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RPF0551-Friday_QA


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00:00:29.800 | It's Friday.
00:00:33.840 | That means live Q&A.
00:00:52.680 | Welcome to Radical Personal Finance, the show dedicated to providing you with the knowledge,
00:00:55.720 | skills, insight and encouragement you need to live a rich and meaningful life now while
00:01:00.040 | building a plan for financial freedom in 10 years or less.
00:01:03.600 | My name is Joshua and I am your host most days on Radical Personal Finance.
00:01:07.280 | I speak into the ether, right into your ears without getting to hear back from you.
00:01:12.000 | But on Fridays we open up the phones and I get to talk to you, a real live person.
00:01:24.160 | Each Friday that I can arrange the technology in order to do so, I host a live Q&A call.
00:01:28.480 | This works kind of like talk radio where you call in and I answer the phone and we talk
00:01:31.720 | about anything that you want to talk about.
00:01:34.060 | These calls are open to patrons of the show.
00:01:35.960 | You can find out more information about how to become a patron at RadicalPersonalFinance.com/patron.
00:01:42.720 | But I would encourage you if you would like to talk to me, ask me questions, discuss anything
00:01:46.620 | about your personal situation, this is the place to do it.
00:01:50.520 | I love doing these.
00:01:51.520 | I know from many of you, you love hearing them.
00:01:54.320 | So today we begin with Greg in Pennsylvania.
00:01:56.960 | Greg, welcome to Radical Personal Finance.
00:01:59.000 | How can I serve you today?
00:02:00.000 | Hello, Joshua.
00:02:01.000 | I was excited to be here today.
00:02:03.600 | Just wanted to kind of run through some numbers for financial independence and just talk about
00:02:08.320 | that and see if I'm on the right track.
00:02:10.840 | I love the topic.
00:02:11.840 | So tell me about your situation.
00:02:14.720 | Well I am 48 years old and I'm married with two young children.
00:02:21.760 | One is eight and one is six.
00:02:24.600 | And my wife is a few years younger than me.
00:02:27.200 | She's 46.
00:02:28.200 | Okay.
00:02:29.200 | What we, let's see, we, I guess what I'm trying to just kind of determine is I keep crunching
00:02:38.000 | numbers and really kind of thinking about financial independence and make sure that
00:02:43.280 | I am going in the right direction with all that and that the path is clear.
00:02:49.600 | What's the best way to ask these questions?
00:02:50.960 | I'm sorry.
00:02:51.960 | How much money do you have?
00:02:52.960 | How much money do I have in my pocket?
00:02:56.600 | No I have for retirement, sorry, let me just click this here.
00:03:03.480 | So in retirement savings, I have about $790,000.
00:03:09.280 | Okay.
00:03:10.280 | And let's see, I, yeah, and I have a small mortgage.
00:03:19.680 | It's under $100,000 at this point.
00:03:23.040 | And really no other debts, just monthly credit card debts that I pay off as I go.
00:03:27.200 | How much is your house worth?
00:03:29.200 | Probably about 400.
00:03:32.040 | Okay.
00:03:33.040 | Do you have any money or investments that's not represented in your house or in your retirement
00:03:37.760 | accounts?
00:03:38.760 | I do.
00:03:42.360 | I have, let's see, probably about $200,000 outside of that.
00:03:50.080 | $100,000 of it I've kind of earmarked for college savings.
00:03:55.720 | And I've already probably have about $30,000 in 529s.
00:04:00.120 | Okay.
00:04:01.500 | And the remaining $100,000 is just invested in stocks?
00:04:04.760 | Yeah, in cash and yeah, cash and I have like kind of a personal loan out to a business
00:04:12.840 | and things like that.
00:04:14.840 | So all told, your investment assets between your retirement accounts and the $200,000
00:04:19.120 | other are about a million dollars and you live in a house worth about $400,000.
00:04:23.720 | How much are you earning currently?
00:04:26.880 | Our household income is about a hundred.
00:04:30.720 | And how much do you spend every month?
00:04:34.720 | Five to 6,000.
00:04:38.320 | That includes our mortgage, that includes paying towards like an IRA, IRA contributions.
00:04:48.560 | So taking out IRA contributions, you're just telling me the expenses.
00:04:52.280 | How much are your monthly expenses?
00:04:57.920 | I'd say $5,000.
00:04:59.920 | Okay.
00:05:00.920 | Because I've often thought if I was right now, if I was to reach a financial independence,
00:05:07.040 | if I was spending what I needed to and my house was paid off, that I would probably
00:05:12.040 | need about $50,000 a year is what I think.
00:05:15.480 | So if you had a house paid off and you had an income of $50,000 a year from your investments,
00:05:20.520 | what would you do with your life?
00:05:22.520 | Well, that's part of why I'm calling Ask because I'm currently working in a position
00:05:31.400 | I get to really do what I love, but it's very kind of gig oriented.
00:05:38.880 | So it's not a, I'm not a W2 employee.
00:05:42.120 | I get to run through kind of my own business and serve people as they need it.
00:05:46.320 | And as I'm able to find this business, but it's not every day, but it pays really well
00:05:51.120 | and I really love it.
00:05:52.320 | And it also gives me a lot of free time now to do a lot of things that I like.
00:05:58.280 | So it's a good situation.
00:06:00.920 | My spouse is the one that has the more formal job, a corporate job and brings the benefits
00:06:08.360 | home and things like that.
00:06:09.520 | So it seems like we're, we have a really good kind of pairing right now and I would continue
00:06:15.200 | to do what I'm doing for as long as I'm interested in it.
00:06:18.960 | And I could see that growing in the future as well.
00:06:21.520 | So I guess I'm not too concerned about that part of it, but I would think, you know, if
00:06:26.760 | my wife could kind of cut back from her work in the near future, maybe, you know, so that
00:06:32.000 | her life was a little more enjoyable for her.
00:06:35.280 | Does she want to cut back?
00:06:41.920 | I think if I think that the conversation would be easier if there was a, you know, a very
00:06:47.200 | clear path and she understood that that's a good option.
00:06:52.920 | I think we need to address the benefits such as the healthcare.
00:06:57.040 | You know, that's something important from her work.
00:07:00.280 | But I think she would enjoy cutting back a bit and, you know, doing things she likes
00:07:03.880 | more than this.
00:07:05.840 | But I think she's also very satisfied in her job at this time as well.
00:07:10.600 | Last year, how much revenue did your business bring into your household?
00:07:18.480 | After my expenses?
00:07:19.480 | Yes.
00:07:20.480 | Yeah, so about 20, 25,000.
00:07:27.760 | Could you increase that number to a higher number?
00:07:31.520 | Yes.
00:07:33.400 | About how much could you increase it to?
00:07:37.200 | I can definitely double that in a year, I'm sure.
00:07:47.720 | If you were to double it, would you still continue to enjoy the work, the business,
00:07:54.240 | the doing the gigs that you're doing?
00:07:58.280 | I'm afraid if I if I went on beyond doubling it, then it would would seem like a bigger
00:08:03.800 | business than maybe I would want to do, because it does involve traveling and, you know, just
00:08:10.720 | going around the country and things like that.
00:08:13.120 | So I would I would think that that would kind of take away from some of this, because then
00:08:20.400 | I'd be away from home a lot more and not with the family and things that I do value
00:08:25.560 | greatly now.
00:08:28.240 | How much longer do you and your wife want to continue to live in the house that you
00:08:30.960 | live in?
00:08:31.960 | I am confident this is a forever home for us unless we were to downsize after the children
00:08:39.880 | were gone.
00:08:41.160 | Would you want to downsize after the children are gone?
00:08:50.680 | If I made that decision, I would probably find something that was more simple and was
00:08:56.880 | lower cost.
00:08:57.880 | But I love this house.
00:08:58.880 | We're in the perfect location, so it's not something that's on my radar now.
00:09:05.360 | So in my assessment, you are now financially independent, at least to a degree.
00:09:11.480 | You are not financially independent such that you never have to work again the rest of your
00:09:16.520 | life.
00:09:17.520 | But I don't use that as the beginning point.
00:09:20.360 | I use that as a nice kind of end benchmark.
00:09:23.840 | But I consider you to be financially independent at this point in time.
00:09:26.440 | And here's how I would explain that.
00:09:30.120 | There's no decision in life that you couldn't make at this point in time.
00:09:35.780 | You could change jobs.
00:09:36.780 | You could change businesses.
00:09:37.780 | Your wife could change jobs.
00:09:39.040 | She could change businesses.
00:09:40.720 | You could move.
00:09:41.720 | You could sell your house.
00:09:42.720 | You could move.
00:09:43.720 | You could do anything you wanted with your children.
00:09:44.720 | You have enough cash available to you to make any decision that you want.
00:09:49.040 | So you should now begin to operate from the perspective of financial independence.
00:09:53.640 | Now, of course, one of your concerns is, well, I have to save for retirement.
00:09:57.960 | And that's fine.
00:09:59.680 | That's laudable.
00:10:00.920 | But you are 48 years old and you have already saved for retirement.
00:10:05.960 | So let me just give you an example bit of math here on your retirement portfolio that
00:10:10.120 | most people forget about.
00:10:11.920 | You with about $800,000 of retirement savings are in the top few percent of U.S. American
00:10:18.960 | households in terms of wealth.
00:10:20.880 | The vast majority of U.S. American households have nothing saved and have nothing saved
00:10:24.840 | for retirement.
00:10:25.840 | You're a millionaire.
00:10:27.280 | You have a lot saved.
00:10:28.840 | And so you should start thinking like a millionaire, thinking like someone who has a lot saved.
00:10:33.760 | Pretend today that you never saved any more money for retirement and you just started
00:10:38.540 | with what you have right now.
00:10:40.520 | So let's put that into a financial calculator to $800,000 of investments currently.
00:10:45.000 | I'm just going to change it to negative.
00:10:47.720 | I can't run a calculator these days.
00:10:50.440 | OK, $800,000 in to your investments.
00:10:53.880 | Let's put in a 20 year time horizon taking you from 48 to 68.
00:10:58.400 | And Greg, what rate of return do you think that you will earn on your investments in
00:11:01.800 | the next 20 years?
00:11:04.520 | Well, I never put the 11.
00:11:08.120 | I usually put the 5 just to be conservative.
00:11:11.000 | But I think realistically it would probably be around a 7 or an 8.
00:11:15.200 | I'm comfortable with using 7, right?
00:11:16.600 | So let's use 7, be a little bit conservative.
00:11:18.800 | And no further contributions to that account.
00:11:21.320 | So that would put you in a situation where at 68 years old, beginning with $800,000,
00:11:26.200 | if you could earn 7% per year over the next 20 years with a current value of $800,000
00:11:32.400 | with no further contributions, you could expect your retirement portfolio at age 68 to be
00:11:37.720 | worth about $3 million.
00:11:40.120 | The retirement calculator, the calculator says $3,095,000.
00:11:44.120 | So about $3 million.
00:11:45.760 | Now at age 68, would you be comfortable with having a portfolio of $3 million?
00:11:51.960 | Absolutely, because I feel that that kind of target financial independence number for
00:11:57.800 | me is less than that.
00:11:59.200 | So yeah.
00:12:00.200 | Okay.
00:12:01.200 | So now we've assured that at 60...
00:12:03.760 | We've not assured, but there's a good chance.
00:12:05.640 | We've used fairly conservative calculations here and we've squared away retirement.
00:12:11.160 | So at this point in time, the goal is...
00:12:14.480 | The trick is to say, how can we plan for the next 20 years?
00:12:18.440 | Now if I take from you and I say to you and your wife, you are not allowed to save any
00:12:23.400 | money at all for the next 20 years, but you can't spend any money at all from your investments
00:12:31.960 | for the next 20 years.
00:12:33.960 | Do you think...
00:12:34.960 | Well, let me rephrase.
00:12:35.960 | You can't spend any money from your retirement account.
00:12:38.320 | You can spend the other $200,000 if you need to, but you can't spend any money from your
00:12:42.480 | retirement accounts in the next 20 years.
00:12:44.760 | Do you think that the two of you could figure out a way to live a lifestyle that you would
00:12:50.160 | love and to pay for that lifestyle from your earnings?
00:12:54.360 | Yes.
00:12:55.680 | And I think maybe that would have been a better way for me to phrase my question in the beginning,
00:13:01.400 | Joshua.
00:13:02.400 | I'm kind of curious if we spent the next four or five years adding to that retirement and
00:13:09.440 | paying down that mortgage.
00:13:11.080 | And then when we got to that point, then suddenly saying, okay, we just need to earn enough
00:13:16.400 | to pay the bills and forget about the savings and those other things.
00:13:20.800 | And then suddenly our expenses are more like $4,000 a month.
00:13:24.960 | And we go on and do work that we love to earn that 4,000, not ever touching that nest egg
00:13:30.440 | until later down the road.
00:13:33.240 | Yeah, that's what I would do.
00:13:34.960 | I would add one more wrinkle.
00:13:36.400 | I think you should consider things in two ways.
00:13:41.240 | First, I think that you should think of things in terms of this 20-year time horizon, because
00:13:46.080 | 20 years puts you at about Social Security retirement age.
00:13:49.800 | My hope is that you would never stop being productive and financially productive.
00:13:53.840 | My hope is that you would never retire, but I know you'll want to be in a position where
00:13:58.200 | you would feel like you could if you wanted to.
00:14:00.980 | So at 68, you want to have a retirement portfolio.
00:14:03.280 | You're going to have that $3 million.
00:14:04.640 | You would have additionally potentially Social Security income of some amount coming in at
00:14:09.080 | about that age.
00:14:10.800 | And that's enough of a time horizon that you could legitimately look forward for that 20-year
00:14:14.560 | period of time.
00:14:15.560 | Now, I would additionally encourage you, based upon the age of your children, to think of
00:14:20.400 | the next 20 years almost in two separate 10-year chunks, because you're in a very crucial age
00:14:26.920 | with your children.
00:14:28.240 | They're eight and they're six, which means that your input as a father really needs to
00:14:33.440 | happen for your eight-year-old in the next five to eight years, and for your six-year-old
00:14:38.680 | in the next seven to 11 years.
00:14:42.640 | That basically, by the time your children are about 13, you need to have put into them
00:14:48.760 | the vast majority of the fatherly input that you're going to put into them.
00:14:53.400 | Because by the time they reach age 13, that's when they start transitioning to adulthood.
00:14:58.320 | That's when they start transitioning into adolescence.
00:15:01.180 | That's when your role as a parent changes.
00:15:03.520 | At this point in time, you are a parent.
00:15:05.840 | Now, you'll always be a parent, but your role from about age 13 to, say, age 20, will change
00:15:11.680 | more into the role of a coach rather than a hands-on parent.
00:15:15.480 | And your relationship with your children will also change in terms of the time that they
00:15:19.560 | have available and the time that you are able to spend with them.
00:15:22.900 | That relationship will look very different at age 9 than it does at age 17.
00:15:27.280 | So you're in that crucial stage in the next decade where your children are still in the
00:15:32.680 | child phase.
00:15:34.400 | And I would encourage you to say that this next 10 years should look very different than
00:15:37.800 | the following 10 years.
00:15:39.580 | Because 10 years from now, you'll have an 18-year-old and a 16-year-old.
00:15:43.340 | At that point in time, if you want to move and sell your house, you can easily sell your
00:15:46.960 | house, move into a beautiful one-bedroom condo on the lake or wherever you want to
00:15:51.240 | live.
00:15:52.240 | You can easily make any decision that you want to.
00:15:54.280 | But you should think in terms of the next decade and your role as a father and your
00:15:58.600 | wife's role as a mother, and then the following decade at which your children will be more
00:16:02.280 | independent and you'll be transitioning into that empty-nest phase of life.
00:16:07.780 | Those plans are probably going to be different.
00:16:10.040 | But if I had to choose, I would rather see you taking more time in the next decade, less
00:16:15.660 | time for work, more time with your children, doing whatever those adventures are that you
00:16:19.320 | have planned for your children, focusing intently on teaching them, on instructing them on the
00:16:24.520 | way that they should go, and then do that in the next decade.
00:16:27.280 | And then in the following decade, that's when, you know, ramp up the business.
00:16:31.200 | Go ahead and start a new one.
00:16:32.640 | Do whatever you're going to do in that next decade and commit that, you know, from years
00:16:36.120 | 10 to 20 from now to heavy work or launching a totally new project, whatever that is.
00:16:41.880 | Does that make sense?
00:16:42.880 | Michael O'Hara, MD, PhD It does.
00:16:45.160 | It does.
00:16:46.160 | I enjoyed hearing that part because part of me wonders, well, you know, is it okay for
00:16:52.000 | me to not be out there, you know, hustling like crazy now?
00:16:56.320 | Because I do value that time with them and I do, you know, it serves a big function for
00:17:00.200 | my family, my flexibility and time too, which is great.
00:17:04.880 | So it's something I'm not wanting to give up at this time because I do see a lot of
00:17:10.200 | people that don't have that opportunity to quite be there as a father like I do at this
00:17:15.400 | time.
00:17:16.400 | You mentioned that your work involves travel.
00:17:18.360 | Do you take your children with you?
00:17:20.880 | I'm not afraid to, but it hasn't worked out like that.
00:17:27.080 | Typically I try to really push the extremes of the travel to get there and back as fast
00:17:32.360 | as possible.
00:17:33.360 | And I don't usually stop and smell the roses too often.
00:17:36.480 | Of course.
00:17:37.480 | So I just would encourage you, one thing to think about, and then let's go to one more
00:17:40.680 | specific that I want to talk with you about.
00:17:42.920 | But I would encourage you, the most important thing that your children need at this stage
00:17:46.560 | of your life is to be with you.
00:17:48.520 | They need you to teach them how to live.
00:17:50.980 | They need you to teach them how to interact with others.
00:17:53.840 | They need you to teach them how to treat other people, how to build business, whatever it
00:17:57.880 | is that you're doing.
00:17:58.880 | Your children need to have that interaction with you at this stage of your life.
00:18:02.280 | And they're in a perfect phase for you to be working together with them.
00:18:07.040 | So I wouldn't view it as either or.
00:18:09.160 | Whether you work like a maniac or you spend all your time just hanging out with your kids.
00:18:13.920 | I don't see a lot of value.
00:18:15.240 | I see some value in having time to hang out with your children.
00:18:20.760 | That's fine.
00:18:21.760 | But if you're just focusing on hanging out with your children, what are you teaching
00:18:25.360 | them?
00:18:26.360 | They're not learning anything other than that life is about hanging out.
00:18:28.880 | And I deny that.
00:18:29.880 | I don't believe that life is about hanging out.
00:18:32.440 | So what I would say is look at your families, talk with your wife, and look at your overall
00:18:36.440 | family structure and say, "How can we at this stage live a life of integrated family connection
00:18:42.640 | where we're involved in productive activities as a family, where those activities can be
00:18:47.560 | integrated with our children, not separated?"
00:18:50.960 | Because you don't want just your children to learn, well, they go to school and they
00:18:53.840 | have all their instruction at school, but then they just hang out with dad.
00:18:57.080 | Hanging out is fine, but working with dad, whether it's building an addition or going
00:19:01.420 | with you on your business trips, working with dad, in my opinion, is more valuable than
00:19:05.720 | just hanging out.
00:19:07.080 | So that's a lot of my philosophy.
00:19:10.480 | You take it, you test it, you talk with your wife, see what it is about you.
00:19:13.960 | But I don't think that I would...you are now financially independent.
00:19:18.120 | So focus a lot on the next decade and think about how you can discharge this time period
00:19:23.800 | of your family responsibility in the most effective way possible with you, your wife,
00:19:28.760 | your children, in a way that conforms to your vision for your family.
00:19:34.280 | I want to talk just a moment about health insurance.
00:19:36.760 | You mentioned that your wife has health benefits through her job.
00:19:40.980 | And so of course, one concern is how to replace that.
00:19:43.320 | Are there any other benefits that you have that you're concerned about?
00:19:46.240 | Well, I mean, she has a great package for the dental and vision and 401k matches and
00:19:56.080 | all that good stuff that comes with a job like that.
00:19:59.120 | And I would say that's the one that seems the hardest to replace would be the health
00:20:04.360 | insurance.
00:20:05.360 | Is anybody in your family sick?
00:20:07.560 | No.
00:20:09.320 | So this is a huge pet peeve of mine.
00:20:11.880 | You'll hear me talk about it all the time.
00:20:14.440 | But if neither of you is sick, you should not labor at the altar of health insurance.
00:20:20.200 | Health insurance is designed to protect you from a catastrophic illness.
00:20:24.300 | But statistically, if neither of you is sick and neither of you has a catastrophic illness,
00:20:29.400 | then chances are that health insurance is not going to be a huge factor for you.
00:20:35.440 | That would be different if you had a problem, had a physical problem.
00:20:40.560 | Good friend of mine is in very bad physical shape, all kinds of medical issues.
00:20:45.280 | And he works at a job for the government and he works there exclusively.
00:20:49.960 | He doesn't need the money, but he needs the health insurance coverage.
00:20:53.020 | It's reasonable if you have it.
00:20:54.660 | But if you don't have it, don't buy into this weird American thing where it's all about
00:20:59.120 | working so that you can have health insurance.
00:21:01.260 | You can go out and you can buy health insurance in the open market and you can just simply
00:21:05.880 | pay for it and you can plan for it.
00:21:08.660 | There are all kinds of you, whether you go with a traditional health insurance policy,
00:21:13.520 | after the Affordable Care Act, that market became very difficult.
00:21:17.020 | But my hope is that in the future, more options will be presented.
00:21:20.720 | We'll see.
00:21:22.360 | We're in this weird in-between legislative stage where some of the requirements of the
00:21:26.920 | Affordable Care Act were reversed and some of them were not.
00:21:31.240 | Prior to the passage of the Affordable Care Act, you could buy a catastrophic health insurance
00:21:34.400 | policy for your family for a couple hundred bucks a month.
00:21:37.820 | Things like that should still be available in the future.
00:21:40.840 | There's also health care sharing programs.
00:21:42.600 | There are more of those coming on and the average cost there is only a few hundred dollars.
00:21:46.440 | And you can pay for stuff out of pocket.
00:21:48.360 | Dental insurance almost never works out in a positive sense in the terms of dental insurance
00:21:56.000 | is always capped on the upside.
00:21:57.920 | So it gives you a little bit of benefit, but you can also just go to your dentist and just
00:22:01.440 | offer to pay them cash and you can get most of the same benefits cheaper by paying cash.
00:22:06.460 | So figure out how to earn enough money to pay for health insurance, but build your life
00:22:10.920 | and your lifestyle first, beginning with an open slate, and just put health insurance
00:22:15.240 | on a list as something that needs to be solved rather than this insurmountable problem that
00:22:19.760 | if I don't have a job, I can't get health insurance.
00:22:22.360 | And hey, if that doesn't work, go get a job at Starbucks for health insurance like lots
00:22:25.440 | of people do.
00:22:26.440 | Anything else, Greg?
00:22:27.440 | No, this is valuable.
00:22:28.440 | Thank you so much.
00:22:33.040 | Begin and build from a place of strength.
00:22:35.000 | You are now financially independent.
00:22:38.200 | Now act like it.
00:22:39.520 | Build your life in the way that fits your vision.
00:22:41.680 | You are now financially independent.
00:22:44.400 | And from now going forward, you will have increasing levels of financial independence.
00:22:48.680 | But don't buy into this lie that the financial advice industry says that you have to have
00:22:53.400 | your $3 million now to be financially independent.
00:22:57.160 | You are now financially independent.
00:23:00.080 | Even if you just earned $30,000 a year for the next five years and your wife quit her
00:23:05.640 | work and she came home and did nothing productive that brought no financial benefit to the family.
00:23:11.420 | And for the next five years, you took $20,000 per year out of your savings so that you could
00:23:18.960 | spend your $50,000 a year.
00:23:21.020 | Even if you did that, that would be fine.
00:23:23.500 | You could do that if that was what you chose to do.
00:23:25.800 | And you wouldn't be stupid.
00:23:26.800 | You've saved this money for a purpose.
00:23:28.820 | So break it out into reasonable, thoughtful life stages that actually matter versus this
00:23:34.600 | monolithic, "I'm either working or I'm retired."
00:23:37.320 | That, in my opinion, is a bad formula for life.
00:23:40.880 | Richard, in Virginia, welcome to Radical Personal Finance.
00:23:43.680 | How can I serve you today?
00:23:44.680 | Hey, Joshua.
00:23:45.680 | First time caller, long time listener.
00:23:46.680 | I'm a retirement plan administrator by day and a husband and a father by night.
00:23:58.760 | I'm in the beginning stages of trying to redo my life insurance.
00:24:05.400 | And I do have about 1.5 million of term life insurance already in force.
00:24:11.520 | I do have a young child who's three years old and I haven't redone my insurance since
00:24:17.240 | she was born.
00:24:19.080 | And my specific question is, I already have an existing relationship with an agent, but
00:24:26.080 | he is not able to give me any quotes with any of the mutual insurance companies, to
00:24:32.080 | my knowledge.
00:24:33.640 | And just due to my position with my employer, I've had the opportunity to informally interview
00:24:42.280 | several financial advisors just by way of the company to see what they offer to our
00:24:46.920 | executives, but haven't necessarily taken the personal step forward to contacting some
00:24:53.320 | of those agents who happen to work for the mutual insurance companies, if you will.
00:24:58.960 | And after listening to several of your old podcasts on life insurance and with your particular
00:25:06.040 | work experience background, I was wondering if there really is any value to starting our
00:25:12.380 | new relationship with a captive insurance agent or just sticking with my current insurance
00:25:20.800 | agent who won't be able to give me any life insurance quotes with the mutual insurance
00:25:25.520 | companies.
00:25:26.520 | So, it's a little bit of a muddle because it used to be clear, used to be there were
00:25:32.000 | captive agents and then there were independent agents.
00:25:35.520 | And some companies only wrote their business with captive agents and some companies only
00:25:39.820 | wrote their business with independent agents.
00:25:42.460 | That line is a little bit more, it's not as clear as it once was because there are companies
00:25:49.080 | that restrict their products only to their own representatives.
00:25:53.880 | And I don't know of any company who does that, whose representatives can't write other products.
00:26:00.920 | And there are mutual insurance companies that are represented by independent agents.
00:26:07.120 | So it's not, so there are companies that you can buy the policies and they have both.
00:26:12.740 | They sell their policies through captive agents and through independent agents.
00:26:17.000 | The first thing that I would do is I would ask your current advisor, your current life
00:26:22.280 | insurance agent.
00:26:23.780 | If they can become appointed with any of the companies that you are interested in.
00:26:27.940 | It would be common that that particular advisor could gain an appointment with some large
00:26:35.520 | mutual insurance companies.
00:26:36.960 | There are a number of them that do represent their products independently.
00:26:40.480 | The general downside is usually an independent life insurance agent will not be as familiar
00:26:46.680 | with the ins and outs of those particular companies' products.
00:26:50.760 | If you're dealing with a simple product, like a simple term life insurance product, or if
00:26:56.600 | you're dealing with a very simple traditional whole life insurance product, I don't think
00:27:00.680 | there's any, that's a danger.
00:27:02.680 | But if you're dealing with a more complex product, a hybrid product where it has a certain
00:27:09.080 | number of internal options, there you do want to make sure the agent that you're working
00:27:12.700 | with is well versed in the actual product.
00:27:15.580 | So to begin with, do you feel like your current life insurance agent is competent and are
00:27:20.320 | you satisfied with their service to you?
00:27:26.320 | I would say they do a good job.
00:27:32.080 | They don't knock it out of the park in terms of impressing me, but they don't necessarily
00:27:37.160 | do anything wrong.
00:27:40.840 | He is not a CLU, so I've learned the value of a CLU.
00:27:47.600 | And so that concerns me a little bit.
00:27:49.400 | If I'm not so much losing out per se, I'm not trying to express that concept, but just
00:27:57.440 | is this the best for my family or should I just be keeping with the existing insurance
00:28:04.440 | agent?
00:28:05.440 | So that's kind of my concern if you will, working with an existing agent and being independent,
00:28:11.640 | what am I losing out on?
00:28:13.480 | And then also not being a CLU, how much am I losing in that transaction, not having that
00:28:19.560 | certification behind this fellow's name?
00:28:22.400 | So here's what I say.
00:28:23.400 | There's no reason for you not to meet with other people.
00:28:26.320 | In anything in life, no matter how much you like somebody or appreciate somebody, you
00:28:32.040 | want to go ahead and get multiple sources of input, multiple quotes.
00:28:37.400 | Now when I was an insurance agent, I of course would have liked it if my clients had loyalty
00:28:41.760 | to me and never wanted to talk to anybody other than me.
00:28:45.200 | But the reality is they need to.
00:28:46.760 | They need to talk to other people because that keeps me on my toes and that makes sure
00:28:50.440 | that they're served effectively.
00:28:53.220 | If I'm not serving them to the best degree that they need, then they should be being
00:28:57.520 | served by somebody.
00:29:00.040 | That's honest, that's forthright, that should be happening.
00:29:02.840 | And the only thing I would always just ask is that if you're working with another agent
00:29:07.480 | or if you are taking, you're collecting quotes, give me a shot, give me a shot.
00:29:12.480 | Let me compete for the business.
00:29:13.720 | All I want is a chance to compete, a chance to bid.
00:29:16.480 | And so I don't see any reason for you not to go ahead and meet with other people, especially
00:29:21.240 | if there's an agent that's impressed you, because there very well may be that you'll
00:29:24.280 | get better service, you'll get better products, you'll get good and useful ideas.
00:29:28.360 | And I think throughout life, we should always maintain an openness to new ideas.
00:29:32.920 | Closed-mindedness is rarely a virtue.
00:29:36.880 | Openness is usually a really good course of action on anything.
00:29:41.360 | We shouldn't be scared of ideas, whether they're about the large existential problems of life
00:29:46.200 | or the simple application of how to do a life insurance analysis.
00:29:50.840 | Chances are you will want to keep the insurance that you have in force currently.
00:29:54.920 | A good rule for anybody who has life insurance is you should always be highly skeptical of
00:30:00.920 | replacing any insurance coverage that you currently have.
00:30:06.280 | Usually an insurance policy that you have will be better than any insurance policy that
00:30:11.840 | you could buy.
00:30:12.920 | You bought it when you were younger.
00:30:14.340 | You probably bought it when you were healthier.
00:30:16.560 | You bought it when it was cheaper.
00:30:18.320 | And unless some of those things have changed, unless you've magically become younger, ha-ha,
00:30:22.720 | or unless you've become healthier or it's become cheaper because you're looking at a
00:30:26.160 | different option, those are the only reasons why you should change.
00:30:28.960 | So most likely you should keep all the insurance that you have in force.
00:30:32.600 | That will allow you to make sure that your existing agent is still getting the commissions
00:30:37.040 | from the policies that he sold you.
00:30:39.720 | And then if a new agent can suggest something else that does help you, that does materially
00:30:44.440 | help you, then at that point in time, it's up to the new agent.
00:30:48.040 | That's their job.
00:30:49.040 | Clear enough answer?
00:30:50.040 | Any follow-up questions, Richard?
00:30:51.040 | Richard D. Lawyer, MD No, that's very helpful.
00:30:54.600 | That's exactly what I was looking for.
00:30:55.920 | I was struggling with reconciling the idea in my mind of shopping around and being loyal
00:31:01.320 | and thank you for giving me your perspective.
00:31:04.240 | I appreciate that.
00:31:05.240 | Tom Holland In financial relationships and financial sales,
00:31:09.280 | a lot of the strength of the interaction is based upon the relationship.
00:31:14.480 | I believe the relationship is valuable.
00:31:16.600 | I believe there's a value to loyalty to a person.
00:31:20.840 | There really is.
00:31:22.280 | I think that there are people that I do have interactions with that I'm happy to pay more
00:31:28.480 | to, that I'm happy to get a slightly inferior product if such a thing were the case, in
00:31:33.760 | order to do business with that person.
00:31:36.480 | So if your answer to me had been, "This life insurance agent is awesome," and there were
00:31:41.560 | no hesitation in your voice, then I would say, "Well, just go with them because you're
00:31:46.560 | going to get more value out of somebody who knows you than some tiny little product advantage."
00:31:51.560 | However, competition is a benefit.
00:31:55.640 | And in order to put that into place, we've got to actually judge the competition.
00:31:59.880 | You've got to actually go out and collect the quotes.
00:32:02.520 | And going out and collecting the quotes will be important for you to know that you're getting
00:32:08.120 | the best deal possible and you're doing the best thing for your family.
00:32:12.120 | And it helps collectively to keep the entire industry of life insurance agents better.
00:32:18.220 | If there were no competition, we'd have real problems.
00:32:20.320 | So you're doing your part to feed that competition.
00:32:23.560 | Kevin in Washington, welcome to Radical Personal Finance.
00:32:26.000 | How can I serve you?
00:32:27.000 | Thanks for taking the call.
00:32:28.000 | I had a hopefully simple question and maybe get your opinion on raising my cost basis
00:32:35.120 | in the context of a taxable investment account.
00:32:38.240 | I understand it means paying taxes, but I just wanted to see what your thoughts were
00:32:43.120 | upon that.
00:32:44.120 | Okay.
00:32:45.120 | Tell me more.
00:32:46.120 | I guess, what do you need to know?
00:32:49.840 | It's kind of an odd question, I think.
00:32:51.880 | What investments do you own that you're thinking about selling?
00:32:54.320 | What's your cost basis and what's the value currently?
00:32:56.920 | So just index funds, about 780K, possible 250 capital gains.
00:33:10.320 | And why do you think, so you're basically referring to the concept of tax gains harvesting.
00:33:14.940 | Why do you think this would be beneficial to you at this point in time?
00:33:18.160 | Well, I wasn't trying to, I guess, gain anything, but I just wanted to ping the taxes now instead
00:33:27.880 | of just doing it later.
00:33:28.880 | Is there any benefit to that, more or less?
00:33:31.560 | Do you have any reason to believe that the taxes will be lower now than they will be
00:33:36.640 | later?
00:33:42.440 | I guess not necessarily.
00:33:43.440 | I mean, the tax rate stayed fairly consistent over the last long time.
00:33:49.840 | I guess not.
00:33:50.840 | All right.
00:33:51.920 | So let me back up and just kind of explain the concept, first of all.
00:33:57.500 | So when you own a capital gain asset, you choose when the tax will be due based upon
00:34:05.960 | when you realize and recognize the income.
00:34:10.100 | So when you choose to sell it.
00:34:11.640 | So if you have an asset such as a set of shares of a mutual fund or a piece of real estate
00:34:18.560 | property, there won't be any tax due on the property until you actually sell it and realize
00:34:24.720 | the gains.
00:34:25.720 | Now, in general, you never want to pay a tax that you can push off to the future.
00:34:31.600 | The basic rule is any kind of expense that you can push off to the future, you always
00:34:37.120 | should.
00:34:38.120 | So if I told you you can pay me a thousand dollars today or you can pay me a thousand
00:34:41.840 | dollars a year from now, you should always want to pay me a thousand dollars a year from
00:34:46.000 | now because you get the utility of using that thousand dollars today for the next year.
00:34:52.160 | So any expense that we can push off to the future, that should always be our default
00:34:57.700 | option.
00:34:58.960 | Same thing with any income, any income we can bring forward to today, that should always
00:35:03.320 | be our default option.
00:35:05.400 | So if I gave you the option of having a thousand dollars today from me as income or a thousand
00:35:10.760 | dollars a year from now as income, you should take it today.
00:35:14.480 | So you push expenses out and you bring income forward.
00:35:17.640 | That's the default position.
00:35:19.360 | Now if I adjust the numbers a little bit and I say to you, Kevin, you're going to incur
00:35:24.200 | an expense, would you like to incur a thousand dollar expense today or would you like to
00:35:29.900 | incur an eight hundred dollar expense a year from now?
00:35:32.820 | Well now all of a sudden you're going to go for the eight hundred dollar expense a year
00:35:35.400 | from now because you get the best deal of time to use the money and it's a discount.
00:35:42.440 | Now if I flip it and I say, would you like to incur a thousand dollar expense today or
00:35:45.920 | a twelve hundred dollar expense a year from now?
00:35:48.480 | Now you have to do a few calculations and you have to calculate and see, is it worth
00:35:52.400 | it to me to take the two hundred dollar discount in order to pay now versus later?
00:35:57.260 | So this is just basic planning.
00:35:59.300 | Same thing with income, just in reverse.
00:36:01.040 | This is basic planning.
00:36:02.440 | So the basic rule of expenses is you push them out to the future and that applies to
00:36:06.480 | taxes.
00:36:07.480 | There's no reason to want to pay a tax today that you don't have to pay when you can pay
00:36:12.360 | it later.
00:36:13.480 | So if you were just going to sell your index funds, incur the tax, and then move those
00:36:18.620 | index funds back and then buy the index funds again so that you've increased your tax basis
00:36:23.960 | in the account, there's no reason to do that unless it gets you some very valuable benefit.
00:36:32.180 | So what are the valuable benefits that you could get?
00:36:34.580 | Well first of all, you might have some knowledge or guess about the direction of tax rates
00:36:41.060 | in the future.
00:36:42.320 | So you might say, tax rates I think are going to go up.
00:36:46.980 | If you believe that tax rates are going to go up in the future, then you might place
00:36:52.500 | your bet and say, it's better for me to pay the tax now at a lower rate and then in the
00:36:59.520 | future I won't owe so much tax.
00:37:02.780 | So there you're making a guess about tax rates.
00:37:05.520 | The information that you would need to make your guess about tax rates is what will the
00:37:10.640 | U.S. Congress do about tax rates in the future?
00:37:15.940 | Now if you can accurately predict that, you ought to take the microphone and take my job
00:37:20.220 | away from me.
00:37:21.220 | That's a question that nobody really knows.
00:37:23.900 | Everyone has guesses and your guess is as good as just about anybody else's, but nobody
00:37:28.720 | really knows.
00:37:29.720 | I'll go ahead and just tell you my guess on it.
00:37:32.860 | My guess is that I don't think tax rates generally will go up.
00:37:37.500 | The reason I don't believe that is I am persuaded that tax rates over the last 50 years have
00:37:44.020 | actually been on the whole fairly stable.
00:37:46.900 | Now the tax brackets march around a little bit, but on the whole they've been fairly
00:37:51.100 | stable.
00:37:52.140 | If you actually look past the political rhetoric during election season to what people actually
00:37:57.540 | do, there's very little change in what the politicians in the United States actually
00:38:02.780 | do.
00:38:04.260 | During the election season, you'll generally hear Republicans say, "We need to cut taxes,"
00:38:08.820 | and you'll hear Democrats say, "We need to raise taxes on the rich," but you'll actually
00:38:13.020 | watch them.
00:38:14.380 | And when they're in the middle of a recession, the Democrats sign on for tax cuts and Republicans
00:38:19.740 | sign on for tax increases in certain situations as well.
00:38:23.980 | So on the whole, I don't think there's any political will for raising taxes.
00:38:27.900 | And the only thing that I think personally would change that would be if the flow of
00:38:33.460 | money to the US federal government dried up.
00:38:37.960 | But right now the US federal government spends out of deficits and out of debt, not out of
00:38:43.620 | tax revenue.
00:38:45.000 | So they never worry about adjusting their expenditures to the amount of tax revenue.
00:38:49.000 | They just worry about borrowing more money.
00:38:51.200 | So as long as they can borrow more money to pay for their bills, I don't see why they
00:38:55.580 | would change tax rates.
00:38:56.940 | So I think that on the whole, tax rates are probably politically stable.
00:39:00.380 | Again, cut out election season, and it seems like everybody actually does just about the
00:39:04.780 | same thing.
00:39:05.780 | Marc Thiessen: There are changes at the margin.
00:39:07.780 | There are changes with a little bit of fiddling here with an estate tax exemption.
00:39:11.620 | There's a little bit of fiddling there with a corporate tax, blah, blah, blah.
00:39:16.460 | But go and look it through and you find that for the last 50 years, it's been pretty stable.
00:39:21.960 | Doesn't mean the future will be, but that's my guess.
00:39:24.080 | Your guess may differ.
00:39:25.300 | So tax rates are hard to predict.
00:39:27.560 | What about tax brackets?
00:39:29.280 | Because the other thing that could happen for you is that you could be changing brackets.
00:39:34.140 | Right now you might be earning $20,000 per year, but you know that you've got good idea
00:39:41.100 | that all of a sudden your income is going to go from $20,000 per year to $2 million
00:39:45.480 | per year.
00:39:46.520 | This is where you can actually have inside knowledge on your situation.
00:39:50.500 | If you think that your tax bracket is going to go up, either while you're working or in
00:39:55.920 | retirement, then in general, you want to pay at the lowest bracket, whenever you're going
00:40:00.560 | to be in the lowest bracket.
00:40:02.160 | And here's where capital gains tax, tax gain harvesting does come into play.
00:40:08.520 | If your income is low enough so that you could take advantage of the 0% capital gains tax
00:40:14.320 | rate, that can be a really wise thing to do.
00:40:17.740 | So if your income, your earned income is low, then, and you say, okay, well I can go over
00:40:21.860 | here and I can go ahead and recognize $50,000 of gains and I can still stay in my 0% capital
00:40:28.640 | gains tax rate, tax bracket.
00:40:31.080 | That can be really, really good because now you're paying tax, you're increasing your
00:40:34.880 | tax basis and you're not actually, you're increasing your tax basis and you're not actually
00:40:41.200 | paying any tax.
00:40:43.140 | That's really good.
00:40:44.440 | On the flip side also, and so if you knew, for example, that next year you're going to
00:40:47.680 | take a year off and your earned income is going to go to zero, well yes, absolutely
00:40:52.240 | start selling and take advantage of as much as you can to harvest those tax gains.
00:40:57.200 | On the top end as well, if you think that you're going to realize the additional 3.8%
00:41:03.080 | Medicare tax tax on the very top end of tax rates, then also you might go ahead and trigger
00:41:10.240 | your gains now in order to avoid that in the future.
00:41:13.720 | But in general, your default option should be, I'm not going to pay taxes today unless
00:41:19.740 | there's some compelling financial justification as to why that's in your best interest.
00:41:25.600 | How does that, does that make sense to you?
00:41:27.440 | Absolutely.
00:41:28.440 | I was having those same conversations in my head.
00:41:31.120 | So this pretty much put it to bed to not sell anything, just to wait.
00:41:37.320 | Right.
00:41:38.320 | And it's good because when you actually look at your taxes and you actually run the numbers,
00:41:45.040 | here we get into the question of do you pay taxes from within the portfolio or pay taxes
00:41:49.080 | from outside of the portfolio?
00:41:51.880 | And all of the, you know, there are other tax analysis, points of tax analysis, same
00:41:56.200 | type of thing of someone asking, should I convert from a traditional IRA to a Roth IRA
00:42:00.160 | and pay the tax?
00:42:01.160 | Well, where's the money coming from?
00:42:02.840 | And then what is going to be your tax brackets?
00:42:04.920 | But on the whole, if you're, if you don't have a need for the income, you don't have
00:42:11.840 | a something that you can spend it on, you're probably going to be in a lower tax bracket
00:42:17.460 | in the future than now during your high years of earning.
00:42:21.060 | So the good general rule of thumb is just wait, just wait.
00:42:24.920 | The other thing that can happen is I wouldn't do it unless something dramatically changed.
00:42:30.560 | Let's say that you became sick and you couldn't work for a year.
00:42:33.880 | Well, that would be the time.
00:42:35.280 | Go ahead and start triggering gains and harvesting your gains.
00:42:38.200 | Or again, as I already mentioned, you travel for a year, trigger your gains, or you retire,
00:42:42.360 | trigger your gains.
00:42:43.600 | But that is one wonderful about a capital gain asset is you can control when those gains
00:42:49.060 | come in.
00:42:50.060 | Any other questions, Kevin, or clear enough for now?
00:42:52.120 | No, that's wonderful.
00:42:53.720 | Thank you.
00:42:54.720 | Thank you for calling in.
00:42:56.000 | I enjoyed hearing from you.
00:42:57.760 | That is it for today's Q&A show.
00:42:59.480 | If you would like to be on next week's Q&A show, please come by RadicalPersonalFinance.com/patron.
00:43:04.240 | Sign up to support the show there at RadicalPersonalFinance.com/patron and you will be receiving information on next week's
00:43:10.520 | show.
00:43:11.520 | We can talk about your situation.
00:43:12.520 | Great diversity of calls today.
00:43:13.520 | I hope you enjoyed it.
00:43:14.520 | I enjoyed it.
00:43:15.520 | And I will be back with you very soon.
00:43:16.840 | Again, RadicalPersonalFinance.com/patron.
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