B (4:08)

What I truly wanted to hear. I wanted you to tell everyone what AI said we would say. That's what I wanted to hear, Paula. Oh, or maybe she wants to hear us without the bias of what AI would have said. But I would. I would love to. I've never asked ChatGPT to predict what I would say.

A (4:25)

Think in the style of Josal Sehi. Well, I guess that means our thinking styles will outlive us. I suppose there is that as a silver lining.

D (4:35)

All right.

B (4:35)

Well, Paula, well, do you want to go first? What do you think of that allocation of hers?

A (4:41)

My bias says I do kind of love the 6% Cathie woods arc spice. I also love that she calls it spice.

B (4:48)

I love that it's spicy. I don't love that pick. I think Morningstar rates the Ark Innovation Fund one star for a reason, because I think it is a one star fund. I think you could do that same spicy approach and leave Cathie Wood out of it. How's that for a hot take?

A (5:06)

Oh, yeah. Cathie Wood Arc Funds is a very polarizing choice, but it's a reasonable allocation. And I think there's an argument to be made that it will see its day, that that her investment thesis will prove to be viable in the long term. So, Christina, Jo and I disagree on the Cathie Wood allocation.

B (5:27)

I think it's also hilarious that we are debating the smallest part of her portfolio right now.

A (5:31)

Yeah, exactly.

B (5:32)

We're taking the piece that's completely irrelevant.

A (5:35)

The big, the other 94% of her portfolio we have just ignored. That is actually a testament to how headline grabbing and also how polarizing Cathie Wood and Ark funds are. But moving on, Christina, to the other 94% of your portfolio, a couple of things stood out to me. I think the US total market allocation sounds great. The US value tilt I absolutely love. I'm a big fan of value tilts generally and I have a lot of that in my own portfolio. I have a question as to why the international component is high dividend. International as a 15% and with emerging markets, 20% allocation. Great. I have no objection to that. I think that sounds totally reasonable. Why high dividend? Because when stocks are high dividend, they tend to, broadly speaking, not be growth oriented. And at 43, you've got a long, long investing career ahead of you many, many decades. I would want at such a young age to tilt towards stocks that are either growth or value, but certainly that do not have an income bias, which is how high dividend stocks are positioned. On top of that, you have a 24% bond allocation. So that's your income portion of your portfolio right there. So that's the major change that I would make to your portfolio is I would, I'd keep the international allocation, but I would switch out of high dividend and into a broad international fund.

B (7:03)

If I understand why the international high dividend is there, I think it's because international until this year has done so poorly that the dividend still cranks out some return when international over longer periods lately has trailed. So I'm betting, I'm betting that's why that high dividend is in there. Which is why I went, yeah, not something I would have picked, but for me, that one doesn't bother me at all.

A (7:32)

Oh, all right. What are the ones that bother you then? Is it the value till.

B (7:35)

Well, let's start off with a piece that I won't go near, which is the 24% bonds. Because if she's using a three bucket approach, I don't know which funds are in which bucket. But I'm assuming because she's seven years away that that's why there's such a heavy bond allocation. If she were further away, I wouldn't have that bond allocation at all. Number one, by the way, that assumes. So I want to make sure that we get this in on the record.

A (7:57)

Yeah.

B (7:58)

Before people start writing, that assumes that we look at the standard deviation, that that creates meaning for people that are new to the show. That creates. That's going to create a more volatile Portfolio. And I'm assuming then that Christina can handle that volatility by not having that there because that is a big thing for a lot of people. As you know, Paula, that having an all stock portfolio makes some big time waves that are hard to stomach for a lot of investors. But I think Christina can, you know why? Because she's got Cathie Woodner portfolio, that's why. So I think the 24% bonds has to do with her buckets. And so I'm not going to challenge it because I haven't seen the whole financial plan. So I don't know about the bonds.

A (8:44)

Yeah. I will also state this for the record. I do think there's an argument to be made that if you are in your income earning years, you don't necessarily need a bond allocation. No, I mean I think if you're actively earning an income, bonds are not necessary. That's also a spicy take. It's a bit of a hot take.

B (9:00)

But I don't know.

A (9:01)

Yeah, I personally do not have a bond allocation.

B (9:03)

We know plenty of CFPs that believe that. I mean OG, who's a CFP, longtime CFP, who's my co host on stacking, Benjamin's totally believes that. That if you are far enough away from retirement, forget bonds.

A (9:15)

Right, right.

B (9:15)

He always. And you and I too. That means you have to be okay with the increased volatility.

A (9:23)

Yep, exactly.

B (9:24)

Because the worst thing that could happen is blowing up your own plan.

A (9:27)

Right. But yeah, I agree with you, Joe. The reason I did not object to a 24% bond allocation is because I see that as the income portion of her portfolio. And in a three bucket approach she needs some sort of an income portion. And to be fair, when I say that I personally don't have a bond allocation, I do have rental properties and those rental properties I view as the income portion of my portfolio. So I get the desire for an income oriented slice of a portfolio. For some people that's rental properties, for others that's bonds. Good for her for having it if.

B (10:00)

She were further away from retirement. I mean that High Dividend International Fund and the REIT, those are both cranking out pretty hefty dividends on 25% of the portfolio. So she's got some decent money coming in there as well. I like 5% REITs, I think that's great. I think that's fantastic. 5% emerging markets I also think is fantastic. We already talked about the international High Dividend. Let's talk about the other 45% of the portfolio. I think that if you're doing an asset allocation that includes seven positions, I think the US Total stock market is just plain sloppy.

A (10:35)

Wow.

B (10:35)

The whole goal of having an asset allocation is because of the fact that vtsax is sloppy. It just is sloppy. So why would you have something this detailed and have 25%? That's just sloppy? Wow. Well, I don't think that's. I don't think that's a hot take. I think that goes exactly with what I said when I said that you should look to be closer to the efficient frontier. And this is clearly more Scientific with 25% of the portfolio saying, I'm not going to be scientific.

A (11:08)

So that is not a hot take. That is a Fahrenheit 451 degrees.

B (11:13)

That's not hot at all. That was predictable. It's 100% predictable. And it's quite in line with what I've said in the past. So I don't know if you're doing that for large cap, if you're doing that for what you're doing it for, and then the 20% US value till again, I would challenge you to pick an asset class. Are we talking small cap value? We talking large cap value? If you take the 45%, if you would have told me I want 35% of my money in large cap value, I want then 10% in small cap value, and you would have had that with the rest of this, I would have gone, good. There's your value tilt, there's your large cap, your small cap. We just solve the equation. And I think you're actually closer to the efficient frontier. Just based on all of the research I've done and the amount of time I spent on it. You're much closer to being more efficient with your money than you are with a value tilt that's all over the place. Large, medium, small, and a total stock market index that's all over the place. I'd be a lot more granular with that part of the portfolio. So I'm wondering now, I'm just wondering if that's what the robot said. I'd say I don't care if people think the robot's right or I'm right, but I just want to know if that's what the robot said.

A (12:32)

I'd say you want to know how well the AI is going to predict you so that when you're gone.

B (12:39)

Because I think my answer was pretty predictable. I think my answer was very predictable on all those fronts.

A (12:44)

I actually was not expecting you to give your take on Total stock market. Really? Yeah. Well, because I know that you, you believe that 100% VTS X and chill, like in the JL Collins Simple Path to wealth style. I know that you believe that that is lazy and we can do better.

B (13:01)

Except when you're starting out, I think it's the 100% place to be.

A (13:05)

Right.

B (13:05)

So before people send hate mail, just realize where you're going to hate me and where you're going to like me.

A (13:10)

Right, Right. But for anybody who has over $100,000 in their portfolio, they can do better. I long have known that that is your take and I agree with that take. What I was not expecting was for you to say that even putting a sliver, albeit a large sliver, a quarter of your portfolio into total stock Market, I was not expecting you to disagree with that.

B (13:32)

I don't know why you go, why would you go halfway?

A (13:34)

Because it's slivered. It's, you know, you can, it's, it's.

B (13:39)

It defeats the premise. Cathie Wood has a strong premise and she believes in that premise.

A (13:45)

Joe Salsihai has an investment thesis and that investment thesis, strong thesis, it is the opposite of the J.L. collins thesis. He's 100% VTS X and you are a 0% VTS.

B (13:57)

And then I'm 0%. You know what, I will mitigate that though. We had a great question recently that Og and I were asked on Stacking Benjamins and somebody said, does it matter so much in my non IRA accounts that I move my VTSAX over to large cap growth and value, which is what the efficient frontier told her to do. I'm going to pay big taxes because I've held onto these for a long time. Doesn't matter a ton. And the answer was no. I would just sell off that position as you need money and just not buy it back.

A (14:37)

Right.

B (14:37)

So I do think that moving out of that position if it's in a taxable account, you know, if this is a legacy thing and she had the total stock market and it's 25% of her portfolio, she doesn't want to sell it for tax reasons. Fine. Great. Close enough. If it's in the tax Advantage account though, why would I keep it if there's no fee to move it?

A (14:56)

Yeah. And I will say, and this is a broad statement for everybody listening, if you've got assets that are in a taxable account and you want to rebalance those assets depending on how big those assets are and how out of whack your asset allocation Is my preferred way of rebalancing a taxable account is through contributions.

B (15:13)

Yeah. Tax. Do it around it.

A (15:15)

Yeah, exactly. My preferred way, even if it takes a little bit longer, even if your asset allocation is out of whack for, you know, an extra year, I think that's for, in most cases, that's fine. Rebalance by virtue of making new contributions that buy in so that that way you don't take the tax hit of selling off positions in a taxable account.

B (15:35)

This was fun though, Christina. This was a fun exercise.

A (15:38)

Yeah.

B (15:39)

Thanks for asking us.

A (15:41)

I love that we both fixated on the Cathie woods section first.

B (15:44)

Immediately.

A (15:45)

Yeah. Well, I mean, you know what, sometimes when you eat a dish, the thing that first hits you is the spice.

B (15:51)

The spice, right. Absolutely.

A (15:52)

The very first thing that like wows your taste buds right away. And it's only after that the more complex flavors make themselves known. So thank you, Christina, for the question. We're going to take a break to hear from the sponsors who make the show possible. And when we return, we are going to hear from someone who has questions about asset allocation, particularly as she and her husband get closer and closer to retirement. If you run a business, every time you miss a call, you're leaving money on the table. Think about the last time that you had a plumbing emergency if the first plumber didn't answer. Did you wait? No, of course not. You called the next plumber on the list. With OpenPhone, you'll never miss an opportunity to connect with your customers. OpenPhone is one of the top business phone systems that streamlines and scales your customer communications. It works through an app on your phone or computer so you don't need to carry two phones around. 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They've got cashmere, they've got silk, they've got perfectly tailored denim, they've got wool coats. I mean designer level, but at a fraction of the price. And the quality is just as good, if not better. They partner directly with ethical top tier factories and they cut out the middleman, which is how they're able to deliver luxury quality pieces at half the price of similar brands. So it's a smart, stylish, effortless wardrobe upgrade. If you want to see what it looks like, go to my YouTube channel. The interview that I did with the behavioral economist Etenosa Agban Lahore, I was wearing a quince camisole. The episode with Josel Sihai where we talk about whether or not ChatGPT's portfolio is better than VTSAX. I'm wearing a burgundy colored quince cashmere shirt. The interview that I did with Wharton professor Laurie Rosenkopf, I'm wearing a quince silk shirt in aqua blue. My interview with Melody Wilding, I'm wearing a quince silk shirt in like a darker blue and I'm wearing a quince pencil skirt. You can see all of this on YouTube. You know, as I'm retiring old pieces out of my wardrobe, I am very slowly replacing my wardrobe to pretty much be an all quince or certainly a majority quints wardrobe. That's how much I like their stuff. And by the way, I should add, they have not asked me to wear their clothes on YouTube. I don't think they even know that I'm doing it. That's how much I like their stuff. I am not somebody who in the past has ever had silk or cashmere in her wardrobe that felt felt so expensive and so out of reach. And that's why I love Quince. It made those types of really high quality materials affordable and accessible and it's ethical. Keep it classic and cozy this fall with long lasting staples from quince Go to quince.compaula for free shipping on your order and 365 day returns. That's Q U I-n c e.compaula to get free shipping and 365 day returns. Quince.compaula P A U L A welcome back. Our next question comes from Anonymous.

D (23:07)

Hi Paula and Joe, this is Anonymous. My husband and I are big fans of the show and have been wanting to ask a question. When we heard your episode with Frank Vasquez, I knew then that we had to call in. So here's the picture. I am 57 years old and semi retired. My husband is 53 and working full time. He plans to retire from full time work in five years. We believe we are currently invested along the efficient frontier. We have about 2.75 million allocated as follows 58% large cap growth, 16% small cap value, 20% international ex US and 6% divided between individual stocks, REITs and bonds. 98% of this is inside our retirement accounts and in addition we have about 80,000 in cash. We also have 10 investment properties with estimated value of 2.1 million and outstanding mortgage of around 1 million. Seven of the 10 properties have a five to one ARM at 7% and and three have a 30 year 3.5% mortgage. Monthly rents 18,800 PITI 12,400 management costs 10% of the rents. We both have a small pension from previous work at full retirement age at around 1000 each and our house is paid off only debt right now 35k car loan at 3.9%. So as Joe would often say, begin with the end in mind. Upon retirement we would like to continue our adventure travel and also do some slow traveling. We plan to give generously and share the blessings with others and we are excited to try living in different places a few months at a time. We also would like the option to stay close to our daughter once she starts her own family. We estimate this will cost around 12,000amonth. We both expect to be doing some paid work even during retirement and this will give us conservatively 4000amonth net. For the question. Number one we would love to hear your perspective on how we should look at our assets as a whole. You discussed the golden ratio as well as All Weather Portfolio with Frank Vasquez. How can we apply that to our situation? Number two husband is still contributing to his work 401k up to the match and we both still contribute to abakdor, Roth and HSA. On top of that, we have about 3,000amonth that we can save. How should we allocate that at this time? Should we go to cash bonds or continue with our current allocation? And lastly, should we rebalance our portfolio now to mimic the All Weather portfolio or wait till closer to 5 years? Any other input or idea on how to evaluate our situation will be very much appreciated. And thank you both for all your invaluable insights and I look forward to hearing your answers. Stay well.

A (26:07)

Anonymous thank you for the question. And before we answer it, we first have to give you a name.

B (26:12)

We have to. It is a requirement.

A (26:15)

Joe, I have an idea.

B (26:16)

Oh fantastic.

A (26:18)

In honor of the debate that we just had, I think we should name her Kathy.

B (26:25)

And we both said we do Like Cathie Wood.

A (26:27)

Exactly.

B (26:29)

Let's do it.

A (26:29)

Awesome. Excellent. Anonymous your name will be Kathy.

B (26:33)

Well, let's just start here then. Paula, what grabs your attention first?

A (26:36)

All right, first of all, congratulations. 10 rental properties valued at $2.1 million. That is absolutely incredible given that you are semi retired, given that your husband plans on retiring five years from now, and given that you want a lifestyle that will cost around $12,000 as you live close to your daughter in retirement and you plan on having part time income, that will bring in about 4,000amonth. So we've got an $8,000 gap that we need to plug. What I would like to see are more of your rental properties paid off within the next five years before you get to retirement. You've got right now 10 properties with mortgages on them. If you snowballed all of your extra payments beyond the minimum into whatever property has the smallest outstanding balance, particularly if it's one of the properties that has the 51 ARM at 7%. I don't know what the balances are on those 10 mortgages, but I estimate that you would be able to pay off the smallest mortgage balance relatively quickly if you were to direct that 3,000 per month towards that mortgage balance. And then of course that would then have a compounding effect because as soon as you pay off the smallest mortgage balance, you then have all the additional cash flow from that property that you can put towards the second smallest mortgage balance and so on and so forth. So I'm not saying you need to pay off all 10 properties, but if you could at least pay off one or two or even three, and especially if you can target the properties that have that 7% rate I think you'd see a lot of progress very quickly.

B (28:15)

I find this fascinating because my brain went right to the same place, Paula.

A (28:19)

Oh.

B (28:20)

But I want to give people the rubric, which I think you and I are both thinking around. What are we solving for when you're just starting out? We're solving for how can you put more money in. Right. Which is why vtsax is a great place to go. Then I think getting more efficient pays well. Once you get past a hundred thousand dollars, I think when you get this close to retirement, then we are solving for cash flow. How do we create this income stream? And she is so close to having it.

A (28:48)

Right.

B (28:49)

And immediately my head went to the rental properties as well. And two things. Number one was the 3,000amonth clearly should go to trying to pay those off and snowball them. So I love that. And then the second thing is where are the alarms going off? And I think that there are alarms going off on the 51 arms. I mean, whenever I see that, that's a ticking time bomb.

A (29:11)

Wow, Joe. We're in agreement.

B (29:13)

Well, what is going on? But I think we're working off the same. You know what I mean?

A (29:18)

Yeah, we're working on.

B (29:19)

We're trying to solve the same thing. And so, you know, she's asking questions about how do I get my portfolio assets to X, Y, Z? And you and I are like, yeah, no, rental properties.

A (29:31)

Yeah.

B (29:31)

That is where.

A (29:33)

Well, where my brain went first is she said that they estimate that they're going to need $12,000 to support their lifestyle. So my brain is like, all right, the goal is $12,000 per month five years from now. Now of that 12,000, 4,000 is going to come from income. Cool. So there's an $8,000 gap that we need to plug. And just doing back of the envelope math on the rental properties, right, the properties are bringing in 18,800 per month. And then, you know, minus 12 grand for the mortgages, PITI minus another just shy of 2,000 for management. All right, so we've got 18,000, minus 12, minus 2. We're down to 4,000amonth. But that 4,000amonth still needs to account for repairs, maintenance, capex. So of that 4,000amonth, you know, there's a portion of that they're going to have to reinvest back in. So they're probably keeping 2 to 3,000amonth. That means there's still a gap. Right. If $4,000 comes from income. And another, currently we'll say 2 to 3,000 comes from net proceeds from the rental properties. All right, now that means they've got between 6 to $7,000 per month, which means there's a gap of between 5 to 6,000 that they need to plug. Seems to me that the solution to plugging that gap, if they've got a five year time horizon, comes from paying off the properties.

B (30:58)

I think it's the easiest way to solve so many problems.

A (31:02)

Yeah.

B (31:02)

And what I heard that I liked was that she feels like the rest of her portfolio is already along the efficient frontier. And I know we're going to get to this sooner or later, but the longer I can just leave that alone and I can leave it there and I don't have to go to a risk parity portfolio. I want to do that as well.

A (31:20)

Yeah.

B (31:21)

So if I can not mess with an engine that is working fine and take the piece that could be trouble. The, the piece that bothers me about the rental properties is the mortgage. I mean, it's 100% the mortgages. Because when your income streams go away, you want to have as little outflow toward debt as possible.

A (31:43)

Right.

B (31:43)

While you got a bunch of money coming in. You know, debt can be a nice leverage thing. But I really want to try to deleverage as much as possible when those income streams begin to fade.

A (31:53)

Right, Exactly. And the 5:1 arm, I mean, that's concerning for a handful of reasons. There's the, the not knowing what it's going to adjust to, and there's the fact that it's at 7%. That's two strikes against it.

B (32:06)

So I believe that answers the primary question. But she asked a little bit about the portfolio, about timing and going toward a risk parity portfolio. Paula.

A (32:18)

Right. Frank Vasquez's answer is that people should start shifting over towards a risk parity portfolio as they approach retirement. You know, as they're getting T minus five years, four years, three years. And so if they're planning on retiring five years from now, if the husband is planning on retiring five years from now, that means they're right at the beginning of that T minus zone. But I don't see, particularly given how, how much of their portfolio is diversified into rental properties. I don't see them as having an urgent need to start reallocating at this time. I think that they can hold off on it for a little while because the risk parity portfolio, if you choose to have it, makes sense in the context of being a retiree who does not have any other income sources, but their retirement income is well diversified. Right. They're going to have part time income, they're going to have rental property income, and then they're going to have the income that they pull from their portfolio. Given that level of diversification in retirement, I think they can wait on the risk parity portion.

B (33:29)

I don't think they ever need a risk parity portfolio.

A (33:33)

Is it for the same reason? Because of the income diversification I do.

B (33:36)

I think a risk parity portfolio works really, really well when you're trying to eke out single dollar of your safe withdrawal rate, whatever you want your safe withdrawal rate to be. If we decide that Bill Payan's 5.2 is the new number. So if I'm trying to take out all the 5.2, 5.2 is the new.

A (33:56)

4.2, new 4.0, but if you want.

B (34:00)

To take every nickel of that, then I think the risk parity portfolio could be on the table. I still don't love it, which is interesting because everybody who knows me, longtime listeners, the show, know I frickin love Frank. What I think people have to be more comfortable with than I've seen sometimes is some of our big fans think we need to agree on every single thing. And smart people disagree fairly often around the edges. And I do feel like in this issue Frank is looking at the science that I don't disagree with. But I've worked with hundreds of people and I think that trying to manage your average afforder into a risk parody portfolio, there's a huge risk that you will blow up your own plan. Because of the fact that I think it's way more complicated than Frank thinks it is. Frank thinks it's not complicated at all. I can't figure out a way to get it scientifically into portfolios. Just looking back over the course of my career and I'm comfortable with that. What was interesting was I did a podcast episode which featured Frank and Karsten Jeske, who, you know, Paula.

A (35:11)

Yeah.

B (35:12)

Carson's great cfp, Dana Anspa, who also is great. And so I had the three of them and the only comments I saw was people saying I left that episode more confused than when I started. People haven't heard it yet. What I want people to listen for is that Carsten and Frank are theorists and Dana and I, I'm a former practitioner and Dana is a practitioner. And the practitioners were for the bucket strategy. And the theorist said the bucket strategy is nowhere near the science of the risk parity. And I don't think either Dana nor I disagree with them. We just think that practically What Carsten and Frank were advocating is harder to roll out, I think than Frank believes it is.

A (35:59)

So are you saying Carsten and Frank are physicists and you and Dana are engineers?

B (36:04)

Wow. You got to put a TM on the end of that, Paula.

A (36:09)

Well, thank you. Thank you.

B (36:10)

Yeah, I think so. Like you look at the plans and you go, yeah, in theory this looks great. It looks fantastic. I'm just not behind. And I love Frank and Frank and I both believe in the efficient frontier and risk parity portfolios and efficient portfolio and it's made for efficiencies while you're taking money out. I think it's really cool. And I mean I'm not going to say Ray Dalio is wrong. Right. For people who are uber nerds like you and I.

A (36:33)

Right.

B (36:33)

Like I'm not betting against Ray Dalio who has a great risk parity portfolio. I just really think that based on the nice job they've done a saving and the fact they know how much money they want to spend, they can then focus on the amount of money they want to spend and not on a maximum safe withdrawal rate. So I have to retool my portfolio completely to eke out money that I might spend on stuff that I don't really care about.

A (37:03)

By the way, for any listeners who are wondering what we're talking about as we talk through Frank Vasquez and the risk parity portfolio, if you want a primer on this, we did an in depth interview with Frank vasquez in episode 618. You can listen to that by going to afford anything.com episode 618. We also have a cheat sheet, a free giveaway that summarizes much of what we talked about. And you can download that for free at affordanything.com riskparody that's affordanything.com risk P A R I T Y riskparity.

B (37:41)

Your interview with Frank was fantastic.

A (37:43)

Oh, thank you, thank you. You know it was helpful. Frank and I met beforehand and did a pre interview and kind of talked through everything that we were going to talk through.

B (37:52)

Fabulous.

A (37:52)

Honestly, that helped a lot. The preparation for the interview that I. That I thought made it sing and it did.

B (37:58)

Yeah.

A (38:00)

But you know, she started with the question how do we view our assets holistically? And stepping back, big picture, I view everything that she's talked about, the part time income portion, the rental property portion and the portfolio portion as her own version of a or their own version of a three legged stool. You know, oftentimes in retirement planning people say the three legged stool is portfolio, Social Security and a pension if you have it. But they have built their own three legged stool and it's part time income, rental properties, portfolio. And so holistically I would say don't over focus on the portfolio portion. Your asset allocation as it currently stand. Sounds great. Keep that, keep on keeping on. Especially right now in the next couple of years. I don't see any imminent need to change that. Or to Joe's point, maybe not ever. I think the rental property portion of your portfolio is really where you stand to make the biggest inroads because there's still a million dollars of mortgage debt to pay off. And once that is paid off, you're going to be cash flowing so heavily that it solves a lot of your retirement planning questions right there.

B (39:21)

And then the exciting piece of that, Paula, for them is that they could leave the portfolio, the funds and stocks as a growth engine.

A (39:31)

Exactly.

B (39:32)

And then they can begin thinking about do I expand my lifestyle using this money or do I begin legacy planning which is also exciting.

A (39:42)

So thank you, Kathy, for the question. We're going to take one final break to hear from the sponsors who make the show possible. And when we return, we're going to hear from a listener with a fantastic first name. My favorite first name, Jo.

B (39:56)

Her name's Jo.

A (39:57)

Her name is Paula and she's got a question about 529 plans. All right, so that's coming up next.

E (40:07)

Thursday Night Football is back and it's only on Prime Video. This week, the Washington Commanders take on the Green Bay Packers. With both teams determined to prove their worth, this should be a terrific game. The Washington Commanders going up to Green Bay trying to get a win up there. Jordan Love, the quarterback for the Green Bay packers, had a subpar year last year. Can he shake it off and show his true talent against the Washington Commanders? Coverage begins at 7pm Eastern with football's best party, TNF tonight presented by Verizon. Not a Prime member, Not a problem. Simply sign up for a 30 day free trial. It's the Commanders and the packers Thursday at 7pm Eastern only on Prime Video. Restrictions apply. See Amazon.com Amazon prime for details.

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F (42:15)

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A (43:02)

Welcome back. Our final question today comes from a caller with an amazing first name, Joe. Paula.

G (43:11)

Hi Paula, thank you so much for your show. I have a question about 529 plans my husband and I are expecting and we're planning to have probably three kids and they are going to be going to private school and then possibly public or private university. So I think it is going to be a pretty large sum of money. First I'm trying to figure out how much to put in a 529 plans. One thing that my financial advisor from Fidelity mentioned was that I can put in five years worth of gifts at once without issue and I think that would be smarter because it can grow over time more. I do right now have about 200,000 that's just growing in high yield savings account that was kind of allocated for property. But I think based on just how things are going, I'm not sure we're really going to buy property at this time. In the end so I'm debating if I should put that money into a 529 plan or at least, you know, put 90,000 in to start when the baby's born. And then another thing that I'm trying to figure out is it looks like there are so many types of 529 plans with so many different restrictions and allocations. I obviously need one that going to allow me to take out the $10,000 a year for private school in addition to college expenses, but I'm otherwise having a hard time sorting through that. We're located in California for now, but I don't know if we'll be here long term. I'll be here for at least the next few years and then it's a little bit up in the air after that. I would just love to hear your perspective about using 529s, especially for high schooling expenses for kids. And then if you have any thoughts about the top 529 plans that exist, thank you so much. I appreciate it.

A (45:09)

Paula, first of all, thank you for the question and congratulations on expecting your first child. I love that you are getting a head start on setting up 529 plans. So I'm stating this for the sake of everyone who's listening. The benefit of a 529 plan is tax deferred growth, which means the longer that that money sits in the plan the better. And I know that you already understand this because of the comment that you made about frontloading five years worth of contributions in advance, but I'm stating this for the sake of everyone who's listening. The reason that that is so significant and the reason that front loading that contribution in particular is going to make such a big impact is because it is the tax deferral and the growth that comes on those tax deferred assets that is truly the bulk of that benefit. The earlier you can put money into the plan the better. Which is why I love that you are thinking about 529 plans while you're still expecting the first and before the other two children are born, you're doing it at exactly the right time. And the reason that I emphasize that is because sometimes I hear from listeners who will say, hey, my kid is 14 years old and we're thinking about opening up a 529 plan. And at that stage, assuming that the child goes to college at the age of 18, there might be some value in it, but that value is significantly more curtailed as compared to what it might have been had they started earlier.

B (46:39)

The good news about 529 plans is that they are fairly uniform. Now when you say different types of 529 plans, I think where people really get in the weeds with this, Paula, is that 529 plans mean that they are state sponsored. So there's this spaghetti of different plans because every state has their own plan. Now here's the good news. Most all plans are available to everyone in the United States. No matter what state you live in. You might get a tax break, a state tax break for putting money into your own State's financial 529 plan. So you'll want to check that out. But in terms of the rules around 529 plans, up until 2026, you're allowed to use $10,000 per year for K12 education expenses and that'll be tax free. Meaning even though you put after tax money in, it's like a Roth ira, when you pull it out, you're not going to pay any tax on any of the gains or distribution. So that part is a positive. Now the good news, next year that number goes up to 20,000. These are uniform numbers. So no matter which 529 plan you choose, you will have the ability to do that. And just to make sure that I'm right, I would always run this by your financial advisor that you mentioned and I would also look at the documentation or call the representative of the 529 plan that you choose. My bias usually is toward 529 plan in the state where you live because of the potential for not just the state tax break, but there might be other incentives that you get for being in state. So a place to look. My favorite comparison site. I love this site called savingforcollege.com I.

A (48:26)

Was wondering if you were going to say that because you mentioned savingforcollege.com on a previous episode, a recent previous episode, and this was in. Was it in the context of the 529?

B (48:37)

It's the number one place to go there. I might have referenced it too because when you ask about how much money to put into the 529, there's lots of calculators there.

A (48:46)

I think you were referencing it in the context of calculators the last time.

B (48:50)

Yeah. So I like both of those things for saving for college. But it will go over everything about the 529 plan. Now there are three basic RIFs on a 529 plan and I'm not even sure if one is a 529 plan. But people call it a 529 plan. The two main 529 plans are ones that you choose yourself and other ones that are advisor assisted. And I'll caution you on advisor assisted 529 plans. There are places, Paula, where I've said there might be value for you to buy things through an Advisor. I'm not 100% anti advisor on everything when it comes to 529 plans. This is a fund where you're going to put money in and you're probably not going to move it around. And so an advisor is going to get fees from this plan year over year. You're going to pay a commission to buy it. And they literally, not even figuratively, they're. Because I hate it when people say literally. They mean figuratively. They literally aren't going to do anything for that money. They are never going to do anything for 529 plans. When advisors take a chunk out, I always roll my eyes, like, really? You're doing nothing for this? You're not going to watch it? There's nothing to do. It's so simple. So I'd look at California's first and then my favorite 529 plans. Vanguard offers a 529 plan through, I believe, the state of Utah. So if you look at Utah's plan and Vanguard and I like the New Hampshire Fidelity plan, I think that's good. T roll price is another great fund manager. Their Alaska plan is fine. And again, don't get caught up in the state. The state, frankly, is irrelevant. My kids, because I had twins, I used two. We lived in Michigan at the time. I used Michigan and Wisconsin and we had some money in Utah as well. So I had money in three different state 529 plans for my twins. When they went through school, they never went near Utah.

A (50:53)

Mm.

B (50:54)

We didn't go there. We didn't have to do anything with Utah at all. We might have gone to Wisconsin once. It was irrelevant. Didn't matter. We did get a state tax break on the Michigan part of the plan.

A (51:05)

Why did you pick Wisconsin and Utah as the other two?

B (51:08)

Wisconsin had a fund management team that's now defunct that I really like, which was strong funds at the time that managed it. And I was very close to that fun family. I understood that fun family very much. I knew exactly what I wanted. I thought it fit the asset allocation I was looking for. And then Utah was easy. It was the Vanguard plan.

A (51:28)

The Vanguard one. Yeah. The Utah one is really popular. Utah one is the one I Hear about the most.

B (51:34)

Yeah. And Michigan's plan was TIA craft, which is also another 520.

A (51:38)

Yeah, yeah, yeah.

B (51:40)

Now the third one, which often gets called a 529 plan. In fact, it's funny, when I was just making sure that my eyes were dotted and my T's were crossed for this segment, in some places it was called a 529 and others it wasn't called a 529. It's irrelevant. These are prepaid college plans. And really, if your child hasn't been born yet, this is a tough one because, Paula, what you're doing is you're saying if my kid goes to a school, usually it's a state school in X state. I will prepay based on either prices today or I'm just going to put money like it's a layaway plan for college.

A (52:17)

Mm.

B (52:18)

If I'm really locked into a school or I've started late, I've seen these work fairly well for some people. It's a really conservative way to save for college and to put money toward college. But if you're starting as early as you are, I would highly recommend not going with a prepaid tuition plan.

A (52:38)

Well, and that locks you into a particular school.

B (52:40)

It does. Or a set of schools. Like as an example, Michigan has a plan called the Met Michigan Education Trust, which you put money into so you can go to any of the Michigan state schools. So University of Michigan, where horrible people go. Michigan State, where amazing people went.

A (52:58)

Huh?

B (52:59)

Yes.

A (52:59)

Little Spartan vs. Wolverine rivalry right there.

B (53:02)

What do you see? A bias? I don't. I didn't get a bias in my answer there. You know, Western Michigan, eastern, central, northern, whatever. As long as it's a state school, you, you're good. But if they decided that they want to go to Notre Dame or to Utah.

A (53:18)

Right.

B (53:19)

As an example, yeah, you can do it. But the amount of money they give you is going to not be great.

A (53:27)

What about the private school expenses, Joe? Should she be thinking about that differently? Given that these, you know, these are costs that are more imminent, they're closer in the timeline. Does that impact her choice of 529?

B (53:41)

I don't think it impacts the choice of 529 as much as it impacts which track she chooses? What you'll find is with 529s, they are very simplified. Really, really simplified. And some 529s are only target day funds. So you're going to bucket much more conservatively for that K12 because of the fact that that's you're going to be using some of that money imminently versus a college education 18 years from now, maybe 17 years from now. You'll be more aggressive in that part. So I think you're going to choose just the more conservative option inside of that plan. I think the place where I hesitate, though, Paula, isn't on that. Although I do think it's important to think about your timeline and when I'm going to use this money. So I might use three different buckets here. I might use like K through third grade and then third grade through senior year and then the college money and the much more aggressive one. The thing that I worry though about, and this was one of Paula's big questions that I want to make sure that we cover.

A (54:47)

Paula the caller.

B (54:48)

Yeah, Paula the caller. How much money should I put into the 529? I think use those calculators. But I also think Paula, she's got to be really conservative because so many things are still up in the air.

A (55:00)

Right.

B (55:01)

She mentioned that this money was for property, but given the way things are going, I don't know what that phrase meant, but given the way things are going, I'm not sure. Paula, I want you to hear this clearly. Not Paula Pant Paula or caller.

A (55:13)

Paula the listener. Paula the caller.

B (55:14)

Once you put money in the 529 plan, it's going to be really hard to take it back out. This is a decision that I don't want to have to back the money out of the 529 plan. I don't want to have to figure that out. I don't want to mess with that. I would only put money in the 529 plan where I have extreme clarity that that is going to be an education expense. So here's what I would do. When I was a financial planner, we would take the amount we were sure of, no matter what school my kid went to or if they got scholarships or any variety of things happen. And we would put that money in the 529 plan. The rest of the money we would just put in a regular brokerage account and we would put it in funds or indexes, ETFs that we've segregated so that I know that this is, quote, college money. In my head, it's college money. But I haven't officially put it in the 529 plan yet because we're not sure. And now I have the flexibility to change my mind.

A (56:15)

I was thinking that as well when she mentioned such a large sum in a high yield savings Account. Well, actually, my first thought, to be honest, my very first thought was, all right, if you're interested in buying property, you can buy property on a 15 year mortgage.

B (56:29)

Yeah.

A (56:30)

And if you do that at the time the child is born, then by the time they're 15, that property is going to be paid off free and clear. And you then have the choice of either selling it off and getting a lump sum that you can use for educational expenses. Granted, you will have to pay capital gains tax, which is the drawback to that, but you would have a lump sum largely paid for by your tenants that you can use for educational expenses. Or you have a property that's paid free and clear and that's cash flowing really well. And you can use that cash flow to cover educational expenses and you can make a game time decision 15 years from now when that property is paid off based on what's happening in the market at the time.

B (57:07)

Yeah, I like the bucketing of the 529 plan, but I also think it's not the only answer. And a lot of times in our head we hear 529 and we think, you know, we get very myopic. And this is my only choice. There's several ways to do this and creating a cash flow engine is a great way to do it.

A (57:23)

Right? Exactly. So when she mentioned the 200,000 earmarked for a property, my first thought was that property itself could functionally be the education savings component or a portion of the education savings component. Because particularly the 15 year mortgage when a baby is born is one of my favorite college saving strategies.

B (57:45)

Because at the end of 15 years the mortgage has paid off and now you're cash flowing huge amounts of money.

A (57:50)

Exactly. And she's talking about private school. I mean, if this is paid off when the child is 15, that really pays for the latter half of high school. She's currently expecting her first child. If she's planning on having three, and she does this now for baby number two and three, that 15 year mortgage can be paid off by the time Those kids are 12, 10. I mean, I don't know what year baby number two and baby number three are going to be born in, but this could account for the cost of high school tuition, the cost of perhaps part of middle school tuition.

B (58:24)

Paula, one more thing I want to acknowledge. Your fidelity advisor is 100% correct. You can front end load 5 years worth of contributions to make them at once. And then I think right on. The quicker you can. Time is a great, great, great weapon. The only maximum that you have around 529 plans. You're only allowed to put 500,000 in to one 529 plan for the beneficiary. So you just gotta watch that number. The other good news, too, is that, you know, you talked about three kids. You also can change the beneficiary on a 529. So let's say that child one, for whatever reason, goes a different path. You can roll that to child two. You can roll it to yourself. It essentially can become the Paula family Trust education trust, where the family just continues to pass it down, one, you know, family member to another. Or if nobody uses it for college, there's now a provision where you can turn it into a Roth ira. However, the Roth IRA option is down the line.

A (59:29)

Paula, thank you for the question, and congratulations again. Joe. We did it again.

B (59:35)

We did it. We did it. This was so fun.

A (59:38)

This was great.

B (59:39)

We haven't had just an episode in a long time where it was all investing. Like every single thing was investing. Some financial planning, but a lot of investing.

A (59:47)

Exactly the letter I. The second of the two letter I's in F, I, R, E. Fantastic episode covering many elements of investing, from the efficient frontier to risk parity to 5 29s. Joe, where can people find you if they want to hear more investing wisdom?

B (60:03)

I already mentioned earlier a couple episodes of Stacking Benjamin's people might want to dig into if they want to continue what we talked about. I'd like to talk about something else going on. My life, Paula. Oh, which is this. I help build walking trails in my hometown of Texarkana. I love taking part my community. I think everybody should have some community involvement. Signups just opened for our half marathon.

A (60:29)

Run the line only half crazy.

B (60:32)

Run the line half marathon. You're only half crazy. And the cool thing about our half marathons is it's half in Arkansas, half in Texas. If we get enough afforders and we get enough stackers that want to come run my hometown Half Marathon. It's February 15th next year. Registration is open. I like committing to this stuff early on, but if enough people come, I will try to put together an event here in our hometown for afforders, for stackers, for runners in our community that want to do a destination run, we'll figure out how to make it a fun weekend. You know why, Paula? Why is that the day after this thing is my birthday.

A (61:13)

Oh.

B (61:14)

And the day before it's Valentine's Day. And because we all love each other. Why wouldn't we spend this gorgeous weekend with each other. So anyway, February 15, 2026, go to run signup.com and look up Run the Line Half marathon. Just put in Run the Line half marathon and you'll find it. And tell me, tell me if you signed up for our race.

A (61:34)

Wait, wait. Serious question, Joe. Can a person walk the half marathon?

B (61:40)

You really don't want to, but we have two other options. Okay, we have a two person and a four person relay. So people can walk part of it like three miles. The last option is there are people and kids who run an event called Kids run the Line and we have a lot of walkers that do that. So come to Texarkana and support walking trails in my community.

A (62:03)

All right, you know what? I'm seriously going to consider this. Although on the walking side, that's fantastic.

B (62:09)

Because Paula ran once and it was so great. She texted me, oh my goodness.

A (62:15)

I ran for like two minutes and it was the worst two minutes of my life.

B (62:19)

And she's like, you do this for fun. This sucks. It was so good.

A (62:25)

I enjoy keeping fit in other ways, but I am very much not a runner, but I could totally walk a half marathon.

B (62:33)

And it is super fun because we start in Texas downtown. You very quickly cross over the state line into Arkansas. You run the first half run or walk the first half in Arkansas and then you cross back over into Texas and then the last about half mile, you actually go right down the line. Pretty fun and big party at the finish. Ah, it is, by the way, the biggest run in our region. There's about 600 people that run this race. So it's not going to be just the. It's not going to be the 10 of us just staring at each other, supporting trails. It's a pretty big deal in our little town.

A (63:08)

That sounds great. Okay, well, I will consider showing up and walking it. Walking half of it maybe and seeing if I can relay with somebody else.

B (63:16)

Fantastic.

A (63:17)

Well, thank you all for being part of this community. If you enjoyed today's episode, please do three things. Follow us. Number one, follow us in your favorite podcast playing app. Open up that app. Hit the follow button. While you're there, please leave a review. Number two, download the risk parity cheat sheet affordanything.com riskparity R I S K P A R I T Y and number three, share this with all of the people in your life. The runners, the walkers, the kids, the grown ups.

B (63:47)

Your 529 plan representative. Yes, the people@savingforcollege.com oh, I hope they know about us.

A (63:55)

We've been promoting them quite a bit.

B (63:57)

The person at the bank where you're paying off your mortgage early.

A (64:00)

The people at your retirement party when you retire in five years.

B (64:03)

The people at your kids private school.

A (64:05)

Share this with all of them and more. Because that is the single most important way that you spread the message of fi r e. Thanks again for tuning in. I'm Paula Pant.

B (64:14)

I'm Joe Salsihai and we'll meet you.

A (64:17)

In the next episode. Well, I'm. I'm gonna do my best to keep branding you Mr. Efficient Frontier.

B (64:26)

Well, thank you.

A (64:27)

You know, if I call you that enough, It'll. It'll stick.

B (64:30)

Mr. Efficient Frontier. Put on my headstone.

A (64:33)

Oh, I. I announced on the show what I want on my headstone.

B (64:36)

What's that?

A (64:37)

It's I'll meet you in the next episode.

B (64:42)

And she had the total stock market and it's 25% of her portfolio. She doesn't want to sell it for tax reasons. Fine, great. But if it's inside a taxable account, there's no fees to change it. Why would I keep it?

A (64:52)

You mean if it's in a tax advantaged account?

B (64:54)

I'm sorry, if it's in a tax advantage account. You want me to say that cleanly or not?

A (64:57)

No.

B (64:57)

Well, now that I said that, I will. Yeah. If I would have paused there, we could have done it. All right.