RPF0374-Friday

00:00:00.000 | It's Friday here at Radical Personal Finance. That means Q&A.

00:00:23.000 | Welcome to the Radical Personal Finance podcast. This is the show dedicated to helping you

00:00:26.800 | live a rich life now while also building a plan for financial freedom in 10 years or

00:00:30.800 | less. My name is Joshua Sheets and I am your host on Fridays here at Radical Personal Finance.

00:00:35.120 | Try to do it every week, although last week I was out of town. But generally we try to

00:00:38.920 | do a Friday show here and we do a live Q&A. That's where you call in, ask questions, and

00:00:43.880 | I do my best to come up with some kind of useful answer for you. Today you sit back,

00:00:47.920 | relax and see if you learn something.

00:00:54.960 | I enjoy doing these shows because they're often current and they're social. I'm an introvert

00:01:00.400 | by nature. I get recharged by being by myself. The best way for me to build my energy and

00:01:06.880 | recharge is just simply to sit back and read a book. That's one of the most important things

00:01:11.320 | that I can do to recharge. But I do often get lonely just being on this side of the

00:01:16.160 | microphone. That's why I love your feedback. By the way, you can always email me, joshua@radicalpersonalfinance.com.

00:01:21.720 | So if you're going to make a comment, I actually prefer you do it on the show. That way my

00:01:25.560 | email box gets so overwhelmed. But anyway, thank you for those of you who email me. And

00:01:29.640 | then also this is a really cool Q&A call where I can speak with members of the audience live

00:01:33.360 | and in real time. If you would like to join this show on a future basis to ask a question,

00:01:38.760 | this is your most consistent way to be actually able to get an answer from me on something

00:01:43.160 | particular to your situation. All the details of this program can be found at radicalpersonalfinance.com/patron.

00:01:49.360 | I don't have a call screen or I don't have a 1-800 number that you can just call into.

00:01:53.600 | What it is, this is an intimate group at the moment. And so if you're a patron of the show,

00:01:57.760 | you have access to this conference call. Details of that can be found at radicalpersonalfinance.com/patron.

00:02:03.200 | Right now I've got three callers on the line with a total of four different questions. We're

00:02:06.200 | going to talk about, let's see, due diligence on buying a house, the number of credit cards

00:02:10.000 | to have. We're going to talk about the new iPhone and what would be the best way to purchase

00:02:14.920 | an iPhone. And we're going to talk about defined benefit plans. I'll tell you what, let's start.

00:02:20.200 | Erica, you're up first. Tell me the question that you have about potentially buying a new

00:02:24.880 | iPhone.

00:02:25.880 | Oh, thanks, Joshua. I am still on my old iPhone 5S, which is getting towards the end of its

00:02:31.640 | life. So I've been doing some due diligence looking around. I'm definitely in the Apple

00:02:35.480 | silo, so I'm a fan girl and I'll be staying in an Apple. My biggest question was trying

00:02:40.680 | to figure out what to do. I had looked at things previously and decided that in the

00:02:45.120 | sixes, I would be a success plus and I wanted 128 gigabytes, but didn't want to pay that

00:02:51.760 | much. The great thing about the announcement yesterday is now the seven, the sevens obviously

00:02:57.360 | take a step up, but with the memory increase, I can get that 128 at a price point I like

00:03:02.280 | a lot better. So I've pretty much narrowed myself in on a seven plus with 128 gigs. But

00:03:07.880 | my question is just sort of to look at the different ways to pay for it and figure out

00:03:12.720 | if there is really a free roll there or if there's some risks that I'm not seeing on

00:03:17.080 | the financing side. I'm either looking at paying the 186, sorry, 169 upfront, no sales

00:03:23.960 | tax here in New Hampshire with the 129 in Apple Care or doing the Apple iPhone upgrade

00:03:29.240 | program with that, with what I want, it's 4150 a month. And after 12 months, as long

00:03:35.200 | as it's still in good shape, I can just switch it in. The rest of that balance is fine as

00:03:40.240 | long as I take the next phone the same way or I can hold on to it. And with the Apple

00:03:45.120 | Care, the fact that if it's still not in good condition, it doesn't seem to be as much of

00:03:50.200 | a worry because I figure after either two screens or two repairs, I'll get myself another

00:03:54.560 | life proof case if that's the case. And to me, it looks like a great opportunity to do

00:03:59.720 | this. I don't like that I'm going to have another hit on my credit report of having

00:04:02.860 | another active account, but I'm pretty much stuck in the high 700s anyways. I'm not sure

00:04:07.840 | I'm getting out of there. So it probably shouldn't be too much of a concern. So I just like any

00:04:12.400 | insight you have.

00:04:13.400 | - Super fun. It's a great question. It's a very practical question. You're an Apple fan,

00:04:17.480 | girl. Let me back up and just give a little bit of preamble. These are my thoughts, my

00:04:20.360 | opinions just for other people who are facing this constant question of phones. And then

00:04:25.960 | I'll tell you what I've done because I have an iPhone and I'll tell you what I've did

00:04:29.920 | as far as the purchasing model and methodology of it. So I think the biggest financial mistake,

00:04:37.600 | speaking purely from a frugality and finance perspective, is to choose iOS over Android.

00:04:43.360 | Now there are reasons to do it. I've chosen iOS over Android and I'll tell why in a moment.

00:04:47.780 | But for just the average person, you can get so much of a better, cheaper phone if you're

00:04:53.160 | not locked in to the Apple ecosystem. The phones are cheaper. Little things like replacing

00:04:59.660 | the batteries. Apple, you have to go to a service place and have the battery replaced

00:05:03.260 | by a service person. Android, you can buy an extra battery and do it yourself. All the

00:05:07.280 | little things are just so much cheaper in the Android marketplace than they are in the

00:05:13.680 | Apple marketplace. So you're going to pay a premium of a few hundred dollars to hang

00:05:18.880 | out in the iOS marketplace. So I generally would steer most people, especially if they're

00:05:25.920 | technologically savvy, into the Android world. It's really, really good, especially for people

00:05:34.880 | who are just going to do normal stuff like talk, text, surf the web, browse on Facebook,

00:05:40.080 | take some videos and some pictures. You're going to save a few hundred bucks. And the

00:05:43.600 | phones that we have today that are cheap are so much better than the best phones on the

00:05:46.920 | market were a couple of years ago. So there are some reasons, I think, to go and consider

00:05:53.120 | the world of Apple. If somebody has a pre-existing commitment, I think the most compelling thing

00:05:57.280 | is the great integration for those people who are Mac users. If you do your computing

00:06:02.480 | on a Mac, you have an iPad, having everything just put across the same system is really,

00:06:10.320 | really compelling. I use a Windows PC because I'm just not willing to spend the money on

00:06:16.920 | a Mac at the moment, although who knows, it's possible that I'll do it in the future. But

00:06:20.160 | one of the things that I miss very much that, as I understand it, Mac users have the ability

00:06:24.240 | to do is to do all their texting on their computer. And for years, I maintained my cell

00:06:29.720 | phone through a Google Voice number so that I could do all of my texting through the computer

00:06:34.280 | instead of over the phone. Now, that's changing with the integration of phone systems onto

00:06:40.040 | the computer. More and more systems are allowing you to do that. And also, as we go away from

00:06:44.320 | hardware to software solutions, that's more and more doable. So for example, many people

00:06:49.960 | these days are on Facebook. Well, Facebook, you can do your texting equivalent right on

00:06:54.760 | the computer. You can also do your calling through Facebook right from your mobile device.

00:06:59.920 | So there are all kinds of ways to hack it today. It's just getting easier and easier

00:07:03.760 | and easier. But I always found that to be a useful thing. And it's one thing I wish

00:07:07.400 | I still had today was the ability to do texting over the computer. So if you're in the Apple

00:07:12.000 | ecosystem, that's really compelling. If you have some particular reason why Apple products

00:07:16.960 | are the best, and that's what I have. So if you're an artist and you want to use the Apple

00:07:21.600 | Pencil and do all of your sketches on the Apple iPad or some other similar thing, then

00:07:28.520 | the Apple is good. And if you are at the leader, usually you'll get the best software up front

00:07:33.480 | because the early adopters are usually Apple. The reason I chose to switch back after being

00:07:38.240 | on Android for a while was for audio production. So Apple, coming from the music background,

00:07:45.240 | has a better built-in system for things like audio. And they have the ability to come in

00:07:51.240 | with a direct digital signal right into the lightning port with various microphones and

00:07:56.240 | different options. So I use my phone. And when I travel, if I'm going to go to a conference

00:08:01.240 | or go and record an interview somewhere, then I can just do that directly into the phone.

00:08:05.240 | And I can do it with a digital signal. I don't have to deal with the 3.5 millimeter headphone

00:08:09.240 | jack. I can do it with a digital signal right off of the microphone. And I can do it with

00:08:13.240 | a digital signal right off of the microphones into the actual Apple device. And it's just

00:08:17.240 | a higher quality output. It's also valuable for me to be able to use the Apple M4A system

00:08:27.240 | when I'm exporting from when I record on a show. So in the future, as I travel, I tend

00:08:34.240 | to produce episodes of Radical Personal Finance while on the road and then export and upload

00:08:39.240 | them directly from my phone. I've done that while on the road in the past. And so just

00:08:44.240 | having that all in the Apple system makes that work a little bit better. But I definitely

00:08:48.240 | caution people, if you want to stay on the cheapest side of things and save money, it's

00:08:52.240 | really hard to be frugal with Apple devices. I have found that. The most frustrating thing

00:08:58.240 | to me about frugality with Apple devices is for whatever reason, I'm not an Apple junkie,

00:09:03.240 | but all of my devices seem to be obsolete in a very short period of time. They just

00:09:07.240 | seem unusable. And I don't know why that is, but I have an iPad 2 that's unusable. But

00:09:13.240 | the only thing that works on it is Kindle. It's so horrifyingly slow. I have sitting

00:09:18.240 | here on my desk in front of me, I have a couple of iPhone 4s. And what happens is that as

00:09:24.240 | the new software packages come out, both of these phones have been stripped off. I don't

00:09:28.240 | even use one of them. It's just sitting here as a backup in case I ever need it. The other

00:09:32.240 | one I actually use to run my sound effects into the show from. I have nothing on them.

00:09:37.240 | They're completely stripped off. They were wiped and reset. But still, with the changes

00:09:42.240 | and the upgrades to the software system, they're unusable as devices because they are so slow.

00:09:49.240 | So I don't know why Apple does it, but it's really hard for me to... And why they don't

00:09:56.240 | fix that? Why I can't just have a stripped off phone that's as fast as it used to be?

00:10:00.240 | Who knows? Maybe there's a technical reason why they can't. But I find that frustrating

00:10:04.240 | and annoying because at this point, sadly, computerized devices just seem to be recycled.

00:10:11.240 | You just have to upgrade them every few years. And so if I weren't operating my business

00:10:17.240 | through my phone, I would just have not a cheap, cheap Android, but a middle to cheap

00:10:24.240 | Android, and I would just upgrade it every couple of years. So background on the phone

00:10:29.240 | side. Now, as to actually buying it, you've made up your mind, Erica. And as far as you

00:10:33.240 | want an iPhone, you've chosen the model that you're going to get, et cetera. So as far

00:10:40.240 | as that, in the decisions, Apple, you need the higher memory generally if you're going

00:10:47.240 | to use the device, and their memory is incredibly overpriced. And so because the memory is not

00:10:53.240 | expandable, meaning that you can't put a micro SD card in the side of the device and have

00:10:57.240 | multiple micro SD cards, you've got to pay for more memory. And so it's definitely an

00:11:02.240 | extra expense. But I have always found it to be an important thing to do with the two

00:11:07.240 | iPhones that I've owned, the one I currently have, which is 6S Plus, and then the past

00:11:11.240 | one, the 4, I've always bought the largest one. Because if I'm going to buy an expensive

00:11:16.240 | thing like that, I need to have the memory. And since it's not expandable, you've got

00:11:19.240 | to kind of go for it up front. And I don't see the point of having a tool or a toy that

00:11:24.240 | you don't actually have set up the way that you want it to be. One of my just little tips

00:11:30.240 | that I think, if you're going to buy something, make sure that you save enough money and plan

00:11:35.240 | ahead for the accessories that you're going to buy for it. Simple example for me with

00:11:39.240 | a phone. It's not just the price of the phone, but I'm not going to buy a phone and then

00:11:43.240 | not go ahead, buy a case, buy charging cables. What I do is the phone's got to be charged.

00:11:49.240 | It's generally for most of us, our most important tool. So I have a charging cable on my desk,

00:11:54.240 | a charging cable by my bed. I go ahead and buy the long six foot one so you don't have

00:11:58.240 | to deal with a stupid three foot cord. I have charging cables in all of my cars. And then

00:12:02.240 | I have a travel kit set aside that has its own charging cables in it. So I've got six

00:12:07.240 | cables and USB adapters and everything like that set up so that I don't ever have to worry

00:12:11.240 | about pulling one from here and pulling one from there. I don't forget them. It just makes

00:12:15.240 | life simple. And so I think you should budget ahead and it'll make your life better and

00:12:18.240 | it'll cost you 30 bucks in advance for USB cords and all of that. But it's just one of

00:12:23.240 | those little things where you can buy a lot of ease with it. So buying the higher model,

00:12:28.240 | the higher memory is generally what I've done. I can't find a reason. That was a long preamble,

00:12:35.240 | not to your question, Erica, but just for the benefit of the listening audience. But

00:12:38.240 | I can't find a reason not to just simply buy directly from Apple anymore. When I was sorting

00:12:44.240 | it out, and I've done it twice, I did it a year ago for my phone and then just a couple

00:12:51.240 | months ago for my wife's phone. And I sorted through all the different payment options

00:12:55.240 | from all the different carriers, etc. And I sorted it through for Apple. And I came

00:13:00.240 | to this conclusion. Yes, if you're willing to buy used, you can go ahead and buy used

00:13:04.240 | and you get a little bit of a discount there. But if you're going to buy new, I could never

00:13:07.240 | come. I couldn't come up with a reason to choose anything except the Apple program because

00:13:13.240 | you can't get basically you can't get a discount on the devices. And when I went through

00:13:18.240 | and looked at the different carriers and looked at their contract prices and calculated the

00:13:22.240 | line fees and etc. It just seemed to me so much simpler to just simply buy the device

00:13:28.240 | from Apple. The device is unlocked from the beginning. Your carrier agnostic. You can

00:13:32.240 | change to any carrier anywhere in the world at any time. And Apple has a perfectly reasonable

00:13:37.240 | program. And the Apple iPhone upgrade program, it's a very simple program. What they do

00:13:44.240 | is they take the price of the phone, the retail price of the phone, which is very expensive.

00:13:50.240 | We've established that, but now we've decided we want to get one. They take the retail price

00:13:54.240 | of the phone. They take that cost. They add to it the $129 AppleCare package. And AppleCare

00:14:01.240 | is their basically tech support where they cover you for two years with a lot of tech

00:14:06.240 | support issues. They'll help you fix it. If something goes wrong, they'll help you. If

00:14:10.240 | you crack a screen, they'll help you with those things. So they take the retail price

00:14:14.240 | of the phone. They add $129 and they divide that amount by 24 months. And then you pay

00:14:21.240 | a monthly payment of 24 months plus tax on the total cost. So you pay the tax up front.

00:14:27.240 | So if the cost is $700, what you said, so they take $700. You add to that the $129 and

00:14:38.240 | then divide that by 24 and did it wrong? 700. It actually is a higher price on that at $869

00:14:46.240 | so it's $4,150. Okay, perfect. So $869 plus $129 divided by 24 comes out to $4,158. So

00:14:57.240 | you're paying just a flat, you don't pay any interest charges. The interest is baked

00:15:01.240 | into the retail price of the phone. So you're just getting a flat 0% interest rate loan

00:15:06.240 | from them and the interest is baked into the price of the phone. And then just pay in the

00:15:10.240 | first payment, you pay the sales tax up front as I remember. I couldn't find a reason not

00:15:15.240 | to just go with that because then you have the option after the way it works is after

00:15:19.240 | I think it's 12 payments. If you want to upgrade because they come out with their fancy

00:15:24.240 | new iPhone 7 and if there's some, for some reason you've got to do that or because it's

00:15:29.240 | beneficial to you to do that in some way, then after one year of payments, you take

00:15:33.240 | the device in. You've got basically a guaranteed floor on it. 50% of the value is what you're

00:15:38.240 | going to get. It's going to depreciate 50% in the first year and they'll basically give

00:15:41.240 | you 50% of the upfront cost without Apple care and then you start a new plan.

00:15:46.240 | So the way I've looked at it is none of this is cheap and none of it is, none of it's cheap

00:15:53.240 | and it's not good for people who are trying to be frugal and trying to build things to

00:15:58.240 | be out upgrading an iPhone every year. It's totally destructive. But if you can make it

00:16:03.240 | pay off, I mean I use mine a ton. I can do my entire business on it and at this point

00:16:09.240 | with running a virtual digital business, I have found it to be extremely important and

00:16:14.240 | so I'm willing in the grand scale of everything else that I'm doing, I'm willing to spend

00:16:18.240 | the money on it at this point. But that's been my story and I just went with the Apple

00:16:23.240 | upgrade program. I couldn't find a reason or a reason not to.

00:16:27.240 | Thank you, Joshua. That's incredibly helpful. A lot of what ties me into the ecosystem is

00:16:32.240 | both my last computer and went back to the PC world and updating hardware and software

00:16:36.240 | separately made me want to throw it against the wall. And also some of the tools within

00:16:41.240 | Mac, I do OmniFocus which I can do on my phone. I do FileMaker Pro which I will be able to

00:16:46.240 | do a little bit better from the phone. So there is that benefit there.

00:16:50.240 | Absolutely.

00:16:51.240 | So thank you for running through your view on the upgrade and thank you for upselling

00:16:54.240 | me to the 256 gigabytes because that's, it's a difference of $4.25 a month.

00:17:01.240 | Right, right. And look at it this way. So the problem, sorry, to interrupt you, the

00:17:07.240 | problem with upgrading technology is every time they upgrade technology, they're upgrading

00:17:11.240 | capability as well. So 256 gigabytes, if you went back five years, you would never fill

00:17:18.240 | up 256 gigabytes. But if you were going to take 4K video, all of a sudden if you start

00:17:25.240 | taking 4K video, you're going to use that up much more quickly. So let me give you an

00:17:31.240 | example, the reason I went with large memory. Simple example. If you have a phone, I recommend

00:17:41.240 | and I should do a show or like a video on this at some point, get some accessories that

00:17:46.240 | are going to make it more useful for other things. So the cameras on the phones are so

00:17:50.240 | great. The phone is the least important aspect of it anymore. The point is that you have

00:17:54.240 | a camera that is accessible to you and it's a very expensive camera, but it does work

00:17:58.240 | really, really well. And so I have for my phone, I have an inexpensive monopod and I

00:18:06.240 | have a little clip that goes on, a little grabby clip that goes to the top of the monopod

00:18:10.240 | that into which my phone goes. And then I use one of my external microphones. For any

00:18:15.240 | of you gear nerds, you can, the best one is to use an Audio Technica ATR 2100 or Audio

00:18:22.240 | Technica AT 2005. I'll repeat it again if you're writing it, Audio Technica ATR 2100

00:18:29.240 | or AT 2005. Those are usually the 2005 is a little bit cheaper, but it's this cheap

00:18:34.240 | basically 50 to $70 microphone and it'll send out a digital signal right off the bottom

00:18:40.240 | of it into, and you can put the digital signal right into the lightning port on the bottom

00:18:45.240 | of your phone. So with that, although I haven't done it much and published the videos, I'm

00:18:51.240 | not going to do it. With that, I can go out to something like a protest or a political

00:18:56.240 | event or a meeting or anything like that. And I have the phone on a monopod. I can set

00:19:02.240 | the monopod down, carry it. It's very, very flexible. And then I have the microphone with

00:19:06.240 | a USB cord on it with a long USB cord. And I can use that for a kind of man on the street

00:19:12.240 | or reporter type interviews. So if I need someone else to hold the phone or I can actually

00:19:16.240 | do it myself and I can get really high quality video and really high quality audio right

00:19:21.240 | into the phone. And for someone like a mobile reporter, and this is what I want everyone

00:19:25.240 | in my audience to have that equipment so that when a protest is going on around you or when

00:19:29.240 | there's a riot or when there's a political event or when there's some kind of something

00:19:33.240 | being done, you grab your phone and your little mobile reporter kit and you take your expensive

00:19:38.240 | phone that you have plus $100 of accessories and now you can get really high quality video.

00:19:43.240 | And so now when I want to know what's going on with the Black Lives Matter protest, I

00:19:46.240 | don't tune in. I don't want to see the local CBS News report. I mean, that's great, but

00:19:50.240 | I'd much rather go on YouTube and see an independent journalist who's gone out and said and interviewed

00:19:56.240 | people at Black Lives Matter and edited the video together on their phone and talked about

00:20:01.240 | what they saw. And you can do that all on your phone and you can publish a report that

00:20:04.240 | day. So something like that is where you actually get the benefit of the phone just with a little

00:20:11.240 | bit of extra. But you need 256 gigs if you're going to go out and get 4K video and go ahead

00:20:17.240 | and use those types of capabilities.

00:20:19.240 | Thank you so much, Joshua. You're right. And I hadn't even realized the benefit of just

00:20:25.240 | doing that on the street. Clearly, we've seen enough. I'm up in New Hampshire, so it's the

00:20:29.240 | home of cop block. So we've seen plenty of that, but I just hadn't seen myself behind

00:20:34.240 | the camera. But you're right. With the right tools, if you're in the wrong place, you can

00:20:38.240 | spread that information or if it's the right place, too.

00:20:40.240 | Yeah, exactly.

00:20:41.240 | And I actually was out at a big campfire over Labor Day weekend just hoping to get some

00:20:45.240 | pictures and my camera was not up to it. Although, fortunately, everybody else's were.

00:20:50.240 | I see the value of two little kids. So thank you so much for your insight.

00:20:56.240 | For sure. Hey, other tip while I'm on this mobile journalist thing, not related to finance.

00:21:01.240 | Well, it is. It could save you or somebody else some money with a major trial. One app,

00:21:05.240 | every single one of you listening should have on your phone is you should download an app

00:21:10.240 | to your phone called Bamuser. B-A-M-B-U-S-E-R. Bamuser. And you should put that app right

00:21:19.240 | on the home screen of your phone. And that app is a live video streaming app where it's

00:21:25.240 | super, super simple. But once you put it on there, go ahead and create an account and

00:21:30.240 | test it out. It'll take no more than a few minutes to do that. Free app, free test, free

00:21:35.240 | account. And what this does is if you're in a situation where video would be useful,

00:21:41.240 | anytime I see a police officer or police activity happening, I always stop. I take out my phone

00:21:46.240 | and I film it. And I recommend all of you do the same thing. If you see something going

00:21:51.240 | on that's a skirmish or you're concerned about something, if you're in a safe situation

00:21:56.240 | and you can film it, go ahead and film it. You can do that using the native video recording

00:22:01.240 | application on your phone and that'll work fine. But the problem is that the video is

00:22:05.240 | then stored on your phone. And it's possible in most, in 99.999% of situations, that won't

00:22:13.240 | be a problem because it's just stored on your phone and you can go ahead and upload it to

00:22:19.240 | the internet at a later time. But if you are in a contentious situation or if you have

00:22:24.240 | trouble, you want to get that video off of your phone as quickly as possible. And you

00:22:29.240 | want to get it to an external location in case somebody comes by, confiscates your phone

00:22:33.240 | and tries to delete the video. So Bamboozler will stream automatically to their servers

00:22:39.240 | and they'll go ahead and post it online. And so what you can do is get out of the way.

00:22:46.240 | But if you mentioned CopBlock, if you see police activity happening, go ahead, pull

00:22:50.240 | out your phone, launch Bamboozler and just film it. Stay back an appropriate distance.

00:22:55.240 | Make sure that you work with that, but film it. And that way you're creating an archived

00:22:59.240 | video to an external server that's not on your phone. So if your phone is confiscated,

00:23:02.240 | if you're arrested, you won't have to worry about that video not existing. And then you

00:23:07.240 | can authorize it to locate all of the metadata as well. So it'll have the GPS, it'll know

00:23:15.240 | where it is. Sometimes they have apps that'll know the orientation of the phone. They'll

00:23:19.240 | record the gyroscopic data of the phone, which in some court cases can be important. There

00:23:24.240 | are other more complicated apps, but every one of you should at least have Bamboozler

00:23:28.240 | on your phone and use it. It's very, very useful to society.

00:23:32.240 | All right, lecture over. Let's go on to Jim. Jim, you got two questions. I don't care which

00:23:37.240 | one you start with, so you pick.

00:23:39.240 | Okay, great. Thanks, Josh. In a previous podcast, you mentioned all the homework and diligence

00:23:44.240 | you did in researching where to buy your home. As we're looking to buy here in Southern

00:23:48.240 | California, we found that there are many different cities and jurisdictions that all run together

00:23:53.240 | and you really can't tell the difference between them. So we thought there might be advantages

00:23:57.240 | in buying one over the other due to certain city regulations, rules, and so forth. So

00:24:05.240 | if you don't mind, what kind of homework and documents did you review and look at when

00:24:11.240 | you considered buying in a similar area and there might be advantages to one city over

00:24:16.240 | another?

00:24:17.240 | First, you know this, but I do feel compelled to say I would personally, I don't live in

00:24:21.240 | Southern California, I don't have my thumb on the real estate market, but as a far distant

00:24:26.240 | observer and reader of various reports, I would be concerned about buying in Southern

00:24:31.240 | California at the moment as we record this in September 2016. Do your own research locally

00:24:38.240 | and make sure that you're doing everything you can to consider what's right in the local

00:24:42.240 | market and what's right in your situation. But I'm uncomfortable with some of the things

00:24:47.240 | I see currently. So let's skip that. I just did want to say that for you and for other

00:24:50.240 | people's benefit.

00:24:51.240 | As far as the research, the most important thing I think is to start with the municipality.

00:24:56.240 | So at every layer of, so when you buy a house, you've got multiple layers of government and

00:25:03.240 | those multiple layers of government are going to dramatically affect your living circumstances.

00:25:08.240 | And I think the simplest thing is to start with that. And you can either start on the

00:25:12.240 | small or start out to the big. So let's start with the big. You're buying in the United

00:25:16.240 | States. That's going to come with a bunch of advantages and it's going to come with

00:25:19.240 | some disadvantages. You consider those things.

00:25:21.240 | Next, you're buying in California. That may come with some advantages. It also comes with

00:25:26.240 | some significant disadvantages. So you should, the biggest one would be calculating the impact

00:25:32.240 | of income taxation as compared to property taxation. So California, a very high income

00:25:37.240 | taxes. Some of your other taxes are much lower though than other places. So you calculate

00:25:43.240 | that based upon where you want to live, based upon the things that you're trying to accomplish

00:25:48.240 | and other possible places to be.

00:25:51.240 | If you're going to be in certain business markets, well, the cost of housing comes with

00:25:55.240 | it. If you need to live in Hong Kong, you're going to pay a pretty penny for a tiny little

00:25:59.240 | apartment. But there's also a ton of benefits that come from living in Hong Kong. You can

00:26:03.240 | also live in Thailand and you can get a much cheaper place to live. But if you need to

00:26:08.240 | work in big Asian banking, Thailand's probably not going to cut it. But if you're an online

00:26:13.240 | entrepreneur, Thailand will cut it. So consider very carefully the larger jurisdictions and

00:26:19.240 | locations.

00:26:20.240 | Then you just drill down. So then you would have a city or a county and that's going to

00:26:24.240 | have certain restrictions. That's where your research is probably going to be the most

00:26:29.240 | impactful. Where I live, it was Palm Beach County restrictions that caused me a lot of

00:26:33.240 | grief with my purchase based upon some of the ways that I wanted to have my house be

00:26:40.240 | and the things that I wanted to do with it. I wanted to have chickens. Well, I thought

00:26:45.240 | that I was buying in a place that was governed by Palm Beach County regulation, but my research

00:26:51.240 | had been incomplete in order to identify that yes, chickens were allowed, but I wasn't in

00:26:56.240 | the ex-urban tier as the Palm Beach County regulations say where chickens were permitted.

00:27:03.240 | So I thought that I had read all the regulations right, but I was wrong. So you got to deal

00:27:08.240 | with the county. You also then have to deal with the city. Then if it drills down, you

00:27:12.240 | have to deal with the neighborhood. So there will be various neighborhood covenants, various

00:27:16.240 | homeowners associations or property owners associations or communities of some kind.

00:27:21.240 | The key thing to remember is that you are not going to change the community. It's not

00:27:26.240 | going to happen. So before going in, before you buy in, you should look at all of those

00:27:33.240 | levels of regulations, read the laws and see if you're comfortable with it. For example,

00:27:39.240 | here in Florida where I live especially, this is a heavily, a community that's heavily overrun

00:27:47.240 | by property owners associations and homeowners associations. And as a simple example, homeowners

00:27:54.240 | associations here in Florida under Florida law, I don't know about other states, but

00:27:57.240 | here in Florida law, your homeowners association has the legal right to foreclose on you if

00:28:04.240 | you do not pay your homeowners dues. And they can legally be very aggressive with foreclosure

00:28:10.240 | proceedings if you don't pay your property dues. And they are generally very aggressive.

00:28:16.240 | Well, I learned this just through when years ago when I was right in college actually.

00:28:22.240 | I was Mr. Personal Finance Nerd. There was a friend of mine at work, the company I worked

00:28:27.240 | for that was having some trouble with foreclosure. They were current on their mortgage, but they

00:28:32.240 | weren't current with their homeowners association. Their homeowners association was in the process

00:28:36.240 | of evicting them. I couldn't believe they had that right. And we're talking, they were

00:28:40.240 | being evicted over a couple of thousand dollars of unpaid association dues. And they were

00:28:46.240 | being very aggressive with the eviction. So I, me thinking, "Okay, Mr. Arrogant, I'm

00:28:51.240 | going to call them up and I'm going to tell them what's what." I call up and the attorney

00:28:54.240 | very matter-of-factly explained to me, "No, you're wrong. The law's on our side. The homeowners

00:28:58.240 | association has this right. And if you don't pay us this amount of money by this date,

00:29:02.240 | you're out or your friend is out." So I learned that they had the law on their side.

00:29:07.240 | I've since learned that almost nobody knows that. But I personally would be very slow

00:29:12.240 | and I've said I would never buy a house in a homeowners association. That's my intention.

00:29:18.240 | It's not a, who knows, I guess in theory that could be changed. But I would be very, very

00:29:23.240 | slow to buy in a homeowners association. And one of the reasons is I always like to think

00:29:28.240 | of the worst case scenario. And so if I am in a worst case scenario and if I can't pay

00:29:34.240 | my bills, then I don't want to be dealing with multiple people that could foreclose

00:29:39.240 | on my house and kick me out. I'd rather just only deal with a mortgage company. And the

00:29:43.240 | mortgage company has to move much more slowly and there are more delay tactics and techniques

00:29:49.240 | that could be used with the mortgage company, with the homeowners association to stay in

00:29:52.240 | the property. So think about things like that. Investigate the government at every level.

00:29:58.240 | Read the municipal codes. You can download those municipal codes online, most of them.

00:30:04.240 | And what I would do is in hindsight, I would call and speak with the authorities in the

00:30:11.240 | county, in the city, if you're governed also by a city, and in the homeowners association.

00:30:16.240 | And I would get from them a full listing of the laws and not just go by what I read online.

00:30:22.240 | That was in hindsight where I made the mistake. I downloaded the couple thousand page document

00:30:27.240 | from the municipal codes and I looked through it and I thought I had understood it all,

00:30:31.240 | but I hadn't. And silly old me, if I had just started with the ten common infractions,

00:30:36.240 | I would have seen chickens. I would have not bought the house or I would have not gotten

00:30:41.240 | the chickens, one of those. The other thing I think is to look for when you're doing it,

00:30:47.240 | look for any little wrinkles that you can find in differences between counties and cities.

00:30:55.240 | So if you look at where you want to live and you look to see is there something nearby

00:31:00.240 | that's a little bit different. The example that I use from here in West Palm Beach is

00:31:07.240 | there's Palm Beach County and there's Martin County. And Palm Beach County and Martin County

00:31:11.240 | are contiguous counties. Martin County, however, has half the property tax rate of Palm Beach

00:31:16.240 | County. And there's a little corner of Martin County that comes down and touches Palm Beach

00:31:21.240 | County and it kind of digs into Palm Beach County. Well, if you can find a good deal

00:31:25.240 | on a house and often the property values, if it's an efficient market, will reflect this.

00:31:29.240 | But if you can find a good deal on a house, you can basically be essentially in Palm Beach

00:31:34.240 | County, but you get half the property rates because you're actually just over the county

00:31:40.240 | line. The house that I did own and then later sold, I was within the city of Palm Beach

00:31:47.240 | Gardens in terms of for all practical value, for all intents and purposes, I was in the

00:31:51.240 | city, but I was on a little finger of land that stuck into the city that was unincorporated

00:31:56.240 | Palm Beach County. So I didn't have to pay the additional layer of city taxes and that

00:32:00.240 | saved me, I never calculated it fully, but I would guess maybe a thousand dollars a year.

00:32:06.240 | I never, that may not be accurate, but that saved me a thousand dollars a year. But I

00:32:11.240 | was in, I was for all practical purposes, I was in the city. And you can do this with

00:32:17.240 | things like school districts. Most people look for the good school districts, but if

00:32:21.240 | you don't need the good school district, then you could do it within the bad school district.

00:32:25.240 | That certainly can impact your property values. But me, if I were going to move into a city,

00:32:29.240 | I would look for the best property in the worst school district because I wouldn't use

00:32:34.240 | the school, so I don't care about the school, but that's going to reflect the property value

00:32:40.240 | for me and for other people. It comes with risks of resale value, et cetera. You've got

00:32:46.240 | to calculate, you've got to think that through. But look for any little thing that you can

00:32:50.240 | exploit that's going to fit your lifestyle. And there's some famous communities where

00:32:53.240 | this works. I mean, you've got the upper peninsula of Michigan is detached from Michigan, but

00:32:57.240 | it's governed by Michigan, but it's practically Canada. Advantages and disadvantages there.

00:33:01.240 | You've got up in Washington, there's a little community that's on the very corner, I forget

00:33:06.240 | the name of it, but there's an island there that's United States territory, but you can't

00:33:10.240 | get at it without going through Canada. And so that leads to just a very different climate,

00:33:16.240 | a very, very safe place to live. You can buy in a state where the state next to you, if

00:33:21.240 | you can live in a state that has no income tax, but you live next to the state that has

00:33:25.240 | no sales tax, then you just go across the border to buy everything in the state that

00:33:29.240 | has no sales tax and live in the state that has no income tax. Things like that do exist.

00:33:35.240 | And so look for any opportunities that you see. And that's just where you ask around,

00:33:40.240 | look around, look at the maps, look at the things like that. And then all the normal

00:33:46.240 | stuff that real estate agents say and do of doing good due diligence on the actual property,

00:33:50.240 | doing good records, making sure your title insurance, I mean, that's all normal standard

00:33:54.240 | stuff. But those are the ideas I have. You have additional ideas to that, Jim?

00:33:57.240 | Is any of that helpful?

00:33:59.240 | That's exactly, those exploitations were exactly what we're looking at. And those,

00:34:05.240 | so exactly like you said, borders, living on one side of a border and taking advantage

00:34:11.240 | of things on the other side are exactly what we're looking to exploit. So you recommend

00:34:15.240 | basically municipal codes are the things that you looked at to find a lot of little chickens

00:34:22.240 | instances and such.

00:34:23.240 | Right. Yeah, that's what I found. I mean, if you want to build an earthship, you're

00:34:28.240 | not going to do that in downtown San Francisco. So if you need an earthship, you got to buy

00:34:32.240 | land out in the Nevada desert. So depending, I say first start with your ideal lifestyle.

00:34:39.240 | If you want to live in a small walkable town in a traditional stick built house, that's

00:34:44.240 | going to be one thing. If you want to build an off-grid house out of a container, that's

00:34:49.240 | going to be something else. And there's shades in between. If you want a front yard

00:34:53.240 | garden, if you want different things, you've got to just think about the lifestyle that

00:34:57.240 | you want. And if possible, before you buy, go ahead and establish that. Nothing wrong.

00:35:01.240 | I have no problem with people who want to live in a covenanted neighborhood where everything

00:35:06.240 | is going to be held to this certain standard and they live in kind of perfectville. That's

00:35:10.240 | not for me. But if you want to live in perfectville, you got to make sure that the laws are going

00:35:14.240 | to be tight enough that a redneck neighbor doesn't move in and destroy the place.

00:35:19.240 | Exactly. Exactly. So second question, if you don't mind. Currently, we have a checking

00:35:26.240 | accounts with debit cards and we have only one credit card account. We have great credit

00:35:31.240 | rating, zero debt. Credit limit on the credit card is $22,000. And I have easy, quick, and

00:35:37.240 | simple access to over six figures in cash. You've spoken about the need for emergency

00:35:42.240 | backups in finance and having credit cards as a worst case scenario if things go bad.

00:35:49.240 | Do you recommend having more than one credit card for any reason? We honestly hardly ever

00:35:55.240 | use it. We pay cash for almost everything. We don't use credit hardly at all. And so

00:36:00.240 | I don't know if it's really critically necessary to have a second credit card for emergency

00:36:05.240 | situations like you've spoken about on previous podcasts.

00:36:09.240 | Yes. One more thought on the previous question. Just the economic principle. I just want to

00:36:16.240 | not forget this. All changes occur at the margin. It's kind of an economic principle.

00:36:21.240 | So when you're looking for opportunities, the opportunities are going to come at the

00:36:26.240 | margin. And you see this throughout society. It exists in permaculture. They talk about

00:36:31.240 | the edge of being the most productive, the edge between two things. And so when you're

00:36:35.240 | looking at your life, always look for whatever edges exist in your life or what margins exist

00:36:40.240 | in your life. Look for those lines, the county lines, the city lines. Look for the rates

00:36:45.240 | and the tax code when you make that jump into the next bracket, just as kind of a central

00:36:49.240 | planning theme. Didn't want to forget to say that.

00:36:52.240 | Back to credit cards. I think the best resource that I have ever found on that that's free

00:36:58.240 | is the website Credit Karma. Credit Karma, C-R-E-D-I-T-K-A-R-M-A.com. It's one of these

00:37:08.240 | websites where what they do is they provide a service. And in exchange for the service,

00:37:12.240 | they are hoping to upsell you on using their affiliate links to purchase other additional

00:37:18.240 | products. So this is built, for example, on the same business model as Mint.com. Mint.com

00:37:23.240 | gives you a really cool personal finance dashboard. And the way they make their money is by having

00:37:29.240 | access to your information. Then they're hoping you'll click on their offer. They'll get an

00:37:33.240 | affiliate commission code based upon your clicking. And they'll have that information

00:37:39.240 | for you. But Credit Karma is good because they have a listing where they'll talk about

00:37:47.240 | what you should do to build your credits. So if you use their website, free service,

00:37:53.240 | and you put in your information, they'll use the formula for the FICO score and they will

00:38:01.240 | go ahead and click and give you, "Hey, here are our suggestions." And they'll show you

00:38:06.240 | your strengths and your weaknesses. So they'll say you're too close to your credit utilization

00:38:11.240 | score, meaning you have too much, you owe too many balances on these cards. Or they'll

00:38:16.240 | say you're too far away from the credit utilization score, or sorry, you have too few accounts

00:38:21.240 | or you have too many revolving credit accounts and no consistent payment accounts. And they'll

00:38:25.240 | give you free advice on that that's tailored to your situation. They do a good job with

00:38:30.240 | that. And I've never seen from everything I've heard and read about them, I have an

00:38:34.240 | account with them and I've used it. Everything seems to line up. So that would be the first

00:38:37.240 | thing that I would do is put your information in there. If you're comfortable disclosing

00:38:42.240 | your information to them, I don't have any reason not to be. And what they'll do is they'll

00:38:45.240 | look at your history of your credit report and their algorithm will give you some suggestions.

00:38:52.240 | That's creditkarma.com. I believe if I were in your situation, I probably would go ahead

00:38:57.240 | and get one or two more cards. When you look at the risks of credit, the biggest risk of

00:39:03.240 | credit is always being undisciplined with it, using it, going deeply into debt and winding

00:39:09.240 | up with lots of credit card debt. So if you look at your situation and you have that risk,

00:39:15.240 | then definitely you should not apply for additional credits. You've just stated that you're the

00:39:19.240 | opposite, disciplined, consistent, have cash and no balances. That may not be other audience

00:39:25.240 | members. For someone like you though, I would go ahead and get maybe one or two more cards.

00:39:33.240 | As I understand it, the reason is not necessarily the number of cards, but it's more of the

00:39:41.240 | amount of credit available. So if you think through the situations that you would if you

00:39:48.240 | were ever going to use a credit card or if you were going to use it for a certain amount

00:39:52.240 | and how that would affect your credit score. If you're the type of person who you have

00:39:55.240 | a credit card that has a $20,000 limit on it and if you can put your hands on six figures

00:40:00.240 | of cash, then you're no longer a 15-year-old just getting started. Well, what could happen?

00:40:05.240 | You might buy a cruise for the whole family and you might take your family on a family

00:40:10.240 | vacation. So you might put $15,000 on a credit card as you're going through the expenses

00:40:16.240 | of that until you get it home and pay it off. Well, that $15,000 is going to use up 75%

00:40:24.240 | of your credit and that's going to have a temporary impact on your credit score.

00:40:29.240 | So I don't have a science for this, but kind of my gut is to say look at the scale

00:40:34.240 | of your household and then just make sure that you have credit lines larger than that

00:40:39.240 | that are available for you. If you wind up in a bind and you're trying to, you know,

00:40:44.240 | Southern California real estate market crashes, you can't sell your house, you've got to

00:40:48.240 | move across the country, you've got lots of money but it's tied up in your business

00:40:52.240 | and in your accounts and you need access to capital, you need liquid credit capital

00:40:56.240 | available to you. Well, $20,000 doesn't sound like a ton to me. You could burn through

00:41:01.240 | that pretty quickly. So I'd rather have 60 or 80,000 sitting there on three or four

00:41:06.240 | cards and just have an American Express, a Discover, a Visa, and a MasterCard,

00:41:11.240 | something like that. And I'd rather have 80,000 sitting there and that way when I

00:41:15.240 | go ahead and use the 20,000 on moving my family across the country while we wait

00:41:19.240 | for the house to sell and we're sitting it through, etc., and if I'm carrying the

00:41:22.240 | balance for three months, I'm not destroying my credit right when I need that score

00:41:26.240 | to go and do something else. So that's my unscientific answer but kind of thinking

00:41:30.240 | that the biggest impact on your credit score is going to be – oh, a big impact

00:41:35.240 | on your credit score in addition to number of accounts, type of credit, payment

00:41:39.240 | histories being clean and all of that is utilization, the utilization ratio.

00:41:45.240 | So make sure you have enough money available to you that you can't ever imagine

00:41:50.240 | using it. That's how I'd approach it.

00:41:53.240 | Gotcha. Great. Yeah, Josh, I appreciate the advice on everything and I think you're

00:42:01.240 | spot on and I really appreciate it, your podcast and everything that you do.

00:42:05.240 | Thank you. On the credit cards also, a diversity of issuers is useful. A couple

00:42:09.240 | of platinum cards from Visa and MasterCard and an American Express, things like that

00:42:16.240 | can be useful because when you go in to buy a big ticket item, some of the credit

00:42:21.240 | card benefits are very, very helpful. Always see if you can get a better deal, as

00:42:26.240 | we always say. Always see if you can get a better deal paying cash, etc., blah, blah,

00:42:29.240 | blah. But if you can go in and if you're going to buy an expensive – you're looking

00:42:35.240 | at buying a home, you're buying a home and you're going in and you're buying an

00:42:38.240 | expensive water treatment system or some kind of electronic thing for the house,

00:42:43.240 | well, go ahead and put that on the credit card and that's another reason to have

00:42:46.240 | big balances available for you. Put it on the credit card and use a credit card

00:42:50.240 | that gives you some significant purchase protection, natural built-in extended

00:42:54.240 | warranty, etc. and that can save you money. So a diversity of cards that are well

00:42:59.240 | chosen to provide you with some of those extra benefits is helpful.

00:43:05.240 | Alright, next we go to – oh, go ahead. Sorry, I cut you off. What was that, Jim?

00:43:10.240 | Okay, we'll go on to Jason. Jason, go ahead with your question, please.

00:43:18.240 | Yes, sir. My company that I work for offers a fine benefit plan that's fully

00:43:23.240 | funded by the company that is designed to, at the end of, say, 35 years, I think

00:43:30.240 | is the max out, replace somewhere between 30% and 40% of your income at retirement.

00:43:36.240 | My question that I've always had – two questions. One is, is there a way to

00:43:41.240 | accurately reflect from year to year what my pension benefit is worth as far as a

00:43:48.240 | – from a retirement standpoint, as far as maybe a net worth or projected

00:43:54.240 | retirement income? And then secondly, how does the benefit – how is it

00:44:03.240 | beneficial to me as far as life insurance purchase? For me, since my pension here

00:44:11.240 | becomes immediate life annuity, income annuity for my wife if I die, that starts,

00:44:18.240 | I think, within 30 days of my death. So those are my questions regarding that.

00:44:23.240 | Good questions both. When you get your pension statements, probably annually,

00:44:28.240 | what type of information is on those? What do they write on there about the

00:44:32.240 | information, and how do they change year by year?

00:44:35.240 | You have, obviously, your years of service that you have, the vesting schedule.

00:44:43.240 | I'll go beyond that. But then you have an estimated projection based upon your

00:44:49.240 | current years of service, what your annual retirement income would be if you quit,

00:44:56.240 | like today, but waited until you're like 65 or whatever to collect.

00:45:01.240 | So you kind of have – it's not accurate. I've already been told it's not accurate.

00:45:05.240 | Because it's backward – it's not accurate because it's backward looking and it's not

00:45:08.240 | factoring in your working there for another 15 years? Is that what you're saying?

00:45:11.240 | Well, it's not accurate in that it's the lowest possible number you could have

00:45:16.240 | based upon your compensation amount. It doesn't factor in overtime.

00:45:24.240 | Basically, what they tell us is when it's time for you to collect the pension,

00:45:30.240 | they're going to calculate your highest 1825 consecutive days of pay to come up

00:45:37.240 | with a number to begin the formula. So that's why they tell us you look at the

00:45:41.240 | number and it gives you an estimate, but it's on the low side, especially for a

00:45:45.240 | period of time during a career you worked a lot of overtime, a lot of bonuses,

00:45:50.240 | that sort of thing. So it's just based upon your base compensation level.

00:45:56.240 | Not including those – it's not going to be factoring in the overtime?

00:45:59.240 | Correct.

00:46:00.240 | Okay. And what percentage of your income is it scheduled to replace?

00:46:04.240 | What percentage of those 1825 days?

00:46:07.240 | They say it's about 40%.

00:46:10.240 | Okay.

00:46:11.240 | That's the idea.

00:46:12.240 | All right.

00:46:13.240 | It's fully funded. We don't have to contribute to that. We have a separate 401(k)

00:46:16.240 | for all that, too.

00:46:18.240 | And is your question for valuing it just simply how much do I put on my net worth

00:46:21.240 | statement or is it I'm trying to do retirement calculations and figure out when I

00:46:25.240 | can afford to retire and so I need to be able to figure it out from that?

00:46:29.240 | What are you going to use the number for?

00:46:30.240 | Well, both of those would be nice. But primarily for retirement's sake, down the

00:46:37.240 | road, because they don't give you a total amount of what it's worth, obviously.

00:46:41.240 | It's just the promise to pay down the road, deferred compensation. Obviously it

00:46:45.240 | costs me a lot of income now that they're deferring for me later. So I'm trying to

00:46:51.240 | figure out is there a way to figure out what it's worth or how I can plan on that

00:46:58.240 | in retirement for retirement projections down the road.

00:47:01.240 | Okay. So let's tackle question number one first, which is how to calculate what

00:47:05.240 | it's worth. And it'll be kind of the same. It'll be a little bit different if you

00:47:09.240 | just want to put it on the net worth statement versus something else. Let's do

00:47:12.240 | the simple one first.

00:47:14.240 | If I were going to put it on a net worth statement, I would – where on the

00:47:20.240 | internet could you get this information? If you've got a buddy – here's how I

00:47:24.240 | would do it. Start with a buddy who sells annuities. Find somebody who's in the

00:47:29.240 | insurance business. Just say, "Hey, I need a favor. Can you just calculate for me

00:47:33.240 | how much I would have to do to buy a fixed annuity that's going to pay out this

00:47:37.240 | amount?" And let's say that you're looking at that statement and they're saying

00:47:41.240 | it's $3,000 a month, that that's what they're going to pay you at retirement.

00:47:45.240 | You know that's a little bit low, but it's $3,000 a month. What I would do is

00:47:50.240 | either call a friend and say, "How much cash lump sum would I need to give you

00:47:54.240 | today for you to give me a life annuity starting at 65 of $3,000 a month?" Or

00:47:59.240 | just for the sake of comparison, just pick a percentage. And so the useful

00:48:06.240 | percentage would be something – well, let's start with 4% rule is always useful.

00:48:12.240 | Then you said, "Okay, if I had to replace this with stocks and $3,000 per month,

00:48:16.240 | take 3,000, multiply it times 300, that's about a $900,000 asset." Because if you

00:48:21.240 | had $900,000 of investments, of stocks, that were spitting off 4% per year and

00:48:29.240 | you're taking 4% of that portfolio, which statistically is designed where it would

00:48:34.240 | last you longer than that over a 30-year period, that would be about $36,000 a

00:48:40.240 | year. 4% of $900,000 is $36,000 a year, and that would be $3,000 a month. So you

00:48:45.240 | can take a monthly number of $3,000, multiply that times 300, that'll give you

00:48:50.240 | the inverse of the 4% rule, and you could value that at $900,000. If you're working

00:48:55.240 | with an annual number, you can just multiply it times 25. So if you had $30,000

00:49:00.240 | per year, multiply that times 25, that would be $750,000 asset. However, a

00:49:06.240 | defined benefit annuity that is guaranteed and is a life annuity and is not subject

00:49:11.240 | to fluctuations would actually be significantly more valuable than that. I

00:49:16.240 | don't know how much more valuable. It would depend on current annuity rates

00:49:20.240 | being offered by commercial annuity companies. But I would at least be

00:49:24.240 | comfortable with your saying something like 3%. And so if you said, "Okay, if I

00:49:29.240 | had $1.2 million and I was getting a 3% -- let's see, $1.2 million -- and I were

00:49:35.240 | getting 3% of that, that would be $3,000 a month," then I would be comfortable

00:49:40.240 | with that. So somewhere in that range of 3% to 4% would be probably a very

00:49:45.240 | reasonable way to value it just for your own personal net worth statement. That

00:49:50.240 | way, when you're making your net worth statement, "Hey, I've got a pension which

00:49:54.240 | is worth in a lump sum value today about a million bucks," very conservatively a

00:49:59.240 | million bucks. That would be the first thing that I would do.

00:50:04.240 | Second thing that I would do -- and I've got to make sure to remember to answer

00:50:08.240 | your life insurance question. Okay, that's the second question. Second thing I

00:50:12.240 | would do is with regard to retirement planning. Now, if you're doing your own

00:50:15.240 | retirement planning, the simplest thing to do is to just figure this out. And

00:50:20.240 | when I say doing your own, I mean you're not using professional financial

00:50:24.240 | planner software. We'll get to that in a moment. If you're just doing this

00:50:27.240 | yourself, the simplest thing to do is just to use that monthly number and use

00:50:33.240 | the monthly number of -- well, two monthly numbers. And what I'm trying to do is

00:50:39.240 | give you simple calculations that you don't have to account for inflation. If

00:50:42.240 | you know the number that's on there is low, and if the reason it's low is simply

00:50:47.240 | because you don't yet have the full years of service, you can't use the number.

00:50:52.240 | Meaning that if they say after 30 years of service, then you get this 40 percent

00:50:58.240 | of your highest 1825 days payout. Well, you've only got 15 years of service, and

00:51:03.240 | so you're not at the full amount yet, then you can't use the number that's on

00:51:07.240 | the paper. But if the number that's on the paper is just low because it's

00:51:11.240 | pretending that you're fully vested in it, and it's low because you don't have

00:51:14.240 | your later salary, you can use the number on the paper. So if my statement says

00:51:20.240 | I'm making $10,000 a month, and my statement says that I've got a benefit that

00:51:27.240 | after 30 years I'm going to be fully vested in it, it's going to be 40 percent,

00:51:30.240 | then what I'll just do is I'll just use that 40 percent number. I'll just use the

00:51:35.240 | $4,000 a month number. And I'll look at my retirement planning and say, "In

00:51:40.240 | retirement, will I need more than $4,000 a month?" There's no need to get super

00:51:46.240 | technical for retirement planning in the early years. It's only when you're in

00:51:50.240 | that last five or ten year transition where you've actually got to live on the

00:51:53.240 | income that you need to start to get more precise. But for now, you look and say,

00:51:57.240 | "Well, am I planning to be here? Is my house going to be paid off, et cetera?

00:52:01.240 | What are my expenses going to be?" And you just figure that your expenses are

00:52:04.240 | going to be what they are now, or figure out what's going to change, and use that

00:52:07.240 | $4,000 number. There's no reason not to use the number that is on there if it's

00:52:13.240 | calculating the fulfillment of your service. Does that make sense so far?

00:52:18.240 | Yes, it does.

00:52:19.240 | Okay. Now, if the number that's on there is not calculating the fulfillment of

00:52:25.240 | your service, then you need to take your income and just simply use your current

00:52:30.240 | income and use the formula. So I'm making $10,000 a month, but the number that's

00:52:36.240 | on the paper isn't right, but I'm actually just using it. I'm just calculating

00:52:41.240 | 40% of that, so I know it's going to be $4,000. So depending on what the number

00:52:46.240 | indicates, that's how you do it. What I'm trying to get you away from is having to

00:52:49.240 | calculate the inflation-adjusted amount, because you can calculate the

00:52:54.240 | inflation-adjusted amount based upon your income, but you're also going to have

00:52:58.240 | inflation that's affecting your expenses. So you can safely, for big-picture

00:53:03.240 | planning, you can safely ignore inflation for something like this, because yeah,

00:53:07.240 | the benefit's going to be higher, but the inflation's not going to be higher.

00:53:11.240 | The difference would be if you're seeing your income rise substantially over

00:53:15.240 | time. So let me give you the final way to calculate it. If you're looking at your

00:53:19.240 | income today and you're saying, "Okay, I'm making $10,000 per month, but this

00:53:25.240 | formula is only reflecting that $10,000 a month number, and I've got another 15

00:53:30.240 | years in my career, and I know that my income is actually increasing at a higher

00:53:36.240 | amount, a higher percentage rate than just the general rate of inflation, and I

00:53:41.240 | think this benefit's going to be a lot more valuable, because after all, I've got

00:53:44.240 | this pension because I'm doing this work and I'm doing good work, and I'm

00:53:48.240 | exponentially growing my work, so this is going to be a lot more valuable," then

00:53:52.240 | take your income today and increase it based upon what you think is going to be

00:53:57.240 | the increase of your pay. So 1,825 days, depending, is that 1,825 working days,

00:54:05.240 | so you probably work about 250 days a year is probably what you're calculated

00:54:09.240 | for, so that's 7.3 years. So go forward to about 7 years from retirement and

00:54:15.240 | calculate what your income would be increasing to. So if you had $10,000 per

00:54:20.240 | month, let's just do $120,000 per year, and you're going to inflate that, and

00:54:25.240 | you're saying, "I've got 17 years until I retire, so I want to know what this

00:54:29.240 | number is 10 years from now," then put that into a financial calculator. Let's

00:54:34.240 | do present value is $120,000. Let's do 10 years out. It's going to be our N.

00:54:40.240 | We know that we're increasing our income at 6% compounded, so let's use 6%, no

00:54:45.240 | payments, and we calculate the future value. We now know that our income then

00:54:49.240 | is $214,000 per year. And then what you can do is just divide that into monthly.

00:54:56.240 | That's 17,908, so that's about 18,000. Let's just use 18,000 to round up. So we

00:55:02.240 | got 18,000, and you take 40% of that, and you've got now a pension of $7,200 per

00:55:08.240 | month. So what I did was I adjusted there for an income that's increasing faster

00:55:14.240 | than the rate of inflation, and then I just stopped it at 7 years before I

00:55:19.240 | retire, recognizing that it's probably going to be higher, but here I'm just

00:55:22.240 | taking the conservative number. So now I know I'm going to have a pension of

00:55:26.240 | $7,200 a month, and that's great, because if you've got a pension, you should be

00:55:30.240 | looking at ways to maximize that, which is when it's based upon a formula, you

00:55:34.240 | want to maximize your income as much as possible. And that'll be actually a

00:55:38.240 | really good investment, especially if the pension is driven off of a formula.

00:55:43.240 | It's going to be a really good investment to max that out as much as possible. So

00:55:47.240 | you're looking at your business unit, you're looking at the area of operations

00:55:51.240 | you have control for and saying, "How can I get my rates of increase of income up

00:55:55.240 | significantly higher than the prevailing numbers?" Now, if you're actually doing

00:55:59.240 | technical financial planning, then it's simpler, and a financial planner will

00:56:03.240 | just simply use usually a set of software. You can do it by a calculator, but all of

00:56:09.240 | the calculator work is going to be kind of this rough stuff that I'm doing for you

00:56:13.240 | now. If you actually have financial planning software, then you just put it in.

00:56:17.240 | You put in the assumptions. Here's what the amount of income is. A lot of the

00:56:21.240 | good financial planning software gives you an ability to put in the formula, so

00:56:25.240 | you can say it's the highest of the average of the last number of years, and

00:56:29.240 | then they'll do the projections, and they'll put in the questions of, "Does that

00:56:33.240 | benefit increase with inflation? Does it not?" And they can calculate that. And

00:56:38.240 | that brings me to the answer to question number two, which is, "How does it work

00:56:41.240 | in life insurance?" It's an amount of cash flow that you don't need to cover with

00:56:48.240 | life insurance in retirement. So if I had a pension like you're describing, and I

00:56:53.240 | knew that it was going to be paid out under my current way, and I'm planning for

00:56:57.240 | my wife, what I'm going to do is I'm going to say, "When I die, there's going to

00:57:01.240 | be a certain amount of lump sum cash needed," whether that's pay off the house,

00:57:05.240 | give my wife money to go and travel around the world while she's grieving for

00:57:09.240 | me, or pay for my funeral, etc., pay off my debts. I'm going to give a lump sum of

00:57:14.240 | cash, and then I'm going to give a cash flow need for the rest of her life. And

00:57:18.240 | so I'm going to say, "Well, she's got a 70-year life expectancy, and I want to

00:57:22.240 | provide $6,000 a month." So I just take that $6,000 a month, and I increase it

00:57:28.240 | over time. But then in the financial planning software, I just put in there

00:57:32.240 | that there's going to be a payment now of $3,000 a month that's coming in in the

00:57:37.240 | form of a life annuity for her. And so the amount of life insurance needed is

00:57:42.240 | just calculated based upon the present value of $3,000 a month and is not

00:57:47.240 | calculated based upon the present value of the $6,000 a month. So it just goes in

00:57:51.240 | as a cash flow into the software system because it is an asset. And it's an asset

00:57:57.240 | that, if guaranteed by the company in the event of your death, then it's an asset

00:58:02.240 | that you don't need to plan for with life insurance. Where some people have to be

00:58:06.240 | careful, and I don't think this applies to you, Jason, but where some people have

00:58:09.240 | to be careful would be people who have a benefit that only applies in certain

00:58:14.240 | circumstances. So, example, firefighter. If a firefighter generally, with most

00:58:19.240 | municipalities, if a firefighter dies while on duty, then their errors in their

00:58:26.240 | spouse is going to be qualified for a payout from that because of the fact that

00:58:32.240 | they died in the line of duty. But that doesn't mean that they're automatically

00:58:36.240 | going to be qualified if they die not in the line of duty. And a firefighter has

00:58:42.240 | the same statistical probability of dying in a car accident on their way to work as

00:58:47.240 | any of the rest of us do. They just have the additional risk of dying while

00:58:51.240 | fighting a fire. And so you have to, if you're one of these people who has a

00:58:55.240 | payment for your family if you die, you need to understand what the terms of that

00:58:59.240 | payment are. Because a firefighter still needs every bit as much life insurance

00:59:03.240 | in force if he dies on the way to work as he does if he dies in the fire. So the

00:59:09.240 | best way to plan for that is you get your couple million bucks of term life

00:59:12.240 | insurance, and then if you died fighting a fire, your family gets an extra million

00:59:16.240 | dollars from the fire department.

00:59:18.240 | Gotcha. That helps. That helps a lot.

00:59:23.240 | Anything else with that? Does that clear it up enough for now or any other

00:59:26.240 | questions?

00:59:27.240 | I think that clears it up for now. I've been wondering about that for a couple

00:59:31.240 | years now. So you start getting a little long in the tooth and you're here in the

00:59:35.240 | company for a while, you're over the hill, you see the end, trying to figure out,

00:59:39.240 | "Hey, what have I been working all these years for?" Other than just numbers on

00:59:44.240 | the page.

00:59:45.240 | Yeah. Well, look at it and see how to optimize that. So remember, with what

00:59:53.240 | we're doing in financial planning, we want to look at everything that we do and

00:59:57.240 | see is there a way to optimize it. And so when you have a pension, there may be

01:00:02.240 | something that you could do to optimize it. You may not--let's say that your

01:00:07.240 | pension--I'm going to simplify the case, Jason, to apply to more people. Let's say

01:00:11.240 | that your pension is going to be calculated upon your final five years of

01:00:15.240 | service at your company. And you've been at this company for 25 years. You think

01:00:25.240 | you could do it another five years and you know then you're going to be fully

01:00:27.240 | vested in your pension. Well, is there a promotion that you could get that is

01:00:32.240 | going to make a big difference on your base pay? Or are you working where you're

01:00:37.240 | getting a lot of overtime and commissions, but if you move to something else where

01:00:43.240 | your base salary would be affected by--your pension is going to be based upon

01:00:50.240 | your base salary, and so maybe job A has low base and lots of bonuses, but job B

01:00:56.240 | has a high base and less bonuses. Well, maybe for the last five years you want

01:01:00.240 | to transition to job B with a high base and less bonuses to maximize your pension

01:01:04.240 | benefit. There could be jobs like this or listeners listening who might have

01:01:10.240 | something that they could do. Another practical example would be Social

01:01:15.240 | Security. Social Security--the way the Social Security formula works is that it's

01:01:20.240 | based upon your primary insurance amount, which is the number that drives all of

01:01:26.240 | the various benefits that you get. It's your primary insurance amount. That's

01:01:29.240 | based upon your 30 highest years of earned income, of wages that are reported to

01:01:36.240 | Social Security. So if you don't understand that, if you don't look at your

01:01:41.240 | earnings record, what might happen is you might miss out on a substantial

01:01:46.240 | maximization of that Social Security benefit based upon a different work

01:01:51.240 | decision. There are lots of moms who worked and reported earned wages early in

01:01:57.240 | their career before having children. Then they stayed at home, raised their

01:02:02.240 | children, and then went back to the workforce afterward and started recording

01:02:07.240 | wages that are calculating in the Social Security benefit again. And then maybe

01:02:11.240 | you get to 55 years old or something like that and you say, "Well, I could

01:02:14.240 | retire or 60. When should I take Social Security?" But if you have 25 years of

01:02:20.240 | earnings and five years of zeros, those zeros are calculated in based upon that

01:02:26.240 | 30-year average. And so if you work for another five years and you replace five

01:02:32.240 | years of zeros with five years of $100,000 of income, not only are you

01:02:38.240 | replacing zeros, but that your later working years might be at a higher rate.

01:02:46.240 | So this could apply if you have years of zeros. It could also apply if your

01:02:49.240 | career has been relatively low in the beginning in terms of your wages are low

01:02:54.240 | in the beginning and they're higher down the road. You started and you worked as

01:02:58.240 | an artist doing lots of volunteer work and making $30,000 per year. But you're

01:03:03.240 | now in a situation where you're making $150,000 per year and your income is now

01:03:09.240 | exceeding the Social Security wage base, which is about $120,000. So you're

01:03:14.240 | getting credit there for $120,000 every year as you're working currently. Well,

01:03:22.240 | better for you to go ahead and work for five more years and knock off five years

01:03:27.240 | of $30,000 credits with five years of $120,000 credits. And that could make a

01:03:33.240 | big difference in your number, in your primary insurance number. And if you are

01:03:38.240 | maybe you're short on retirement, that might be the best thing you could do. And

01:03:42.240 | so I've been able to use tools like that to get people to keep working for a few

01:03:47.240 | more years because I could see how we're going to be able to make a big benefit

01:03:53.240 | here in your guaranteed income from Social Security during these working years.

01:03:58.240 | Of course, like any financial planning technique, it doesn't apply across the

01:04:02.240 | board. But it's the type of thing that you should look for and you should see,

01:04:06.240 | "Is there a way I can maximize my pension with a career move? Is there a way I can

01:04:10.240 | maximize my pension?" You may not be able to do the really stressful job for 20

01:04:16.240 | years, but you might be willing to slip into that really stressful job for five

01:04:20.240 | years because it comes with a much higher income and you know that you've got your

01:04:24.240 | 25 years of service to vest you in the pension and five more years of benefits

01:04:29.240 | calculated upon the higher number are going to make a big difference for you.

01:04:35.240 | So, Jason, thank you for the question and I appreciate your calling in.

01:04:40.240 | I know that there's a ton of ideas here and the idea with learning all of these

01:04:50.240 | things, you're not going to be able to take everything from a show like this and

01:04:54.240 | apply it to your situation. But you should be taking the ideas that are coming in

01:04:59.240 | shows like this and looking to see what is applicable to my life.

01:05:04.240 | So, if we look at the questions we've covered today, we've covered cell phone

01:05:08.240 | houses, credit cards, and defined benefit plans. It's kind of a pretty sweet

01:05:14.240 | variety. If you're just at the beginning phase of life, you're in college, you're

01:05:21.240 | a young person in your teens, you're in your middle 20s, and you're not rich yet,

01:05:25.240 | don't take what I said about an iPhone and use that as a license to go out and

01:05:32.240 | spend $1,000 on a phone when you don't have money.

01:05:37.240 | Go get a cheap phone and buy a Chromebook and use the Chromebook for your

01:05:41.240 | computer. But at a different phase, you can do that. But be thinking in advance

01:05:46.240 | down the road and learn from somebody who's in a different situation. Learn from

01:05:50.240 | somebody who has six figures in cash and is figuring out how can I maximize my

01:05:55.240 | liquidity. Learn from somebody who has a job with a defined benefit pension plan

01:05:59.240 | and see what you can apply to your situation.

01:06:03.240 | And then on the flip side, like Erica when she's talking about her iPhone, or

01:06:08.240 | Jim where he's talking about buying a house in California, recognize that you're

01:06:12.240 | probably going to reach a stage of life where some of those financial decisions

01:06:17.240 | that earlier and younger aren't a big deal. You can buy a fancy phone because

01:06:22.240 | you like it. You can buy an expensive Mac because it's fun and you like it. Now

01:06:25.240 | Erica's using it, she said, but you can do it because it's fun and you like it.

01:06:29.240 | The problem comes when you try to live somewhere you're not before you're there.

01:06:34.240 | So make sure that you're not trying to be somebody that you're not before you're

01:06:38.240 | there. And that's it for today's show. If you would like to get on a call like

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