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Here's your host, Jake. Hi, it's Jake here. Welcome to The Voluntary Life. This is an episode about tax and I think it's relevant for anyone who's interested in entrepreneurship, but also just for anyone who's interested in financial independence and working towards more financial freedom. Tax is a really important topic.

I want to talk about this issue strategically and I'm really pleased to have a special guest to talk this through with me. It is Joshua Sheets, the host of the Radical Personal Finance podcast. Hi, Joshua. Good morning, Jake. I'm glad to be here. Yeah, really pleased to have you on the show.

You're currently in Florida, is that right? West Palm Beach, Florida. Awesome. Well, I really appreciated your invitation to appear on your show a while back and we had some great chats about the permanent portfolio and entrepreneurship. I wanted to bring you on to talk to you about your area of expertise in finance, in particular in terms of tax.

But for those people who didn't hear those previous episodes, can you just give a little bit of a background to your background in finance and what your podcast is about? I come from a mixture of backgrounds, which is how I wound up doing a podcast. I was a long time, I call it personal finance junkie.

From an early age, even before when I was a boy, I wanted to be rich. That was one of my major life goals and so I started studying everything I could learn about how to actually be rich. That led me deep into the personal finance world. Through a series of circumstances, I wound up working in the financial advice industry after college, working as a professional financial advisor and spent six years in that business.

And on both sides of the aisle, I call it the personal finance world versus the professional financial advice world. I became frustrated with the opposite side. As a personal finance junkie, I was annoyed with the financial advice industry and how many things that I thought they were doing wrong.

And then I got over in the financial advice industry and I got annoyed with all the stuff on the personal finance side that I found to be inaccurate and many people very well-meaning, but just simply ignorant and inaccurate in what they were saying. And so that led to my desire to see somebody put together kind of a combination of those worlds, bringing together everything from the world of personal finance, whether it's the big picture stuff like goal setting, life planning, a comprehensive view of life, or whether it's just the simple things like budgeting or how to actually manage the technical day-to-day details and the professional financial advice world.

So technical details on how the tax code works in the United States of America, creative ways to use some of the benefits that most people don't think about, the in-depth nature of different financial products and how each of them has advantages and disadvantages. And all of that stuff came together to be personal finance and essentially radical personal finance.

Essentially, the goal is to create the kind of show that I wish I'd had to go from no knowledge whatsoever of finance to the equivalent of a master's degree in financial planning. I actually have a master's degree in financial planning. And so I'm trying to give away everything I know on the podcast for free and support the independent media space by putting my content out there and helping others.

I think it's awesome and you are prolific. You're putting out, I think, on average, it's like an episode a day, isn't it, that you're doing? Just about. We're on average over four a week. I shoot for five, but I'm not necessarily every day committed to that. But I do try to put out a lot of content.

And the content, I try to keep it extremely varied. So I do interviews, my basic schedule, I do about two interviews a week. And I try to interview people from interesting perspectives, some of them rich, some of them not. Some of them have set up interesting, unique lifestyles and some of them haven't.

I try to do a big picture show on things like goal setting, life planning, alternative ways of approaching life. I try to do a technical financial planning show where I go through some of the details of the US finance law. And then I answer questions and listen to Q&A.

And I try to basically just create the kind of show that I wish I had had ten years ago to listen to every day on my commute. Awesome. Well, I'm really pleased to have you on the show to talk about this subject. And I thought I would start off by giving you my perspective on why I wanted you to talk this through with me.

So as you know, we tackle issues to do with entrepreneurship and achieving financial independence on the voluntary life in lots of different ways. And when you look at the question of tax and look at the books that are out there on financial independence, a lot of books like, for example, the classic Your Money or Your Life have almost nothing to say about tax.

They focus on opportunities for saving and investing through saving money on what is typically referred to as three big areas of spending, your housing, your transportation and your food. And yet other books like, for example, The Millionaire Next Door talk about tax and especially income tax as the number one expense in life.

So it seems to me tax, if you're interested in financial independence, it's a really key issue. But some people don't even tackle it at all. So how important do you think it is for people who are interested in financial independence to really address this question of tax? Depending on the jurisdiction and tax authority under which somebody lives, and that will vary across the world and even within countries, it will vary from county to county.

But for most people, I think it's their number one biggest expense. Usually it's not seen that way because we only see taxes one at a time. So for example, you might have a certain amount of income tax that you owe. But even within the United States, we have different types of tax that are levied against our income.

And most people are only familiar with one of them and they don't see it. And so what I teach people to do is to calculate all of your tax. And I'll give you a simple example that I believe would have some parallels in the U.S. But it's a simple example from the U.S.

tax code. In the United States, we have what we call employment taxes. And this is what funds our systems of socialized benefits, Medicare, Medicaid and Social Security. And for employees, this is levied against their income before their actual paycheck is received at a rate of 7.65 percent. The employee pays 7.65 percent and the employer pays 7.65 percent.

So it comes out to about 15 percent, just over 15 percent when you add that up. Then on top of that, by the way, just to let you know and to interrupt, and we have exactly the same kind of thing. It's called national insurance contributions here. Very, very similar.

So, yeah, I know exactly what you're talking about. So, yes, do carry on. OK, so most people are completely ignorant of that in terms of they don't factor that into their budget because they only sit down after the fact and actually run their budget much later. And they only run it based upon what they actually, the money that shows up in their checking account after their check is direct deposited.

Well, that's 7.65 percent of your income. And in reality, it's 15 percent of your income, because if you weren't paying that tax, your employer would go ahead and send that money to you. From the employer's perspective, it's just a cost of doing business. And whether it goes to you or to the government, they don't have a choice in that.

So that's essentially equivalent to 15 percent of their income missing. But most people don't ever calculate that, even when you get to the more straightforward number, which is income tax. So in the U.S., we run through and you calculate all of your income and then you pay a certain level of income tax.

I have a little experiment that I play with folks, and I always ask them, "How much did you pay last year in income tax?" And then I wait for the answer. And I would guess about 90 percent of the time, the answer is, "Oh, I didn't pay anything. I got back $2,000." And because the way it works in the U.S.

is some amount of money is automatically deducted from your paycheck, and then people at the end of the year will file a tax return and many people will do a refund from the federal government. But nobody actually understands how to sit down and read the tax forms and look and see, "Oh, I actually paid $9,000 of federal income tax.

And even though I got $1,000 back, that was simply because I'd overpaid $1,000 through the course of the year." So when you start listing them out, and what I teach people to do the very first step is make a comprehensive list of all of your expenses and all of your income, and you start fundamentally individually identifying, "I'm paying this amount in employment tax," or for you, national insurance contribution, "I'm paying this amount in income tax.

I'm paying this amount in property tax. I'm paying this amount in sales tax." And it goes on and on. And actually identify where each dollar goes. It can lead to substantial savings. And I'll give one story that might provide a little bit of incentive to actually do it. I had one listener called in and wrote me an email to my show and his letter to me said, "I want to thank you for the content that you've created on your show.

Because of you, today is my wife's last day at work." And the story he told me was that by listening to my show, they had found in their family $30,000 of savings that could be had by his wife staying at home with their kids. Meaning, she was probably earning something like $50,000 per year.

But the tax level was so high at that incremental amount, and they were able to find some other savings that in effect, if she stayed home, they'd only be out about $20,000 of income. And the net effect on their lifestyle of the amount of work that she was doing and the stressed existence of both people going out to salary jobs and fighting rush hour traffic and having to hurry through and put the kids in daycare and all of that wasn't worth it for $20,000 a year.

But a major component of it was actually understanding the tax involved. And they could see that they actually saved $30,000 by her not working. That is really interesting. And so basically, what they were dealing with that couple, and we have a very similar system here is that if you have progressive income tax, where the more you work, effectively, the more tax you pay and also your tax rate goes up, then as a couple, you've got to sometimes reach the point where it's really questionable, is it really worth one of us working because of the amount that we're losing in taxes?

And so that's what I get from what you're saying is, in their case, it actually was better off having the opportunity for them not to. Exactly. Right. Now, that's really helpful. And that brings me on to the question, the next question that I have for you, which is the comparison between being an employee and being an entrepreneur, because I come at this question from an entrepreneur's background, and looking at taxes, and in particular, income tax, because we were just talking about that example of that couple with income tax.

It seems to me that there is a much bigger scope for reducing your tax liability relative, especially to the amount of value that you're creating and your potential for reaching financial independence in the future from becoming an entrepreneur relative to being an employee. Is that your view as well?

What do you have to say about the comparison of employee versus entrepreneur when it comes to tax? In the US, there's a big debate among different political parties about, you know, do we, should we tax the rich or should we tax the poor? And people talk about having different tax loopholes for people at different income levels.

There might be some of those things that exist. I haven't been able to specifically identify them, but I am convinced there are two tax codes in the US. There's a business owner tax code and there's an employee tax code. And it's exactly like you say, the individual employee has almost no flexibility with their tax planning.

But the employer, the entrepreneur, even at the smallest, simplest level has an incredible amount of flexibility in their tax planning. And I often get questions from people. I was working with a couple recently and just talking and this couple is high income earners. One spouse is a pharmacist. The other spouse is a physical therapist.

And both of them are employees earning an excellent amount of income. And we're looking at their tax bill and they're like, we paid so much in tax. What can we do? Well, unfortunately, as an employee, there were a few little tricks, but none of them that make nearly as big of a difference as if we could take $100,000 of income and have one of the spouses stop working as an employee pharmacist and start running a pharmacy of their own or moving to their own independent company.

And I could go into details, but essentially, it's a huge difference. Right. Well, I do want to go into more details on the entrepreneur side. I'm definitely interested in that. But let's stick with the employees for just for a moment, because that is an interesting one, because I know that a lot of people who are pursuing the kind of extreme saving approach to trying to reach financial independence, they're doing it as employees.

They have full time jobs and they're maxing out their savings within tax deferred or tax exempt savings accounts and retirement accounts. But it seems to me that if you are an employee, that's one of the kind of main ways that you can try and save tax is by using tax deferred accounts.

Is that the way that you see it as for employees? Absolutely. That's about that's about the only big one. The ability to defer, you know, depending on the type of account, something like 17, 18 thousand dollars of your own money into the account and and, you know, delay the income tax on it in the US, that would be 401ks, IRAs.

And every country has a similar system. That's that's the biggest savings. To answer the question, let me give you a quick bit of background. And there's a little bit of a framework that I use. And for years, I would read these little books and these personal finance things. And they would talk about putting money into IRAs or putting money into retirement accounts, things like that.

And I would read them and I didn't have a framework to fit them into. And then one time I was reading a financial planning textbook and it was going through and giving the framework. And once I found this, it helped me to understand everything. And it's a framework that any person in any tax jurisdiction can apply to any tax.

There are only three basic things that you can do to to change the level of taxation that you're the only three basic strategies that you can apply to tax planning. The first strategy is timing. The second strategy is income shifting. And the third strategy is conversion. Let me give some examples so you understand.

Cool. With regard to timing, the only thing that you can do under a timing strategy is to either defer income to the future. When hopefully you'll be paying tax at a lower rate or accelerate income today to where you're going to be paying tax at a lower rate or deferring tax deductions to the future or accelerating a tax deduction to today.

Those are all going to be income timing strategies. So the simple example of a retirement account, the way that most of the retirement accounts work in most of our countries is you put money into the retirement account and you don't pay any income tax today, but rather you defer the income to the future and you're going to pay income tax in the future under whatever rate you're paying at that point in time.

And so the idea is I'm deferring it toward retirement years and I'm going to be paying tax at a lower rate then. So therefore, I'm going to pay a lower aggregate rate by deferring the income. Now, on the flip side, you can also accelerate income. And sometimes you might find yourself in a very low tax bracket.

And some of the hardcore savers in the US, they apply this strategy. They save, save, save for five or six years and then they quit earning money and that drops them down into an extremely low tax bracket. And so now they go ahead and accelerate some of the income out of those retirement accounts and they keep it in at the zero percent tax brackets and they go ahead and bring it into today when they're paying tax at a low rate.

So those are deferring income or accelerating income. And the key variable is what's the total rate that we're going to be paying on each dollar of income. That's all going to come into a timing strategy. - Okay, okay. Now, that sounds great. Now, I definitely want to hear about the other two, but let me just interject there just to give an example of what you're talking about to kind of make this more concrete.

So for example, I sold my business to a much larger company. And when I did that, I went from being an entrepreneur to being an employee. I became a director in this larger company. I had to go and work in this company. So I found myself for the first time in many, many years actually being an employee.

And during that period of time, it was three years that I worked for this company, I put the absolute maximum amount that I could into the UK equivalent of a retirement account. We call it a pension here, but I don't think you use quite the same terminology. But so I was putting the maximum amount that I could from my income into this retirement account so that I wouldn't get taxed on the income.

And if I'd just taken that as income, I would have had income tax. And so I would have lost that money in tax. So I've done exactly what you're saying, which is to defer tax on that money, which is now sitting in a retirement account, and I won't be able to access that until I think it's, I think maybe when you're 55 in the UK is the first time you can access some of it.

And then, and then you'll start, you get some tax free, and some of it you have to pay income tax on. But in the meantime, it also, it can accumulate interest and grow tax free as well inside this sort of shelter. So that strategy is very, very clear to me.

But the other thing that you said about, you know, the extreme savers who then accelerate that income, I don't know if that works in the UK, because you see our pensions, the way that it works here is once you, if you do put that money aside, in our equivalent of retirement accounts, you can't access that until you're aged 55 or whatever.

But it sounds to me like that's not the case in the US. Is it different for you there? Do you have any exceptions that you're aware of? For example, in the UK, if you put money into a pension account, and you decide to buy a home for the first time, can you take money out for that?

Or if you have a you go through bankruptcy, can you take money out for that without paying penalties? I think there is there are some I'm definitely not the expert on this. There are some exceptions that you like you we have something called self invested pension, where you can also use their pension to, to buy property or various other things.

So there is some there is a certain amount of flexibility, but essentially, the money's kind of locked up until until you're able to get to it. Again, I'm not an expert. So maybe I'm just missing a huge chunk of opportunities. But it sounds like there's quite a lot more flexibility in the States.

There's been a there have been a few changes in the last few years that have added some of the flexibility. And these are unintended loopholes, intended or unintended doesn't really matter. What happens is nobody in the US country in the world, probably nobody actually understands the tax code. And the politicians are the worst.

They don't understand it either. So they pass things and then later we find out what's in it and then they they add a patch to it and they change something and adjust it. So what I was referring to as far as the change, there's a little strategy in the US that they call the Roth conversion ladder.

And so fundamentally, there are two major different types of pension accounts. We do call them pensions, although most people don't, but the technical financial planner would usually call them a pension account. There are two types of pension there. When you use the and both of them are pensions, there's what's called a defined contribution pension, which is where you're just putting in a same defined amount, a contribution each time.

And then there's a defined benefit pension. And that's where you're guaranteed a certain amount out of it. But they're both pensions. And so the accounts that we use in the US, things like IRAs and 401ks, those are still pension accounts. But most people don't think of them as that.

They usually think of the US pensions as defined benefits. I'm going to get 3000 a month when I retire. But the little loophole that came out was that we have two different types of defined contribution pensions. And these are known as IRAs, individual retirement accounts, or Roth IRAs. And they're also known as traditional 401ks and Roth 401ks.

And basically, one of the accounts, you go ahead and pay the tax now and you put the money into the account and then you leave the money alone. And when you take it out at retirement, you never pay income tax on the gain. And the other type of account, you defer the money now.

You don't pay any tax on it now. But you pay all the tax in the future on the gain. And the rule of taxes, income tax specifically, you're always going to pay tax. You're either going to pay it now or you're going to pay it later. And so that's the whole calculation you're running.

Is it better to pay it now or is it better to pay it later? So the difference between these is that in the US, they passed a law where you can actually convert your account from one type of account into another type of account. And there used to be an income limitation on this.

But now that income limitation has gone away. And my theory is that the US government is broke and they need more tax revenue. And that was why they passed it. I don't know if it's true or not, but that's what it seems to me. They're trying to encourage people to go ahead and pay income tax now instead of deferring it for the future.

But what has happened is many people have the opportunity to put money into a traditional 401k, which is the same thing you have at jobs, or an IRA, these deferred contribution plans and pay no tax on it now while they're working. So they're working, say, earning $100,000 a year as an engineer.

Then they're putting $20,000 a year into the account. And then they leave their engineering job. And they've set aside a little bit of money in an external account. They move to Mexico or they go travel the world full time. And they don't need that much money. Well, now their income has dropped to zero.

And in the United States, you can pick up a certain amount of income and still stay in the 0% tax bracket. So then little by little, they start converting over some of the money from the traditional account, which is where the tax is deferred, into the Roth account. And by only doing that in, say, $10,000 increments, they can stay under the 0% tax limit.

Because when you convert it, you have to pay the income tax in the year of conversion. But because they're not making any money, they're keeping it at a 0% rate. Then by putting it over into the Roth account, they'll be able to use it in the future. And this is compounded with a little rule, a little trick that the early retirees in the US system are using, where in a Roth IRA, you can always take out what's called your tax basis, the actual contributions into it, without paying any tax and without paying any penalties.

So even though it's a retirement account, you put in $5,000 this year and $5,000 next year, you've contributed $10,000. That's what we call your basis in the account. And the account's grown to be $12,000. You can take out the $10,000 for any reason without paying penalties or tax. But if you take out the $2,000 additional, you'd pay penalties and tax on that.

So what they do is that once you put the money into the Roth IRA and once you leave it alone for five years, then you can go ahead and take out the contributions without paying any tax or penalty. And so people are putting money into their 401(k) during their working years.

They're pursuing early retirement. Then they quit. They go travel. They start incrementally converting the money over into a Roth IRA, leaving it alone for five years, and then start taking out their basis at the age of, say, 48, 49 and taking that money income tax-free. And then at 55 or 59, when they go ahead and start taking the distributions out, they can go ahead and take the gains out tax-free.

So that's the strategy that is available under the U.S. tax code. And the two best resources, if listeners are interested in reading about that, there is a site called MADFientist, M-A-D-F as in Foxtrot, I-E-N-T-I-S-T. That's written by a guy named Brandon. He does a great job explaining this for U.S.-based people.

And there's also an excellent travel site by an author named Jeremy and his wife Winnie, and they have a site called GoCurryCracker.com, GoCurryC-U-R-R-Y-Cracker.com. And on that site, they go through details and actually show with their tax returns how they've employed this strategy for their early retirement perpetual travel lifestyle.

That's cool. I actually interviewed them. And so, yeah, that's a nice example. And that makes it's really helpful you explaining it because that makes a lot more sense to me how people in the U.S. can pursue that approach. I may be wrong on this, but I don't think that you can do quite the same thing in the U.K.

because we do have the same basic structure in that you can either pay the tax now and then put your after-tax income in a tax-exempt savings account, which can grow without having tax on the interest, or you can defer the tax by putting your money into a retirement account or pension.

But then you can't switch them between the two, if you see what I mean, at least not that I know of. But that actually means that for the employee who's pursuing early retirement in the States, that's a pretty important strategy to be able to use because otherwise a lot of your money gets locked up and it becomes a lot less flexible as to how and when you can access your money, which I believe is the case in the U.K.

Right. It's extremely important. Now, it does have downsides. Every strategy has downsides. And it's up to the individual to look at their individual strategy and just look at their individual investments and understand what are the risks and benefits, what are the upsides and downsides of this strategy in my life, and is this one going to be right for me.

But if somebody is an employee, because there are many benefits to being an employee, I often think what it would be like to just go and work a 40-hour-a-week job and leave my work there on Thursday night. There are many benefits to it. And the key is to understand what are the strategies that I can apply within my context that will help me get closer to my goals.

Yeah, absolutely. Well, I have another question about those deferred accounts, because as well as the question of how flexible they are, and it does sound like they're more flexible in the States, there is also the question of whether or not you have other risks using – putting a lot of your money into tax-deferred accounts.

And one of the risks that people talk about is the question of sovereign risk and the question of pension funds essentially being expropriated, which does happen. It hasn't happened in the U.S. or the U.K. for a long time, or maybe I'm not even sure if it has happened in the past.

But it happens all over the world in places like Argentina and so forth. And this is one of those risks that you either dismiss or you think is maybe a possibility or some people are very concerned about it. What is your thought about that question? In my mind, the best answer is going to be a balance.

To me, to assume that tax law doesn't change and that governments don't change the law in order to suit their own purposes is simply naive. On the other hand, to think that it's all a vast conspiracy of trying to strip each and every individual of all of their wealth, I haven't seen the evidence for that.

And even though I usually am drawn towards those kinds of theories, I want them – I want to see a little bit of evidence. I am very concerned about this risk and I'm especially concerned about it in many of the large Western countries. I do not see personally any possible way for the U.S.

government specifically to be able to handle all of their obligations. And in the U.S., in the financial structure, the problems that the U.S. faces, it's not so much a current debt problem. The U.S. government owes, depending on where you go, something like $18 trillion of direct debt. But the problem is not the direct debt but rather what we call the unfunded liabilities of the social programs.

And this number, depending on whose number you go with, can be anywhere from $100 trillion to one professor that I think makes a lot of sense, a guy named Lawrence Kotlikoff at Boston University. He estimates it to be over $220 trillion of total debt. And so you look at that and the big problem in the U.S.

is not actually the social security system, although that is a problem. It's primarily the medical systems, Medicare and Medicaid, which are woefully underfunded. And I look at it almost as from a perspective of political reality. The political reality is that in general, politicians will usually promise as many benefits as they can and pay for as few as possible.

And this is why in the U.S. we have an epidemic of local municipalities, pension programs going completely kaput. Because if you come in and you're working as a firefighter, it's very easy for the mayor and the town council to say, "We don't have a lot of money right now, so we're not going to pay you a high current salary.

But what we will do is we will fund this pension plan for you, and we'll pay you a very generous pension." And most firefighters that I had as clients and that were friends of mine primarily were working in order to gain their pension benefits. And it's a great early retirement plan.

You go and you work for 20 years, then you retire and you get 80 percent of your take home pay from then on for the rest of your life. And I worked with guys that were 44, 45 years old coming out of a 20-year career and getting paid almost $100,000 U.S.

per year every year for the rest of their life. And you look at that and say, "Wow, that's fantastic." But the problem is, is that going to be paid? Now it varies among municipalities, and this is the risk that we face in different countries. The U.S. is different than Great Britain, and Great Britain is going to be different than Greece.

And there's no comparison between the Greek economy and the U.S. economy in the sense of they're not the same in almost any way except that there's a country and there's a national economy and politicians are politicians. So I'm very concerned about that risk. I personally see an even bigger risk to retirement accounts, and I'll tell you that one because to me that's the more applicable one that has me steering away from them in my own personal financial planning.

But I think it's an important risk and to just simply discard it is naive. I would be uncomfortable planning on those accounts never changing their laws for the coming 50 to 75 years. I wouldn't recommend to somebody, if I were coaching a client and this client is 50 years old and they have a lot of their wealth in 401(k)s, I wouldn't recommend that in the U.S.

current situation that they freak out, sell everything, and move everything into gold coins. But I wouldn't recommend that a 15-year-old put all of their faith and all of their plans into those types of accounts. So in my mind it's a balance. If you don't mind, let me just share the bigger risk that I see about these accounts.

Yeah, I was going to ask you what you think that is. I think sovereign risk matters. But to me, I think the bigger risk is lack of control of money. And this was a major thing that I learned as a professional financial advisor. When I was a personal finance junkie, every personal finance book I read, the path to wealth was simply this.

Go to college, get a job, and fully fund your retirement accounts and buy good mutual funds in those retirement accounts. And I did that. The problem was I got to the point even a few years ago when I started Radical Personal Finance where the majority of my savings was in retirement accounts and other tax-deferred accounts that I couldn't access immediately, funds that weren't fully liquid.

And I had other savings but then I made the mistake of buying a house and heavily putting much of my liquid savings into that house. Now I thought it was a good decision at the time because I thought I was in a very stable situation. And anybody who had known my financial plan at that time would have encouraged me to make the decision that I made.

But then all of a sudden, I found myself in a desire to start a business and I didn't have a lot of liquid cash. Now when you combine my experience with my observation doing financial planning and I challenge each and every listener to go and look in their town and ask themselves this question, "Do you know anybody who became very wealthy and the foundation of their wealth was the fact that they fully funded their retirement plans from the age of 20 to the age of 60?" I know only one person like that.

And what I found was that it's very unusual. Now many people have a lot of money in their retirement accounts. Most of those people have a lot of money in their retirement accounts simply because they have a very high income. And when you compare say somebody making $40,000 a year and how much money they can contribute to their account putting $400 a month aside versus somebody making $300,000 a year and setting aside $20,000 a year, the $300,000 a year earner is going to have a massive retirement account balance.

But it's not necessarily because of the account. It's because they put $20,000 a year in savings. And what I noticed is that if you go around my town and just about every town I've been in, the people who are wealthy are always the people who own the businesses of the town.

You know, the Joshua Sheets car dealership or the Joshua Sheets gas stations or the Jake DeSilis engineering company or insert whatever business it is here. And I learned that business was the primary driver of wealth. And if I put all my money into retirement accounts, that can work if I'm going to be an employee over a long period of time.

But it's a much faster path to financial independence to simply be an entrepreneur. I live right now almost exactly the same lifestyle that I would be living if I were purely living on dividends. I'm working more than I would be working if I were just living on dividends from an investment portfolio.

That is true. But I would still be doing the same work that I'm doing now and I'd be living the same lifestyle. I didn't need to wait 10 or 15 or 20 years and become a multimillionaire to build a lifestyle of financial independence. I've built a business that funds my lifestyle, but in order to build a business, I need investment capital.

And if it's all locked up in a retirement account and I don't have the money to go out and buy a microphone for my podcast or I don't have the money to go out and pay a web designer to design my website, etc., then I don't have my business and I'm stuck in the system.

And you go back to this question of intent and frankly, I don't know. I could talk on, I've talked a lot about the history of retirement on my show. I don't know what the intent was, but I will say this. If I were trying to design a system in which the primary wealth was going to be accrued and accreted by the companies that are involved in the investment business and I were trying to design a system where people bought investments for as long as possible, thus allowing me to make money and yet never used those investments, I would design a system that looks very much like the retirement account system.

Because what happens in reality is people put all their money into it, all they have is a limited number of investments in most plans, the investment companies gain a lot of money off the fees of managing those investments, it all goes into the generalized markets around the world and those people cannot touch it for 40 years.

That's a pretty good system if your goal is to gain wealth. Now was that the intention? I don't know if it was the intention or not, but I guarantee that the people who were influential in getting those laws established and at least recognizing the opportunity, they saw the business potential because every business person that has an opportunity to rope in a consumer under some type of terms is going to keep that consumer a very long term customer with little ability to escape, every business person is going to see the benefit of that.

That is so interesting. I really appreciate that perspective and I think that's a really important point because I was talking about locking your money up in a retirement account for a very long time being an issue just in terms of gaining access to your funds and you're talking about it even within the context of the states where there are some special ways that you may have a bit more flexibility than in the UK.

You still have less flexibility and that's still going to limit your opportunity to pursue other great opportunities in life like entrepreneurship and like the chance to start a business. So I think that gives a really interesting perspective for people to think about the possible downsides and some of the things that you have to take into account.

As you said Joshua, everyone is going to have to make their own decision about this, but I do think that there are negative sides to locking your money up in that way that limit your opportunities and that's something that people need to be aware of too. Having said that, I also had the advice – like I read the advice in Harry Brown's book about retirement accounts when he was talking about this sort of sovereign risk and the fact that some people are afraid of that.

His point was look, you can't be sure what's going to happen in the future. Laws can change, but that doesn't mean that you shouldn't take advantage of the opportunities that are available to you to minimize your taxes in any way that you can. I personally consider that to be a good approach.

I think why not use whatever opportunities for deductions that you have and opportunities for deferring taxes if you can. Yes, it's true in the future the laws might change and you may not be able to use them, but I think it's sensible to take advantage of things that you can take advantage of if they're available now.

The best thing that I try to do on my show is to pull the emotion out of the decision because what happened for me was I spent so many years reading personal finance books and they said never cash out your retirement account, never touch your retirement account, never touch your retirement account.

For me, it almost became almost a religious idea in the sense of you never touch your retirement account, but it was a religious idea without any actual fundamental basis and truth. It was just simply an emotional idea of don't touch your retirement account and the reality is if you simply pull back from the emotion of it and you look at it as opportunities and advantages and disadvantages, you can create a list of the benefits and the pros and the cons of actually of the contribution to the retirement account.

One of the potential disadvantages is the sovereign risk, but one of the potential advantages is the deferral on tax and you can measure that risk. I perceive the current risk based upon the political reality under today's world in the US to be pretty low, but I'm not sure about that 30 years from now because political situations can change, but if you flip it around and recognize, okay, what's the alternative use of the dollar and this is what most people don't think about.

The fundamental most important concept I think people need to grasp with financial planning is the concept of opportunity cost. I did a show on it. It's one of my most popular shows about how opportunity cost influences everything and some practical examples of this would be if you were trying to decide between the age at the age of say 18, you're trying to decide whether to put a thousand dollars into a retirement account or to take that thousand dollars and to pursue an educational opportunity which is actually going to result in a substantial increase in your earning ability.

So whether that's a class, a certification, a university degree of some type that has a specific applicable financial outcome and you were trying to measure the benefit of investing the thousand dollars in the retirement account or investing the thousand dollars in your education, you would be able to come up with which one is better and I think almost every time it would be better to invest that thousand dollars into education and knowledge that's going to lead to higher earning potential.

Now if you're comparing investing that thousand dollars in the retirement account versus consuming the thousand dollars which is the situation that most people are in, it's either I put the money in my retirement account or I spend all my money. Well, in that situation, you would be better off going ahead and investing the thousand dollars.

If you, Jake DeSilis, were going to go back and you were going to recreate your financial life and you were going to compare the amount of money and the amount of sweat equity that you put into building your business and you were going to put the same amount of money into a retirement account, you came out far ahead with building the business.

And so for you, it was better to build the business than to put the money into the retirement account. But that switched once you became the employee and you said, "Now I've got this high income. I've got this asset that I don't know what the terms of your payout were but it was either deferred or it's being paid out over time.

I don't need all this income right now because I have low lifestyle expenses. Now the retirement account is a good fit." So removing the emotion from it and then comparing and saying what's the actual tax benefit versus tax cost. For example, if you're 18 years old and you're making say $20,000 a year, you're not paying much tax.

And in that situation, deferring the tax from today at a 0% tax rate to the future when you're going to have millions of dollars, there's not much of a reason to fund that kind of account if you can find a better place to invest it. Absolutely. That's all for this week's episode.

In next week's episode, we'll have the second part of the interview with Joshua. In that part of the interview, we talk more about entrepreneurs and the question of tax strategy for entrepreneurs. As always with financial topics, it's your responsibility what you do with your money and this is meant as food for thought and not as advice.

So do your own research and make a decision that works for you. But I hope you found the discussion helpful. We'll be back next week with another episode. Thank you for listening to The Voluntary Life. If you have feedback about the show, please email jake@thevoluntarylife.com. If you enjoyed this program, please share the podcast with your friends or click the donate button on thevoluntarylife.com.