Afford Anything Podcast Summary: “Q&A: Breaking Up with Total Market Funds After 10 Years”

Hosted by Paula Pant on the Cumulus Podcast Network

Introduction

In this episode of the Afford Anything podcast, host Paula Pant teams up with Joe Saul-Sehy to address listener questions centered around investment diversification, handling inheritances, and prioritizing financial goals. The discussion delves into practical strategies for managing multiple financial objectives, optimizing investment portfolios, and making informed decisions to align with personal priorities.

Listener Question 1: Diversifying Beyond Total Market Funds

Time Stamp: [00:00] - [10:54]

Questioner: Jackie

Background: Jackie and her husband, both in their late 30s, have nearly a million dollars invested across various accounts, all primarily in total stock market index funds or S&P 500 funds. They are seeking guidance on diversifying their investments by adopting Paul Merriman's four-fund approach.

Key Discussion Points:

1. Simplicity vs. Diversification:

   • Joe Saul-Sehy emphasizes the importance of starting simple: "The first thing, Jackie, is I want to clarify what I said... keep things simple." ([04:14])
   • He recommends maintaining broad diversification initially by sticking with index funds before gradually adopting a more analytical approach as the investment portfolio grows.

2. Paul Merriman’s Four-Fund Strategy:

   • Joe explains the strategy: "If you use four indexes instead of one that follow four subsets of the market, you will get closer to the efficient frontier." ([07:09])
   • He reassures that transitioning to four funds across multiple accounts is manageable and not as time-consuming as Jackie fears. “[Joe] … you’re doing one thing. You’re just doing it nine times.” ([10:22])

3. Tax Implications and Asset Location:

   • Paula Pant introduces the concept of asset location, highlighting the importance of placing different types of funds in tax-advantaged accounts appropriately. ([10:54])
   • Joe Saul-Sehy advises assessing the tax impact before rebalancing and suggests strategies like splitting sales across tax years to manage tax liabilities effectively. “Maybe Jackie, maybe you keep it simple and don't change your allocation away from the simple path in your brokerage account.” ([13:17])

4. Rebalancing Made Easy:

   • Joe outlines a straightforward rebalancing process: “Once you have those funds and you know what percentage go in each fund now... set a 15 minute date for yourself on your calendar and all you do is this.” ([10:22])

5. Behavioral Considerations:

   • The duo discusses common behavioral pitfalls, such as the temptation to let high-performing sectors dominate the portfolio, and the importance of sticking to the established plan despite market fluctuations. ([18:10] - [21:02])

Notable Quotes:

• Joe Saul-Sehy: “Don’t make perfect the enemy of good.” ([09:15])
• Paula Pant: “When an asset class is doing well, it’s natural human behavior to find a reason to justify reallocating to a larger portion of it.” ([19:06])

Listener Question 2: Managing an Inheritance Annuity

Time Stamp: [33:33] - [45:00]

Questioner: Heidi

Background: Heidi has received an annuity inheritance of approximately $500,000. The advisor recommended a 10-year distribution plan, but Heidi is considering extending it to 15 years to minimize tax impacts. She and her husband are in their early 30s with a combined income of around $160,000 and are in the 22% tax bracket.

Key Discussion Points:

1. Understanding Goals Before Actions:

   • Paula Pant emphasizes starting with identifying the purpose of the inheritance: "What do you want to do with this money?" ([34:12])
   • She suggests aligning the use of funds with personal goals, such as retirement, planned travel, or supporting passions like fostering animals. ([34:12] - [37:31])

2. Tax Implications of Annuity Distributions:

   • Joe Saul-Sehy breaks down how annuities are taxed using the LIFO (Last-In-First-Out) method, where interest is taxed first. ([40:21] - [41:03])
   • He advises assessing the tax liability before withdrawing large sums and considering strategies like splitting withdrawals across tax years to manage tax brackets effectively. ([41:08] - [45:00])

3. Behavioral Approaches to Spending:

   • Paula discusses the difference between conscious and unconscious spending, highlighting the importance of deliberate allocation to prevent lifestyle creep and ensure the inheritance is used purposefully. ([45:00] - [47:20])
   • Joe reinforces spending in alignment with goals and honoring the legacy, emphasizing emotional attachment to how money is utilized. ([47:20] - [48:17])

Notable Quotes:

• Paula Pant: “What do you want to do with this money? What legacy or imprint do you want it to leave?” ([34:18])
• Joe Saul-Sehi: “Money has no emotion... It’s about honoring the person.” ([47:28])

Listener Question 3: Prioritizing Multiple Financial Goals

Time Stamp: [33:33] - [84:09]

Questioner: Grace

Background: Grace and her husband, aged 34 and 40 respectively, have multiple financial goals including retiring well by age 60 with a combined $3 to $4 million, purchasing a larger home in the next 5-10 years while potentially renting out their current townhome, buying their next car with cash, funding their children’s 529 college plans, and affording two annual family vacations. They are seeking advice on how to prioritize these goals and visualize their savings strategy.

Key Discussion Points:

1. Timelining Financial Goals:

   • Joe Saul-Sehy introduces the concept of timelining goals to visualize and prioritize them effectively. “With a limited pool of resources and an unlimited life, how do I make these limited resources fit this big, wide, beautiful unlimited life?” ([56:50])
   • He suggests mapping out each goal on a timeline to understand their interdependencies and potential conflicts. ([57:11] - [60:25])

2. Visualizing and Prioritizing:

   • Paula recommends using sub-accounts or labeled savings goals to segregate funds for different objectives, enhancing behavioral commitment to each goal. (“Labeling your accounts is phenomenal for better behavior.”) ([60:25] - [61:06])
   • Both discuss the importance of knowing the purpose behind each financial target to stay motivated and organized. ([61:06] - [65:21])

3. Balancing Risks and Flexibility:

   • Joe emphasizes adjusting investment strategies based on the flexibility and time horizon of each goal, advocating for higher risk in flexible timelines and lower risk in fixed timelines like college funding. ([65:27] - [70:21])
   • They discuss the need for periodic reassessment of goals and allocations as circumstances evolve. ([72:01] - [77:00])

4. Prioritization Strategies:

   • Joe introduces the concept of an MMA match analogy, where goals vie for limited resources, and stronger priorities should win funding. ([75:43] - [77:07])
   • Paula adds that some goals have fixed timelines (e.g., children's college) while others (e.g., retirement, home purchase) are more flexible, requiring different strategic approaches. ([78:30] - [80:02])

5. Practical Tools and Resources:

   • Joe promotes his book and financial planning services, offering structured guidance for listeners seeking in-depth assistance. ([80:00] - [83:20])

Notable Quotes:

• Paula Pant: “This is the heart of what money management is all about.” ([56:50])
• Joe Saul-Sehi: “It's the difference between conscious versus unconscious spending.” ([61:35])
• Paula Pant: “Celebrating the fact that you got to $2,000 is a big celebration.” ([72:01])

Conclusion

In this comprehensive Q&A episode, Paula Pant and Joe Saul-Sehy provide actionable insights into sophisticated financial planning topics. They stress the importance of simplicity in the early stages of investing, the benefits of diversification via proven strategies like Paul Merriman’s approach, and the necessity of aligning financial actions with personal goals to maintain motivation and achieve financial well-being. Their blend of practical advice, behavioral psychology, and strategic planning offers listeners a robust framework to navigate complex financial landscapes.

For more detailed discussions and resources, listeners are encouraged to visit affordanything.com and explore additional episodes featuring expert interviews and decision-making frameworks.