RPF0324-Friday_QA
00:00:00.000 | It's Friday. On Fridays we do Q&A shows. Basically, you call in with questions and
00:00:06.900 | I do my best to come up with some kind of helpful answer. Of course, you've got to
00:00:12.560 | be the judge of how truly helpful it is.
00:00:15.560 | Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets and I'm your host.
00:00:35.840 | Thank you for being with me today. This is the show where we're dedicated to providing
00:00:38.660 | you with the knowledge, skills, insight and encouragement you need to live a rich and
00:00:43.360 | meaningful life now while building a plan for financial freedom in 10 years or less.
00:00:48.020 | If you're a patron of the show, you get access to a Friday Q&A call. That's the very best
00:00:52.240 | way if you've got a specific question that you'd like to get some input on for you to
00:00:56.520 | get a hold of me.
00:01:03.800 | As we head over to the conference call line here, it looks like I've got a total of four
00:01:07.160 | callers lined up. I know what a couple of them want to talk about. I just want to mention
00:01:11.440 | to you if you would like to ask a question, if you'd like to steer the content of these
00:01:15.320 | shows, the best way to do that is to become a patron of the show. As a patron of the show
00:01:19.040 | at a certain level, you get access to the conference call line. You can call in and
00:01:23.160 | you can ask a question. I don't screen the calls, so if you want to catch me out or ask
00:01:27.200 | me something interesting or see if you can stump me, this is the very best way for you
00:01:32.280 | to do that.
00:01:33.280 | Right now, I've got four callers on the line. Let's go and jump first to Eric from Georgia.
00:01:39.440 | Eric, go ahead with your question, please.
00:01:41.800 | Thanks, Joshua. What are some hands-on investments in the $1,000 to $10,000 range? When I think
00:01:48.240 | of hands-on, I'm thinking of real estate. I can purchase the real estate, go to the
00:01:53.480 | property, fix it up and meet my tenants. I consider stock index fund investing hands-off.
00:02:00.160 | I want to do more of that hands-on investing, but it seems like most people only talk about
00:02:04.640 | relatively affordable stocks or on the other side, the relatively expensive real estate.
00:02:09.560 | Do you have any ideas for lower cost hands-on investments?
00:02:13.600 | Why do you want to do hands-on investing?
00:02:23.360 | It really comes from your podcasts and your philosophy of trying to get out of the market.
00:02:33.880 | I know you have your specific reasons for that. I like those reasons. I do own one rental
00:02:40.880 | property and I really enjoy that hands-on aspect of that, of being able to go fix things
00:02:46.760 | when I need fixing to in a sense touch my investment as opposed to just hope that companies
00:02:54.440 | do well with whatever money I invest with them.
00:02:59.080 | The reason I ask the question is we should start first always with the why. If we're
00:03:04.160 | going to do extra work, why? There could be a few different reasons. For example, you
00:03:09.040 | mentioned, "Well, I might not be comfortable. I might not want to invest in this certain
00:03:12.800 | vehicle over here and so therefore I'm choosing something else." If you're going to get
00:03:16.280 | involved in the world of active investing where you're actually putting your time
00:03:19.200 | and energy into it, the only rational – well, the major rational reason for you to do that
00:03:24.080 | would be if you could earn higher returns. So that's kind of the why that I would encourage
00:03:29.320 | you to consider first.
00:03:30.320 | If you could trot down to the bank and buy a guaranteed one-year CD and they pay you
00:03:35.160 | a 10% annual rate of return on that CD, well, if you're comparing that 10% annual rate
00:03:41.080 | of return on the CD to the hands-on investment and you're calculating that I could do this
00:03:45.240 | work but basically I'm going to wind up with a 10% rate of return, there would be
00:03:49.560 | no rational reason for you to do all the work of say finding another rental property.
00:03:54.640 | So with that as just a basic foundation, the major reason you're going to be looking
00:04:00.340 | for something is so that you can increase your returns. So you've got to find – the
00:04:05.320 | ideas on how to invest in this active way is going to be where do you see an opportunity
00:04:11.520 | to invest your cash and your time in such a way that you can get returns that are to
00:04:18.400 | a very – that are much higher than what's available in a passive world.
00:04:23.000 | This is the fundamental distinction if we were just to restrict our conversation to
00:04:28.320 | active mutual funds and passive mutual funds, the biggest conversation that goes on in the
00:04:31.960 | personal finance world. Usually those who argue in favor of passive investing are not
00:04:37.560 | saying that an active investment manager can never beat the market. What they usually are
00:04:42.680 | saying is when you take into account the costs of potentially beating the market, they can't
00:04:49.160 | do it in excess of the costs, the costs of research, the costs of the time, the costs
00:04:53.920 | of the work of the investment manager.
00:04:55.960 | So we can apply that same thing to your and my individual investment activities and say
00:05:00.200 | if we're going to invest actively, we've got to get returns that are going to be in
00:05:03.860 | excess of the costs, the costs of the time, the costs of the energy, the costs of whatever
00:05:09.320 | specific things we need to spend money on.
00:05:11.920 | Now you are already investing in – you have one specific rental property. Are you specifically
00:05:19.360 | looking for tools and strategies and ideas that are related to real estate or a more
00:05:24.400 | general question?
00:05:25.400 | Yeah, a more general question I guess just a way to have – I guess just be more diversified
00:05:32.520 | as well but without having to drop a lot of money on a second rental property or other
00:05:40.640 | real estate, just kind of looking for more things in a lower price range but that have
00:05:47.080 | that hands-on feel of the investment.
00:05:51.080 | What type of work is your job or your business?
00:05:55.560 | I do website development and it's my own company. So I invest in that in a sense of
00:06:04.760 | investing in the business.
00:06:07.560 | Have you exhausted all of the areas of investment that you see there or is there something there
00:06:12.640 | within the context of your own business that you could employ the money in?
00:06:17.840 | Yeah, I could probably employ the money in that probably mostly on the education side,
00:06:27.880 | learning new skills and improving that way.
00:06:33.080 | So that's probably going to be your best opportunity. Let me give you a simple example.
00:06:38.120 | Let's just say $1,000 or $1,000 to $10,000. You could – and I'm using this as a real
00:06:45.120 | example but also as a metaphor. You could go and buy a hot dog cart and sell hot dogs
00:06:51.000 | from that hot dog cart on the weekends and the evenings. That would be a legitimate form
00:06:57.040 | of investment. That would be an active business basically that you're functioning in but
00:07:02.080 | that would be a legitimate form of investment and you could do that in that $1,000 to $10,000
00:07:06.240 | budget range that you talked about.
00:07:09.300 | So why wouldn't you do that? Well, the reason you wouldn't do that is if you had a better
00:07:14.080 | use of your time and money elsewhere and usually, the best place for us to invest our time and
00:07:20.240 | money is into our primary career. Now, what hampers some of us is within the context of
00:07:27.640 | employment, some of us have more upward mobility options and some of us have fewer upward mobility
00:07:34.440 | options.
00:07:35.440 | If you are running your own company, whether that's a solopreneur endeavor or whether
00:07:39.360 | that's just you and a few employees, you probably have a lot of options and areas around
00:07:44.720 | you through which you can invest and that will probably be the most productive thing
00:07:50.940 | for you to do. I don't know if this is applicable to your business. So again, take this metaphorically
00:07:55.980 | and apply it to whatever is appropriate in your specific situation.
00:07:59.640 | But if you're looking at your business and you're saying, "I develop software or websites
00:08:03.280 | or I do this IT work and I could really use the services of a graphic designer," then
00:08:08.080 | perhaps the $5,000 that you desire to invest would be most effectively invested into buying
00:08:14.080 | a new computer, putting it into a corner of the office and bringing in a part-time graphic
00:08:19.160 | designer to work on it and operate it. Then perhaps by adding that additional capability
00:08:23.780 | and skill to your company's offerings, you'll be able to provide more of a one-stop solution.
00:08:29.440 | That's the type of investment that we should usually be primarily looking for. If you didn't
00:08:34.440 | have your own company or even if you do, you would be looking to say, "Is there an opportunity
00:08:39.080 | for education that I need?" You mentioned that. "Is there an opportunity for networking
00:08:43.000 | that I need?" That would be something that I would look for. A thousand dollars might
00:08:47.360 | be effectively used by going and signing up for an industry conference or going and finding
00:08:52.480 | somebody who is a real leader in the field and asking them to study with you and perhaps
00:08:57.400 | – excuse me, to study with them. Perhaps the best use of the $3,000 of cash is for
00:09:02.560 | you not to go to your office every day for a week but rather to fly across the country
00:09:07.720 | and spend a week with somebody who's a real leader in the field and observe what they're
00:09:11.680 | doing. You may come home with a notebook filled with ideas and possibilities of ways to improve
00:09:17.440 | your business. Now, that is usually going to be the highest
00:09:21.160 | returning investment for most of us. However, we can't always stay with that. So depending
00:09:27.780 | on what phase you're in, perhaps you've done some of those investments. Perhaps your
00:09:31.840 | business is working well and now you're looking to diversify out of your business
00:09:36.800 | or your job. Now you need to look at the market around and say, "What am I trying to accomplish?"
00:09:42.240 | So let's pretend that you've done all those things and take the example a little farther.
00:09:46.400 | You've invested in your business. You've bought that computer. You hired that employee.
00:09:49.920 | You're getting new revenue. You went ahead and hired the bookkeeper, that freed up time.
00:09:53.520 | So now you've got more time and now you've got some excess money.
00:09:55.960 | Now you're looking and saying, "I've got some capital and I want to invest the
00:09:59.360 | money." But the business is working well and you're concerned about a change in the
00:10:04.000 | marketplace that's going to affect your business and you're not exactly sure how
00:10:07.280 | you are going to reposition yourself to compete with it. You're manufacturing buggy whips
00:10:12.680 | and buggy whips are quickly going out of style because people are buying cars.
00:10:16.040 | Well, you might want to hedge against that by saying, "I need some other type of investment
00:10:23.800 | that's not correlated to my primary business." So when I was actively managing investment
00:10:29.760 | accounts for clients, I didn't want to have all of my investments invested in the stock
00:10:34.680 | market because if the stock market were to decline dramatically, that would dramatically
00:10:40.800 | affect my personal compensation because all of my clients' accounts would decline.
00:10:45.680 | That would affect my compensation and that would also at the same time affect my investment
00:10:49.840 | accounts. So I would really be feeling the pinch if all of my money were invested in
00:10:53.960 | stocks.
00:10:54.960 | Now of course I had to have some money invested in stocks. Otherwise, I would probably be
00:10:57.880 | a bit of a hypocrite to my clients when they ask, "Well, how do you invest?" and I
00:11:01.480 | say, "Well, I don't buy stocks." That would be a problem. But I have to protect
00:11:05.000 | from that risk. So that's where then you look and you say, "Now, how do I invest
00:11:09.240 | this capital?" and if you have time, then maybe you buy a food truck or a hot dog cart
00:11:15.000 | or maybe you take something like that, some type of simple business and you can invest
00:11:26.080 | that.
00:11:27.080 | You can – specifically on the topic of investing, you can flip all kinds of things. So for example,
00:11:33.320 | if I had $1,000, I would probably not – and I didn't have any skill or experience to
00:11:37.900 | point to. I would probably not be looking to flip real estate. I would be looking to
00:11:43.000 | flip lawnmowers or washing machines or something in my area where I could see that I can purchase
00:11:51.240 | this item over here for cheaper and flip it for more.
00:11:54.640 | I know people who flip cars and they do four, five, six cars a year. They have perhaps – sometimes
00:12:00.200 | they have a little mechanical ability. They get a dealer's license. They go to the auction.
00:12:03.640 | They buy some cars for cheap. They shine them up, fix them up and they flip them and they're
00:12:07.320 | making a few thousand bucks on every car. Well, that's a dramatic rate of return that
00:12:12.080 | is a lot higher than what they're going to make if they just passively invested the
00:12:16.800 | money.
00:12:17.800 | But you have to do it based upon the scale where you're at and the skills that you
00:12:21.520 | have and the time that you have to invest. So that would be my way of answering it is
00:12:27.120 | more conceptual. I don't – practically it sounds like an answer to your question,
00:12:31.320 | Eric. It's going to be your business at this stage.
00:12:33.920 | But then perhaps in the next stage, it will be something different. So be aware of what
00:12:38.080 | those skills are. For you, maybe it's flipping computer systems. If you only had $1,000 to
00:12:43.600 | invest and you could buy computers at 50 bucks, tweak a few things and sell them for 150,
00:12:49.520 | that would be a great rate of return but it's a lot more time-intensive.
00:12:54.680 | So as the investment capital grows, you have to adjust the things that you invest in so
00:13:00.760 | that you can still produce higher returns because you have so much capital. You can
00:13:05.040 | invest $1,000 in computers and flip them possibly, maybe. I don't know if that's actually
00:13:09.440 | true but you would know that. But it would be really tough for you to figure out how
00:13:13.160 | to invest $100,000 in used computer systems and flip them.
00:13:17.640 | So it's the basic concept and idea of investment and you've got to look in your local area
00:13:24.440 | based upon your situation, your skills, your time, your markets and just be aware of the
00:13:28.720 | opportunities and the answer will probably present itself.
00:13:33.720 | Helpful, Eric? Any follow-up question to that?
00:13:36.640 | Yeah. No, very helpful. Thank you very much.
00:13:39.920 | Good. Denise, you're next.
00:13:42.000 | Thanks, Joshua. So I am looking for suggestions for prioritizing competing goals and by this
00:13:49.560 | I mean I'm a true sandwich generation. I have two children, one in college, one going
00:13:54.320 | in four years, but I also have an older parent who I have to plan to care for. So I'm trying
00:14:00.200 | to balance the competing goals of savings, building emergency funds, saving for retirement
00:14:06.480 | with the goal of eliminating debt, paying off credit cards, student loans and I anticipate
00:14:13.040 | in the next three to five years I'm going to need to purchase a home that can accommodate
00:14:17.200 | my mother. My current home just cannot do it. I need a first floor disability accessible.
00:14:25.000 | So I'm trying to balance those three goals, trying to figure out which I should work on
00:14:30.600 | because I look at them as sort of all being urgent and within the next two to three years
00:14:36.480 | I need to really work on things. So I just appreciate some thoughts.
00:14:40.600 | Tell me a little bit more about your current financial situation. Are you – you're working
00:14:44.960 | to pay off debt, save an emergency fund or you're well established in some of those
00:14:48.200 | basic steps?
00:14:50.440 | I'm working on all of those things. I have money in a 401(k). I think I'm a little bit
00:14:56.200 | ahead of the game on that. I have a bit of an emergency fund. It's probably at this point
00:15:01.280 | probably about one to two months, so I certainly want to bulk that up. At the same time, most
00:15:06.720 | recently I've been really focusing on trying to pay off my credit card debt, get all of
00:15:11.120 | that out the way so that I can have more money to use for other things.
00:15:16.440 | Is it just your mom you are caring for or going to be caring for?
00:15:22.440 | Yes, it's my mom. I'll be caring for. And just to tell you one more thing, I have a
00:15:26.000 | high income. I'm an attorney.
00:15:28.040 | Great.
00:15:29.040 | But, well, I actually probably want to transition to a different career in the next, say, five
00:15:37.120 | to seven years, and I anticipate that'll be a much lower paying career. So that's something
00:15:41.360 | that's on the backbone that I have to consider as well.
00:15:45.000 | Okay. And what level of care does your mom presently need?
00:15:49.800 | Currently she's fine on her own, but I anticipate, like I said, three to five years I'll need
00:15:54.600 | something that's a little more accessible. And my home, current home, just can't be reconfigured
00:16:00.800 | for that. I need something with no stairs.
00:16:04.400 | Is she physically healthy and you're just planning for her advancing age, or is she
00:16:09.740 | showing indications of beginning stages of dementia, something like that?
00:16:14.960 | Oh, no, nothing like that, but just more physical. She has knee issues. She uses a cane. So I'm
00:16:20.880 | anticipating a little bit more of a decline in that respect, but otherwise healthy.
00:16:26.800 | Okay. A couple of ideas occur to me. It's a good question. I think it's a challenge
00:16:31.360 | that we all have as far as we always have competing goals. I bought some paddle boards
00:16:41.200 | this week, and some of the audience have been yelling at me to get them for a while, but
00:16:44.920 | I bought some paddle boards this last Saturday. And I didn't necessarily have to buy them,
00:16:49.300 | but I chose to not save and invest the money that I chose to spend on my family.
00:16:53.760 | And I have thought about it for years. I've considered it for years. I was just shopping
00:16:57.740 | the market. I was never willing to pay the money that people wanted to pay for them,
00:17:01.240 | but I finally reached a point in time where the prices had come down. I found a deal that
00:17:04.640 | worked and I'm at a phase in my family life where those paddle boards are going to be
00:17:09.480 | really useful. I don't know that I can create an academic model. It's just simply that by
00:17:14.780 | being aware of what you're giving up, you can start to look at some things.
00:17:18.960 | So here would be some ideas that I would suggest for you. First, you can think about it in
00:17:25.560 | terms of concentric circles of responsibility. If you are not stable yourself, you're not
00:17:31.600 | able to be of any help to anybody else. I've said it as a joke and some people are offended
00:17:39.160 | by it, but I think it's in many ways true that the best way to help the poor is to start
00:17:44.720 | by not being one of them. It's only people who are financially stable and who have money
00:17:49.560 | who are able to help others on financial topics.
00:17:53.600 | So our first responsibility is always to care for ourselves. I need to care for myself first
00:17:59.920 | and then I need to care for my family, which is the stage that you're at. But if your mom
00:18:04.720 | is presently able to take care of herself, you need to focus first on taking care of
00:18:11.560 | yourself. So I wouldn't give a major amount of focus to saying I'm going to do certain
00:18:17.960 | things – so I wouldn't set aside extra money for the care of my mom in the future
00:18:23.600 | if I'm currently saving up an emergency fund and paying off debt for myself. So you've
00:18:29.160 | got to care for yourself first.
00:18:32.400 | Then once you are in a solid and stable place or as your financial stability increases,
00:18:39.520 | you'll be able to be of more help to other people. The cool thing about finance is the
00:18:44.360 | things that you do for yourself are also the things that are going to prepare you to be
00:18:51.040 | effective for helping your mother and your children. So focus on you first, recognizing
00:18:58.400 | that everything you do for you is also going to equip you to be able to help others.
00:19:04.200 | So that's the idea of concentric circles. Start with you and spread out. Don't worry
00:19:08.160 | about caring for the orphans in Africa until you first cared for the orphans next door
00:19:13.040 | and then you can't care for the orphans next door until you've cared for yourself
00:19:15.840 | and taken care of that.
00:19:17.800 | The second thing is look to see what the opportunities are. So with your kids, are you paying for
00:19:28.200 | their school? Have you promised to pay for their school? What are your obligations or
00:19:32.240 | what commitments have you made to them with regard to that?
00:19:36.560 | I purchased a Virginia 529, so I told both of them, "I'll pay for your first year
00:19:43.920 | of school. After that, you need to seek scholarships and if necessary, take loans." Certainly,
00:19:50.760 | I would like to help them as much as possible, but I recognize that I've heard the saying,
00:19:55.400 | "They can borrow for their education, but I can't borrow for retirement." So I've
00:19:59.960 | sort of limited it to that. And fortunately, my older daughter that's in college now
00:20:03.920 | has a tuition scholarship, so she won't need to borrow for her room and board. My
00:20:09.360 | younger daughter, we have a little time. She's in high school.
00:20:12.360 | Great. So if I were you, given my opinions, perspectives, and I guess just awareness of
00:20:22.880 | the world, which are not going to be yours, but if I were you, I would not prioritize
00:20:29.200 | trying to save money or allocate money towards my kids' schooling. Any person who is desirous
00:20:35.960 | of getting a college education can put themselves through school simply by working and studying
00:20:42.880 | at the same time, absent any scholarships, absent any financial aid, absent any tuition.
00:20:48.700 | If your children want to get a college degree, the best way that you can help them is to
00:20:54.040 | simply provide a place for them to live rent-free if they're being responsible with their
00:20:58.420 | studies and they can go and they can work a minimum wage job and put themselves through
00:21:02.360 | college. And if you remove simply the cost of rent from their life, there's no reason
00:21:06.120 | why anybody who wants to can't work their way through school.
00:21:10.860 | To me, I don't see the point of anybody paying a lot of money for college degrees.
00:21:16.220 | And I certainly wasted a lot of money on my college degree and that the biggest waste
00:21:21.000 | was on that room and board. So if you can help your children, and you can do this without
00:21:25.120 | saving any money just by budgeting it in, help your children stay at home, live with
00:21:29.640 | you. They can do the first few years of schooling online for very cheap or they can go to a
00:21:35.400 | local community college or they can just go to a university that is nearby. Or if they
00:21:40.360 | want, they can do the work that's required to get a bunch of scholarships and have somebody
00:21:43.480 | else pay for their school if they really want to do it.
00:21:46.200 | And then in the worst case scenario, if they do borrow money, that's up to them. They
00:21:50.120 | can easily borrow money for school. I think it's a foolish thing to do but they can
00:21:53.600 | easily borrow money for their schooling. So as a parent, I don't think you have any
00:21:57.440 | responsibility or moral duty or obligation to pay for your kid's college education.
00:22:03.880 | A lot of parents feel they do. And if you do, you have to address that. But I don't
00:22:09.040 | see any reason whatsoever why any parent has a moral duty or obligation to pay for the
00:22:14.800 | kid's college. You can let them live at home. They can work a minimum wage job and
00:22:18.560 | they can put themselves through school. It's not that expensive to get a college degree
00:22:23.480 | here currently.
00:22:24.480 | It's much more important for you to care for yourself and also to be prepared to care
00:22:29.840 | for your mom than it is for you to set aside money for your kid's college. So even if
00:22:36.400 | they did borrow money and even if they did have to pay that back, they've got a lifetime
00:22:39.560 | of earnings before them. So if I were you, I would focus on me and I would focus on caring
00:22:45.120 | for mom.
00:22:46.560 | And the final comment that I would make with regard to being prepared to care for mom,
00:22:51.560 | it probably will not involve a lot of money. So it probably – just based upon what you
00:22:58.640 | said to me, it's probably not going to involve a lot of money. It's probably going to involve
00:23:02.120 | your simply moving and adjusting to a different place to live in the future.
00:23:06.760 | But you could probably adjust from where you are living to a different place to live that's
00:23:11.520 | simply more suitable for your circumstances without spending a lot of money. If you have
00:23:16.960 | to sell your place and buy another place or sell your place and rent another place, you
00:23:20.680 | could probably find something suitable similar to what you're paying right now, especially
00:23:25.840 | if you have a bedroom that's freed up with a kid moving out.
00:23:29.320 | I've cared for – I cared for my grandparents when I was younger and my parents were caring
00:23:35.440 | for them. Depending on the ages of your children and your mom, sometimes, yes, you do need
00:23:40.960 | a bigger house. But if she's independent right now and then if at some point in the
00:23:45.840 | future you join your households together, remember she's going to be bringing income
00:23:49.080 | to the table. So that income can be planned on to meet the needs.
00:23:55.340 | So if I were you, given what you said about the career, I would focus on saving some cash,
00:24:01.180 | getting out of debt, freeing yourself up, building an appropriate career that's going
00:24:04.960 | to give you the flexibility that you need and the earning power because the biggest
00:24:08.540 | thing you'll need with – if you wind up in a position where you're providing physical
00:24:12.060 | care for your mom is you'll either need a lot of money or she'll need a lot of money
00:24:15.580 | to pay for professional caregivers or you'll need flexibility and help to actually provide
00:24:21.660 | the care. It's primarily the flexibility that will be the most benefit to you, especially
00:24:26.380 | if she's healthy. If your mom were facing a severe end-stage form of dementia, that
00:24:31.660 | type of care is very difficult. But just occasional care, she's weakening, she needs some help
00:24:36.500 | with cooking, those are things that you can integrate into your lifestyle without a lot
00:24:40.260 | of excess – not a lot of excess money. You just need some time and flexibility. Those
00:24:45.460 | would be my answers. Helpful, Denise? You want to ask a follow-up question? Is that
00:24:48.420 | good enough?
00:24:49.420 | No, that was incredibly helpful. Thank you very much.
00:24:52.220 | Good. Thank you. Next, Joe.
00:24:54.220 | Hey, Joe. Excuse me. Hey, Joshua. If I take a job with a 501(c)(3) as a contractor, I'll
00:25:02.180 | have an opportunity to enroll my 401(k) into a 457(b). My understanding on this is that
00:25:08.460 | there's no 10% penalty on early withdrawals from a 457(b). So I'm wondering if this
00:25:13.580 | is a valid strategy for accessing 401(k) money penalty-free before age 59 and a half without
00:25:20.740 | committing to a 72(t) or waiting five years for a rock ladder to kick in?
00:25:27.260 | That is a good question, Joe. Are you planning on retiring early before 59 and a half?
00:25:33.580 | Yes, definitely. Looking at unjobbed mostly, I'm sort of very illiquid right now with
00:25:40.100 | most of my money in 401(k)s and minor A's.
00:25:45.980 | Okay. Trying to think here. I am not sure of the answer, Joe, and I don't know the answer
00:26:00.580 | to that. Have you found anybody online who's written about that or talked about that previously?
00:26:09.540 | No, no. That was sort of the genesis of calling in. I Googled the heck out of this and couldn't
00:26:15.300 | find anything. On the IRS publication, it seemed to suggest that 401(k) to 457(b) was
00:26:22.140 | a valid transition, but there was some footnote about requiring separate accounts, and I wasn't
00:26:29.100 | sure if that was somehow related to trying to prevent this strategy I was thinking about.
00:26:38.340 | I'm sorry. I can't confidently say whether it's one way or the other. If the 457(b) – so
00:26:45.540 | let me give you a short answer and let me add that to my things to research and try
00:26:52.500 | to determine an answer and publish a researched answer. If you can – if the 457 will accept
00:27:02.860 | the transfer in, then there's the technical legal answer and then there's the practical
00:27:09.740 | answer.
00:27:10.740 | So I don't know the answer to the technical legal answer. I'm giving you just the practical
00:27:13.900 | answer. If the 457 will accept the transfer in and if the 457 allows distributions from
00:27:21.500 | assets, there's no – practically, it would work. There's no – the people who are
00:27:30.860 | running these plans are not generally – they're not going to be all that knowledgeable about
00:27:36.500 | this.
00:27:37.500 | So if you can actually get the money in without paying taxes and things like that and if the
00:27:40.780 | money is seasoned and it's in the 457, you start taking distributions, it's unlikely
00:27:45.420 | practically that anybody is ever going to – that it's ever going to be a problem.
00:27:49.940 | So if the funds allow that transfer, then I would say practically you could probably
00:27:53.900 | do it.
00:27:54.900 | Now technically, I don't know but I don't see any reason why if the 457 would accept
00:27:59.580 | the fund and if you've proven that, why it wouldn't be possible. But I'm hesitant
00:28:05.980 | because it would seem to me that I would have heard about it and I've never heard this
00:28:09.900 | idea.
00:28:10.900 | So I'm useless to you, Joe. Let me – I've made a note of it. I will research it and
00:28:16.180 | I will try to do my best to get an answer and please do me a favor. Email me, Joshua@radicalpersonalfinance.com
00:28:22.380 | and let me know that it was you.
00:28:24.420 | If I can determine the answer, I will personally tell it to you and if I can get the clear
00:28:29.660 | answer where I'm confident, I'll go ahead and share it on the show in a future episode.
00:28:34.340 | But send me an email after our call and I will follow through on it.
00:28:37.900 | Joe Fossum All right. I appreciate it.
00:28:40.700 | Marc Thiessen For sure. All right. We've got three more callers. Let's go with – who's
00:28:46.180 | next? 856-AREACODE, please. Looks like a Philadelphia number, 856. Go ahead with your question,
00:28:58.780 | please. All right. We'll go on to the Arizona number, 520-AREACODE, please.
00:29:04.860 | Julian Julian, go ahead.
00:29:10.860 | Joshua Julian Thanks, Josh. I've been struggling
00:29:15.780 | a little bit with a particular situation with a 401(k) profit sharing and cash balance pension
00:29:25.340 | plan match. My life is a little bit shaken up based on getting married and going on a
00:29:31.500 | honeymoon and then also moving all within a few months. By the time the dust settles,
00:29:37.420 | I'll only be a couple months away from being fully vested for a three-year vest period.
00:29:44.500 | About seven months away, I could theoretically transfer within the company to, I guess, finish
00:29:52.660 | out the three-year timeframe to get the matching contributions while at the same time I'm evaluating
00:30:00.420 | just moving on altogether to greener pastures, if you will. I think that moving would provide
00:30:08.060 | a clean break to do that, but I'm trying to evaluate the opportunity cost of those
00:30:14.460 | matching contributions for the past two years against the opportunity cost of having a fresh
00:30:20.700 | start and moving on to something and starting that sooner rather than later.
00:30:25.100 | How much money are we talking about?
00:30:29.060 | It wouldn't be a significant amount of retirement savings. It wouldn't derail me altogether,
00:30:35.060 | but I'm just really thinking about the opportunity cost 30-35 years later, looking back and thinking
00:30:41.060 | about what it could have been. Depending on bonuses and other pay between now and when
00:30:46.420 | I leave, I would say it's going to be between $7,500 and $10,000.
00:30:51.780 | If you were to leave right away, what type of opportunity would you be going to?
00:30:57.620 | Something that makes more sense given my skill set and my career aspiration. I've been with
00:31:03.380 | the company a while and it's been a rocky path, if you will. It's a little bit difficult
00:31:09.060 | to find my true calling within the company. I've been able to make it work, but I've consistently
00:31:16.200 | been trying to find other opportunities. I haven't found anything that was worthwhile
00:31:22.280 | to jump for, but with the move, I technically have to find another job within the same company
00:31:27.560 | which if I'm going to do that, I could also just spread that out to working for other
00:31:31.600 | companies.
00:31:32.600 | For my clarity, you have gotten married and you have moved or you have a specific deadline
00:31:40.160 | where you're going to move for certain and that's what's causing the question?
00:31:44.120 | Exactly. Based on my wife's job, the move is in September. By then, if I were to transfer,
00:31:55.080 | if I can do that which I think that I can, then I would be seven months from this three-year
00:32:01.160 | like cliff fast on both retirement plans.
00:32:05.800 | If you were to leave this company completely, would you go to a company in a similar industry
00:32:13.840 | or similar occupation or would you completely switch industries?
00:32:18.840 | Same industry. Probably the role itself would be similar in scope, but the company would
00:32:26.000 | be quite a bit different, sort of a different type of company within that same industry.
00:32:33.400 | It wouldn't be an occupation change at all.
00:32:38.440 | Final question before I give you my thoughts. Is $7,500, is that a significant amount of
00:32:44.600 | money as compared to your annual compensation and your investments or is it relatively insignificant?
00:32:52.360 | That's kind of tough. I think I struggle with that because I'm thinking back on the amount
00:33:03.000 | of time it took to get those matching contributions. A little bit of back story, I did sort of
00:33:10.160 | a similar thing with another company where I was a six-year. I left earlier. Obviously,
00:33:15.000 | I was far off from working there six years, but I left some money on the table and I still
00:33:19.000 | look back at that and think to myself, "Well, that would have been nice. That would have
00:33:21.720 | been helpful to my overall retirement, obviously to my overall net worth." I wouldn't say it's
00:33:26.640 | significant, but it's not like I would burn that amount of money if that makes any sense.
00:33:36.800 | In theory, without having a specific idea, without having a specific opportunity to compare
00:33:44.720 | it to, you're not going to be able to come up with the right answer because right now,
00:33:49.840 | you're basically trying to calculate something, the $7,500, as compared to nothing. You don't
00:33:56.480 | have the opportunity lined up. You don't have the job, et cetera. You're not going to be
00:34:00.520 | able to make that as a clear decision. Something is better than nothing.
00:34:05.120 | $7,500 or zero, well, I'll take $7,500. That's why you're experiencing such an emotional
00:34:14.760 | cognitive dissonance about it because you don't have anything that you're actually comparing
00:34:19.120 | it to. Again, you're trying to compare something to nothing. That's the major problem. I don't
00:34:27.680 | think there's anything magical about retirement accounts or vesting, et cetera. The concept
00:34:34.880 | is golden handcuffs and you're experiencing the power of those golden handcuffs.
00:34:39.060 | If you have a compelling opportunity, if there's something that you knew you wanted to do or
00:34:45.040 | were clearly something that you should do, the decision would be easy. When I left Northwestern
00:34:49.760 | Mutual, I walked away from the vast majority of my retirement plans because I wasn't fully
00:34:54.680 | vested in them. I did that without – I mean I considered it, but I had something that
00:35:00.520 | was compelling to me and had a reason why the timing was important. I was watching the
00:35:05.760 | timing of what was happening in the marketplace. I was watching the timing of what was happening
00:35:12.400 | with podcasts. I wanted to have as much of an early mover advantage as possible and I
00:35:16.960 | knew I was already a year or so behind where I would have liked to have been and I said,
00:35:21.040 | "I'll get more benefit out of being a year early with this business than I will
00:35:28.200 | if I hang out and get this extra retirement money."
00:35:31.800 | For me, it was a relatively easy decision because I had something compelling to go to.
00:35:35.720 | So practically speaking, what would my advice to you be? First, if you're moving to a
00:35:39.360 | new town and a new city and you don't have anything there, there's really not much
00:35:43.120 | reason for you to go there and sit on the couch and do nothing. If you're going to
00:35:47.560 | a – if you want to work in a similar industry, what I would do if I were in your shoes is
00:35:53.280 | I would do my best to try to arrange a transfer within the company that you're in. If there's
00:35:58.180 | a job position, once you're in a company, you know what the job positions are that are
00:36:02.120 | probably suitable for you or more suitable or less suitable.
00:36:05.480 | But if you can arrange a transfer within that company, that will be helpful. Even if you
00:36:11.280 | earn less money because perhaps you transition to a different type of position, maybe it
00:36:16.640 | pays better, maybe it pays less. Even if you're earning money, just – I mean let's say
00:36:21.760 | you're earning median income, $4,000 a month but you're working in this new city
00:36:25.700 | for six months. Well, if you can line up $4,000 of income for six months, that's $24,000
00:36:32.040 | of gross earnings plus the $7,500. You've got a compelling reason to be working at that
00:36:40.600 | company.
00:36:41.600 | Secondly, it's always easier to get a job when you're already well-employed than it
00:36:45.840 | is when you're unemployed. So if you can arrange to be employed while you're doing
00:36:50.560 | a job search, I think that's superior to your being unemployed. So I wouldn't burn
00:36:56.160 | the bridges unless there were some tremendous reason why you had to leave, ethical conflict,
00:37:01.680 | compelling issue, major problems. I wouldn't burn the bridges. I'd rather transfer within
00:37:06.280 | the company knowing that I've got a $7,500 in effect bonus coming and knowing that it
00:37:13.840 | will be easier for me to get a job when I'm working within the industry and I'm already
00:37:18.000 | settled in the industry than it will be for me to get a job if I'm unemployed.
00:37:24.840 | Finally, practically speaking, it's just easier to set up life in a new town if you've
00:37:29.360 | got a job and it's going to be easier for you to arrange a job with the company you're
00:37:32.640 | with than it will be with a different company. I wouldn't let that keep me from looking
00:37:38.180 | for another opportunity with another company but I would allow it to motivate me to negotiate
00:37:45.960 | a little bit harder, to work a little bit harder and to try to negotiate a deal knowing
00:37:52.480 | that I'm going to walk away from $7,500 if I take this job. So raise your sights.
00:37:58.000 | Try to get a better job, a fancier job, knowing that if you want to get an equal job with
00:38:01.840 | a different company, you can always do that but you need to get a better job and a fancier
00:38:05.400 | job in order for it to compensate for the $7,500 potential loss. So those are my thoughts,
00:38:12.080 | Julian.
00:38:13.080 | Julian: Thank you so much, Joshua. That's extremely helpful and gives me definitely
00:38:19.000 | a lot to think about and I really like the way that you broke that down into a couple
00:38:23.120 | different things because it's not necessarily just about the money. It's also about what
00:38:26.400 | am I going to do when I get there and how am I going to find a better job. So I can't
00:38:31.520 | tell you how much I appreciate it. That was a great answer.
00:38:33.640 | Josh Buettner: Good. I'm happy to help. We often think and it's hard. This is why
00:38:36.800 | we always have to talk things out. A multitude of counsel is wisdom and it's helpful to
00:38:40.800 | talk to people because other people who aren't facing the emotion of what we're facing
00:38:44.480 | often see opportunities. But there's no reason why every single person who is listening
00:38:49.760 | to this show can't concurrently with your current employment be working on something
00:38:56.480 | better. We should always be working on something better.
00:39:00.080 | So we often see it as an either/or and that's what I'm encouraging is it's not. You can
00:39:05.360 | both work on something better and continue what you're doing at the same time. Of
00:39:09.680 | course, you can't give full priority to one or the other. You always have to adjust
00:39:13.760 | and vary how much energy and focus and effort do I have. But you can do both at the same
00:39:18.640 | time. So that'll be awesome. What town are you moving to?
00:39:21.840 | Josh Buettner: The home of your ex-employer, sir.
00:39:25.040 | Ah, Milwaukee, Wisconsin. I like Milwaukee. If you like midwestern towns, it's a nice
00:39:33.680 | city. It's awesome.
00:39:34.680 | Josh Buettner: We're really excited for it. Thanks, Josh.
00:39:36.680 | Cool. Let's see. I've got another caller here, Los Angeles phone number. Go ahead.
00:39:40.680 | Hey, Josh. How are you doing?
00:39:43.680 | Well, sir, how are you?
00:39:45.680 | Good. Good. So I've got a question about my in-laws actually. So they have a small
00:39:54.680 | business. It's a motel business and they have a couple of employees that are family
00:39:58.680 | members. And then they have a couple of employees which are not family members. And
00:40:04.680 | they're both over 55. And so they don't have a 401k or retirement plan, an account
00:40:13.680 | or anything like that. And they have a high income right now for the last two years. So
00:40:19.680 | I'm thinking what are some good ways they can defer a good amount of money through
00:40:26.680 | the business, through like a SEP or an SEP IRA or a simple IRA?
00:40:32.680 | How many employees do they have?
00:40:34.680 | They have about 12.
00:40:37.680 | Okay. And what is a high income? Do you have any idea of how much money they're
00:40:42.680 | actually earning?
00:40:43.680 | About a quarter of a million.
00:40:46.680 | Okay. And do you have any idea what they're actually spending? Like is this a new
00:40:49.680 | thing for them? They're living on 50 and earning 250?
00:40:52.680 | So that's after, that would be after all the expenses. So that's the profit.
00:41:03.680 | What do they intend to do with regard to retirement? Do they intend to retire? Is
00:41:09.680 | that important to them?
00:41:10.680 | Well, the business, the motel business is not going to be there for that many years.
00:41:16.680 | So the owner is, they don't own the business, they lease the business and that
00:41:21.680 | property is getting converted into condos. And we don't know when that's going to
00:41:25.680 | happen, but I'm guessing two or three years later it's going to happen. So they're
00:41:30.680 | probably going to retire after that happens.
00:41:34.680 | Do they have a lot of other savings and investments that aren't connected to this
00:41:38.680 | hotel business?
00:41:42.680 | They just have cash set aside.
00:41:45.680 | And I know you may not know all the details, but I mean a lot of cash. Do they
00:41:48.680 | have millions of dollars of cash that they actually can retire or do they have
00:41:52.680 | $100,000 sitting in a checking account?
00:41:55.680 | Yeah, it's the latter.
00:41:57.680 | Okay. So there's almost two questions in what you're asking. The first is simply
00:42:03.680 | is there an intelligent type of financial deferral account? That's the first
00:42:09.680 | question. That's the less important question. The bigger question is what are
00:42:13.680 | they going to do with their lives? But let's start with that first question with
00:42:19.680 | regard to retirement accounts.
00:42:22.680 | If they don't currently have any retirement accounts in the business, which
00:42:28.680 | would not be unusual for a business like you described, a hotel business, 12
00:42:33.680 | employees, this is a small business. It's unusual for a business like this to have
00:42:38.680 | any type of group retirement account set up.
00:42:41.680 | If they don't have something, they could establish, for example, a 401(k) plan.
00:42:46.680 | They could establish some – depending on what type of business entity they're
00:42:51.680 | running, they could establish some kind of group plan. Let's just keep it simple
00:42:56.680 | and compare a 401(k) plan versus where a lot of people's minds go on a question
00:43:00.680 | like this, some sort of defined benefit plan.
00:43:03.680 | A 401(k) plan would allow them to set aside some money and it would also allow
00:43:07.680 | their employees to set aside some money.
00:43:11.680 | The challenge with a small business like this and the challenge with 401(k) plans
00:43:16.680 | in a business where you have an owner who's making a high income and you have
00:43:20.680 | the majority of the staff, which is probably not making a lot of income.
00:43:24.680 | Several of the employees I would imagine are housekeepers, some basic front desk
00:43:28.680 | staff, et cetera. These are not highly compensated employees.
00:43:31.680 | You have to meet all of the appropriate regulations for highly compensated
00:43:35.680 | employees and owners of businesses.
00:43:37.680 | So that means that they need to match their employees' contributions.
00:43:41.680 | They need to do a safe harbor plan, something along those lines.
00:43:45.680 | Their employees probably don't have much of a value of that.
00:43:50.680 | In this type of business, it's unusual that the employees highly value
00:43:55.680 | retirement accounts. That's very different than a white-collar engineering
00:43:59.680 | firm where people want the 401(k) accounts.
00:44:01.680 | Oftentimes, business owners in this position struggle to get enough
00:44:05.680 | participation among their employees to meet the federally required
00:44:09.680 | participation ratios.
00:44:11.680 | So I wouldn't guess that their employees are clamoring for it.
00:44:15.680 | Also, within the context of their overall financial plan, for them just to put
00:44:20.680 | aside some money in a 401(k) plan for two years, that's not going to make a
00:44:24.680 | meaningful impact on their ability to retire.
00:44:27.680 | If they are, you said they're 60 years old? How old are they?
00:44:33.680 | Yeah, they're 60 years old.
00:44:36.680 | Okay, 60 years old. So if they're 60 years old and if they've got $100,000
00:44:40.680 | in the bank, maybe they own a house with a hundred or a couple hundred
00:44:43.680 | thousand dollars of equity and then they have this business, if somehow
00:44:46.680 | magically we were able to fast forward a couple years and they open a 401(k)
00:44:51.680 | plan for themselves and they defer into the 401(k) plan, let's just say
00:44:56.680 | $100,000 each and they – over the course of a couple years and they're
00:45:00.680 | able to have an account with a couple hundred thousand dollars in it, this is
00:45:03.680 | not going to allow them to retire.
00:45:06.680 | They can't retire at 62 years old with $200,000 in a 401(k) plan.
00:45:10.680 | So practically, it's impractical.
00:45:13.680 | It's not going to adjust their financial situation very significantly.
00:45:19.680 | It's not going to allow them to retire.
00:45:21.680 | Their employees probably aren't going to participate.
00:45:23.680 | They're probably not going to meet the participation ratios such to allow
00:45:27.680 | them to not have to do a safe harbor plan or something like that.
00:45:31.680 | It's not going to work.
00:45:32.680 | Now, the next employee option, when you have a business where you are going
00:45:37.680 | to have – where you have highly compensated employees and less highly
00:45:40.680 | compensated employees, where you have a big diversity and also when you
00:45:44.680 | have a business where the business owners are older but some of the
00:45:48.680 | employees are much younger, then you want to look to see if doing a
00:45:52.680 | defined benefit plan would be an intelligent option.
00:45:55.680 | Where financial planners usually look out for these is the best example is
00:45:59.680 | you look for a doctor who has a very high income and they have one older
00:46:05.680 | doctor, two older doctors in the company and then maybe a couple of nurses
00:46:11.680 | and receptionists who are earning less money, substantially less money.
00:46:16.680 | Then perhaps there's an opportunity there where they can set up a defined
00:46:19.680 | benefit plan.
00:46:20.680 | The idea behind a defined benefit plan is instead of deferring a certain
00:46:24.680 | amount of the doctor's compensation based upon the contribution like a
00:46:28.680 | 401(k) plan, which is called a defined contribution plan, instead of just
00:46:31.680 | deferring $50,000, the way a defined benefit plan works is you can calculate
00:46:36.680 | out the total annual retirement income that you're trying to solve for.
00:46:42.680 | Let's say you're trying to solve for an annual retirement income of $75,000.
00:46:47.680 | Now the business needs to fund the plan sufficient to the level where
00:46:51.680 | actuarially it can deliver that retirement benefit for the retiring physician.
00:46:57.680 | So this type of plan is very attractive if you have an older, higher income
00:47:03.680 | earner as a key figure in the business and you have younger, less compensated
00:47:09.680 | staff.
00:47:10.680 | The reason it's attractive is because the business will have to set aside
00:47:14.680 | enough money to fund a benefit for all of the employees.
00:47:17.680 | But the older, highly compensated business owner is going to get
00:47:22.680 | proportionately a much higher benefit because it's going to be based upon
00:47:25.680 | the salary.
00:47:26.680 | So this is the way we're in the scenario I mentioned.
00:47:29.680 | Like I said, financial planners, we look for doctors who are old and rich
00:47:32.680 | and have a young, lightly paid staff.
00:47:36.680 | This is where – why do I allow the business to set aside hundreds of
00:47:40.680 | thousands of dollars per year, all of which is deductible?
00:47:43.680 | Well, that type of situation doesn't apply here with this scenario of
00:47:47.680 | outline for me either simply because they're going to be forced out of the
00:47:50.680 | business.
00:47:51.680 | The defined benefit plan, it's very important when setting up one of these
00:47:54.680 | for a business that the business needs to be confident that its future earnings
00:47:58.680 | are stable because these plans need to be funded for enough time and they need
00:48:02.680 | to be stable.
00:48:04.680 | Depending on the nature of the business, you can sometimes choose a business
00:48:07.680 | that's steady or that's – where the contribution is steady and flat or it's
00:48:12.680 | adjust but it needs to be stable.
00:48:14.680 | So if they know the business is going to be closing in a couple of years and
00:48:17.680 | this is just – this is not going to work.
00:48:18.680 | It's just too much of a hassle to set it up.
00:48:20.680 | They don't have enough money practically to fund it anyway in what you
00:48:23.680 | described to me and it's just not going to work.
00:48:25.680 | So that was the long-winded financial planner way to say I wouldn't bother
00:48:30.680 | with setting up any kind of retirement plan in what you described here.
00:48:33.680 | What I would do in their situation is I would start with that second question
00:48:39.680 | which is more important.
00:48:40.680 | I would say, "What are they going to do with their lives?"
00:48:43.680 | because they're not going to sit around – number one, in what you described to
00:48:48.680 | me, they don't have enough money to retire.
00:48:50.680 | So this idea that they're going to somehow turn 63, take social security and
00:48:54.680 | say – are they going to live on $2,000 a month?
00:48:57.680 | They need to figure out what's the business and adventure that they're going to
00:49:02.680 | start on for the rest of their life.
00:49:04.680 | What I would do is I would take the next two years of profit from this business
00:49:09.680 | and I would – knowing that it's going to be closing under the circumstances
00:49:13.680 | you said and I would invest that profit into setting up the next business.
00:49:17.680 | I would encourage them to consider some sort of lifestyle business that will
00:49:20.680 | meet their needs.
00:49:22.680 | So is that lifestyle business to establish a bed and breakfast in the
00:49:28.680 | Shenandoah Valley?
00:49:29.680 | I don't know.
00:49:30.680 | Is that lifestyle business to purchase some houses that they're going to put
00:49:35.680 | out on Airbnb in a desirable market of real estate?
00:49:40.680 | Do they want to – what do they want to do?
00:49:43.680 | They're going to need to earn income out of it because they don't have enough
00:49:46.680 | money to retire.
00:49:48.680 | So how could they take some of those profits and invest them into that next
00:49:52.680 | business and make these higher years of earnings the time in which they're
00:49:57.680 | making these investments into the next business?
00:49:59.680 | Now, whether that's within their current business entity or that's in the
00:50:03.680 | context of a separate business entity or whether that's in the context of
00:50:07.680 | investment activities, that's beyond the scope of your knowledge of their
00:50:12.680 | finances.
00:50:13.680 | That's between them and their financial advice team.
00:50:15.680 | But conceptually, that's their best opportunity to save taxes is to take these
00:50:20.680 | next two years of high income and invest it into setting up the next business
00:50:24.680 | which is actually going to fund their retirement lifestyle.
00:50:27.680 | That's my answer.
00:50:29.680 | Follow-up questions?
00:50:30.680 | Is that helpful?
00:50:31.680 | Yes, that's very helpful.
00:50:33.680 | Now, when you say the best way to defer the taxes currently would be investing
00:50:39.680 | in another business.
00:50:40.680 | Now, what sort of structure would that be?
00:50:45.680 | If they don't know what that business is, would it be like opening up another
00:50:49.680 | corporation and then just putting money there or was that just more of a general
00:50:54.680 | idea?
00:50:56.680 | Well, it would depend on the specifics of their situation.
00:50:58.680 | So I'm just talking about in general an idea.
00:51:01.680 | But simply speaking, they own – they are operating a hotel using a leased
00:51:06.680 | facility.
00:51:08.680 | Well, if they like the hotel business, then why don't they go find another
00:51:11.680 | hotel?
00:51:12.680 | And so if they have one location – and where is this hotel located that they're
00:51:17.680 | operating?
00:51:18.680 | In Los Angeles.
00:51:20.680 | OK, in Los Angeles.
00:51:21.680 | And do they want to stay in Los Angeles?
00:51:23.680 | Yes.
00:51:24.680 | OK.
00:51:25.680 | So they need to go find another hotel in Los Angeles.
00:51:27.680 | And so what I mean is there – that if it takes them time away from the
00:51:32.680 | business to go find the hotel, if it takes them hiring a consultant to help
00:51:38.680 | them find the hotel, if they need to go and negotiate a deal on a building to
00:51:44.680 | buy a building, if they need to go and find some unbuilt out land to build it,
00:51:49.680 | if they need to go and find a new lease and they need to put a – make a
00:51:53.680 | purchase – set up a lease option and make an option payment on a building
00:51:57.680 | that they find, these are all reliable ways of them investing money into the
00:52:03.680 | business.
00:52:04.680 | And what this has the net effect of doing is it lowers their profit in the
00:52:08.680 | current year, which lowers their tax burden, and it shifts – this is a – it
00:52:13.680 | moves the timing forward.
00:52:15.680 | This is a timing strategy.
00:52:16.680 | So they're making an expenditure and deferring a deduction to the future,
00:52:21.680 | cutting down on their tax bill now so that they can set that next business up.
00:52:25.680 | So every business grows and expands itself by investing back into it.
00:52:30.680 | And so yes, this does have the net effect of lowering the tax bill, but it's
00:52:34.680 | not a game.
00:52:35.680 | It's not a shell game.
00:52:36.680 | It's just simply that it's a way of thinking that I'm going to invest and
00:52:39.680 | to expand the business.
00:52:40.680 | And the biggest thing is for them to build a compelling vision of what their
00:52:46.680 | next business and career is going to be and then go make that happen.
00:52:49.680 | But there's no – in the circumstances you described to me, I don't see any
00:52:53.680 | easy wins from a tax perspective with regard to retirement plans.
00:52:57.680 | Specifically, I see a big win for them to recognize they're not going to retire.
00:53:02.680 | Now go and build the business they want to own for the next 20, 30 years.
00:53:06.680 | Sure.
00:53:08.680 | That makes sense.
00:53:09.680 | Cool.
00:53:10.680 | Got a few minutes left.
00:53:11.680 | I think I've taken all the questions from the callers on the line.
00:53:13.680 | Anyone – would anybody like to step in and ask another question or ask a
00:53:17.680 | follow-up question who's on the line right now?
00:53:21.680 | Joshua, this is Joe.
00:53:23.680 | Hey, Joe.
00:53:24.680 | Go ahead.
00:53:25.680 | Yeah, I just wanted to let you know I've been Googling furiously for the past
00:53:28.680 | 25 minutes and it looks like using the 457(b) to dodge the 10% early withdrawal
00:53:35.680 | penalty is not a valid strategy.
00:53:37.680 | According to an IRS publication I found, it appears that the 457 plan will track
00:53:43.680 | them out from a qualified retirement plan and they're subject to the 10%.
00:53:49.680 | That's what we need to know.
00:53:50.680 | If you found an IRS publication saying that, I wouldn't risk it.
00:53:53.680 | There are enough other things that you could do.
00:53:56.680 | I wouldn't risk that and I'm glad you found that.
00:54:01.680 | I could go with the Roth ladder.
00:54:03.680 | This sounded too good to be true.
00:54:05.680 | It is.
00:54:06.680 | Yeah.
00:54:07.680 | I've never heard of that strategy of moving the – the 457 for those listeners
00:54:11.680 | who aren't familiar because I didn't clarify it earlier.
00:54:14.680 | 457 accounts can be tremendously valuable for early retirement because they can
00:54:21.680 | be tax-deferred accounts that are open to government employees, usually
00:54:24.680 | nonprofit employees, but they don't have the 59.5 restriction on them.
00:54:29.680 | So a police officer can heavily fund a 457 plan and they can retire, pull money
00:54:36.680 | from the 457 plan just like they would if it were an IRA, but they don't have
00:54:40.680 | to wait until 59.5.
00:54:42.680 | That can be a valuable bridge account for example if they're going to have a
00:54:45.680 | pension distribution at a certain age and they fund the bridge, the gap between
00:54:49.680 | when they retire and when they start receiving their pension payments.
00:54:53.680 | There can be a lot of options and usefulness with it.
00:54:57.680 | But Joe, I had never heard of somebody using it for early retirement and I read
00:55:01.680 | enough and I pay attention to it that I figure if it were a useful strategy,
00:55:05.680 | I probably would have heard of it.
00:55:06.680 | I'm not infallible.
00:55:07.680 | A few weeks ago, I did that show on just simply taking profits out of a 401(k)
00:55:12.680 | and having that still be superior to using a taxable account even if you're
00:55:16.680 | paying the penalty and I learned something completely new.
00:55:19.680 | But yeah, I had not heard of somebody using this strategy.
00:55:22.680 | So if you found the IRS publication, that's what we need.
00:55:24.680 | Maybe, Joe, after this show goes out on the website, maybe you can link to that
00:55:27.680 | publication and if any other listeners have comments or contributions on this
00:55:31.680 | subject, chat about it in the blog post for today's show.
00:55:35.680 | Any other follow-up questions, comments before I hit the music?
00:55:38.680 | Cool.
00:55:42.680 | Thank you all so much for calling in to these shows.
00:55:44.680 | I enjoy doing these Q&A shows.
00:55:46.680 | I hope that you, the listening audience, have learned something.
00:55:48.680 | I love doing this.
00:55:50.680 | It's so useful to hear other people's questions because then you can turn and
00:55:55.680 | hopefully look at your own situation and apply a little bit of creative thinking
00:56:01.680 | to your own situation.
00:56:03.680 | My encouragement to you is consider what you can do with your money in your
00:56:08.680 | situation and your context.
00:56:10.680 | Notice there was not a specific theme that rolled through this but the theme in
00:56:16.680 | today's show that I picked up on was invest the money into things that you know.
00:56:20.680 | So if you know how to operate a hotel and that's something where you have skills,
00:56:24.680 | well, you can take that skill and you can transition it to a new business.
00:56:27.680 | Now, it might be better for you to go and just get a job as a general manager of
00:56:31.680 | a hotel for someone else.
00:56:33.680 | I mean $250,000 of profit is -- it's not insubstantial but you could probably get
00:56:38.680 | a nice six-figure job working for a major hotel chain or you could take that
00:56:41.680 | skill and if you wanted to go and open a bed and breakfast in a rural county
00:56:45.680 | somewhere, you could go and do that as well.
00:56:48.680 | Even in the first caller, Eric, when he was talking about how do I invest the
00:56:51.680 | money, you look to see can I invest the money in myself, in my business, and then
00:56:56.680 | is there something where I have a skill and interest and ability to invest it
00:56:59.680 | locally.
00:57:00.680 | I talk about flipping lawnmowers because I see that.
00:57:04.680 | I know a couple of friends of mine who make a lot of money flipping lawnmowers
00:57:08.680 | on Craigslist.
00:57:09.680 | They live a great lifestyle.
00:57:11.680 | Now, what that is for you, you'll have to figure out.
00:57:14.680 | But take the concept and apply it.
00:57:16.680 | It applies to flipping lawnmowers on Craigslist and it applies to flipping
00:57:19.680 | billion-dollar businesses.
00:57:22.680 | Same concept.
00:57:24.680 | So thank you all so much for listening.
00:57:25.680 | Thank you for calling in.
00:57:26.680 | If you would like to call into a show like this, frankly, this is your best way.
00:57:31.680 | Presently at the moment, you can see I think we have five or six callers on
00:57:33.680 | today's show.
00:57:34.680 | This is your best way to get a direct response from me.
00:57:36.680 | I get dozens of emails.
00:57:37.680 | It's very difficult for me to respond to emails consistently.
00:57:40.680 | I put them aside in the queue for future shows.
00:57:43.680 | But this is always going to be your best bet.
00:57:45.680 | So feel free to become a patron of the show at RadicalPersonalFinance.com/patron.
00:57:49.680 | All the details there.
00:57:50.680 | You also get access to our private Facebook group and you can check in with
00:57:55.680 | us in that private Facebook group and you'll be able to hear, also interact
00:58:00.680 | with me and with some other really smart people there.
00:58:02.680 | So thank you for listening very much to this episode of Radical Personal
00:58:05.680 | Finance.
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00:58:19.680 | of the show.
00:58:20.680 | Thank you.
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