,
00:44:25.500 | or put a minimal down payment on it.
00:44:27.500 | Maybe they can get good financing on it.
00:44:29.500 | Buy a duplex or triplex, rent out one or two of the other units so they have some income.
00:44:34.500 | Your dad loves to hunt and fish, so he can figure out--get some part-time work
00:44:38.500 | as a hunting guide or a fishing guide, or maybe he can create custom cabinetry.
00:44:42.500 | And then your mom loves to garden, so they can subsidize their grocery costs with her gardening.
00:44:48.500 | Maybe you could sell organic produce out of the backyard,
00:44:51.500 | or maybe they can get part-time jobs that give them enough--
00:44:55.500 | like these are the scenarios where they need to actually go.
00:44:59.500 | And this is the reality of the average American of their age, the baby boomers.
00:45:03.500 | That's what I'm saying. Go look at AARP, and you'll see that there's been a major change
00:45:07.500 | in their literature even because of how to--the average person can't retire
00:45:13.500 | in the sense that it's been held out.
00:45:16.500 | You can't expose yourself to just Social Security.
00:45:20.500 | I mean, Social Security is doomed anyway.
00:45:23.500 | Is it doomed during their lifetime? I don't know. Probably not. I don't think so.
00:45:27.500 | But, yeah, there's my answer. I have no idea if it was useful or not.
00:45:33.500 | So next question, voicemail from Mark. Let's see here.
00:45:38.500 | Hey, Josh. Thanks very much for your podcast, mate. I'm really enjoying them.
00:45:44.500 | Mark here from Melbourne, Australia.
00:45:48.500 | Just got one question in relation to insurance.
00:45:52.500 | Your thoughts. Let's say you can afford to cover yourself for life insurance.
00:46:02.500 | You can afford to cover yourself for TPD and also income protection.
00:46:08.500 | But your financially independent question is, is it a good investment to continue
00:46:16.500 | to insure those assets, that is, the asset of being able to work and the asset of your life
00:46:24.500 | compared to the cost of the cover?
00:46:28.500 | I thought it was worth sending you a question there.
00:46:32.500 | All right. All the best, mate. See you.
00:46:34.500 | So this is a fun one. And Mark is from Australia.
00:46:37.500 | I didn't know what TPD was. I went and looked it up.
00:46:40.500 | And what TPD stands for is total and permanent disability.
00:46:44.500 | And so evidently this is a separate type of insurance in Australia.
00:46:48.500 | So you mentioned life insurance, total and permanent disability, and income protection.
00:46:52.500 | So usually, Mark, in the U.S., we would include total and permanent disability
00:46:57.500 | as just a component of the disability income insurance policy.
00:47:02.500 | But maybe it sounds like you guys have them separate or just a separate feature.
00:47:05.500 | I read a couple of things online, but that's what TPD is for those who are listening.
00:47:08.500 | So is it a good investment to continue to insure assets when you don't need to?
00:47:13.500 | So this is an interesting question.
00:47:17.500 | A lot of people disagree on this.
00:47:18.500 | And I'll tell you how I would say is that, as always, it depends on the cost
00:47:24.500 | and depends on the benefits, depends on the alternative use of the dollar,
00:47:27.500 | and it depends on, frankly, any inside knowledge that you may have as to your personal risks
00:47:32.500 | and depends on the cost.
00:47:35.500 | So insurance is always, generally, always going to be properly priced by the insurance company.
00:47:41.500 | Depending on the type of insurance, it's basically always going to be properly priced.
00:47:45.500 | So with insurance, there's a difference between the emotion of it and then the logic of it.
00:47:52.500 | So if you say, "Josh, I'm self-insured.
00:47:54.500 | I could comfortably--I could have a level of income for myself and for my family
00:48:01.500 | that would be enough to support myself, and if I died, my family is financially independent,
00:48:06.500 | so do I need the insurance?"
00:48:08.500 | Well, in that situation, no.
00:48:10.500 | And you may want to go ahead and drop it if you don't need it anymore,
00:48:14.500 | just simply because you don't need it.
00:48:17.500 | But different people have different variations of that number.
00:48:21.500 | So let's say, for example, if I have a disability insurance contract that I own, and I do,
00:48:26.500 | so if I own a policy and I have just enough money to make my family--
00:48:33.500 | we could just barely eke it out if I were disabled.
00:48:37.500 | I'm technically self-insured, but the policy premium is just not that big a deal.
00:48:43.500 | I'm used to paying for it.
00:48:45.500 | Well, I'm probably going to keep it because it's going to make me feel better.
00:48:48.500 | I have more life insurance than I need just because I think it's pretty cheap
00:48:51.500 | and it makes me feel better.
00:48:53.500 | Now, "cheap," is it cheap in the relative sense, relative to my budget,
00:48:58.500 | or is it cheap in the absolute sense, meaning this is a mispriced product in the insurance market?
00:49:03.500 | The life insurance that I have, the amount of it, it's not cheap.
00:49:07.500 | I have $2.5 million of life insurance.
00:49:09.500 | It's not cheap from the perspective of the insurance company.
00:49:11.500 | It's perfectly priced.
00:49:13.500 | But it's cheap to me because it's a very small number in my budget,
00:49:17.500 | and it makes me feel good to own it.
00:49:19.500 | I like knowing that if I died today, the fortune of my family is assured and insured,
00:49:25.500 | that no matter what happens, I've got the money there.
00:49:28.500 | Now, let's say I had $2.5 million in the bank.
00:49:30.500 | Would I still keep the $2.5 million of life insurance?
00:49:33.500 | Well, right now, my $2.5 million of life insurance costs me what?
00:49:36.500 | It's under $100 a month if it were all in term.
00:49:39.500 | It's not all in term, but if it were all in term, it'd be under $100 a month.
00:49:43.500 | So if I have $2.5 million, do I still feel good having the $2.5 million of coverage for $100 a month?
00:49:50.500 | I do, and I find that many people, even once they get to the point that they're technically self-insured,
00:49:56.500 | they could actually cover the cost, they still will keep their insurance because the premiums are pretty cheap.
00:50:02.500 | And it makes them feel good.
00:50:06.500 | It makes my wife feel good knowing that I have the $2.5 million of coverage.
00:50:10.500 | And it makes me feel good too knowing that it's assured.
00:50:14.500 | So you can't answer that in a technical perspective of is it a good investment in that sense because it's not.
00:50:21.500 | It's probably just a pure cost.
00:50:23.500 | Most insurance is pure cost.
00:50:25.500 | There's no investment reaction, but it's just a pure cost.
00:50:29.500 | Now, you may know something about your actual risks.
00:50:32.500 | So this has happened, for example, and I don't know anything about how the Australian insurance market works,
00:50:38.500 | but in the U.S., a lot of times you could do things like this.
00:50:42.500 | I have a bunch of term life insurance, and when I got it all, I got the best rates,
00:50:47.500 | and without any riders, no flat extras, which is what is known in the insurance business.
00:50:52.500 | It's just cheap insurance.
00:50:54.500 | Now, when I got it, I didn't have any dangerous hobbies,
00:50:56.500 | and I had no specific plans to start any dangerous hobbies that are going to increase the cost of my insurance.
00:51:01.500 | I don't plan to jump out of airplanes.
00:51:03.500 | I don't plan to do any of those things.
00:51:05.500 | In the back of my mind, I always know that, you know what, it would be fun to learn how to fly airplanes someday.
00:51:12.500 | It really would be, and I know people who are pilots.
00:51:16.500 | I have people in my family who are pilots.
00:51:18.500 | I have a brother-in-law who is a flight instructor who could teach me how to fly airplanes,
00:51:22.500 | and I don't have any plans to actually do it.
00:51:26.500 | I'm not signed up for pilot's lessons.
00:51:28.500 | It's been years since I bought the insurance, so I could, in full faith and truthfulness,
00:51:32.500 | answer the questionnaire that, no, I don't have a pilot's license,
00:51:36.500 | and I don't intend to get a pilot's license in the next two years, however it's worded on the application.
00:51:42.500 | I can answer that honestly and truthfully, no, and a few years have passed.
00:51:46.500 | But I know in the back of my mind, you know what, someday I might like to get a pilot's license.
00:51:50.500 | Well, in that scenario, it's less likely for me to be willing to drop my insurance coverage
00:51:59.500 | because I know that the day I sign up for flying lessons, let's see,
00:52:04.500 | I think it's a $5 flat extra for every $1,000 of insurance.
00:52:09.500 | So what that means is if I had $5 per year of extra premium for every $1,000 of life insurance coverage
00:52:17.500 | that I own the day I sign up for flying lessons.
00:52:19.500 | So in that scenario, that would be a good investment for me to keep the insurance
00:52:23.500 | because I can have it for longer at the lower premium.
00:52:26.500 | So if you know something about that, another example would be, let's say that you come from
00:52:31.500 | a very safe job occupation in the U.S. with disability income insurance, individual disability policy.
00:52:37.500 | Let's say you're an attorney or you're an accountant.
00:52:39.500 | So you go ahead and you load up on disability income insurance.
00:52:43.500 | And I would do something like this, me personally, given my personal structure.
00:52:46.500 | So if I loaded up on -- I were working as an attorney.
00:52:50.500 | I loaded up on disability income insurance, personally owned, and then I've had it for 5, 10 years.
00:52:55.500 | I've saved a bunch of money.
00:52:56.500 | I've become financially independent.
00:52:58.500 | Well, because I know what's written in the contract, if I went and started a farm
00:53:03.500 | or I went and started riding, bucking Broncos for a living,
00:53:07.500 | I would keep that disability insurance contract because many of the contracts,
00:53:11.500 | at least the contracts I used to sell, their definition of disability was
00:53:15.500 | whatever you're doing at the time of injury.
00:53:18.500 | But you don't have to change your premium rate for individually owned disability insurance
00:53:23.500 | after you leave.
00:53:24.500 | So if you retired from being an attorney and went and worked on a farm,
00:53:28.500 | I would say that's a good investment to have it because you're far more likely to get injured on the farm
00:53:32.500 | and be unable to farm than you were as an attorney,
00:53:35.500 | but you have a mispriced policy at that point in time.
00:53:38.500 | So if you know something about your risk, about your personal risk,
00:53:42.500 | then you can -- you're basically practicing what's known as adverse selection
00:53:47.500 | against the insurance company.
00:53:48.500 | Now, that's the way the insurance contracts are written.
00:53:51.500 | There's nothing wrong with it.
00:53:52.500 | That's technically how they're written.
00:53:53.500 | The insurance company would not approve you if you had worked in that --
00:53:56.500 | if you had started from that perspective as a farmer.
00:53:58.500 | They wouldn't have approved you at the same rate.
00:54:00.500 | But since you already have that rate, then you can go ahead and do it.
00:54:03.500 | So if you have a scenario like that that you can exploit, then I would look at that.
00:54:08.500 | What you're probably asking is more technically, is this a good use of the dollar?
00:54:15.500 | So here would be the question -- another way to answer it.
00:54:19.500 | Let's just start with zero-based thinking.
00:54:22.500 | And let's just pretend that we don't have the policy.
00:54:25.500 | And we're going to say, would I go out and buy this policy if I had the opportunity?
00:54:29.500 | Well, that's where you're going to get into the financial return and the financial reward.
00:54:32.500 | So the best example here would probably be life insurance,
00:54:36.500 | the example that many people would face.
00:54:38.500 | Okay, I'm 45 years old.
00:54:39.500 | I don't technically need the life insurance anymore, but I own the policy.
00:54:44.500 | Is this a good use of the dollar?
00:54:47.500 | Well, if it's termed life insurance, then that -- meaning it's temporary,
00:54:50.500 | it's for a specific amount of time, and it's going to go away.
00:54:53.500 | Then the question is just how much does it cost, and do I feel good having it, basically.
00:54:58.500 | It's negligible cost, sure, I'll go ahead and buy it.
00:55:00.500 | And I don't understand why more people don't do that.
00:55:03.500 | When you can buy at 50 years old, you can buy a 10-year level term policy for what?
00:55:08.500 | A million bucks for, I don't know, 50 bucks a month probably, 70 bucks a month,
00:55:12.500 | something like that.
00:55:14.500 | To me it's a no-brainer.
00:55:16.500 | If you have money, why wouldn't I want to have that?
00:55:18.500 | Do I need it?
00:55:19.500 | It's a negligible -- it's a rounding error in my budget,
00:55:21.500 | and it makes me feel good to have the extra million bucks in case --
00:55:24.500 | portfolio correction or something like that.
00:55:26.500 | If you're talking a policy with a much bigger price tag,
00:55:29.500 | so you're considering buying a whole life policy, a million bucks,
00:55:33.500 | well, now you've got to compare it properly to what the alternative use of the dollar is.
00:55:37.500 | And that's where it very much depends on the policy,
00:55:40.500 | and it very much depends on what your investment options are.
00:55:43.500 | It very much depends on the internal price of the contract inside,
00:55:47.500 | the actual performance of the underlying investment contract.
00:55:51.500 | Are we talking about a policy that's tied to what's known as a variable policy,
00:55:55.500 | where it's tied to the performance of an investment?
00:55:58.500 | Are we talking about a policy that is tied to a fixed account?
00:56:04.500 | What's the tax ramifications?
00:56:06.500 | So in the United States we have life insurance policies.
00:56:10.500 | The death benefit is never income taxable,
00:56:14.500 | and the cash values can be pulled out depending on how you pull them out,
00:56:19.500 | sometimes on a tax-favorable basis.
00:56:22.500 | This can be useful for estate planning.
00:56:24.500 | You would have to look at what are you actually guaranteeing.
00:56:27.500 | And in the next question, actually -- we're not going to have time today.
00:56:31.500 | In the next question I was going to answer that and talk about how I would use it.
00:56:35.500 | So the answer -- because we're going to wrap up with this question,
00:56:38.500 | I'm going to stick 58 minutes into the show.
00:56:41.500 | The answer would -- you need to compare it to what your alternative use is.
00:56:45.500 | And in general with life insurance,
00:56:48.500 | you're probably going to be using this as an assuring technique to guarantee a certain number.
00:56:54.500 | So you may be using it to guarantee a certain size of an inheritance for your family members,
00:57:00.500 | and you're also going to be comparing it against what your alternative investment would be,
00:57:05.500 | and you're very much going to be considering income tax and estate tax.
00:57:09.500 | And estate tax ramifications.
00:57:12.500 | That's kind of a general answer to the question.
00:57:15.500 | You can figure it out specifically.
00:57:18.500 | I don't know what Australian law is.
00:57:19.500 | In the U.S., though, we could very easily figure it out.
00:57:22.500 | A million dollars of insurance is going to cost you $1,000 a month for a whole life policy.
00:57:26.500 | Here's what we project your date of death is going to be.
00:57:30.500 | And here's what we project is going to be the performance of the contract.
00:57:35.500 | Here's what the internal expenses are.
00:57:37.500 | If we compare them to this mutual fund, to this portfolio of CDs, to this portfolio of bonds,
00:57:43.500 | to this real estate portfolio, the policy needs to serve a use.
00:57:47.500 | And so is it a good investment?
00:57:49.500 | It could be.
00:57:51.500 | It could also be a really, really bad financial move.
00:57:54.500 | And it's very difficult--it's not difficult, but it's hard to answer the question without specifics.
00:58:01.500 | These types of questions--and I'm going to quit there for today.
00:58:04.500 | I'm at 57 minutes in.
00:58:05.500 | But these types of questions--I hope you can appreciate how I answer them,
00:58:10.500 | but the reality is you have to look at an individual scenario.
00:58:14.500 | It is massively different if you're saying--and I'm making this up, Mark, because you didn't say it,
00:58:19.500 | but it's massively different if you're 50 years old and you just got enough money to where you're financially independent
00:58:26.500 | and you're asking me, "Should I buy a whole life policy as a good amount of money?"
00:58:33.500 | That would be hard to answer.
00:58:35.500 | But if you have lots of money and you have a tax bill due at death
00:58:38.500 | and you're trying to make sure that you fund that tax bill,
00:58:41.500 | and you can fund it easily out of life insurance, and your downside is the premium risk,
00:58:46.500 | but you have maybe another pot of money that is a dramatic upside,
00:58:49.500 | I mean, there's all different ways to position the policy mentally to where it makes a lot of sense.
00:58:55.500 | People make the mistake a lot of times of saying it's all about absolute rate of return.
00:58:59.500 | But the problem with absolute rate of return is when does that return come in,
00:59:02.500 | which is going to be the next question from Lane.
00:59:04.500 | He was asking--he says, "I'm going to start withdrawing money from my retirement funds.
00:59:08.500 | I've told you to talk about the 4% rule, but I want to leave 50% behind."
00:59:12.500 | Well, how would I figure that number out over a 20-year distribution?
00:59:17.500 | And it's very simple to figure out if we know the exact rates of return.
00:59:22.500 | But we don't know the exact rates of return, and the highest--generally, the highest-performing,
00:59:28.500 | the highest-returning asset bases are going to be the most volatile.
00:59:34.500 | So this is where you get to the realm of the difference between investment planning and financial planning,
00:59:39.500 | is that it's very easy to give a generalized investment scenario saying,
00:59:43.500 | "Always invest in the highest-performing asset class and always get the maximum total rate of return,"
00:59:51.500 | because over every 10-year period in the U.S. stock market history, the value is up.
00:59:57.500 | Yes, that is true.
00:59:59.500 | So that works really well for me at 30 years old, but that doesn't work so well for--what was his name?--Justin's parents, who are 60.
01:00:08.500 | They can't just put their $150,000 in the stock market, and when they're requiring from that $1,500 or $2,000 or $3,000 a month
01:00:16.500 | to face their living expenses, they can't just toss the money in there, and it's all going to be hunky-dory,
01:00:22.500 | because they need the money now, so they get into a distribution strategy.
01:00:25.500 | Now, if they had $1.5 million, then, yeah, no big deal.
01:00:29.500 | The volatility is less important.
01:00:32.500 | So what you see is the difference between general concepts and actually applying them at a local level
01:00:40.500 | and actually at a personalized level.
01:00:43.500 | So I hope you guys enjoyed that.
01:00:44.500 | I got through three questions, and I love doing these.
01:00:48.500 | I ought to go back and listen to today's show, and hopefully I dealt with things at an appropriate length.
01:00:53.500 | The primary value is me not answering the question but me telling you how to do it.
01:00:57.500 | I've got another five good ones lined up here for you guys, but there will be another chance.
01:01:02.500 | Thank you so much for being here for today.
01:01:04.500 | Make sure this weekend to go and check out some of those other shows that I mentioned, the other interviews,
01:01:11.500 | and cutting things off here, trying to really get closer to the one-hour time limit to help many of you guys.
01:01:19.500 | Sitting down and listening to a three-hour show is not as easy for some of you.
01:01:25.500 | Next week, I am excited.
01:01:27.500 | On Monday, I am going to -- let's see.
01:01:29.500 | Where's my schedule?
01:01:30.500 | Monday, I think I'm going to walk through some of my ideas for a better high school education experience.
01:01:35.500 | On Tuesday, I am going to launch a voluntary membership program, which I hope that some of you will consider joining.
01:01:43.500 | I'll lay out the history of the show.
01:01:45.500 | I'll lay out all the different options that I've considered,
01:01:47.500 | and I'll tell you why I'm choosing to do things the way that I am choosing.
01:01:52.500 | And if you guys are enjoying the show, let me know.
01:01:55.500 | I will be glad to have you as members to support the show financially.
01:01:59.500 | That would be cool.
01:02:00.500 | It would really make a difference for me.
01:02:02.500 | On Wednesday, I am going to release -- probably I have planned right now to do a technical college financial planning,
01:02:09.500 | 529s, ESAs, blah, blah, blah, all the technical stuff, HOPE grants, Pell grants.
01:02:15.500 | We'll see how much I can fit into one day's show.
01:02:19.500 | I may supersede that with a show on -- we'll see.
01:02:23.500 | And on Thursday, I think I'm going to release an interview that I did with James Wesley Rawls.
01:02:28.500 | He's a hardcore survivalist where he publishes the Survival Blog, and we're going to talk about that,
01:02:33.500 | talk about precious metals a little bit.
01:02:34.500 | I think that will be interesting to you.
01:02:36.500 | One thank you here for a review from Jay Rosen, "Updated review. This podcast is amazing.
01:02:42.500 | The FAQ on whether to pay down a mortgage or invest was incredibly helpful and gave me actionable information.
01:02:47.500 | I'm in the middle of deciding whether to refinance with a 30-year mortgage or a 15-year mortgage,
01:02:51.500 | and the guidance from this episode was incredibly useful in helping me think about the opportunity cost of choosing a 15-year mortgage.
01:02:58.500 | Couldn't have come at a better time.
01:03:00.500 | Once again, this podcast has helped me avoid a financial mistake that could have had significant repercussions.
01:03:04.500 | Detailed and thorough podcast perspectives are nuanced and informed."
01:03:08.500 | Thank you, dude.
01:03:09.500 | Thanks for the reviews.
01:03:10.500 | Make sure you subscribe to the show.
01:03:12.500 | Thanks for listening.
01:03:13.500 | Have a great weekend.
01:03:14.500 | Thank you for listening to today's show.
01:03:15.500 | This show is intended to provide entertainment, education, and financial enlightenment.
01:03:23.500 | Your situation is unique, and I cannot deliver any actionable advice without knowing anything about you.
01:03:31.500 | This show is not and is not intended to be any form of financial advice.
01:03:38.500 | Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy,
01:03:48.500 | and consult them because they are the ones who can understand your specific needs, your specific goals,
01:03:56.500 | and provide specific answers to your questions.
01:03:59.500 | Hold them accountable for your results.
01:04:02.500 | I've done my absolute best to be clear and accurate in today's show, but I'm one person, and I make mistakes.
01:04:09.500 | If you spot a mistake in something I've said, please come by the show page and comment so we can all learn together.
01:04:16.500 | Until tomorrow, thanks for being here.
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01:04:46.500 | Ralph's. Fresh for Everyone.