Q&A: How Much Risk Should My Mom Take in Retirement?

Summary

Afford Anything Podcast Summary: Q&A Episode on Retirement Risk and Financial Strategies

Episode Title: Q&A: How Much Risk Should My Mom Take in Retirement?
Host: Paula Pant
Guest: Joe Salsihai
Release Date: March 11, 2025

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Introduction

In this episode of the Afford Anything podcast, host Paula Pant and financial expert Joe Salsihai delve into listeners' questions about retirement planning, asset allocation, and strategic financial decisions. The episode features three main segments: assisting Kimmy with her mother's retirement investment strategy, a follow-up on a previous inquiry about whole life insurance, and a comprehensive financial breakdown from Jeff seeking optimization advice.

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1. Guiding Kimmy on Her Mother's Retirement Asset Allocation

Timestamp: [00:00] – [19:56]

Caller: Kimmy
Question: Kimmy seeks advice on reallocating her mother's retirement assets. Her mother, having recently redeployed life insurance funds after her father's passing, currently holds a conservative investment portfolio with 15% in high-yield savings, 50% in bonds, and 35% in equities. Kimmy's analysis using a Monte Carlo simulator suggests increasing equity exposure for better long-term growth, but she's concerned about maintaining security and comfort for her mother's retirement.

Discussion & Advice:

• Bucket Strategy: Paula outlines a bucket approach, segmenting the portfolio into short-term (2-3 years), medium-term, and long-term investments. The immediate bucket remains conservative to mitigate sequence of returns risk, while longer-term assets can afford greater equity exposure for growth.

  Paula Pant: “The primary thing to guard against is sequence of returns risk, and you guard against that by keeping the immediate reserve invested conservatively while getting more aggressive with the remainder.”

• Behavioral Considerations: Joe emphasizes the importance of managing behavioral responses to increased portfolio volatility. He suggests transparently communicating potential market fluctuations to ensure the mother remains comfortable with her investment strategy.

  Joe Salsihai: “Explain to mom that this could do 14% worse or 14% better. And that's a normal day at the office for this portfolio.”

• Glide Path Concept: The duo discusses the glide path strategy, which adjusts the asset allocation over time to balance risk as retirement progresses. Initially conservative to protect early retirement years, the portfolio becomes more aggressive once past the vulnerable withdrawal phase.

Conclusion: Both Paula and Joe agree that Kimmy’s mother’s current allocation is overly conservative given her stable income from pensions and Social Security. Transitioning to a more equity-heavy portfolio, especially for the long-term bucket, can enhance growth potential without compromising short-term security.

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2. Revisiting Whole Life Insurance for Charitable Purposes

Timestamp: [23:26] – [35:02]

Caller: Daughter of Generous Parents
Question: A previous caller inquired about utilizing a whole life insurance policy set up by her parents when she was seven. Now an adult, she’s contemplating whether to donate the policy or use it as a financial tool to benefit her children, especially in light of discussions about whole life insurance as an investment vehicle.

Discussion & Advice:

• Existing vs. New Policies: Paula clarifies that while initiating a new whole life insurance policy is generally not advisable for savings or investment purposes due to high fees and lower returns, maintaining an existing policy can be beneficial if it aligns with current financial goals.

  Paula Pant: “Whole life insurance is not a good savings vehicle for parents who want to pass some savings down to their children. There are much, much better ways to do that.”

• Alternative Strategies: Joe reinforces that more efficient methods, such as taxable brokerage accounts or 529 plans, offer better growth potential and flexibility for children’s financial futures without the unnecessary costs associated with whole life policies.

  Joe Salsihai: “If you're buying insurance to replace assets or replace income when somebody passes away, how much money is your 3-year-old making? In 99.999% of cases, they're not making any money.”

• Charitable Giving: For those with existing whole life policies, especially ones that have been funded for decades, converting the policy to benefit a charity can be a strategic way to honor philanthropic intentions without incurring additional costs.

Conclusion: The hosts advise against initiating new whole life insurance policies for investment or savings purposes. However, they support maintaining existing policies if they are already in place, highlighting the inefficiency and high costs of starting fresh. Alternative investment vehicles are recommended for more effective wealth transfer to children.

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3. Comprehensive Financial Optimization Advice for Jeff

Timestamp: [42:54] – [55:31]

Caller: Jeff
Question: Jeff presents a detailed financial overview for his family of five, including income, investments, retirement accounts, mortgage details, and future financial goals. His primary concerns revolve around the heavy allocation in pre-tax accounts potentially leading to substantial tax liabilities during retirement. Additionally, his wife plans to quit her job, prompting queries about optimizing finances before and after this transition, and whether real estate investments could be beneficial.

Financial Snapshot:

• Family: 5 members (children aged 3 to 10)
• Income: Jeff earns ~$200K; wife earns ~$90K
• Investments:
  • Jeff: $2.3M in pre-tax retirement accounts, $66K in Roth IRA
  • Wife: $60K in Roth IRA, $78K in traditional IRA (recently converted from SEP)
  • Taxable Brokerage: $380K (including significant capital gains)
  • Other: $300K in 529s, $50K in crypto, $80K in HSA
• Mortgage: $2,500/month, paid off by October 2030
• Goals: Fund children’s undergraduate education, manage potential tax impacts in retirement, explore real estate investment.

Discussion & Advice:

• Roth Conversions: Joe recommends leveraging the upcoming reduction in household income due to the wife’s job resignation to perform Roth conversions. This strategy can minimize tax liabilities by converting pre-tax funds at a potentially lower tax bracket.

  Joe Salsihai: “Use your cash reserve to pay the taxes on the Roth conversions now while your income is lower.”

• Tax Bracket Optimization: By analyzing current and future tax brackets, Jeff can strategically convert portions of his pre-tax accounts to Roth accounts, thereby reducing taxable income during retirement.

• Real Estate Considerations: Both Paula and Joe caution against rushing into real estate investments unless there is a genuine interest and reliable support network in place. They highlight the complexities and operational demands of real estate, suggesting it should only be pursued if it aligns with personal interests and long-term investment strategies.

  Paula Pant: “Real estate is a great opportunity for people who want to invest in real estate, but the number one qualifying criterion is that you must want it.”

  Joe Salsihai: “Real estate can solve a lot of your problems, Jeff. Just take everything, put it in real estate and you're done. Is that where we go? No, absolutely not.”

• Diversification and Risk Management: The hosts emphasize maintaining a diversified portfolio tailored to Jeff’s specific financial timeline and goals, ensuring that investments align with his risk tolerance and long-term objectives.

Conclusion: Jeff is advised to capitalize on his current financial position by strategically converting pre-tax retirement funds to Roth accounts, thereby mitigating future tax burdens. While real estate is acknowledged as a viable investment avenue, it is recommended only if Jeff has the interest and capacity to manage such investments effectively. The overarching advice centers on personalized financial strategies that align with Jeff's unique circumstances and long-term goals.

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Final Thoughts

Throughout the episode, Paula Pant and Joe Salsihai underscore the importance of personalized financial planning, emphasizing strategies like bucket allocation, Roth conversions, and thoughtful asset diversification. They advocate for informed decision-making based on individual circumstances, risk tolerance, and long-term objectives, reinforcing the podcast’s core philosophy: you can afford anything, but not everything.

Listeners are encouraged to actively engage with their financial plans, continuously educate themselves, and seek expert advice to navigate complex financial landscapes effectively.

Transcript

[Paula Pant]

Joe, did you ever advise your mom on asset allocation?

[Joe Salsihai]

I actually just did. Some people may know my dad passed away this last spring, just under a year ago. And so my mom, when she received some life insurance money and she was redeploying her assets for one person versus two. I got to walk mom through the efficient frontier again.

[Paula Pant]

Oh, she's learning from the best.

[Joe Salsihai]

Well, thank you. Stop, stop.

[Paula Pant]

Ah. Keep going, keep going. Right, well, today we are going to talk to a caller who is helping her mom figure out how to invest. As she approaches the most critical years of making sure you're getting it right. We're going to help her through that. We're also going to talk to a return caller. This is somebody who spoke to us in 2022 with a question about whole life insurance and she's calling with an update and a follow up question. And for the true money nerds out there, we are going to dive deep with the numbers for a caller who says that by the time this episode airs, his wife will likely have quit her job. Oh, you ready, Joe?

[Joe Salsihai]

I'm buckled up.

[Paula Pant]

Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice carries a trade off and that applies to your money, time, focus, and energy. This show covers five financial, psychology, increasing your income, investing, real estate, and entrepreneurship. It's double eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode ish, I answer questions from you and I do so with my buddy, the former financial planner Joe Salsihai. What's up, Joe?

[Joe Salsihai]

Well, it's kind of a sad day because I also found out that in the last week, Paula, the creator of the throat lozenge, died.

[Paula Pant]

Oh, yeah.

[Joe Salsihai]

There was no coffin at his funeral, by the way. Come on. That desserts better than a want want.

[Paula Pant]

In an effort to not lose our audience, we're just gonna jump right into the first question.

[Joe Salsihai]

Okay, fine.

[Paula Pant]

This one comes from Kimmy.

[Kimmy]

Hi, Paula. My name is Kimmy. I'm a huge fan girl. Joe's fine too. My question is mostly about my mom. We grew up dirt poor, but she turned her life around and now has about $1 million in liquid assets, save for retirement. She owns a home worth about 300,000 with $40,000 left on the mortgage. I recently did an analysis of her spending using Monarch and her retirement benefits. If she started drawing next year at age 62, between her pension, 29,000 a year and her Social Security benefit, 20, $27,000 a year at her current rate of spending. She only needs to pull a paltry $8,000 out of her 403B every year, with a little extra in the first three years to cover health insurance before Medicare kicks in. This obviously leaves her with some R and D problems as she ages, and I'm planning to do some Roth conversions with her before she reaches 73. Her assets are currently invested, in my opinion, in an overly conservative way given how little she needs to rely on them. She currently has about 15% of her assets in high yield savings, 50% in bonds and 35% in equities. I spent a little time with a Monte Carlo simulator and in every scenario it looks better for her to move more or all of her assets into equities. Is there anything I'm missing as I push her towards more risk? I'm looking out, of course, for her comfortable and secure retirement. First and foremost, I love my mom and she deserves the absolute best in life. Although she insists on living simply secondarily, I'm looking out for my own future since I am 41 and have been severely disabled and unable to work since I contracted Covid two years ago. I live in a very high cost of living area and because I'm disabled, all of the third of a million dollars I saved for my own retirement is currently accessible to me without the 10% penalty. Nearly all of my money is in equities and I am okay with a roller coaster. I currently draw disability benefits of $2,000 a month and have been spending down my savings at a rate of $3,000 per month, which will slow to a nominal amount if and when I am approved for ssdi, hopefully in two years. Thanks again for all that you do and looking forward to your answer.

[Paula Pant]

Kimmy, thank you so much for that question. First, I love that you're calling with a question about how to take care of your mom. It shows the enormous generosity of spirit and care that you have for your family and for her. I agree her asset allocation sounds too conservative. You said she's 15% in high yield savings, 50% in bonds, and 35% in equities. Now as I think through the framework of what she's going to spend, I'm thinking in buckets. So I'm thinking about the bucket of money that she will rely on in a two to three year window and then I'm thinking of sort of a medium term bucket and then a much longer term bucket. The very long term bucket, I agree could go very heavily into equities. Now what percentage precisely would be determined by Running the efficient frontier, running some simulations around the efficient frontier to take a look. But when it comes to withdrawal strategies, the primary thing to guard against a sequence of returns risk and the way that you guard against that is not by being overly conservative with the entire retirement portfolio, but rather by keeping that particular two or three year reserve invested conservatively and then outside of that, getting more aggressive with the remainder of the portfolio. Financial advisors refer to this as a glide path, which is just a jargony technical way of saying you decrease risk for the early years of retirement and then you increase risk again, because after you get out of those early years of retirement, you've survived sequence of returns risk.

[Joe Salsihai]

I 100% agree with you. And I think just the question of are you overlooking anything? Her instincts are right in terms of what the best thing to do is. But when I look at Achilles heel on this plan, whenever you are working with someone who is older and who's been conservative their entire life, I would assume that this portfolio has always kind of been this way. Might not be the truth, but that's my assumption here, Paula, if that's the case, and then you decide on a glide path which is scientifically more appropriate, you're still increasing standard deviation. And so the thing that I worry about then is just Mom's behavior, which means is mom going to all of a sudden see bumps in her portfolio that she didn't see before, and that's going to give her some consternation because it seems like Kimmy, that you're pretty savvy about this if you're running Monte Carlo simulations on this. So if you can find what the standard deviation would be on this portfolio and then explain to mom that, hey, you know what? This could do 14% worse or 14% better. And that's a normal day at the office for this portfolio. Just tell mom what the volatility is going to be ahead of time. That's the main thing that I worry about.

[Paula Pant]

Joe, do you agree with my instinct that essentially I'm conceptualizing this retirement money into three buckets, One being that very immediate term, two to three year beginning of retirement bucket, and then a medium term bucket, and then a long term bucket?

[Joe Salsihai]

Sure, absolutely. But most of that long term bucket, it appears if Mom's going to be frugal her entire life, I think also her instinct, which she didn't say outright 100%, but a lot of this is inheritance money. So for Kimmy, we can really look at her goals with this money as much as Mom's goals. And by the way, this is where a lot of people get this wrong. During my career when I was a financial planner, I had people call me angry. They're like, this dumb financial advisor has the money aggressive. And mom's 75 years old. Mom has no business to 75 being an aggressive investments. And they're like, we want you to take a look. So then I would go take a look and I talk to mom and guess what? The advisor was just a bad communicator. Because what they were really doing, Paula, was they were basing it on when the money was going to be spent. Mom wasn't going to spend any of that money. So if mom's not going to spend any of that money and the beneficiary is not going to spend it for 15 years, that essentially then is long term money, regardless of what mom's age is. Because it's not about the age, it's about when the dollar is going to be plucked. That's the big thing. But yes, absolutely, the bucket approach and keeping that first bucket just in cash is also going to help with mom's behavior. Just go, mom, you know what, this is going to bounce around a little more. But it comes out better in this, in terms of when you're going to need that money. And with that short term bucket, we've got all this money in cash. So when the market's bouncing around, you don't have to worry about it.

[Paula Pant]

Right. And to the example that you just gave the person who's 75, I would argue that even if the 75 year old is the person who plans on spending that money during their retirement, if you make the assumption that that 75 year old is going to live to the age of 100, which is not unrealistic these days. Well, they've got 25 years ahead of them. Yeah, that's a heck of a long road.

[Joe Salsihai]

Yeah, good point. Longevity risk is a real thing for the CFP community, which, I'm sorry, I.

[Paula Pant]

I still, every time I hear that, all I can think is financial planning is the only industry in which living a long and healthy and happy life is considered a risk.

[Joe Salsihai]

What a pain in the. What a great problem to have. I live too long.

[Paula Pant]

My goal is to live to a triple digit age, but in financial planning that's referred to as a risk.

[Joe Salsihai]

Apparently I don't have an age goal though, do you?

[Paula Pant]

Assuming I'm healthy, right? Assuming that I can live independently, wake up and put my pants on every day.

[Joe Salsihai]

Yeah, yeah.

[Paula Pant]

Assuming I'm healthy. I would love to live into the triple digits.

[Joe Salsihai]

Well, I would too, but I don't have. That's not like my goal. It's much more. I want to say holistic, but that's not the right word. It's more organic. I just want to be able to enjoy what I'm doing. As long as I'm enjoying what I'm doing, I want to keep going. So I don't have a number.

[Paula Pant]

Well, you know, Joe, as they say, what gets measured gets managed.

[Joe Salsihai]

Well, I am. I'm measuring my fun.

[Paula Pant]

That's what I'm measuring.

[Joe Salsihai]

I'm measuring my fun.

[Paula Pant]

The fun. The standard deviation on this fun O meter.

[Joe Salsihai]

The fun meter.

[Paula Pant]

Kimmy, I want to address the portion of your question where you ask about yourself as well. You're 41 years old. I'm so sorry to hear about the long Covid and the disability that has come out of that. I have a good friend who also is suffering from a multi year disability as a result of contracting Covid and it is, I know from talking to her, a tremendously difficult thing to deal with. So I'm so sorry to hear that you are facing that. And I also applaud you for having saved a third of a million dollars so that you are rooted in a position of strength, a position of power that can help fuel you through this current challenge.

[Joe Salsihai]

Absolutely.

[Paula Pant]

So huge kudos to you. Huge congratulations to you for building that source of power for yourself. There are a couple of things about the financial circumstance that you outlined that I want to note. First, you mentioned that you're running right now a $3,000 monthly deficit between your current cost of living and the payments that you're receiving. And you expect that this will continue for another two years, at which point you hope SSDI will kick in. That means that over the span of the next two years you would end up spending 72,000 out of your savings. And it sounds as though with third of a million dollars, your savings are, we'll say ballpark, somewhere in the neighborhood of 330, 340, somewhere in there. So to spend 72,000 out of that is, is a significant chunk in the context of my concern that that money might not be replenished. Where my mind is going is what is the bucket that you need that can get you the portfolio that you can rely on when you are in your 60s, your 70s, your 80s, because right now you're 41, you've got a lot of compounding on your side. I want to make sure as much money as possible retains the opportunity to compound.

[Joe Salsihai]

Yes. A lot of the big wins that both she and her mom have had, I think is because of frugality, Paula. And this is a place, I think where just a little more frugality can go a long way in the, in securing a future, making sure that everything's going to be great for a long period of time.

[Paula Pant]

But I don't know how much more she can do. I mean, she lives in a high cost of living area and total living expenses of $5,000 a month in the context of a high cost of living city is.

[Joe Salsihai]

Is cut to the bone.

[Paula Pant]

Yeah. That's already a small pool of money to live on.

[Joe Salsihai]

This is where a great tracking tool. Right. She said she uses Monarch phenomenal tracking tool. I always advocate, as you know, Paula, this weekly just 20 minute meeting to look at it. It sounds like she does that just staying up with the heartbeat, using technology to her vantage to continue to stay up on the heartbeat of what money's going out the door and how quickly is it's going to work in her favor.

[Paula Pant]

Right. What worries me is what happens if SSDI doesn't kick in in two years.

[Joe Salsihai]

Which is you look at the way that program operates, it is very, very difficult to get. It can take even longer than that for the most qualified people.

[Paula Pant]

Yeah, that's my major concern. I don't mind running a deficit. I understand that oftentimes in a person's life they may have to run a deficit. And speaking in broad generalities in a person's life there will be moments where they may have to run a deficit, they may have to tap into savings. And I don't mind that in the context of a lifespan in which there's cyclicality, sometimes there's a surplus, sometimes there's a deficit. And those times of deficit are offset by future, future surpluses. That's just the rhythm of life. What concerns me is running a deficit with a very real possibility that there might not be a future surplus to pay that back. And I don't know how to address that because I don't know how else she can cut back given that she's already living on 60,000 in a high cost city. I think the most significant financial move would be to go someplace that has a lower cost of living. But if she has relationships with doctors in her current city, if there's certain medical treatment that she's getting in her current city, then she might have a very good reason for prioritizing living in the place where she does well.

[Joe Salsihai]

And this is what's been on My mind a lot lately because we talk about geo arbitrage, and I know it works for some people very well. Paula. But the issue, as I study more and more successful retirement planning, in particular moving to areas where you don't know people, you don't have a social network that can decrease your longevity. We talk about the fun meter, right? Men over 70 have the highest rate of suicide of any age group. I think part of it has to do with the way that we model these behaviors. I deserve to move to a different area where the weather is nicer or suits me. But we underplay the fact that we don't know anybody in that spot. We don't have any friends in that spot. And I've actually seen it as I in my 50s, I'm seeing friends approaching normal retirement age, and they are already making some of these things that I think are kind of a mistake for a lot of people. Not for everybody, but for a lot of people. I have a friend named Todd who spends lots of time at this lake house that they purchased. It's a couple hours. I'm very lucky that I've developed this great friends network. We have game nights, and we'll have between nine and 15 people come to game nights. As a guy in my late 50s, I feel very lucky to have this support network. But we all. We never see Todd anymore. We don't see Todd, and we forget to invite Todd to stuff because of the fact that we don't see Todd anymore. And yet, when you talk to Todd, the reason he's got this vacation house is because, quote, I deserve it, and I worked my whole life for it. And it's isolating, and it's difficult when you isolate like that for a lot of people. So the flippant answer is, well, geo arbitrage. But to your point, also, we don't know what's going on, why she lives in this spot. While I like the idea of geo arbitrage.

[Paula Pant]

Yeah.

[Joe Salsihai]

I also want to make sure that you develop the support network wherever you go. At least look into it wherever you go, before you go.

[Paula Pant]

I agree. Staying in a place where you have family, where you have friends, and where you have really good medical care. That's the other element of it is sometimes there's just better medical care in certain areas than there is in others. And if there are relationships that you've developed with particular providers or any particular specialists, it's worth staying in a place in order to maintain those relationships. I certainly know people who live in the location that they live in. Purely for the sake or largely for the sake of continuing to see the providers that they see. Yeah, the value capture of location is important. I think the reason it's such a challenging question is because, as we always say, the key to financial planning is to grow the gap between what you earn and what you spend. And there are only two ways to grow that gap. You can earn more or you can spend less. And so when there are limitations in both directions, that's where there's a real challenge that occurs.

[Joe Salsihai]

But hopefully, Kimmy, during this you've thought of a few things. I know that whenever I contemplate these, my subconscious mind begins working and hopefully there's a spark, right?

[Paula Pant]

Kimmy, I think if there's one thing I would say it's remember how young you are. 41 Is this interesting age where you're old enough to assume that you're old, but you're too young to realize how young you are. 41 is really, really flipping young. And I'd say that's the biggest point that I want to emphasize. There's far more ahead of you than what's behind you. But Kimmy, tell us how that lands with you. And please call us back if you have any follow up questions. Anything else, Cause we're rooting for you. We're in your corner. We are big Kimmy fans.

[Joe Salsihai]

Yes, we are.

[Paula Pant]

So thank you for the question. Well, speaking of return calls, our next caller is a return call. This is somebody who called us back in 2022.

[Joe Salsihai]

Wow.

[Paula Pant]

With a question about whole life insurance. And she is calling with an update and a follow up question. We're going to hear from her next. This episode is brought to you by Progressive Insurance. You chose to hit play on this podcast today. Smart Choice. Progressive loves to help people make smart choices.

[Joe Salsihai]

That's why they offer a tool called.

[Paula Pant]

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[Daughter of Generous Parents]

Paul and Joe, I am a previous caller I you guys gave me a really beautiful name to memorialize a journalist and I for the life of me can't find what it was. I feel really bad it might have been nor I don't remember. I was the caller whose parents took out a life insurance policy for me on me when I was like 7 and paid the premiums on it until I got my first big girl job and then wrote it over to me. I had called in asking what in the world I should do with a life insurance policy if I don't have any dependents and you guys gave me the great advice to donate it which I didn't even know was an option. So I ended up making the beneficiary, a organization that both my parents and I really like and support because it's partially my money and partially theirs that we need to fund it. So I wanted to honor them. But it came up in conversation with a friend and her husband who are gonna have kids. I'm not that my parents had done this as like a savings account essentially. And they said, oh, that's a good idea to do for your kids. And I said, I actually don't know if it is a good idea. So I guess that's my question for you guys. I mean, for me, that ship has sailed. He bought that 20 years ago. I don't know. And it is what it is. But is that for parents something to look into to like gift money to your children? I guess maybe assume that educational expenses are being saved for that? This wouldn't necessarily be an inheritance. I know that my parents. I think it's called a 529 plan, the one where you save for educational expenses. I know that my college was paid for from saving in a 529 and I know that I will receive an inheritance. So this is all separate from that. Is this a good way to pass on money? I know there's a lot of debate over whether or not whole life insurance can be used as an investment vehicle. And if yes, in what circumstances, that's reasonable. So I'm interested to know Yalls opinion, if maybe on the scale of different ways to give money to one's children, where does this fall? Thank you guys for your great advice and interested to hear your perspective daughter.

[Paula Pant]

Thank you for the question. First of all, I was really curious about what name we gave you, so I looked it up and please correct me if I'm wrong, but I believe you were the caller on episode 378, which aired on May 5, 2022. And if that was you, then can't find it. Yeah, well, if that was you, then the name that we gave you was daughter of generous parents. When I re listened to that question. So it's episode 378, air date May 5, 2022, starting right around the 51 minute mark. And I listened to the entire question and answer. I assume that that was you. And I didn't hear any mention of a journalist there. And the name was daughter of generous parents. But I do recall at some point that fall of 2022 and early 2023, that was the time in which I was giving a lot of people journalist based names. So did we say it on a different episode or did we answer two different life insurance questions? So that's the part that we've been trying to sleuth. We actually spent a decent chunk of the morning trying to figure it out. Okay, if you were the caller on episode 378, air date May 5, 2022, then that means that your premium was $47 a month, and your parents bought that policy for you and your two siblings. And so you wanted to know what to do with it, given that you weren't planning on having any beneficiaries. And sure enough, we told you, name a charity as the beneficiary because you've got, you know, for the cost of less than 50 bucks a month, you have a guaranteed payout to your favorite charity of choice.

[Joe Salsihai]

This is not something that most people think about. So I was glad that we were able to give her that advice. I remember when I first heard that a long time ago, early in my financial planning career, I saw an experienced advisor recommend that with a client. They're like, I really want to give money to the local Humane Society, but I don't know how to do it. And it was a single woman. And the advisor said, do you have a life insurance policy through work? Yes. And does anybody need your money? No. Well, then why don't you name the Humane Society, and then when you retire, you can take over that policy if you'd like. Wow. I can do that. Yeah. Great.

[Paula Pant]

Beautiful. So if you were the caller in 378, then that was the name that we gave you to answer the question that you asked. No, a whole life insurance policy is not a good savings vehicle for parents who want to pass some savings down to their children. There are much, much better ways to do that. Now, the exception would be if you are so incredibly high net worth that you are worried about tax consequences, because the benefit that you as a parent would give to your child is going to have severe estate tax ramifications and is far outside of any type of gift. I mean, if. If we're talking advanced tax planning strategies, that would be the exception. But for the average parent who wants to give money to the average child in any either middle class or even upper middle class home, no, it's not a good method because a parent could open an account, even a taxable brokerage account, contribute money there, and let that money compound over time, and that will produce far more than money that has been subject to this drastic haircut that insurance companies have taken.

[Joe Salsihai]

Yeah, most of that haircut is just the cost of the insurance, which is unnecessary.

[Paula Pant]

Right.

[Joe Salsihai]

If you believe, if you're buying insurance to replace assets or replace income when somebody passes away, how much Money is your 3 year old making? In 99.999 of cases, they're not making any money. They're not contributing at all to the bottom line. And if they're not freeloaders, really? Loser. What are you doing? Get out there. Yes. Parents across the world now all of a sudden going, wait a minute, my kid should be making money at 3.

[Paula Pant]

Yeah, the Olsen twins did.

[Joe Salsihai]

Yeah, they could do it. Your kid can do it. Come on. But I see people do this all the time and it's been very popular for a long time, I think because it's forced savings. But if you're somebody that listens to a show like this, you can set up your own automatic savings into either a 529 plan or just a kid's brokerage account called UTMA or an UGMA account, depending on the state that you live in. You could set up those just as easy as you can. A life insurance policy and you'll avoid all of this. A, unnecessary insurance you don't need, which then means B, all the fees that are associated with that life insurance that you also don't need.

[Paula Pant]

Yeah. Daughter, to explain why we told you to preserve the policy that you have, even though we're also saying that this is not a good new thing to get into, is that is the distinction between a policy that already exists and has existed for 20 plus years versus a brand new policy. In your case, your parents bought a policy on you 20 plus years ago. Right. So they've already been paying into that for decades. Literally decades. Which means that the haircut, the fees, the expense, the payment for that insurance, they've already paid it. So now 20 something odd years later, now you're in the golden phase. They've already paid that upfront fee, they've already gone through the mess of it. So now you get to have this guaranteed payout that's going to go to your favorite charity. And so why would you throw that away once you've already gone through those two decades of paying the fees? Right? That's the distinction. You wouldn't want to sign up for those fees as a brand new thing. There are better ways to do it. But if you've already paid them, then why would you throw that away? So that's why for you who already has a 20 plus year old whole life policy, it makes sense to keep it. Whereas for somebody else who doesn't have a whole life Policy, it doesn't make sense to sign up for one. Keep the existing policy, the old existing policy, but don't get a new one at this point.

[Joe Salsihai]

It's best use of the money at this moment. Right?

[Paula Pant]

Right.

[Joe Salsihai]

If you've charitable intentions, then certainly using the cash value that's already here inside of this policy to be able to maybe even at some point stop putting money into the policy and it's guaranteed to last your whole life is a great way to lock down this charity. No matter at what point you pass away, lock down this gift. The problem the advisor had in the earlier story when they were using a term policy, Paula, is that there is a chance that the person will live so long that term policy ends up becoming really, really, really expensive and you can't afford it anymore. And so if you die after X age when you can't afford the policy anymore, well then there's no charitable gift anymore to the place with the whole life policy though that's not going to be case as long as you either continue to make contributions or make contributions to the point that it's quote paid up, meaning you've prepaid enough money at a young age that it pays the cost of insurance during those older years, which is the main reason why cash value actually exists in a whole life policy, then it's locked down. So I really like a whole life policy in this case for a charitable intention that you want to lock down. Yeah, but the other thing about a whole life policy, you can buy these policies that have what look like mutual funds inside them. Technically they're not mutual funds, it's called a separate account. But you can buy a variable policy like a variable universal life policy. Again, I don't like mixing my food groups to touch. I want my risk management stuff in one corner and I want my assets in another corner. To your point, unless I'm uber wealthy once I get there, then there are some wonderful tax strateg that take forever to explain where life insurance can be your best friend stocking money away. But to a young new parent who's a friend of yours, it's not the type of advice I would give them.

[Paula Pant]

Right.

[Joe Salsihai]

However, if you say to your friend I don't recommend it and they say, well I'll talk to my private banker about that and you can put the permanent insurance back on the table because if they're going to talk to their private banker about it, well then maybe.

[Paula Pant]

Meaning the implication being their ultra high net worth.

[Joe Salsihai]

Yes, I'm going to talk to my family wealth management Officer about that. Yeah. Then you're super high net worth and then it might work out. Great. Great question though, Paula, because we see people make mistakes with this all the time. There's tons of people buying these life insurance policies today. There are far, far, far better ways to grow your child's net worth.

[Paula Pant]

Yeah, exactly. So whole life insurance is not a good savings vehicle for a child as a new account to sign up for. But if you have an existing account.

[Joe Salsihai]

You want to do something fun though?

[Paula Pant]

Yeah, go ahead, let's do something fun.

[Joe Salsihai]

How old do we want to make the kid? Three.

[Paula Pant]

Sure.

[Joe Salsihai]

Three years old. Let's say that we use VTI or vtsax, right. We just use the total stock market index and we open up an account in the child's name and they're not going to touch it until they're 65. So we can use this rule called the Rule of 72. People that don't know what the Rule of 72 is. It's if you take the interest rate, you think you're going to get divided into 72. That tells you how many years it takes your money to double. So Paula, let's say long period of time like that, we can use 8%, don't you think?

[Paula Pant]

Yeah, absolutely.

[Joe Salsihai]

Eight into 72 every nine years. That means if you put $2,000 into an account for your three year old right now, this is going to be awesome. Right? It means it doubles every nine years. So it's going to double when they're 12, double when they're 21, double when they're 30, double when they're 39, double when they're 48, double when they're 57. And let's go ahead and say 66, right. Social Security, full benefit at 67. Currently those rules will change by them, but going to double seven times by 66. So you're not putting away 2,000 bucks that first double. So seven doubles, which means it's going to be 4,000 the first double. 8,000. 16,000. 32,000. 64,000 $128,256,000 of retirement money at 66 years old. If you put $2,000 into, into an account for a three year old, it's so awesome. It's so incredible. Wow.

[Paula Pant]

This is a concept that I was talking to Scott Yamamura about on a recent episode. It was an episode we aimed at beginners and it was the multiplicative power of that's associated with the time at which you invest. So depending on your timeline, every dollar that you put in could have a multiplicative power of 2, 4, 8, 16. It could have these incredible multiplicative powers based on exactly what you were talking about, Joe. Based on the number of times it.

[Joe Salsihai]

Doubles $8,000 at age three, then is over a million dollars at a fairly conservative interest rate for that amount of money. I mean, don't get me wrong, Everybody doesn't have $8,000 to put in their 3 year old's account. But if you think about 8,000 is a million equals a million, poof. There's a guy, Bill Ackman, who is a big hedge fund manager. Bill Amman has publicly said. What would solve Social Security's problem, Paula, is if we gave everybody when they're born just a few thousand dollars and put it in this account, that becomes your Social Security account, so to speak. And it would make the cost of Social Security so much less. He's already done the math. I haven't done the math. I just. This guy has done so much work in this area that I just find it, I find it fascinating and believable that we could solve the issue if when you're born in the US you're given X amount of money. Maybe doesn't solve all our problems, but how cool would that be?

[Paula Pant]

So, daughter, for your friends who are having a new baby, talk to them about this, about simply opening up a taxable brokerage account for that child or an UGMA or an UTMA or any other type of account. But talk to them about opening up an account for that child rather than purchasing an insurance product.

[Joe Salsihai]

I'd be so happy they did.

[Paula Pant]

Yeah. Well, thank you for calling in with that update. And if you figure out what journalist you are referencing, please call back and let us know because I would love to know as well. Noor sounds like a beautiful name. All right, up next, we're going to dive into a question for the money nerds out there. Jeff lays out all of his finances, total disclosure, in order to figure out what his next step should be, given that by the time this episode airs, his wife most likely will have quit her job. We'll hear from him next. So my personal decorating style is really light and bright. All of my furniture is white. White dresser, white cabinets, white countertop, white shelving. And then I have these bright pops of color. So for example, I just got a weighted blanket with a bright orange cover and I got it from Wayfair. Wayfair has this massive selection of items for everything home, whether it's kitchen essentials like appliances, accessories, tableware Whether it's stuff that you need for your bedroom or bathroom, they've got stuff for the outdoors, sheds and patio sets, closet organization, couches, side tables, artwork, rugs, you name it. For me, for my color aesthetic of light and bright, they've got a massive selection for that. But if you are more into something else, if you like neutrals, if you like modern, if you like contemporary, if you like classic, whatever your style, Wayfair has what you're looking for. They have a huge selection and it's really easy to find items in your style and in your budget. Wayfair makes it easy to find any type of home essential plus free and easy delivery. Head over to Wayfair.com and find something that's just your style today. That's W A Y-F A I R.com Wayfair Every style, Every Home when you think about businesses that grow their sales beyond forecasts like feastables by Mr. Beast or even a legacy business like Mattel, I mean, you've got a lot of things that are going right. You've got a product with demand, you've got a focused brand. But there's also the business behind the business that makes selling and for shoppers buying simple. For millions of businesses, that business is Shopify. Nobody does selling better than Shopify, home of the number one checkout on the planet. And they're not so secret secret which is shop pay, which boosts conversions up to 50%, meaning fewer carts going abandoned and more sales going. So if you're into growing your business, your commerce platform needs to be ready to sell wherever your customers are scrolling or strolling, whether it's online or in store. Because businesses that sell more sell on Shopify, upgrade your business and get the same checkout that Feastables by MrBeast and Mattel uses. Sign up for your $1 per month trial period for three months at shopify.com Paula all lowercase go to shopify.com Paula to upgrade your selling today. Shopify.com Paula this is a message from sponsor Intuit TurboTax Taxes was waiting and wondering and worrying if you were going to get any money back. And then waiting, wondering and worrying some more. Now taxes is matching with a TurboTax expert who can do your taxes as soon as today. An expert who gives your taxes their undivided attention as they work on your return while you get real time updates on their progress so you can focus on your day. An expert who will find you every deduction possible and file every form, every investment, Every everything with 100% accuracy. All so you can get the most money back guaranteed. No waiting, no wondering, no worries. Now this is taxes. Get an Expert now on TurboTax.com only available with TurboTax Live full service real time updates only in iOS mobile app. See guarantee [e-mail] guarantees our final question today comes from Jeff.

[Jeff]

We're A family of five living in Colorado with children ages 3 to 10. I'm 46, my wife is 39. Our family spends about 12K a month. I make just over 200 and my wife makes around 90K. In 2023 our taxable income was 218K. I have 2.3 million in my 403B 401A retirement account which is all pre tax. Another $66,000 in a Roth IRA. I get a 10% match on my employee sponsored retirement plan. Also, because I don't have a tradition ira, I'm able to do a backdoor Roth conversion each year. My wife's company automatically contributes 12% of her income to retirement and she's been maxing out the rest. Also in a pre tax 403B. She currently has 60k in a Roth 78k in a traditional IRA that was recently converted from a SEP. When we moved all of our funds into Fidelity, we wanted to do a backdoor conversion with some of her IRA money but got confused by both the pro rata rule and whether we take a huge tax hit or even run into NIT if we converted at all. We recently moved our money to Fidelity out of a traditional brokerage account and we've been working to shed some of our legacy individual stock investments. Last year I was able to pull out about 75k with a small capital gains hit due to capital losses. But now we've got 380k with 270k of capital gains in traditional stocks. Including the money we pulled from the brokerage account, we now have about 115ish in cash. That's in Fidelity Cash Management sitting in SPACs. Other items of note we have 300k and 529s for our children, about 50k in crypto and almost 80 in an HSA. Last year we decided to stop contributing to the 529s and switch to just putting about 350 a week into a bogglehead style taxable investment account with a mix of VTI, VX, US and Bond. I've got a 10 year mortgage of about $2,500 a month. It'll be paid off in October 2030 and the house is worth about $715,000. Obviously we're in really good shape for our long term, but we are concerned that too much of our money is invested into pre tax accounts. We might get hit pretty hard with taxes come retirement. Our long term goals would be to cover undergrad at a state school for all three kids. My wife doesn't like her job. She's planning to quit. We believe we can afford that, but we're looking for advice. What should we do to optimize before she quits? What do we do to optimize after? I know I can put a portion or maybe all after secure 2.0 into a Roth versus traditional for my work account. Just looking for some help and there's a good chance by the time this airs that she will have already quit. And lastly, is real estate the answer?

[Joe Salsihai]

Jeff, thank you for the detailed list of assets and for the question. I gotta say, Paula, he's spot on. He knows that things are going to go pretty well. Jeff, you already know this is a great problem to have because it's a question of are you going to be okay or are you going to be really, really, really okay? And that's a nice spot to be. So congratulations on a nice job of planning minimizing your debt. And I don't know Paula, part of me thinks there was a smile there when he said, is real estate the answer? I think real estate can solve a lot of your problems, Jeff. Just take everything, put it in real estate and you're done. Is that where we go?

[Paula Pant]

No, absolutely not.

[Joe Salsihai]

That's not where we go. All right, here's where we do go, Jeff. Of so much money in your tax triangle. Being in a pre tax position can be problematic and means that you will pay higher income taxes throughout your retirement. So I like your feeling about lowering that. My feeling initially was based on your two income household that your tax situation was such that I was going to wait for an opportunity. Well, guess what? Your wife deciding to quit her job gives you this opportunity possibly this year. So using whatever tax software you use and figuring out, doing some tax projections of what tax bracket you're going to be in, assuming that you're not along a line this year where it makes sense to wait until next year when you'll be at a lower bracket, I would fill up as much of the next bracket as or the bracket that you're in as possible that you feel comfortable with turning over some of that pre tax money into Roth money by doing these mega backdoor Roth conversions. So the math always begins with and I think you know the math, so I'll tell everyone else here in our community about the math. So the way that the math works is that you're going to pay tax today on every dollar that you convert from pre tax, which has never been taxed before, into a Roth. The rule is there's not going to be a penalty, but you are going to pay a one time tax. So it's going to be taxed today and then it becomes Roth inside of your tax shelter. That's why we begin with the tax bracket that you're in. Because let's say, Paula, that he's got $30,000 until he hits the next bracket line. He can then remove $30,000 worth and flip that money over to a Roth. And when he does that, he's going to pay an additional tax on the 30,000 bucks. The cool thing is he's got this really nice cash reserve sitting there. That's the way I look at this hundred thousand plus dollars sitting in cash right now is this is money. Unless you've got it earmarked for something else, this is a decent chunk of this money. Maybe 40,000, 50,000 is to help you pay the tax as you lower the amount of money that's in your pre tax position. Now that said, I see people that try to get it all into a rut. A, you're never going to get there. Right. But number two is don't think there's really any reason to do that. I mean the lowest tax bracket, you will always be able to fill that up with your pre tax money. So it's going to be okay to leave some money in a pre tax position, but to the amount that you can endure the tax pain and you have enough money in cash to be able to move the money over to the Roth position, which it looks like you have several years worth of conversions that you can do based on the amount of cash you have. Assuming that this is just emergency fund money and it's not allocated for some other goal. That's the strategy that I would take. But I would only say take it now because your wife has quit her job. If she hasn't quit her job, then I may wait till next year. If she quits her job next year, then I begin doing it next year.

[Paula Pant]

Yeah, exactly. Now as to the question is real estate the answer my question back to you would be why would it be? Real estate is a great opportunity for people who want to invest in real estate. But the number one qualifying criterion is that you must want it. And there wasn't anything within your question that indicated a curiosity, a desire, and I understand there are limits to what you can leave in a three minute voicemail. So maybe it is the case that that's always sort of been a lingering curiosity. You know, maybe it does pique your interest or it piques your wife's interest and there just wasn't enough time in the voicemail to say it. If that's the case, then follow your curiosity. Absolutely. But remember that real estate is a hybrid between owning an investment and running a business. It's actually in the FIRE acronym. It's perfect that the letter R falls in between the I for investing and the E for entrepreneurship. Because that letter R for real estate really is in directly in between the I of investing and the E of entrepreneurship. It borrows from both. And that's precisely why it's only an answer for people who are interested in it. You have to be interested in it. Same is true for an entrepreneurship. You have to be interested in running a small business in order to have any possibility of doing it. Well, if that minimum viable interest, that minimum viable curiosity isn't there, then don't do it just because everybody else is. Don't FOMO your way into it.

[Joe Salsihai]

Yeah. Leading with the investment versus leading with the process of how you got to that investment is always a mistake. Going, oh, is the answer real estate. Like, if I'm solving for crypto, surprised I'm going to end up at crypto. But I think a much better way of getting there is what is the perfect investment for my timeframe and my overarching goal.

[Paula Pant]

Right.

[Joe Salsihai]

That's going to help propel me there. The best. And there is no such thing as the best, but there certainly is going to be a smaller field. If I need something that's four years, if I need money four years from now, certainly the cost to buy a piece of property and then sell a piece of property is ridiculous. So it's not going to be a.

[Paula Pant]

Great investment unless you're flipping.

[Joe Salsihai]

Well, sure, yeah. By the way, and if it's your first time buying real estate, I wouldn't do a flip because I think a flip is much better if you've got a team that is reliable that you've worked with for a while and you can. Those numbers are like clockwork now because I know that so and so is going to do the job for X price. I know all of the steps.

[Paula Pant]

Yeah.

[Joe Salsihai]

I think flipping is fantastic for somebody that's a seasoned pro in that area.

[Paula Pant]

Right. With flipping, holding costs often end up being a significant portion of your outlay. And if you are not well versed in how to estimate holding costs, then you can quickly lose all of your profits to delays. And so that's something that once you have a few deals under your belt, you have a much better fluency with that time frame.

[Joe Salsihai]

Sure. I would think between that and having a team, you can rely on who they're, you know, how they estimate the project and what to build in. I mean, there's so much more confidence.

[Paula Pant]

Yeah.

[Joe Salsihai]

Later on. But. But anyway, if you begin with the end in mind, you're going to do much better than beginning with the investment in mind.

[Paula Pant]

Right, Exactly. Yeah. It's always worrisome when someone presupposes the answer within the question. But, Jeff, I'm very excited for what's ahead. And please tell your wife I said congratulations on leaving her job.

[Joe Salsihai]

It's a great moment.

[Paula Pant]

Yeah.

[Joe Salsihai]

Gets to explore what's next.

[Paula Pant]

Exactly. Well, Joe, we've done it again. Thank you for spending this time with us.

[Joe Salsihai]

No, thank you, Paula.

[Paula Pant]

Ah, Joe. Where can people find you if they'd like to hear more of you?

[Joe Salsihai]

You could find me at the Stacky Benjamin's podcast, which is every Monday, Wednesday, Friday, Monday. We have Monday mentors. We have very smart people. We talked recently about budgeting. We got a little tactical and talked about budgets that work, budgets that don't work, and why so many people seem to be allergic to it and why, how we can get a little better at it. So had a couple great mentors talking to us about that. Wednesday is always a potpourri. That includes our TikTok minute, which is where we look at some of the ridiculousness that is out in TikTok world. Speaking of, Paula, One of my TikTok minutes I just shared when I spoke at UC Santa Barbara, because I take these TikTok minutes on the road, these real estate people on TikTok, telling you to rip money out of your 401k because, quote, 401ks are a scam, 401ks are a scam. And invest it in flipping houses your first time. And the guy goes, well, let's say I've only got like $40,000 you in my 401k. You think I should do it? Yes, absolutely. Rip it all out and use it to flip a house. That is tragically bad advice. You know what? It's even worse.

[Paula Pant]

That's horrible advice. Yeah.

[Joe Salsihai]

750,000 people have watched that video. Oh, 750,000 people have watched that video. Just so painful. So anyway, we point out stuff like that. On Wednesday we dive into topics with just our team, OG and I. And then on Friday we have people like the brilliant Paula Pant, our friend Jesse Kramer, and OG talk about a topic like recently we talked about your financial go bag. You look at people with the fires recently having to flee their house. What's in your financial go bag?

[Paula Pant]

Amazing. Well, all of that is on the Stacking Benjamin's podcast, which you can find everywhere where you like to listen to podcasts. Finer Podcast, the Finest before we wrap today, I want to share something I'm really excited about. Remember that salary negotiation course I've mentioned? Well, the second round of beta testing is opening up very soon. In fact, specifically, it's opening up the last week of March, March 24 through 28. This is your invitation to be part of our beta community. What does that mean for you? You'll get the complete course at a special, deeply discounted price that will not be available once we launch the full version. And in addition to that, your insights are going to directly influence how we refine and iterate the program. So if you've been thinking about how to approach your next salary conversation with confidence, like if you've been thinking, hey, I don't make enough, I'd like to make more, how do I ask my boss? Well, this is the perfect opportunity to learn those skills while enjoying a deep, deep discount that will never be available at this price again. Mark your calendar for March 24. The week of March 24 through 28. That's when we will open our doors for enrollment for the second beta round. As a heads up, we are keeping the beta group small, so when we open those spots, you're going to want to act quickly. To get an email Update, go to affordanything.com yournextraise that's affordanything.com yournextraise. Thank you so much for tuning in. I'm Paula Pant. I'm Jo Salsihai, and we'll meet you in the next episode.