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Ralphs. Fresh for everyone. ♪ Friday Q&A today. Here are the questions we're going to cover. I almost doubled my income. Saving a bunch of money, what do I do with the difference now? Number two, my parents don't have much money, just a little bit of home equity. How do we figure out a retirement plan for them?

Number three, is insurance a good investment? Number four, how do I figure out an appropriate withdrawal strategy to leave a certain amount of money behind? Number five, 26 years old, make a bunch of money but don't know what to do. Is it okay just to keep money in cash or do I need to have it invested?

Next, how do I allocate and diversify my bond portfolio? Should I pay extra on my mortgage in a lump sum or in a little bit over time? And if we have time, how do I get out of credit card debt? ♪ Welcome to the Radical Personal Finance Podcast. My name is Joshua Sheets and I'm your host.

Today is Friday, November 7, 2014. It's Friday, time for Q&A. Those are the eight questions I've got lined up. Of course, the question is will we get even past number one or number two? I really don't even know. This is episode 98 of the show. I hope you enjoy it.

♪ So you all responded to my – was it a plea? I'm not sure if it was a plea or my request for more questions last week. So I had a bunch of questions sent in which is awesome. I've got those eight that I mentioned in the intro lined up here ready to go.

I'm not sure how many I'm going to get through. I'm going to try to actually answer them a little bit more quickly than sometimes and I'm going to linger on a few different points. So as just a quick up front, I may in some of these questions answer them in a more cursory manner or just pick on a couple of the topics that seem pertinent and interesting to me rather than trying to give such a detailed, exhaustive answer for each of these.

So I hope you enjoy. I'm going to shoot for right about an hour and when I get to an hour, I'll finish whatever question I'm on and I will flip the recorder off. So we're going to keep today to an hour and then I'll keep the questions for future shows lined up in the backlog.

Real quick before I get started on the questions, I want to just give you a quick heads up since I forgot to do it last Friday. I've been interviewed over the last two weeks on two different podcasts and both of those are now out. I will put links in today's show and then also tomorrow I will put out a blog post on the blog.

For part two of my interview with Eric Hemingway on the Family Adventure podcast, we talked about strategies for saving money toward things like family adventure and long-term travel. And then also I was interviewed by Rob Berger on his Dole Roller podcast. And that show was a lot about the business of financial planning, what it's actually like from a business side and he got some personal details out about me.

He got some of those things from me. So I hope you enjoy that and check those out. Links in today's show and go ahead and check those shows out if you are interested in that. Also next week, I'm going to be running through a few different things next week.

I'll share that schedule with you at the end of the show. So first off, we're going to begin with a voicemail question. And if you would like me to answer your voicemail questions, I prefer voicemail questions because it helps the audience to hear your voice. I really like those.

So I will give priority to a good question asked in voicemail versus a question that was emailed to me. But let's kick it off with a question here from Joel. Hey, Joshua, excellent work. This is the best financial podcast out there. You're a gifted thinker and a talented communicator.

Keep up the good work. Thank you. Need your advice. Brainstorming on how to manage a big jump in income. This year we went from $100,000 to $190,000 from my promotion and my wife's second job. Our living expenses are $30,000 thanks to a paid off house. And we give to many causes and to our local church for a total of $25,000.

We maxed out my 401(k) and started an individual 401(k) for her. She's an independent contractor on one of her two jobs making $14,000. We also maxed out an HSA for $6,000. Our assets are $250,000 in mutual funds with maybe 10% of it in company stocks. Home is worth $160,000.

No debts, no kids for college. We need ideas on where else to invest. It leaves us around $500,000 a month. Should we put it all into taxable accounts and buy more mutual funds? With careful asset allocation and with momentum upgrading, I would expect 10% return. Or should we buy rental properties?

I manage a friend's rental house, and I'm a great handyman. Also, we could upgrade to another home and build equity and get a mortgage deduction. But one problem in Texas is high property tax. So we need ideas. Ultimately, our goal is semi-retirement in 5 to 10 years by our late 40s or early 50s so that we could volunteer for different causes and spend time traveling.

Thanks, Joshua. Bye-bye. What a cool question, huh? How exciting to be in that position. What an awesome opportunity to be making almost $200,000 a year, and you only need about $30,000 to live on, and then basically to almost practically double your income. That is awesome. So, Joel, what an exciting, exciting situation to be in.

I've got a few thoughts for you, and I'll just tell you kind of how I would think about it. But I hope you find a few of these things helpful. First of all, a couple of bits of info for you as far as that I picked up in his voicemail, two terms you may not be familiar with.

He mentioned choosing a portfolio of mutual funds using momentum upgrading. So that would indicate to me that he is using a momentum investing strategy. And momentum investing is basically you try to ride the macro wave. So you try to get out when things are going down and get in when things are going up.

But you're not trying to buy it. You're not trying to time it perfectly. You're trying to essentially ride the trend. And since he used the term "upgrading," to the best of my knowledge, I could be mistaken about that, but I think that term is primarily associated with one newsletter.

I think it's called the No Load Fundex Newsletter, something like that. That might be the proper name for it. But if you're interested in that, my library carries that newsletter. I read it off and on every now and then. But that's probably what he is doing for his investment strategy.

It's kind of an interesting strategy. There's a compelling sales copy on it, and I know many people who have done well with it. And it's an interesting newsletter. I like to read it. And basically the idea is you buy or sell certain no-load mutual funds, trying to ride the general trend of the market.

And so in this newsletter they'll publish every month. They'll publish the funds that are a buy, the funds that are a hold, and the funds that are a sell. And so it's an interesting newsletter, interesting strategy. So that's what he probably is referring to when he mentions the two key words are "momentum" and "upgrading." So the other thing is he mentioned he's got about $500,000 a month.

My guess is that he meant $5,000 a month. So that would be about right. If you were to run his expenses, just to give you an update on the numbers, if you were to say, "Okay, $190,000, and let's ignore tax for a moment. Let's just take out expenses. Let's take out $30,000 of a paid-for house.

Take out," he says, "max is 401(k)." So let's just put $18,000 in there. It's just under that. So $18,000 for his 401(k). He says his wife makes $14,000, and he's putting that into an individual 401(k). So let's just assume she puts all of her money in there. $6,000 for the HSA.

And then the $25,000 of money given away. So that leaves us with about $97,000. So my guess is that he meant about $5,000 a month, which would be $6,000, and he's paying $30,000 a year of taxes, $37,000 maybe in my math of employment taxes and income taxes. So the question is primarily basically, "What do we do with $5,000 a month when we need only $30,000 to live on and we're making $190,000?" What a cool, cool scenario to be in.

So first thing I would do in this situation is I would just run some numbers. And he already has $250,000 in mutual funds and a house that's worth $160,000. But if we just quickly run $30,000 and divide that into $190,000, we wind up with basically a 16% expenses versus income ratio.

So essentially he's able to save about 85% of his income. Now it's not going to be quite that high because we've got to take employment taxes out, which is going to be 7.5%. And then we also have to take out income taxes. But he's basically north of 75% of a savings ratio.

So we know from the charts behind this ratio that he says our primary goal is semi-retirement in 5 to 10 years in our late 40s or early 50s. We know that as long as we can keep up that household income of $190,000, even if we didn't have any money, we could be financially independent in 5 to 10 years.

So I love situations like this. It's exciting. So what would I do? You mentioned a couple of key phrases that to me I think make your answer fairly clear. You said, "I'm pretty handy and I manage a friend's rental house and I put all this money into 401(k)s and things like that." Now you will have to test this, but if it were me, I would go in the direction of real estate.

I really would. Now advantages and disadvantages, why? Well, first of all, you said you're pretty handy and you said you're going to be looking for some kind of semi-retirement. So managing a portfolio of real estate and a portfolio of rental houses, in my mind, that is an awesome semi-retirement pursuit.

And if you're fairly handy, you may enjoy working on those. You may enjoy that as a creative outlet or an opportunity to do some work. And if you've had good experience managing your friends, you're comfortable with it. And this would be a great place to focus some of your time and attention.

The advantage that I would see with going in that direction would be it's going to move you out of having all of your assets in paper assets. So I'm not particularly concerned about having only a well-diversified portfolio of mutual funds, but it does expose you to certain risks. So you're still exposed to market risks.

You're still exposed to currency risks, assuming that all of your mutual funds are denominated in dollars. And also with the heavy focus on retirement accounts, you're exposed to extra tax risks that are sitting there. I think that's a good place to start, but if you've got this amount of money that you're expecting to have coming in, then I would start to consider about can I hedge against some of those risks.

And if you don't mind investing in real estate as far as the work involved, something like that, to me that would be an awesome way to go. The cool thing about it is you're going to have so much cash flow. Let's say my numbers are right and what you meant was $5,000 a month, and that gives you $60,000 a year to invest.

Think about let's say you work for another five years. Just buy one property each year for the next five years. If you buy one property each year for the next five years, it's up to you. If you have a strong conviction of a reason to do it debt-free, that would be fine at the moment.

I would probably put a mortgage on it, and with $60,000 of excess cash flow, you would be able to finance that property fairly easily. You would still have a really strong cash cushion underneath you. And with $60,000 a year to invest with your down payment and then as surplus or reserves to handle vacancies, repairs, things like that, and assuming if your job is the type that allows you the time where you could go and do that, I would feel really good about that.

You're still going to be putting, let's just call it $40,000 a year into 401(k)s. You didn't mention Roth IRAs. You're going to be over the limit at $190 depending on how you work the income from your wife's contracting business. So you might be able to go ahead and participate in Roth IRAs, which would be probably the simplest account for you to go ahead and also fund.

But you're quickly getting out of the easy tax-deferred accounts. Once you've taken care of 401(k), self-directed 401(k) for your wife, IRAs, HSAs, those are the easy ones. Then you've got to get into individual plans. You would have to get into the world of non-qualified deferred comp. It just gets more complicated.

So to me, I mean, just those two things you said, manage a friend's rental house and I'm a great handyman, I would consider buy a house a year for the next five years, maybe two if you're good at it. Put mortgages on them, let the tenants pay the mortgages, keep a bunch of cash and reserves, and then that gives you all the options in the world five years from now in semi-retirement.

The only other thought I would have is that you mentioned giving a large amount of money to your church and to causes that you feel strongly about. And you also mentioned in that scenario, you mentioned we would go and we would volunteer. So my question would be this. Do you see a need in something locally that you could invest your money into that would really make an impact from the perspective of really helping people locally?

Clearly you're concerned about charity and helping those around you. I think sometimes some of the things I think a lot about personally for me is how can I build a business that has a dual mandate that is kind of, I guess the term that we've come up with for this would be social entrepreneurship where we're working to solve a need that we have in the community that is in addition to where we're trying to make money but we're also trying to make a difference for this specific need in the community.

And could you use some of your money and funnel it into something like that, knowing that it's not necessarily going to be the most profitable scenario but that it's going to take care of you from an excellent perspective? Give that some thought. Now, I don't know what your job is.

Maybe you're able to do that type of thing in your job successfully. But I'll give you an idea. I heard of a story in the past. I heard of a story. And this business person and a group of business people, they had a scenario where they started landscaping jobs in the inner city, landscaping businesses in the inner city.

And these men would work on these businesses every Saturday. And what they would do is they had this landscaping business, and they would go in and they would recruit teenagers in the inner city to work with them in their landscaping business. And they would pay excellent wages, and they did this every single Saturday.

But basically the goal was to have an opportunity to pay inner city youth, pay them for hard work and to teach them job skills and business skills from the perspective of work, of hard work. And that idea really inspired me because I thought that is a really valuable scenario.

If you could go and if there's a neighborhood nearby where you see a need like that, that you can go ahead and pay people a wage so that they actually have an opportunity to work, there's something maybe better and more valuable than retail, then they have an opportunity to do hard work.

You can teach them business skills. Could you invest in something like that? If these numbers are accurate and you're north of a 75% savings rate, there's no possible way that you're going to be -- you're not going to be poor. You're going to be financially independent, so you're going to hit that goal.

So now that gives you the financial base where you can say, "What impact do I really want to make on the world? How do I want to allocate this capital, and what's the best way to allocate it?" Again, for me, I don't know what it is for you. Maybe it's not landscaping business, working Saturdays with people like that, but maybe there's some business that you can take some of this wonderful excess income that you have and invest it in a way that's not just a straight charitable contribution, but you can go ahead and use a business as a launching platform to help in some need that you see locally.

I would love to see you consider investing in something like that. And that gives you a multitude of advantages because, again, assuming you have the time -- you may not have the time, depending on how constricting your job is, but what I would look for is think then you can add on your social benefit that you're trying to accomplish with your charitable giving and with your volunteering and with your travel.

You can complement that with your business benefit that if you start a business like that and if you can find an idea, the goal should be to make a profit. But let's say that you need to invest into infrastructure. Well, that investment into infrastructure may help you to offset your increase in income.

Let's say that you have a business that you design it, and it's going to be profitable, but there's a heavy investment in infrastructure in the first few years. Well, now those losses, if you structure it appropriately, those losses can help you to discount against your income the increases in your income right now over the next few years.

Then you can transition over to that new business, and then at that point in time, hopefully the business is more profitable. Now you transition away from the job that you have that maybe you don't love doing so much, and then you're able now to have a business that's providing you a living wage, also providing you social benefit, and then along the way, you can still do exactly as your wife has done with running her own consulting company, contracting company, and an individual 401(k).

You can go ahead and use that within the business for the benefits of tax deferral. There's no reason why you can't do one or all of those ideas. You may choose that if you've got $60,000 of cash flow, again, you're investing heavily already into a quality portfolio of mutual funds, that gives you a tremendous amount of exposure.

You clearly have done your research and have chosen your momentum investing strategy, so that gives you exposure. Assuming your 10% per year returns are there, you're going to be wealthy. So build the lifestyle that you wish to build. As far as the upgrade to another home, I don't know.

Do you want one? You can obviously afford it if you want to upgrade. If you and your wife would like to have a fancier house for some reason, then go for it. If you need to adjust your living situation, make sure that you are where you want to be for the long term or that you're planning where you want to be for the long term.

You mentioned Texas. If you're living in Texas and that's where you want to be, build it. Build the real estate empire if valuations are good near you, but plan that long-term lifestyle. What I love about getting to this point, and at least just the people I've worked with, what I've learned is that it kind of gives you that ability to dream a little bit.

And then you get out of this idea of everything depends upon the dollars, and you can focus on how do I build the lifestyle and make the impact that I want to make in my community. So, man, that is exciting. I'm so thrilled that you're listening to the show.

I hope some of those ideas would be helpful. I would love to see you, and I'd love to see other people in the audience. This is a big deal to me. I don't know exactly how I'm going to do this, but I would love to see a lot of us who have a little bit of business experience stop just giving money and go start creating and solving problems that we have in our community.

And use the money that you have. Use that money. And you said you give to your church, so I'll quote Scripture on you. The Scripture says, "Use this unrighteous money to buy for yourself friends." That's the verse. Go check it out. That's what I would say. So use the money and invest it for something that's going to last and that's going to make a difference.

And much as I love mutual funds, and, hey, that's cool, but the only point of the money is to put it to use. And I would consider it--me personally. Now, you may not, but I would consider it an abject failure of my life. If I arrived at the end of my life with millions of dollars, that I should have been responsible to allocate better and to invest now for something that is going to last.

And so you may need to continue investing. Get the 401(k)s and the real estate may bring an opportunity. So let's say that you're pretty handy. Now, using my inner city youth example, you can bring in some people and you can hire them to work on your houses. That gives you an opportunity to mentor them and build some relationships and help them to build some employment skills.

I would consider that and some of those strategies. Hopefully that will help you. But what I was saying about I would consider it a total failure to die rich. So figure out what that number is, and if you need $30,000, set that aside, and maybe you account for that with the mutual funds and a little bit of real estate.

But then consider investing that money for something that really matters to you. I hope that's helpful. Thanks for the question. Next question is an email from Justin. Justin says, "My parents are facing retirement soon, and they haven't really put much of anything away. They have $150,000 of equity in their current home and Social Security to rely on.

My father is 60, and my mom is 55. They have time to sock away some money, but they aren't really high-income earners. They want to live a job-free retirement, so no part-time work. They are weighing the option of living in Texas, which would be closer to family, versus Louisiana, which would be closer to friends and also a big savings on property tax." Interesting.

That's two questions in a row that talk about property taxes in Texas. "They're into gardening, fishing, hunting, woodwork, etc. What should I recommend that they do?" Now, Justin, this is an interesting question, and I was glad to get this one because this describes a massive portion of our population.

It fits into this scenario. Sixty and fifty-five, baby boomers, money and equity in their house and Social Security, but not really any other money. So I'm going to give you a few answers. Some of it you'll like, some of it you won't like. But the advantage of me doing a podcast is that I can be blunt, and I'm going to be blunt, but I'm using it also clearly as a scenario to teach other people.

But there are some realities of this, and I could be mistaken in any of the details because of more info that you have. So take it with a grain of salt, but I'm going to be blunt. Your parents are not going to be able to retire. I don't think--unless, A, this question is not coming from them, it's coming from you, which means that you're observing and you're concerned, but they're probably not concerned.

But there are some things in here that give me that information. So how do I know they're not going to be able to retire? Well, number one, they don't have any money other than the equity in their home. So they have a little bit of, I would guess, forced savings, but they don't have any money.

So unless they had a stroke of bad luck, maybe an illness, business loss, bankruptcy, death of a family member, they were caring for parents, something like that, where they were careful savers previously. They're not savers, and savers really are not going to be able to be financially independent. And so thankfully they've got the money and the equity in their house, but they're not going to be able to retire because they're not going to be able to adjust their income.

Unless over the next 10 years they can actually proactively adjust their expenses-- excuse me, I meant to say expenses--unless they can adjust their expenses down and create a difference between what they're earning now and what they're spending, there's no possible way for them to retire. And it's really tough for people who are 60 and 55 years old for them to change a lifetime of habits.

Again, the exception to this would be if they had a stroke of bad luck or just something really unfortunate happened to them. But if they don't have any money, which they don't, they just have a little bit of equity in their house and Social Security, they're not going to be able to change anything.

Most of the time it would be a rare 60-year-old male and 55-year-old female that would be able to change. The second thing that gives me that indication is it says they want to live a job-free retirement. Well, I've never met somebody--I've rarely met somebody-- who wants to live a job-free retirement who doesn't have any money, who hasn't planned for it, that they're really ever going to be able to do it.

There's a reason why you see more and more old people working, and you see this all over the place in our society. It's because the people who had the ability and they saved earlier in life, then they were already financially independent and they're not working-- I'm getting mixed up here.

They were already financially independent because of their diligence and frugality. And so they don't wind up at the age of 60 still wanting to not be working. Either they're early retirees and they've figured out a lifestyle that works for them and they already fixed it, or they'll never retire.

And your parents are going to probably never retire in that sense, scenario. Now, the final problem is that--and here's the issue with that-- it doesn't really matter what they want to do as far as whether they want to work or not. They're going to deal with what they can do.

So I'm going to give you my financial planner answer. But the majority of people who are in this situation will just simply-- they'll spend the $150,000, they'll buy another house, they may have it mortgage-free, and then they'll hope to live on Social Security and they'll work some side jobs.

Many people go ahead and spend the $150,000, and what will happen is often there will be a medical situation later at the end of life, which 10, 15, 20 years down the road forces the sale of the house to get the money out of that to pay for the medical situation.

So I'm going to give the answers to it, but I do just want to start from that perspective, is that bluntly a fact pattern like you just presented, there's not a lot of hope for actual retirement, but that doesn't mean that you can't do certain things. So here's what you can do.

There are three problems in their scenario that they've got to fix. Number one, what are they going to live on? How much? Number two, what are they going to live on after one of them dies? And then number three, what are they going to live on when one of them needs medical care?

Because these are the big factors in retirement planning that most people don't think about. I can't actually plan--if the $150,000 of equity is all we have, that's almost no money to work from to actually build a scenario and build a lifestyle. The $150,000 would be gone in one long-term care event.

I mean, I don't know what costs are in Texas, but across the nation, costs for long-term care average somewhere about $200 a day. $200 a day comes out to about $6,000 a month. And ignoring any interest calculations, $150,000 equals 25 months of long-term care. And so, one, your dad has a stroke, your mom has a stroke, something like that, early-onset dementia or Alzheimer's, which is what I worked with with my grandfather, or something like that, that $150,000 can be gone in no time.

Plus, more importantly, if that's the only savings that they have, you still have to look at the balance of how are they going to live their lives. So if they need a car, what are they going to pay for the car? How are they going to keep a buffer account?

They're going to want to spend some money on--your dad's going to want to buy a new gun or a new bass boat or something like that, so they're always going to be spending the money. So in essence, in my mind, I kind of set the $150,000 aside because that $150,000 is just barely enough of a buffer account.

And here's the problem with what they're facing. They're planning to live on Social Security, but Social Security is not going to replace 100% of their income. It's going to replace a much lower percentage. But given the fact, if they don't have any other savings, they can't live on that lower percentage.

Now, they may move to Texas, may move to Louisiana, and then they can figure out how to live on it, but until they can actually prove they can live on it, they can't really live on it. And then the bigger problem is that even if they could figure out their budget based upon the Social Security-- so let's say their Social Security between them is going to be $2,500 a month between the two of them.

You said they're relatively low-income earners, so I don't know what the actual number is, but pull the statements and look at it. Even if they can live on the $2,500 a month, what happens when Dad dies? He's five years older, and statistically he's going to die at a younger age.

So what happens when he dies? Well, now all of a sudden, now Mom has dropped either his original benefit or her own benefit, if that amount number is higher, depending on what benefit she's pooling on. And that's going to be less than the $2,500, so they're going to have to completely renegotiate everything.

So I'm being a real downer with the answer to this question, but they've got to face reality. They're not going to be able to retire. Now, what should they do then? Well, first of all, they've got to actually run some numbers on their situation and calculate what their actual life expectancy is.

By the way, I'm going to interrupt myself again. It's not just me saying this. If you go and you look at what the AARP is doing, you will see a dramatic change in their messaging from the traditional idea of retirement to now they're doing life reimagined and retirement reimagined, and that includes some kind of part-time work.

And in my opinion, that's probably a good thing. That is a good thing, and I'll get to how I would fix this is where I'm going. But this is the reality that so many people in this generation face, and the idea that I'm going to be able to live just on Social Security and be able to make that work, it just simply doesn't really work, and it especially doesn't work if one spouse dies, and that's what you've got to plan on.

So they need to actually understand what their life expectancy is. In my experience, very few people actually have an accurate understanding of what their life expectancy is. So if I just simply use a simple Social Security administration calculator, and I did this, and I'll put a link to it in the show notes, but for a 60-year-old male today, 60-year-old male on average can expect to live an additional 23 1/2 years to the age of 83 1/2, and your mom at 55 years old today can expect to live another 30 years to the age of 85 1/2.

Now that's the average, which means that they may die sooner or they may die later, hopefully later. Again, all my grandparents died in their mid-90s, and my grandmother just celebrated her 100th birthday, so hopefully later. But what that means is that if they're going to try to live on Social Security and on the $150,000, in reference to a 30-year retirement, the $150,000 is a relatively meaningless number, relatively speaking.

Now, I'll cash the check if you send me $150,000. I'm being a little bit extreme just to make the point, but it's a relatively meaningless number, especially when you take into account the fact that they're a couple, and so therefore, your dad, he needs to make sure that he's taking care of your mom, and your mom, they need to plan for what happens if one of them is dead.

That's a big deal, and they're past the age where insurance is as easy as a solution as at a younger age. So what would I do? Well, number one, the best investment that they can make right now is in Social Security. So they and you should spend some serious time considering how to create a brilliant Social Security strategy, and let me give you some numbers.

They don't have any investments. They have a house, and they may or may not--I'll get to that in just a second--but they don't have any numbers. They have income, and so what they need to do is they need to get that Social Security income as high as possible. So here would be some simple numbers, and I've got all kinds of shows planned on Social Security.

It's far too complicated for me to do in a Friday Q&A show, but here are the numbers, and you need to be aware of these. So let's assume that we just use a middle-of-the-road Social Security recipient, average income, middle-of-the-road, and assume that their full retirement age is 66 years old and that their monthly benefit at that point in time would be $2,180 a month of benefit, $2,180 a month.

If your dad is 60 and he has his eye on not working in retirement, he may be thinking, "Hey, at 62 I can take that retirement income." If that example recipient were to take their retirement, their Social Security income at 62, that amount would be $1,623 per month. So we go from $2,180 a month to $1,623 per month.

So that would be a 26% decrease in their benefit just by taking it early. That is a massive number, and here's the important thing about that. That number is a guaranteed indexed-for-inflation number. So that reduction of benefit from $2,180 down to $1,623, that's a $557 per month reduction of benefit.

Pretend we were using the 4% rule that we often refer to on the show. Multiply that times 300. That would be the equivalent of $167,000 in an investment portfolio in value, but would actually be more than that because that's a guaranteed lifetime annuity that is indexed with inflation that's backed by the full faith and credit of the United States government, which is a whole other total joke, but in their situation we've got to count on that.

So that's worth $167,000 in an investment account plus. I would give it a lot higher because if you were to go out and buy a commercial annuity that was going to provide that monthly income, it's going to cost you more than $167,000. That's a huge benefit. Now, let's say that we can go to age 70.

So at age 70--and he keeps working and he retires at 70 according to Social Security and takes his income-- that monthly amount is $2,880 per month. So we went up from age 62 to 70 from $1,623 to $2,880 per month. $2,880 per month is $1,257 per month more than at age 62.

The important thing why he needs to--your dad especially because he's older--needs to focus on this, and I don't know which earnings record is higher. In many couples of this age, the husband's earnings record will be higher, and so his amount will be the higher, so we'll usually judge based upon that.

The reason why that's a big deal is because that's the benefit that's ultimately indexed for inflation after they retire, and that's the benefit upon which the spouse will benefit when he dies is based. So if we could get it up to that $3,000 per month, now we're at a scenario where there's a lot more wiggle room than at $1,623 per month.

So it's a huge deal. And what's the value of that if we take that monthly difference between-- so we do $2,880 minus $1,623, so that equals $1,257. Just using 300 times that, that's an investment--that's equal to--it's actually much more than this, but that's equal to an investment account worth $377,000.

So the best investment they can possibly make is not to retire and just simply to keep working, keep contributing to Social Security, and take the higher income at the age of 70. That is a huge, huge deal. Now, you need to do some careful Social Security planning. You need to look at his earnings record.

So, for example, pull his earnings record and look and see, you know, was he not making much money in the beginning such that his higher income now could dramatically affect the earnings record, which drives a number that's called his primary insurance amount, which is what all of these numbers are calculated based upon.

You want to look and see what is his actual scenario. Now, at the end of the day, if he just wants to retire and he just says, "I'm done at 60, I'm done at 61, 62," or whatever, he can do that. It just really dooms your mom, and that's the big deal in this situation.

You've got to think about your mom, and so she needs to do the same benefit as well. So the best investment they're going to make is going to be in Social Security, keeping on working. Now, is this really so bad? Well, if they're working jobs they hate, then use it as an opportunity to quit working jobs they hate and go work jobs they love, but still keep working.

Because the other thing is that if you can eliminate the need on that portfolio of the $150,000 for another 10 years or so, that could give them a massive amount of time to actually save some money, to establish a lifestyle. So think about what their lifestyle planning would be.

Invest you and invest in them. Invest into doing some good Social Security planning. The best book that I've found so far of the books that I've looked at is a book entitled "Social Security Strategies" by William Reichenstein and William Meyer. I'll put a link in the show notes. This is the best one that I've been able to find so far, which will help you to actually look through their situation.

And Social Security planning is tough because it's so detailed, but there are a bunch of strategies that you can do, depending on whether his record is higher, whether her record is higher, whether they're comparable, dramatically disproportionate, things like that, to try to figure out what the best timing is.

But my bet is that it's going to be better for him to defer to 70 if he can. So I would say start with a scenario where they're actually going to keep on working and have him get a job that he loves, which I'll come to in just a second.

Now, let's say he doesn't want to do any of that, and he says, "Joshua, I'm going to retire. By golly, I deserve it. I'm done. I've got to retire." Well, he can't afford it, but the only way that he's going to be able to afford it is if he can live on Social Security at a diminished number and also if we can turn that $150,000 into something useful.

So we have to turn it into income, and when we're turning it into income, in their scenario, that's going to mean we need a higher amount of actual predictable income. So we can't just live off of it. When we're right on the cusp of being able to survive versus not, we can't just toss it all into a portfolio of mutual funds and pull money off of it because we're so near the wire that if we get a 20% correction in the portfolio, they're doomed.

They just can't afford to take that risk. They can't take the risk. So if they had lots of money, then okay, yeah, we can toss it into mutual funds. We'll just pull back. We've got plenty of money, but they're going to be right at the poverty line, basically, so they can't take the risk.

So they've got to do it into something that's going to be a little bit better for them. Now, if your dad is into hunting and fishing and gardening, which is what their hobbies are, maybe he's somewhat handy. I would say go take it and buy a duplex or a triplex.

Maybe if they can buy a duplex and they live in one unit, they can turn the other unit into some sort of rental income and put that thing on a long-term fixed-rate mortgage, which they could cover off their Social Security. And then as long as they keep the other unit rented out, then maybe that will give them some extra cushion of the income and put a minimal down payment onto it so they don't have a bunch of equity tied up in the house.

It would be what I would look for. Or maybe they can, with that money, they can buy a couple of rental houses in Texas. I mean, the things are pretty cheap in Texas, depending on what part, or Louisiana probably too. Maybe they can buy a couple of rental houses that he can manage for his part-time job.

And with him managing the rental houses for his part-time job, he gets out of the job of working for the man that he's got to retire from, and then maybe they can rent a mobile home or something like that where they can keep their expenses really low. But the best way to handle this is really to think about, flip the tail on its head, because with $150,000 of equity and Social Security, the only answer is if they can live on half of what Social Security pays them so that they're okay if mom is in that scenario.

Or if you've got deep enough pockets to help them out and you guys have committed as part of your family unit, "Hey, if you die, Dad, we'll take care of mom. We'll sell things and kind of move on." And that's perfectly fine too. I'm kind of giving you the answers that don't incorporate those outside scenarios.

But you've got to keep that money--they've got to keep that money in reserve just in case of normal scenarios. The vast majority--here are the last two things, and I know I've gone on a long time on the question, but here are the last two things. If they retire now, what are they going to do for health insurance coverage?

They will impoverish themselves utterly trying to get to Medicare if they retire early. So they're going to impoverish themselves when they're already impoverished. And B, the other thing is that the majority of retirees underestimate the cost of medical expenses in retirement. So if they only have the $150,000, they almost can't even take the plan of retiring, and they can't invest the money practically because they need the money for medical expenses.

I mean, do the research on this. The cost of medical expenses is dramatically higher than many people expect. And then with long-term care, they can't afford long-term care insurance because they don't have any money, but yet they'll be wiped out if they have long-term care insurance. So I hope that that--I'm not sure if this answer is useful or not, but in summary, as I move on to the next question--excuse me.

In summary, I would say they can't retire, and the only thing they've got to do is they've got to sit down and they've got to calculate it out for themselves. And they can't afford to retire, but maybe they can set up an ideal lifestyle. And if they can work for another 10 years and get out to age 70, that eliminates a massive pool on that $150,000.

And then if they can just go set up a lifestyle for themselves that they love-- your dad and your mom, they can buy a triplex, put a nice down payment on it, or put a minimal down payment on it. Maybe they can get good financing on it. Buy a duplex or triplex, rent out one or two of the other units so they have some income.

Your dad loves to hunt and fish, so he can figure out--get some part-time work as a hunting guide or a fishing guide, or maybe he can create custom cabinetry. And then your mom loves to garden, so they can subsidize their grocery costs with her gardening. Maybe you could sell organic produce out of the backyard, or maybe they can get part-time jobs that give them enough-- like these are the scenarios where they need to actually go.

And this is the reality of the average American of their age, the baby boomers. That's what I'm saying. Go look at AARP, and you'll see that there's been a major change in their literature even because of how to--the average person can't retire in the sense that it's been held out.

You can't expose yourself to just Social Security. I mean, Social Security is doomed anyway. Is it doomed during their lifetime? I don't know. Probably not. I don't think so. But, yeah, there's my answer. I have no idea if it was useful or not. So next question, voicemail from Mark.

Let's see here. Hey, Josh. Thanks very much for your podcast, mate. I'm really enjoying them. Mark here from Melbourne, Australia. Just got one question in relation to insurance. Your thoughts. Let's say you can afford to cover yourself for life insurance. You can afford to cover yourself for TPD and also income protection.

But your financially independent question is, is it a good investment to continue to insure those assets, that is, the asset of being able to work and the asset of your life compared to the cost of the cover? I thought it was worth sending you a question there. All right.

All the best, mate. See you. So this is a fun one. And Mark is from Australia. I didn't know what TPD was. I went and looked it up. And what TPD stands for is total and permanent disability. And so evidently this is a separate type of insurance in Australia.

So you mentioned life insurance, total and permanent disability, and income protection. So usually, Mark, in the U.S., we would include total and permanent disability as just a component of the disability income insurance policy. But maybe it sounds like you guys have them separate or just a separate feature. I read a couple of things online, but that's what TPD is for those who are listening.

So is it a good investment to continue to insure assets when you don't need to? So this is an interesting question. A lot of people disagree on this. And I'll tell you how I would say is that, as always, it depends on the cost and depends on the benefits, depends on the alternative use of the dollar, and it depends on, frankly, any inside knowledge that you may have as to your personal risks and depends on the cost.

So insurance is always, generally, always going to be properly priced by the insurance company. Depending on the type of insurance, it's basically always going to be properly priced. So with insurance, there's a difference between the emotion of it and then the logic of it. So if you say, "Josh, I'm self-insured.

I could comfortably--I could have a level of income for myself and for my family that would be enough to support myself, and if I died, my family is financially independent, so do I need the insurance?" Well, in that situation, no. And you may want to go ahead and drop it if you don't need it anymore, just simply because you don't need it.

But different people have different variations of that number. So let's say, for example, if I have a disability insurance contract that I own, and I do, so if I own a policy and I have just enough money to make my family-- we could just barely eke it out if I were disabled.

I'm technically self-insured, but the policy premium is just not that big a deal. I'm used to paying for it. Well, I'm probably going to keep it because it's going to make me feel better. I have more life insurance than I need just because I think it's pretty cheap and it makes me feel better.

Now, "cheap," is it cheap in the relative sense, relative to my budget, or is it cheap in the absolute sense, meaning this is a mispriced product in the insurance market? The life insurance that I have, the amount of it, it's not cheap. I have $2.5 million of life insurance.

It's not cheap from the perspective of the insurance company. It's perfectly priced. But it's cheap to me because it's a very small number in my budget, and it makes me feel good to own it. I like knowing that if I died today, the fortune of my family is assured and insured, that no matter what happens, I've got the money there.

Now, let's say I had $2.5 million in the bank. Would I still keep the $2.5 million of life insurance? Well, right now, my $2.5 million of life insurance costs me what? It's under $100 a month if it were all in term. It's not all in term, but if it were all in term, it'd be under $100 a month.

So if I have $2.5 million, do I still feel good having the $2.5 million of coverage for $100 a month? I do, and I find that many people, even once they get to the point that they're technically self-insured, they could actually cover the cost, they still will keep their insurance because the premiums are pretty cheap.

And it makes them feel good. It makes my wife feel good knowing that I have the $2.5 million of coverage. And it makes me feel good too knowing that it's assured. So you can't answer that in a technical perspective of is it a good investment in that sense because it's not.

It's probably just a pure cost. Most insurance is pure cost. There's no investment reaction, but it's just a pure cost. Now, you may know something about your actual risks. So this has happened, for example, and I don't know anything about how the Australian insurance market works, but in the U.S., a lot of times you could do things like this.

I have a bunch of term life insurance, and when I got it all, I got the best rates, and without any riders, no flat extras, which is what is known in the insurance business. It's just cheap insurance. Now, when I got it, I didn't have any dangerous hobbies, and I had no specific plans to start any dangerous hobbies that are going to increase the cost of my insurance.

I don't plan to jump out of airplanes. I don't plan to do any of those things. In the back of my mind, I always know that, you know what, it would be fun to learn how to fly airplanes someday. It really would be, and I know people who are pilots.

I have people in my family who are pilots. I have a brother-in-law who is a flight instructor who could teach me how to fly airplanes, and I don't have any plans to actually do it. I'm not signed up for pilot's lessons. It's been years since I bought the insurance, so I could, in full faith and truthfulness, answer the questionnaire that, no, I don't have a pilot's license, and I don't intend to get a pilot's license in the next two years, however it's worded on the application.

I can answer that honestly and truthfully, no, and a few years have passed. But I know in the back of my mind, you know what, someday I might like to get a pilot's license. Well, in that scenario, it's less likely for me to be willing to drop my insurance coverage because I know that the day I sign up for flying lessons, let's see, I think it's a $5 flat extra for every $1,000 of insurance.

So what that means is if I had $5 per year of extra premium for every $1,000 of life insurance coverage that I own the day I sign up for flying lessons. So in that scenario, that would be a good investment for me to keep the insurance because I can have it for longer at the lower premium.

So if you know something about that, another example would be, let's say that you come from a very safe job occupation in the U.S. with disability income insurance, individual disability policy. Let's say you're an attorney or you're an accountant. So you go ahead and you load up on disability income insurance.

And I would do something like this, me personally, given my personal structure. So if I loaded up on -- I were working as an attorney. I loaded up on disability income insurance, personally owned, and then I've had it for 5, 10 years. I've saved a bunch of money. I've become financially independent.

Well, because I know what's written in the contract, if I went and started a farm or I went and started riding, bucking Broncos for a living, I would keep that disability insurance contract because many of the contracts, at least the contracts I used to sell, their definition of disability was whatever you're doing at the time of injury.

But you don't have to change your premium rate for individually owned disability insurance after you leave. So if you retired from being an attorney and went and worked on a farm, I would say that's a good investment to have it because you're far more likely to get injured on the farm and be unable to farm than you were as an attorney, but you have a mispriced policy at that point in time.

So if you know something about your risk, about your personal risk, then you can -- you're basically practicing what's known as adverse selection against the insurance company. Now, that's the way the insurance contracts are written. There's nothing wrong with it. That's technically how they're written. The insurance company would not approve you if you had worked in that -- if you had started from that perspective as a farmer.

They wouldn't have approved you at the same rate. But since you already have that rate, then you can go ahead and do it. So if you have a scenario like that that you can exploit, then I would look at that. What you're probably asking is more technically, is this a good use of the dollar?

So here would be the question -- another way to answer it. Let's just start with zero-based thinking. And let's just pretend that we don't have the policy. And we're going to say, would I go out and buy this policy if I had the opportunity? Well, that's where you're going to get into the financial return and the financial reward.

So the best example here would probably be life insurance, the example that many people would face. Okay, I'm 45 years old. I don't technically need the life insurance anymore, but I own the policy. Is this a good use of the dollar? Well, if it's termed life insurance, then that -- meaning it's temporary, it's for a specific amount of time, and it's going to go away.

Then the question is just how much does it cost, and do I feel good having it, basically. It's negligible cost, sure, I'll go ahead and buy it. And I don't understand why more people don't do that. When you can buy at 50 years old, you can buy a 10-year level term policy for what?

A million bucks for, I don't know, 50 bucks a month probably, 70 bucks a month, something like that. To me it's a no-brainer. If you have money, why wouldn't I want to have that? Do I need it? It's a negligible -- it's a rounding error in my budget, and it makes me feel good to have the extra million bucks in case -- portfolio correction or something like that.

If you're talking a policy with a much bigger price tag, so you're considering buying a whole life policy, a million bucks, well, now you've got to compare it properly to what the alternative use of the dollar is. And that's where it very much depends on the policy, and it very much depends on what your investment options are.

It very much depends on the internal price of the contract inside, the actual performance of the underlying investment contract. Are we talking about a policy that's tied to what's known as a variable policy, where it's tied to the performance of an investment? Are we talking about a policy that is tied to a fixed account?

What's the tax ramifications? So in the United States we have life insurance policies. The death benefit is never income taxable, and the cash values can be pulled out depending on how you pull them out, sometimes on a tax-favorable basis. This can be useful for estate planning. You would have to look at what are you actually guaranteeing.

And in the next question, actually -- we're not going to have time today. In the next question I was going to answer that and talk about how I would use it. So the answer -- because we're going to wrap up with this question, I'm going to stick 58 minutes into the show.

The answer would -- you need to compare it to what your alternative use is. And in general with life insurance, you're probably going to be using this as an assuring technique to guarantee a certain number. So you may be using it to guarantee a certain size of an inheritance for your family members, and you're also going to be comparing it against what your alternative investment would be, and you're very much going to be considering income tax and estate tax.

And estate tax ramifications. That's kind of a general answer to the question. You can figure it out specifically. I don't know what Australian law is. In the U.S., though, we could very easily figure it out. A million dollars of insurance is going to cost you $1,000 a month for a whole life policy.

Here's what we project your date of death is going to be. And here's what we project is going to be the performance of the contract. Here's what the internal expenses are. If we compare them to this mutual fund, to this portfolio of CDs, to this portfolio of bonds, to this real estate portfolio, the policy needs to serve a use.

And so is it a good investment? It could be. It could also be a really, really bad financial move. And it's very difficult--it's not difficult, but it's hard to answer the question without specifics. These types of questions--and I'm going to quit there for today. I'm at 57 minutes in.

But these types of questions--I hope you can appreciate how I answer them, but the reality is you have to look at an individual scenario. It is massively different if you're saying--and I'm making this up, Mark, because you didn't say it, but it's massively different if you're 50 years old and you just got enough money to where you're financially independent and you're asking me, "Should I buy a whole life policy as a good amount of money?" That would be hard to answer.

But if you have lots of money and you have a tax bill due at death and you're trying to make sure that you fund that tax bill, and you can fund it easily out of life insurance, and your downside is the premium risk, but you have maybe another pot of money that is a dramatic upside, I mean, there's all different ways to position the policy mentally to where it makes a lot of sense.

People make the mistake a lot of times of saying it's all about absolute rate of return. But the problem with absolute rate of return is when does that return come in, which is going to be the next question from Lane. He was asking--he says, "I'm going to start withdrawing money from my retirement funds.

I've told you to talk about the 4% rule, but I want to leave 50% behind." Well, how would I figure that number out over a 20-year distribution? And it's very simple to figure out if we know the exact rates of return. But we don't know the exact rates of return, and the highest--generally, the highest-performing, the highest-returning asset bases are going to be the most volatile.

So this is where you get to the realm of the difference between investment planning and financial planning, is that it's very easy to give a generalized investment scenario saying, "Always invest in the highest-performing asset class and always get the maximum total rate of return," because over every 10-year period in the U.S.

stock market history, the value is up. Yes, that is true. So that works really well for me at 30 years old, but that doesn't work so well for--what was his name?--Justin's parents, who are 60. They can't just put their $150,000 in the stock market, and when they're requiring from that $1,500 or $2,000 or $3,000 a month to face their living expenses, they can't just toss the money in there, and it's all going to be hunky-dory, because they need the money now, so they get into a distribution strategy.

Now, if they had $1.5 million, then, yeah, no big deal. The volatility is less important. So what you see is the difference between general concepts and actually applying them at a local level and actually at a personalized level. So I hope you guys enjoyed that. I got through three questions, and I love doing these.

I ought to go back and listen to today's show, and hopefully I dealt with things at an appropriate length. The primary value is me not answering the question but me telling you how to do it. I've got another five good ones lined up here for you guys, but there will be another chance.

Thank you so much for being here for today. Make sure this weekend to go and check out some of those other shows that I mentioned, the other interviews, and cutting things off here, trying to really get closer to the one-hour time limit to help many of you guys. Sitting down and listening to a three-hour show is not as easy for some of you.

Next week, I am excited. On Monday, I am going to -- let's see. Where's my schedule? Monday, I think I'm going to walk through some of my ideas for a better high school education experience. On Tuesday, I am going to launch a voluntary membership program, which I hope that some of you will consider joining.

I'll lay out the history of the show. I'll lay out all the different options that I've considered, and I'll tell you why I'm choosing to do things the way that I am choosing. And if you guys are enjoying the show, let me know. I will be glad to have you as members to support the show financially.

That would be cool. It would really make a difference for me. On Wednesday, I am going to release -- probably I have planned right now to do a technical college financial planning, 529s, ESAs, blah, blah, blah, all the technical stuff, HOPE grants, Pell grants. We'll see how much I can fit into one day's show.

I may supersede that with a show on -- we'll see. And on Thursday, I think I'm going to release an interview that I did with James Wesley Rawls. He's a hardcore survivalist where he publishes the Survival Blog, and we're going to talk about that, talk about precious metals a little bit.

I think that will be interesting to you. One thank you here for a review from Jay Rosen, "Updated review. This podcast is amazing. The FAQ on whether to pay down a mortgage or invest was incredibly helpful and gave me actionable information. I'm in the middle of deciding whether to refinance with a 30-year mortgage or a 15-year mortgage, and the guidance from this episode was incredibly useful in helping me think about the opportunity cost of choosing a 15-year mortgage.

Couldn't have come at a better time. Once again, this podcast has helped me avoid a financial mistake that could have had significant repercussions. Detailed and thorough podcast perspectives are nuanced and informed." Thank you, dude. Thanks for the reviews. Make sure you subscribe to the show. Thanks for listening. Have a great weekend.

Thank you for listening to today's show. This show is intended to provide entertainment, education, and financial enlightenment. Your situation is unique, and I cannot deliver any actionable advice without knowing anything about you. This show is not and is not intended to be any form of financial advice. Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy, and consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions.

Hold them accountable for your results. I've done my absolute best to be clear and accurate in today's show, but I'm one person, and I make mistakes. If you spot a mistake in something I've said, please come by the show page and comment so we can all learn together. Until tomorrow, thanks for being here.

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