Q&A: Who Actually Makes Money From Gold and Silver These Days?

Summary

Afford Anything Podcast Episode Summary

Title: Q&A: Who Actually Makes Money From Gold and Silver These Days?
Host: Paula Pant
Guests: Joe Salcihai
Release Date: April 29, 2025

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Introduction

In this insightful episode of Afford Anything, host Paula Pant teams up with financial planner Joe Salcihai to tackle pressing financial questions from listeners. This episode delves deep into investment strategies, retirement planning, and educational savings, offering listeners practical advice grounded in financial psychology and critical thinking.

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Listener Question 1: Investing in Gold and Silver

Caller: Bethany from Australia
Timestamp: [02:00] – [22:57]

Question:
Bethany seeks advice on incorporating a significant allocation of gold and silver into her joint investment portfolio. Her partner prefers these commodities over traditional stock market investments due to a lack of confidence in equities and index funds.

Discussion Highlights:

• Strategic Allocation:
  Joe emphasizes that gold and silver should constitute only a small portion of a diversified portfolio. He likens adding these metals to adding a "tiny bit of chili pepper to a recipe"—a little can enhance without overwhelming.

  Joe Salcihai [00:03]: "Having just a little bit is like if you add just a little bit of chili pepper to the recipe, a little goes a long way."

• Risks of Over-Investing:
  Both Paula and Joe caution against significant allocations to gold and silver due to their volatility and limited growth potential compared to equities. Paula points out that while commodities can act as a hedge against inflation, they "do not perform like equities", which are essential for long-term growth.

  Paula Pant [03:36]: "Gold and silver can be a wonderful accent that really make elevate a dish. But it's not the main course."

• Historical Performance:
  Joe references insights from financial expert Peter Mallouk, highlighting that gold and silver retain value over long periods but do not offer returns that exceed inflation like stocks do.

  Joe Salcihai [07:43]: "Ask yourself, what happens if Coca Cola goes out of business? If you have an index fund, another company will take its place automatically."

• Efficient Frontier and Diversification:
  The efficient frontier strategy suggests that equities and real estate are more effective for beating inflation and supporting retirement goals. Joe advocates for a balanced approach, typically recommending 3-5% allocation to precious metals.

  Joe Salcihai [22:39]: "Historically that number was around 3 to 5% of the overall portfolio. Never more than 5 and usually less than 5."

• Practical Advice:
  Paula advises Bethany to focus on broad market index funds and real estate for core investments, using gold and silver as minor portfolio diversifiers. She encourages utilizing online tools to model different portfolios and visualize long-term growth.

  Paula Pant [21:03]: "Investing in broad market indices ensures diversification and smoother portfolio growth over decades."

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Listener Question 2: Saving for Kids’ College

Caller: Diana
Timestamp: [27:27] – [43:33]

Question:
Diana, a parent of three, is concerned about whether she is saving too much for her children's college education. She has been contributing $600 per month per child into 529 plans and is unsure if she should continue at this rate.

Discussion Highlights:

• Assessing Savings Goals:
  Paula introduces the Rule of 72 to help Diana evaluate her savings strategy. This rule estimates the time required for an investment to double based on its annualized return rate.

  Paula Pant [28:28]: "The Rule of 72 states that the amount of time that it takes for money to double is 72 divided by the interest rate."

• Evaluating Overfunding:
  Both hosts agree that Diana may be overfunding her 529 plans, especially considering the substantial contributions already made by her 13-year-old. They suggest reviewing the goal amount needed for each child’s education and adjusting contributions accordingly.

  Joe Salcihai [29:23]: "If she has been saving $600 a month, she might have already exceeded what's necessary."

• Flexibility of 529 Plans:
  Joe highlights the flexibility of 529 plans, such as changing the beneficiary to another child or even grandkids if some funds go unused. This adaptability ensures that excess savings don’t go to waste.

  Joe Salcihai [36:31]: "You can make it so that it's not this child, it is another child. It could also go to grandkids."

• Alternative Uses and Flexibility:
  Paula discusses alternatives if funds are overfunded, including supplementing with brokerage accounts for more flexible usage. This approach allows Diana to redirect excess funds towards other financial goals without being locked into educational expenses.

  Paula Pant [37:00]: "If you've overfunded, you can change the beneficiary or use the funds for other qualified educational expenses, such as graduate school."

• Behavioral Insights:
  Joe shares personal anecdotes about unexpected college expenses, reinforcing the idea that while savings are crucial, not all projected costs materialize as feared.

  Joe Salcihai [37:54]: "Some of those room and board costs were actually less than what I paid when he was home."

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Listener Question 3: Retirement Planning and the 4% Rule

Caller: Wendy
Timestamp: [48:31] – [65:22]

Question:
Wendy is approaching retirement with a combination of secured income (pensions and Social Security) covering her basic expenses. She has an additional $100,000 in discretionary funds intended for extensive travel and lifestyle enhancements. Wendy inquires whether the 4% rule still applies to her discretionary spending and seeks advice on asset allocation to maximize growth without excessive risk.

Discussion Highlights:

• Eliminating Sequence of Returns Risk:
  Paula explains that since Wendy’s basic needs are covered by secured income, the sequence of returns risk (the danger of receiving poor investment returns early in retirement) is largely mitigated. This allows Wendy to adopt a more aggressive investment strategy focused on growth.

  Paula Pant [51:06]: "Because you don't have to touch your portfolio, just delay when the market is down, sequence of returns risk is not a risk."

• Asset Allocation Strategies:
  The hosts discuss whether Wendy needs to include bonds in her portfolio. Given her secure income sources, they suggest that Wendy can afford to maintain a higher allocation to equities, thereby increasing potential growth over the decades.

  Paula Pant [51:37]: "You can take on a heck of a lot more risk in your portfolio. No, you don't need a bond allocation."

• Behavioral Considerations:
  Joe emphasizes the importance of behavioral psychology in investment decisions. He highlights that as people age, their risk tolerance often decreases, influenced by media and the desire to protect accumulated wealth.

  Joe Salcihai [57:05]: "I think our risk tolerance goes down as we age, even if we don't need the money."

• Practical Tools and Strategies:
  Paula suggests using dedicated spending buckets for specific retirement goals, such as travel. This method encourages spending currently when one is most able to enjoy it, rather than deferring until later years when energy and health may decline.

  Paula Pant [59:43]: "Treat it almost like it's a flexible spending account. Use it or lose it."

• Diversification and Flexibility:
  Joe recommends maintaining an additional cash cushion to safeguard against extended downturns. He also advocates for diversifying custodians for different 529 plans to mitigate institutional risks.

  Joe Salcihai [63:35]: "Use different custodians for different kids just because of the fact that different fund companies have different strengths and weaknesses."

• Maximizing Growth Potential:
  With the basic expenses secured, Wendy is encouraged to maximize her discretionary fund's growth through a 100% equity portfolio, leveraging the long investment horizon to absorb market volatility and capitalize on higher returns.

  Paula Pant [51:37]: "Go ahead, be aggressive in your portfolio. Grow it as much as you can."

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Key Takeaways

• Diversification is Crucial: Avoid over-allocating to volatile assets like gold and silver. Instead, maintain a balanced portfolio with a strong foundation in equities and real estate.

• Flexibility in Savings: Utilize the flexibility of 529 plans to adjust for changing educational needs or redirect funds to other financial goals.

• Secure Income Allows for Aggressive Growth: When basic retirement expenses are covered by secured income sources, retirees can afford to adopt more aggressive investment strategies for discretionary funds.

• Behavioral Finance Matters: Understanding and managing one’s psychological responses to market fluctuations is as important as optimizing asset allocation.

• Practical Tools Enhance Financial Planning: Leveraging strategies like the Rule of 72, spending buckets, and diversified custodians can significantly enhance long-term financial health.

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Notable Quotes

• Joe Salcihai [00:03]: "Having just a little bit is like if you add just a little bit of chili pepper to the recipe, a little goes a long way."

• Paula Pant [03:36]: "Gold and silver can be a wonderful accent that really make elevate a dish. But it's not the main course."

• Joe Salcihai [22:39]: "Historically that number was around 3 to 5% of the overall portfolio. Never more than 5 and usually less than 5."

• Paula Pant [28:28]: "The Rule of 72 states that the amount of time that it takes for money to double is 72 divided by the interest rate."

• Paula Pant [51:06]: "Because you don't have to touch your portfolio, just delay when the market is down, sequence of returns risk is not a risk."

• Joe Salcihai [63:35]: "Use different custodians for different kids just because of the fact that different fund companies have different strengths and weaknesses."

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Conclusion

This episode of Afford Anything provides a comprehensive exploration of investment strategies tailored to individual financial goals and life stages. From cautious allocations in gold and silver to robust college savings plans and aggressive retirement portfolios, Paula and Joe deliver actionable insights to help listeners make informed and psychologically sound financial decisions. Whether you're rebalancing your portfolio, planning for your children's education, or strategizing for a fulfilling retirement, this episode equips you with the knowledge to afford anything, but not everything.

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Note: For more in-depth discussions and personalized advice, consider joining the Afford Anything Community or downloading their free book, Escape.

Transcript

[Paula Pant]

Joe, do you have a silver or gold allocation in your portfolio?

[Joe Salcihai]

I have from time to time, very, very small. I also, when I did research around, believe it or not, Paula, the efficient frontier. Oh, I found that having just a little tiny bit is like if you add just a little bit of chili pepper to the recipe, a little goes a long way. But because of the non correlation with equities and sometimes negative correlation, it really mellows out your portfolio.

[Paula Pant]

Oh, all right. Well, we're going to hear from a listener who's wondering about adding a silver or gold allocation. We're also going to hear from someone who's wondering how much is too much to save for kids college.

[Joe Salcihai]

Never too much. Save more.

[Paula Pant]

And we'll hear from someone with some questions about retirement, the 4% rule, the efficient frontier, all of our favorite topics. So it's going to be a meaty episode.

[Joe Salcihai]

Meat.

[Paula Pant]

We'll try not to get the meat sweats. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. This show covers five pillars. Financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode, I answer questions from you alongside my buddy, the former financial planner Joe Salce. Hi. What's up, Joe?

[Joe Salcihai]

I don't mind the meat sweats because if you have them, you earned them. You know what I mean? You get to sit at a table and just, yeah, that's not a bad thing.

[Paula Pant]

Anything you earn is always much more gratifying than anything that's given to you.

[Joe Salcihai]

It certainly is. What's that? The one comedian that's like, I don't stop when I'm full. I stop when I'm ashamed of myself.

[Paula Pant]

Well, speaking of not being ashamed of yourself, how do I segue from there?

[Joe Salcihai]

I don't know. There is no.

[Paula Pant]

No segue. Thinking of a shameful segue. Our first question comes from Bethany.

[Bethany]

Hey, Paula and Jo. My name's Bethany. I'm in my mid-30s and I'm calling you from Australia. My partner and I have been together for over five years and we have fairly combined finances. He is originally from the States and lately we've been talking about having more of a joint investment strategy. We both have our own separate investments, and my partner is really interested in investing in silver and gold, and he doesn't feel very confident in the stock market or investing in index funds or any of those sorts of investment vehicles. He would like as much of his money as possible. To be invested in gold and silver. But I never really hear anybody talking about investing in gold and silver. And so I just really love to get your opinions and anything that I should know. Red flags, things I should look out for. Besides limitations of obviously filling our house up with gold and silver, there's only so much storage. I appreciate that. That's a big limitation. But is there any other things that I need to be keeping an eye out for? Thanks.

[Joe Salcihai]

Well, storing it at home too is a mistake, right?

[Paula Pant]

Yeah.

[Joe Salcihai]

Seriously, if you're going to have gold and silver, find a very safe place for that. Do not keep it in your house.

[Paula Pant]

Yeah, the security risk.

[Joe Salcihai]

Oh, too, too much. Do not keep gold and silver in your house.

[Paula Pant]

But anyway, I had this visual of, of them getting like a mine in Cooper Pedy. Right. And just having like this trove of opals and all kinds of beautiful rare earth minerals.

[Joe Salcihai]

Awesome. Yeah, sounds pretty.

[Paula Pant]

Yeah. But there are some red flags to gold and silver. Gold and silver are both examples of commodities. They're great for having a very, very small, like Joe was saying earlier, spice in your food. It can be a wonderful accent that really make elevates a dish. But it's not the main course and the primary reason for that there are a few. Partially, it's the volatility of the asset. I mean, just look at the historic performance. Partially, it's that it's unlikely to be able to produce the types of returns that you need to be able to support you through your retirement. When it comes to the world of not just gold and silver specifically, but commodities investing more generally, commodities do not perform like equities. And all of our assumptions around retirement planning and long term investing really hinge on having a strong equities, meaning companies portion of your portfolio.

[Joe Salcihai]

Yeah. The first thing here is what you're comfortable with and I think comfort, Paula, comes with education about how these assets perform. And the more you know, the more comfortable you're going to be. I'm very uncomfortable with things that I don't know a lot about. And so let's look first at the goal. If the goal is, and I think for 99.9% of us, it needs to be to beat inflation with investments. Right. If our main goal is to beat inflation, we have to look at historically which asset classes have done that. If we don't beat inflation, let's look at the downside first. We'll do the stick first and then we'll do the carrot. Paul, the stick here is if we don't beat inflation, we have to save at least dollar for dollar, every dollar we're going to spend later if we don't beat inflation.

[Paula Pant]

Inflation beats us.

[Joe Salcihai]

It does. If I want to be retired for, let's say conservatively 30 years, and I want to live on 50, 60, 70, $80,000 a year, I've got to save 80,000 bucks on top of whatever money I need to live on today. So let's say I want to live on $100,000 today and I need to save another $80,000 for later. I got $180,000 after tax. I got to somehow come up with to do both things well.

[Paula Pant]

And if you want to live on the purchasing power equivalent of today's $80,000, I mean, in the future with inflation, that's probably going to be more than you currently make sure.

[Joe Salcihai]

Absolutely. And I guess in my example, Paul, I was just thinking about if we invested it in something that just met inflation, which by the way, that's what gold and silver does over long periods of time. And I'm going to explain why here in a second. But I think we need to look at things that have done that. So what has done that? Equities, stocks, which he's uncomfortable with. And then second, real estate, which we didn't talk about specifically, like rental real estate. Certainly the value of your primary residence doesn't do the same, doesn't work that way. But stocks and real estate are the two big things that do that.

[Paula Pant]

And that's true both in Australia and in the U.S. yeah, it's true worldwide. Yeah, exactly. I will say just because since you're from Australia and we're talking about real estate or we're mentioning it in Australia specifically, there are certain tax laws that people use to justify being negatively geared on a property, meaning negative cash flow. I don't care what the tax laws state. Do not seek to be negative cash flow. I understand that sometimes it happens, you know, every now and again you have a big expense and so for a year or two you might be negatively cash flowed. That's normal. That happens in every company. That happens in every business. That's not what I'm talking about. I mean, don't run out to buy a property that you know is going to be negatively cash flowed in the long term. And in Australia specifically, people will use the tax code as a justification for that. So that, that's my little Australia asterisk that I'm going to put here.

[Joe Salcihai]

Australian caveat.

[Paula Pant]

Yeah, my Australian caveat in the mix.

[Joe Salcihai]

Let's talk specifically though, Paula, about gold and silver. And I'm going to borrow this specifically from one gentleman who made the case better than any I've ever heard before. His name is Peter Mallouk. He wrote a book called Unshakable with a Gentleman that a lot of our listeners have heard of, Tony Robbins. It was a personal finance book. Peter and Tony wrote it together. So Peter, by the way, runs one of the top financial planning organizations in the United States, Fee based financial planning in Kansas City. He also has done well enough. He owns the Kansas City Royals, which for those of you in Australia is an American baseball team. So this dude has done very well and knows his stuff when it comes to personal finance. Peter said to me on our show, I said, why don't you want to invest more money in things like silver and gold, Paula? And he said silver and gold are phenomenal stores of value. They're over long, long, long, long, long periods of time. He said, if you were going to buy a very nice suit in the 1600s, x amount of gold would buy a very nice suit in the 1600s. Today, that same amount of gold will buy the same suit. It hasn't moved it, has it. The X amount of gold then equals X amount of gold now. So if you want to store value. And his analogy was, if I have a time machine, I can go a thousand years in the future. Heck, I don't know what stocks are going to do well a thousand years from now. I don't know if indexes are going to be around. So I'm not taking my index funds. I'm not taking any stocks. I'm not doing any of that. I'm grabbing gold because I know that gold in the year zero in the year 500 BC now is worth about the same. So I can take the gold in my time machine and I can go way in the future and reasonably bet that it's going to continue to do what it's always done.

[Paula Pant]

This is what Joe's packing on his space shuttle to Mars.

[Joe Salcihai]

I'm on my way, baby. But that's not our goal. Our goal is to beat inflation over long periods of time. Stocks do that far better than gold. Gold and silver does not do that. And so I think it's a big mistake. I don't think it's a little mistake. I think it's a colossal mistake to invest all your portfolio in gold and silver.

[Paula Pant]

Yeah. And Bethany, what I want to dig into is why he's uncomfortable with stocks. Because oftentimes when people say that they're uncomfortable with stocks, they sometimes they mean that they're uncomfortable with individual stock picking, which. Great, wonderful. I'm uncomfortable with that too. You should. A healthy attitude towards individual stock picking is to be uncomfortable. That is exactly the proper response. A person could go their entire life never buying any single individual stock, and they would have a wonderful portfolio, a great net worth, a healthy retirement. You could meet all of your financial goals never getting into the individual stock picking game. So stocks or shares, as they're also called, you don't need to pick individual stocks or individual shares. Just stick with broad market baskets of funds, stick with index funds, and you can have a wonderful life doing just that.

[Joe Salcihai]

But you heard her, Paula. He's also uncomfortable with index funds.

[Paula Pant]

And that part I don't understand. I'd like to know why.

[Joe Salcihai]

I think that's more of an educational.

[Paula Pant]

Yeah, peace. Right. The last major worldwide crash was the Great Recession of 2008, 2009. And what I often tell people when they are worried about the broad market is imagine that you had invested a huge lump sum of money on January 1, 2007. Right. You imagine you invested a huge amount of money in one big chunk right at the peak or near peak of the market, right before everything started crashing. If you invested that money January 1, 2007, and you held through today, you'd be doing great. You'd be doing absolutely great. And that's the worst case scenario. Right. That's buying at the. At the top.

[Joe Salcihai]

Yeah. As I'm listening to you, I'm even thinking about starting there. Like if I'm educating someone who is worried about stock market crashes, and clearly we don't know that, but it's a good assumption because that's generally what most people are worried about. What if the stock market crashes? I think we actually start there. Paula too. I think we start with no, it's not if, it's when. Because it will happen.

[Paula Pant]

Right.

[Joe Salcihai]

It 100% will happen. We will see this happen again. And depending on Bethany and her partner's age, it could happen once, twice, three times. As an investor, I've been through two big ones and 2022, not that big a deal in hindsight, but at the time didn't feel great.

[Paula Pant]

Well, and 2022 was weird because that was the year that stocks and bonds moved in tandem. And so a lot of people will asset allocate between stocks and bonds thinking that the two are going to move inverse to one another. Meaning when one goes up, the other goes down. In 2022, they both move together like twins.

[Joe Salcihai]

It was a great Lesson.

[Paula Pant]

Right.

[Joe Salcihai]

For some of us in the hardest way possible.

[Paula Pant]

But yeah, yeah, yeah. So 2022 is one of those years where even having a bond allocation, even having some debt instruments, which is what bonds are, wouldn't necessarily remove the volatility or as much of the volatility from your portfolio. But 2022 was just one year. I think that the bigger lesson is that you don't judge the performance of your portfolio based on what's happening in a month or even a year. You judge it based on how it performs over decades. And it's the same for the way that you would judge a company, assuming that it's stable enough, assuming that it's not going to face bankruptcy. Every company is going to have its ups and downs. Heck, the way that you judge if you're being judgy towards a sibling. Right. How do you ultimately judge if your sibling is like someone you're proud of versus like oh, my loser brother. Right. You don't judge what they've done in a year. You look at what they've done over the span of their life and you're like, you know what, my brother had a couple of tough years, but then he really pulled himself out of it and now he's doing great. And then you know. Right.

[Joe Salcihai]

That's funny. If your brother was the s and P500. Yeah. Back in 2022, my brother had a bad, bad year. Yeah, it wasn't good, but 2023, my bro.

[Paula Pant]

Exactly.

[Joe Salcihai]

Yeah, 2024. Pretty damn proud of what he did in 2024. I like that a lot.

[Paula Pant]

Yeah, yeah, exactly. And you know what? Maybe the brother has a little bit of a slip up again in 2025, but that's okay because you know he's going to get back on his feet in 2026.

[Joe Salcihai]

I'm confident.

[Paula Pant]

I know I use that analogy because it is just an analog to a long term relationship. And that's the way that you've got to think about the relationship with your index fund investments, with your equities investments. It's a long term relationship.

[Joe Salcihai]

Well, and I love that analogy. But then you engineers out there are going, well, why would I be confident? Like, how do I know? And I think this is where we go back and let's just stick with stocks here. The reason stocks beat inflation and it's because of the profit motive of the company. If the price of sugar goes up, Coca Cola does not say, we're screwed. Coca Cola finds a way to make that profitable. Either that or they go out of business.

[Paula Pant]

Right.

[Joe Salcihai]

It's not voodoo. I think that's the big problem people have with the stock market when they're first starting out. It just feels like voodoo. You watch these talking heads on CNBC and Fox Business and they're going, blah, blah, blah, blah, blah, earnings per share, blah, blah, blah, blah, blah. Technical analysis up, blah, blah, blah, blah, blah. Oh, my God. Everybody is. And all this crap. And you're like, what? This is a foreign language. And it just seems like a bunch of mumbo jumbo. And the cool thing is, is as more seasoned investors know, the second you take all that mumbo jumbo and throw it in the trash.

[Paula Pant]

Yeah.

[Joe Salcihai]

Better off you're going to be.

[Paula Pant]

Exactly. Because there are huge industries out there that make a lot of money by making you think that it's scarier than it is and that it's more complicated than it is. There are a lot of people who earn their paycheck by scaring you and overwhelming you so that you will throw up your hands and say, you know what, you just handle it for me. And then they can take a big fee for doing that.

[Joe Salcihai]

And I love this vein because I do think that beginning with it will happen and facing that fear right in the face and going, what can go wrong? And let's eliminate. Let's look at all those things that could go wrong. And I think that educating yourself from that perspective, for me anyway, gives me a lot of comfort because I know that we've got all of these ways to protect ourself when things go wrong. It's the reason we say stocks for the long term but not for the short term. That's a way to protect yourself. Indexing versus buying an individual company, that protects yourself. So if we stare all of these risks in the eye and we look at them and we understand why things are going to go fubar and protect against them, then we become a much stronger investor. Because I actually think, Paula, that fear as an investor can be a really good thing. Scaring you? Not good. But being a healthy amount of afraid, I think is going to help you set up a stronger portfolio.

[Paula Pant]

Yeah, absolutely. Because it's that. That healthy dose of fear that keeps you from turning to these wild speculative assets.

[Joe Salcihai]

Yeah, 100%. And it's the reason why the more you look at this analytically and you get scientific. It's the reason why I turned to the efficient frontier when I was a pro. It's also the reason why I turn toward investment policy statements and putting it in writing. Because if I put my investment approach in writing, I'm much more likely to dig and get a little more analytical about what's the machinery. If I think about as machinery instead of emotional, it's better. And also when the market goes sideways, I'm not wondering what my plan is. I set a plan up when I wasn't emotional and now that I'm emotional, I go, nope, I gotta let it sit for the next three months because that's the next thing on my investment policy statement. Pretty cool.

[Paula Pant]

Yeah, exactly. And I want to go back to Joe something that you said earlier because I can see somebody who's listening to this think, well, wait a minute, but what if Coca Cola does go out of business? I mean, wouldn't that just have these huge ripple waves and everything would come crashing down? But the beauty of an index fund is that if Coca Cola goes out of business, then Pepsi Cola is going to step up and take that market share. And if Pepsi Cola doesn't do that, then some other company will.

[Joe Salcihai]

This is what I love about indexing, Paula. Yeah, I love this about indexing is I don't have to pay attention to that.

[Paula Pant]

Exactly. Because the index is self cleaning.

[Joe Salcihai]

Yeah.

[Paula Pant]

So meaning if Coca Cola goes out, like whoever is the leader of the soft drink industry is going to be in that index and I don't even have to think about swapping them in and out. Like the index is just going to handle it for me. It's all automated. It's all just being done.

[Joe Salcihai]

If you want a front row case study right now, look at what's going on with Southwest Airlines because Southwest Airlines just got rid of their free bag thing. You're seeing them. You're seeing people as big as Clark Howard putting these social media posts out about how bad that sucks and they are getting ripped.

[Paula Pant]

Yeah.

[Joe Salcihai]

So. And rightly so. Right.

[Paula Pant]

You know, people hate it when they have a thing and that thing is taken away.

[Joe Salcihai]

Absolutely.

[Paula Pant]

It's worse than never having had it in the first place.

[Joe Salcihai]

Yeah. And if we want to look at the self cleaning, look at what Frontier Airlines did a few weeks ago. Frontier Airlines ran a special through the end of the summer going we're doing bags for free. And you know what happens, Paula, to your point, Coca Cola is not the leader. Pepsi steps up.

[Paula Pant]

Yeah.

[Joe Salcihai]

Southwest Airlines says, hey, Frontier Airlines says this is an opportunity. In fact, it's funny, a friend of mine is friends with the CEO of Spirit Airlines and the Spirit people were high fiving themselves saying this is an opportunity for us, this is an opportunity.

[Paula Pant]

Right.

[Joe Salcihai]

Other companies will step in and the bad news is we got to get used to as customers. Maybe Southwest isn't the thing anymore for us. Maybe Frontier, I don't know, maybe Spirit is, maybe some other airline steps up, but somebody's going to take that business away that Southwest is giving away right now.

[Paula Pant]

Right. And there's all the chatter about Spirit possibly merging. There was talks of Frontier and then JetBlue and then this or vice versa. And so like there's always deal making happening behind the scenes. And all of it, all of like the upside and downside of all of it gets represented within that index.

[Joe Salcihai]

It's pretty wild that we have that happening right now as we're focusing on this topic. Like, look at what's going on in the airline industry today as Bethany brings up this question.

[Paula Pant]

And so, Bethany, here's what I would encourage you to do or to encourage your partner to do. Look at a chart of the ASX 200, the top 200 companies in Australia, and go to the 20 year view, because the 20 year view, it looks a lot like the Total Stock Market index or the S&P 500 in the US the 20 year view is up and to the right. You see the big tumble at the Great Recession in 2008, 2009, and then from that point you just see growth, growth, growth. And so taking that 20 year view, I think can calm a lot of fears, particularly when you're looking not just at the Australian market, but also at the US Market and other worldwide markets. When you're looking at diversifying across a wide spectrum of different indices, you get that diversification, you get that smoother ride. So play around with that, Put it into a couple of model portfolios, run it through a couple of retirement simulators. Like, what's cool is that there are so many tools that are free online where you can just make a couple of assumptions based on historic returns about how much money you would put into a given stock index. And you can model out what that would mean for you over the span of the next 20, 30, 40 years.

[Joe Salcihai]

And circling back to that chili pepper analogy that I had, Paula and I haven't looked at precious metals in a portfolio in quite a while, but that number historically was around 3 to 5% of the overall portfolio. Never more than 5 and usually less than 5.

[Paula Pant]

Yeah. So thank you, Bethany, for the question. Best of luck with developing that comfort with equity index funds. Company equity is just a fancy word for company company index funds.

[Joe Salcihai]

Great question.

[Paula Pant]

Up next, we're going to hear from Diana, who has three kids between the ages of 7 through 13 and is wondering how much is too much to save for college. There's no such thing that's coming up. Next summer's on the way. It's a great time to sit outdoors, have outdoor furniture. And there's no better place to get that outdoor furniture than Wayfair because they've got a huge selection of outdoor essentials that will make your space more comfortable and more functional, all at unbelievable prices. For me, I live in Manhattan. I live in an apartment on the 20th floor with beautiful views of the city and the river. So the summer means amazing light streaming through the windows. I have big floor to ceiling windows, but unfortunately I don't have an outdoor space. I don't even have a balcony or anything. That's Manhattan life. And so for me, when I shop at Wayfair, I get stuff that makes my apartment more organized, more functional. You know, I have shelves both in the entryway and in the bathroom. I actually put up some shelving in the living room as well. All of that came from Wayfair. I have a daybed from Wayfair. It's multifunctional, so I use Wayfair for spatial efficiency. But for you, if you've got an outdoor space, make use of it. On Wayfair you can get outdoor sofas, Adirondack chairs, gazebos, outdoor dining tables and umbrellas, bar stools, grills, patio cushions, planters. They have a massive selection for any style and any budget. Shop a huge selection of outdoor furniture online this summer. Get outside with Wayfair. Head to Wayfair.com right now. That's W-A-Y-F-A I R.com Wayfair Every style, every Home.

[Diana]

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[Paula Pant]

One of my favorite things about New York is that it's filled with these small local businesses. You've got the little cafe that's run by someone with a huge passion for juicing, or you've got the tiny Italian restaurant with grandma in the kitchen. There are all these small businesses everywhere and many of Them use square. They use square to take payments. You know the square hardware, it's a. I'd describe it, but the name kind of says it all. It's in the shape of a square. You know the square hardware, right. You've seen it a million times. It's that point of sale hardware and beyond that, a whole point of sale system that manages payments, inventory, customer tools. It brings everything together into one really simple platform. You've seen the hardware, it's polished and it fits right into your space. But the software behind it is straightforward, it's intuitive. You don't need any special training. So it's a point of sale system that is highly intuitive and you can track sales, can stay on top of inventory. You get a better understanding of your customers. If you're expanding online, they make it really simple to set up a store in just a few minutes. So it's good for a business at any stage. Even if you're just getting started. Square keeps up so you don't have to slow down. Get everything you need to run and grow your business without any long term commitments. And why wait? Right now you can get up to $200 off square hardware at square.com Go Paula. That's S Q U-A-R-E.com G O Paula. Run your business slash smarter with Square. Get started today. Square.com go Paula. Welcome back. Our next question comes from Diana.

[Wendy]

Hi Paul and Jo. My name is Diana and I'm calling to ask you guys a question about college savings. We have three children ages 13, 11 and 7. Our oldest son, we have 150,000 in a 529 for him for college. He's 13. We expect he will be starting college in four to five years. My question is, can I save too much? We have been contributing 600 per month per child, so 1,800 per month total. Two of the 529s since they were born. And I'm wondering if I should cut this back or stop altogether with the expectation that it should grow some close to his 18th birthday and we may be able to supplement the rest with cash. I would love your advice on this and risk of saving too much. Okay, thank you so much. Bye bye.

[Joe Salcihai]

First of all, Paula, cautionary tale here. Think about this. Saving for college, an appropriate amount of money to save for college per child. $600 per month, which I do think is an appropriate number. And I think Diana, that was. It's kick ass that you did that. But eighteen hundred dollars a month if you have a young child and you're not saving $600 a month. Yeah. For people not watching us, Paula's eyes just went, it is so expensive, Paula. It is so, so, so expensive. So I actually do think she might have saved too much. However, I think it's just amazing, that type of preparation. But if you're not preparing for college, get ready to lose all your hair and look like me.

[Paula Pant]

Well, you know Scott Yamamura, who was a guest on a previous episode, he talked about the Rule of 72. And Rule of 72 states that the amount of time that it takes for money to double. This is a kind of a rough back of the napkin calculation, but the amount of time that it takes for Money to double is 72 divided by the interest rate at which that money will grow. So, for example, if you expect that money will grow at a long term annualized rate of 8% per year, compounded, that means that 72 divided by 8 equals 9, which means that money will double in nine years. So let's take that and apply it to college savings. Let's say that the amount of money that you save if you make a return assumption of 8%, and you might argue that's too high of a return assumption, we should dial the return assumption down lower. We can have that argument in a moment. But let's just, just hang with me for the math for a moment. If you make a return assumption of 8%, then whatever you have saved in the child's portfolio by the age of nine would double in nine more years when that child turns 18. So the balance of the portfolio at the age of nine, if you're making an 8% return assumption, should be roughly half of the total amount that you want to save by the time that child is 18. So let's say that the goal, and this is the part, Diana, that I didn't hear in your question, is what is the goal amount at the time that the child turns 18? Let's say that that goal amount is $100,000. That means that by the time the child is 9, assuming an 8% return assumption, you would want to have $50,000 saved. And so then pull the first nine years of compounding returns out of it and just run an extremely simple calculation. $50,000 over nine years, assuming zero returns. Right. Assuming just pulling all of the returns out of it, looking only at the cash that you would need to save to save $50,000 over nine years, means that you would need to save $462 per month. But obviously that money is going to be growing over the span of the nine years. So you wouldn't even have to save 462 per month. It would be less than that. And so I'm with you, Joe. I think that she saved too much. But again, I'm assuming that $100,000 is the balance that she's aiming for.

[Joe Salcihai]

Sure. Yeah. We don't know what that finish line is. And I love begin with the end of mine.

[Paula Pant]

Right. So if that balance, the finish line is 150,000 rather than 100, that changes the equation.

[Joe Salcihai]

And the issue with the 529 plan in general is that the uses are so limited. It has to be money that's for the cost of college or qualifying expenses around the college. So either going directly to the school or there's a laundry list of pretty obvious expenses that are college related. Right. The good news is the Secure act changed this a little bit, which is that if you don't use that money for college now, there's opportunities to change that into Roth IRA money. But I'll tell you, Paula, I really like if Diana feels like she's been saving too much. I almost said we've been saving too much, as if I had something to do with it. We've been saving too much. Diana, you and I have been saving too much money. Mostly you, but I love just the brokerage account. I like still saving the money. Here's what happens when people dial it back. When you dial it back, that money just goes into your budget, goes into your checkbook, does nothing. I like the fact that you've been directing it. So let's continue to direct it, but direct it into a place that is much more flexible. And this is is, by the way, something for any goal. I mean, it doesn't have to be for college if you're going into a specific place, like let's say a Roth IRA or a 401k if it's for your financial independence goals. How many times have we said supplement that by having money go into a brokerage account? So we've got the gift of flexibility. We don't have the tax shelter, but we've got flexibility, which is really cool on its own. So I would still keep saving the $600 a month. If she's built that muscle, I wouldn't let it go. I would just have that money go into a brokerage account instead. After she does the homework that you're talking about, how much is too much. But even Paula, with that homework, I'm going to talk about another side of this like I'm thinking about my awesome niece who is a senior in high school this year. She applied, Paula, to five different small liberal arts colleges, private liberal arts colleges, they are not cheap. And she got nearly full rides to all five of those because, you know, she's amazing. Mostly because she's related to me. Right. Of course. She now has all this money in a 529 plan. And Paula, she's going to use almost none of it. Almost none. Now the cool thing is, is that her parents are already talking about, hey, what a great Roth IRA to start with, right. They're going to change the ownership name to her and then she will have this beautiful Roth IRA that's going to give her this leg up that she might not have had had she not had her parents save this money. So it's still going to go toward her, but not toward the college education. It's going to go further out. But man, if that were in a flexible place, it'd be a lot easier.

[Paula Pant]

Well, you know, the advantage that Diana has is with three kids, you know, so for I'm thinking the 13 year old child, right. If Diana's been saving 600amonth from the time the child was born, that means that her save her contributions to the account are $93,600. And that's just the contribution of 93, 600. That doesn't count all of the gains that that money has made over the span of the last nine years. And the last nine years has been primarily bull market. So that money has grown pretty substantially. If she is overfunded for the 13 year old, then she can always change the beneficiary on the 529 to be the 11 year old or the 7 year old.

[Joe Salcihai]

But if she's saving $600 for them too, she's in the same situation with them.

[Paula Pant]

Right. But for the youngest who's seven, yes. She can probably stop saving for that child. And that I think there's a good chance that that child, the seven year old, she could do that, can get the, the hand me downs from their older siblings.

[Joe Salcihai]

Yeah, yeah, that definitely is a good idea. I love the fact a lot of people don't know that you can change the beneficiary on your 529 plan, right? So you can make it so that it's not this child, it is another child. In fact, if you go through children, you can make it. You, if you want continuing education, if you've got some cool thing you want to do at the local university, if it's an accredited institution. Accredited in it. If it's an accredited higher education institution, it could be cooking classes, it could be golf lessons, it could be flight school. It could be all kinds of things.

[Paula Pant]

Or it could go to grandkids.

[Joe Salcihai]

It could do that, too.

[Paula Pant]

It has to go to an actual living person. It can't go to a hypothetical person. So it needs to go to somebody who has a U.S. social Security number and is living. But it's not time restricted. So you can always wait until the first grandchild is born and then put it in the grandchild's name.

[Joe Salcihai]

And then it becomes like the Diana Education Trust.

[Paula Pant]

Right.

[Joe Salcihai]

For all purposes, it's like an education trust. Pretty cool. But a great problem to have. This is a wonderful problem to have, was that you took it seriously early on, possibly overfunded it.

[Paula Pant]

Yeah.

[Joe Salcihai]

Not a bad issue.

[Paula Pant]

Yeah. But Diana, to your direct question of how do you know if you've overfunded it or not? I mean, my first question back is what goal amount are you setting? Because again, if the goal amount is $100,000, then you've overfunded it. If the goal amount is $200,000. All right, we're. Now we're having a different conversation.

[Joe Salcihai]

There is a reason, by the way, Paula, that a lot of parents that are doing the right thing over fund college. And I saw this firsthand as a parent, which is that some of the college cost is not new expense. And I see people fall into this. So I'll give you my personal example. My son Nick.

[Paula Pant]

I know what you're about to say. Your grocery bill.

[Joe Salcihai]

Oh, my grocery bill was so high. It was so high. When I saw the amount the University of Texas was going to charge him for on campus food, I was like, my kid and I are going to win this together because University of Texas is losing. And Paula, you've seen Nick, and he's not a big dude, but that guy can eat. It is amazing how many calories he burns with his workout routine and whatever. But Cheryl and I found that when Nick went to college, this money I was spending in groceries, now it's just a cost transfer. I was still spending it, but now I was spending it toward part of the room and board bill to the University of Texas instead of here at home. And actually, frankly, it ended up being less money I paid for food than I paid when he was home. So some of those room and board costs, not as egregious as you think they're going to be. I think sometimes we get really afraid when we look at, you know, you go to savingforcollege.com, which is a fantastic place to look at the cost of College. Responsible 529s, what the fees are going to be on 529s, all the different plan options you have from different states. Really, really like this website. When you go to a place like that and you see all these costs and then you put those into your calculator and you include the room and board, you come up with this huge number.

[Paula Pant]

Well, if you think about it, you don't often see your grocery bill expressed as whether if it's semester, four and a half months, or if it's a year, nine months, 10 months. You don't see your grocery bill expressed in those types of increments.

[Joe Salcihai]

No.

[Paula Pant]

And so like, you tend to think of your grocery bill as weekly or bi weekly or at most monthly. At most monthly. But you never think of your grocery bill in increments of semesters. And so when you see that number, it looks like a huge number.

[Joe Salcihai]

Monster number. Yeah. And then you go, wait a minute. Oh my goodness, I'm already spending that.

[Paula Pant]

Yeah.

[Joe Salcihai]

I love the idea though, of cutting the 7 year old's 529 first and then having the water kind of spilled downhill. Yeah, the overflow spill downhill. I like that idea.

[Paula Pant]

Oh, thank. Well, thank you.

[Joe Salcihai]

Yeah, that's good.

[Paula Pant]

Thank you. I'll be here all week.

[Joe Salcihai]

One thing I like too, for diversification purposes, because of the fact that you can use, you can change the beneficiary. Paula. One thing we did with our twins that I still advocate for people, maybe not for Diana, maybe four, I don't know. I like using different custodians for different kids just because of the fact that different fun companies have different strengths and weaknesses. And knowing that I can mix and match at the time. So I used the Vanguard Utah plan for my daughter and I used the New Hampshire Fidelity plan for my son. And we ended up using the 529s for both of them, which was pretty cool because then I got Vanguard and Fidelity. I wasn't trusting one fund company to take care of all of my college money. And this may seem like a little thing, but there was a time when Worth magazine, I don't even know if Worth is still a magazine. Worth used to be a huge magazine. And personal finance Worth magazine had a cover story that said, is Fidelity dead? Because the Fidelity management team, Paula, went through this. Ruth. Back when everything was managed right, there was very little indexing going on. The Fidelity team was all doing research through the same place. And Fidelity just stepped in it research wise as a group. What was also interesting was that Fidelity at the time was one of the biggest advertisers inside of Worth magazine and it showed great editorial balls, I guess, to be able to say, who cares who our advertisers are? We're going to still ask this question, which was a huge question. Made me really appreciate the editors at Worth magazine at the time that they published that. Now that's not going to be the case as much anymore with indexing. But still, if something bad happens and I have this opportunity, why wouldn't I? 529s are not the type of thing where I'm going to go touch them or move money around all the time. So having won at Fidelity and won it at Vanguard, okay, maybe bad things won't happen, but if it does, I've, I've got this extra layer.

[Paula Pant]

The last thing I'll say, Diana, is that if, if you waterfall the 529 balances down and you still end up overfunded for the 7 year old, then there's always the option of using some of that money. If any of the kids want to go to graduate school, this doesn't necessarily have to be undergrad money, so there's always the option of using it for grad school. There's always the option, as we talked about before, using it for grandkids after they're born, after they have a Social Security number that you can associate with the account or using it for yourself. So there is actually a lot of flexibility in the 529, which is one of the great things about the account. You get tax deferred growth, but you do also get quite a bit of flexibility.

[Joe Salcihai]

Or there's always a popular option, Paula, that we haven't explored yet, which is just send it to your favorite podcasters.

[Paula Pant]

Why would she send it to Alex Cooper?

[Joe Salcihai]

Oh, hey, America's second favorite behind us, right?

[Paula Pant]

All right. Well, thank you, Diana, for the question. Our final question today comes from a caller whose pension and Social Security will cover all of her basic expenses during retirement. So she's wondering, does the 4% rule still apply to her discretionary money? We'll answer that next. My parents who live in Atlanta just bought a new to them older home. It's a fixer upper. It's still under renovation, so it's going to be a couple months before they can move in. But one of the concerns that we need to address are pests and spiders, cockroaches, beetles Centipedes, the stuff you don't want to see crawling through your kitchen. There are other pest control companies out there that can charge over $800 a year or more. But with Pesti you can get started at just $35 per treatment with a customized plan based on your location, bugs and climate. I got a box from Pesti. It's a home barrier pest control kit. It includes a sprayer, a mixing bag, pesticide gloves and instructions. You can finish it in less than 10 minutes once you've read the instructions. Like, you can do the application in less than 10 minutes. And it's kid and pet friendly. The pesticides that they ship are fully registered and have been used in hospitals and schools all over the country. They get rid of over 100 types of bugs and they offer a 100% bug free guarantee or your money back. My parents have not moved into their new home yet. It's still under renovation. But we will continue to use Pesti even after they've moved in to continue to keep it bug free. Now is the time to protect your home from bugs with Pesti. Go to pesti.com Paula for an extra 10% off your order. That's P-E-S-T-I-E.com Paula for an extra 10 percent off. When you're shopping online, do you ever notice that purple shop paid button? You'll see it on a lot of websites so you want to check out, but your wallet or your credit card is in the other room. But there's this big purple shop button and it has all of your payment and shipping information saved. And so you can just hit the button and it makes buying really easy. You know that button, right? The purple one? Well, that's Shopify. And there's a reason that so many businesses use it and it's because Shopify makes everything easier from checkout to creating your own storefront. Shopify is the commerce platform behind 10% of all e commerce in the US ranging from household names like Gymshark and Mattel to brands that are just getting started. And Shopify gives you a leg up with hundreds of beautiful ready to go templates that you can use to express your brand. And you don't need to know how to code. And you can tackle all of these important tasks in one place. Everything from inventory to payments to analytics. So you can spread your brand's word with built in marketing and email tools and that iconic purple Shop pay button. It's why Shopify has the best converting checkout on the planet. If you want to see less carts being abandoned? It's time for you to head over to Shopify. Sign up for your one month $1 per month trial period and start selling today at shopify.com Paula go to shopify.com Paula shopify.com Paula you know one of my favorite things about this podcast is that so many afforders will call in to talk about some big dream. Buying a home, starting a business, sending their kids to college. And we get to help people make those dreams a reality. Now once you've done that, you want to protect it. You want to make sure that the people around you will be okay if the worst were to happen. Life insurance can help do that. It can give your loved ones a financial safety net. With policygenius you can find life insurance policies that start at just $292 per year for $1 million of coverage. Some options are 100% online and let you avoid unnecessary medical exams. Life insurance is commonly used to cover mortgage costs, but you can use it for funeral expenses, for medical co pays and deductibles, for college funds, for debt, for any of those bills that would otherwise be stressing your loved ones out. Life insurance is a form of financial planning and policygenius is the country's leading online insurance marketplace. They've got got thousands of five star reviews on Google and trustpilot and their licensed support team helps you by answering questions, handling paperwork and advocating for you throughout the process so you can compare quotes from top insurers side by side for free with no hidden fees. Secure your families tomorrow so you have peace of mind today. Head to policygenius.com or click the link in the description to get your free life insurance quotes and see how much you could save. That's policygenius.com Our final question today comes from Wendy.

[F]

Dear Paula and Joe, I really enjoy your show and the value, the depth and breadth of your answers compared with many other podcasts. My question is about asset allocation if you have a portion of your retirement income covered by secure sources versus if you are living off your nest egg nearly 100. Whether you use the 4% rule or various other methods of drawdown with guardrails. The assumption is if you are relying on your lump sum to last the rest of your life, that your nest egg is usually invested in a portion of equities and some safer investments like bonds or cash equivalents, usually with equities making up 50 to 75%. I understand for the equities portion you can use a low cost index fund or diversify a little with efficient frontiers approaches. But what if the slump sum is not needed to produce a guaranteed minimum amount of each year that you must withdraw to live our details. My husband and I will retire at age 59 and a half with a pot of conservatively invested dedicated money to take us to age 65 to 66. At that time we will then have income from pensions that are not cost of living adjusted but that generate $100,000 a year for life for both of us plus Social Security for conservatively another 70k if it is still paying out the estimates that SSA website states we will have earned our base budget to cover all of our needs. What some call the minimum dignity floor will be fully funded. This includes all our healthcare, housing, food, transportation, energy and a bare minimum of travel, gifts and entertainment. We do have another budget of 100 to 125,000 a year of fun money that we plan to use for extensive travel, gifting to our kids and bringing our standard of living up to about 300,000 a year which matches our current level of spending. But this fund money can absolutely be calibrated or even not taken at all in a given year if the market is down. My question is if you have a pot of money and you want the most growth over decades without excessive risk is a four fund efficient frontier approach the best way do we need to have any of this money and bonds at all? Last point. In addition to these two buckets we will of guaranteed income and nest egg income, we also have two to two and a half million in real estate equity that we are not including in our calculations. So in the unlikely event of the world is ending worst case scenario like no Social Security or the pension goes bankrupt, we could downsize our real estate assets and simplify our lives dramatically and still not have to eat dog food to survive. Thank you.

[Paula Pant]

And no one wants to eat dog food to survive. So Wendy, I'm glad you're oh, speak for yourself. Speak for yourself gourmet. Wendy, it sounds to me as though and I get the sense that you know the answer by the way that you've described the question, but given that you don't actually need this money, you're not going to be affected by sequence of returns risk. Because if there's a down market right when you retire you don't have to touch your portfolio, just delay.

[Joe Salcihai]

Yeah.

[Paula Pant]

Therefore sequence of returns risk is not a risk and with that risk eliminated, you can take on a heck of a lot more risk in your portfolio. I was about to say aggression. I was like, that's not the word. Yeah, but you can be much more aggressive in your portfolio. So no, you don't need a bond allocation. You can maintain an equities position because you don't have sequence of returns risk looming. You've, you've eliminated that. So go ahead, be aggressive in your portfolio. Grow it as much as you can. That's the opportunity that's available to you by virtue of the fact that you have flexibility and can adjust downwards when the market is down, especially if the market is down in the first five years of retirement. Those are the critical sequence of returns years. And by being ultra flexible during those years, you've eliminated the bulk of retirement withdrawal risk.

[Joe Salcihai]

I'll only hedge what you're saying, Paula, in two ways. The first one is I think if it were me, I would just keep a little larger cash cushion because if you do go through an extended downturn and you don't want to take it, I think you can afford to do that if you are staying completely in stocks and you're very flexible. So a little bit, Paula, of an approach like you use, or my co host on stacking, Benjamin's og, a little bit of a barbell where you've got a little bigger cash reserve than a lot of people have. The second thing that I would look at, since you're comfortable with the efficient frontier, is I would just look at the, what's called the standard deviation on that portfolio just ahead of time to know what the bouncing around is going to be. Because what you're talking about is really making a portfolio that's going to have significantly higher highs and significantly lower lows than you may have had in the past, depending on where you're starting. And I just want to know that ahead of time what that flight plan kind of looks like. Because during those lows, if you're 100% equities, it's going to suck. And the only thing that I worry about, I don't worry about the plan at all. I'm 100% with you, Paula. Don't worry about that plan. It's a beautiful thing if you can stay in equities. And when you're modeling the efficient frontier, just cut all the bonds out and say, put me along the efficient frontier. All equities, baby. Go, go, go up into the right. I'm great with all that. What I'm not great with is you, because I don't know you and I don't know if you're going to blow that plan up when the market Seems like it's in this unrecoverable position, which, which is what happens at the bottom. It's 100%. What Bethany's partner is worried about. Right. Is that you're going to get to this black area where it looks like there's no upside, which you and I know sitting here today is the time of greatest opportunity. But at the time, it feels like the time of greatest risk.

[Paula Pant]

So, Joe, you're not worried about the math of it. You're worried about the behavioral psychology of it.

[Joe Salcihai]

100%.

[Paula Pant]

Right. And that's going to be very highly individualized because only you know yourself well enough to know how you're going to handle that. And I think the best way to get a sense of that is to look at your own past performance, your own behavior during the Great Recession of 2008, during the pandemic. You know, the pandemic recession, it was a short one, but it was a sharp one. Right. When you think about recessions, there are really three characteristics that define any recession. There's severity, there's duration. And then when it comes to multiple recessions, there's frequency. Right. And so the recession of 2020, the pandemic recession, was one of short duration but massive severity. How did you react? Because the way you reacted then is going to be a powerful insight into how you are likely to react in the next one. And then you go back to 2008, that was severe severity, but it was also long duration.

[Joe Salcihai]

Yeah.

[Paula Pant]

And so it gives you a window when you look at your behavior across both of those. It gives you a window into how you will react to severe recessions and how those reactions might change depending on the duration of the recession.

[Joe Salcihai]

And something else is going to change, too, Paula. And I think there's a couple reasons for this. I have some hypotheses which I'm happy to dive into. But I also think that our risk tolerance goes down as we age, even if we don't need the money. I think so. I think there's. My hypothesis is on two fronts. Number one is I think that the popular media and we're always inundated with when you're older, you need to be more careful. And even if you think that doesn't affect you, you hear it so many, so many, so many times that I think that it does. I think the second thing, though is, is that even without that, I think that you realize that your opportunity to wait becomes less as you age. And I think that one is a very real thing. So I think, number one, is learn behavior from everybody around us, telling us over and over and over. But I think number two is you're like, oh, do I wait two years on this trip? Do I go ahead and take it when I'm down 35%.

[Paula Pant]

Right.

[Joe Salcihai]

Which is another reason why I think I keep that extra large cash cushion.

[Paula Pant]

Right.

[Joe Salcihai]

Two years feels a lot different at 30 than it does at 72.

[Paula Pant]

Right. And, you know, one of my favorite components of your question was when you talked about that fun bucket, that flexible bucket of money that you would use for extensive travel for, for all the fun stuff, I would encourage, as you're thinking through your spending in retirement, to pull out a couple of buckets like that. This is actually a tip that comes from Christine Benz, who's also a former guest on this podcast. We'll link to her interview in the show Notes so you can hear it in its entirety. But I flew out to the Bogleheads Conference in Minneapolis last year and sat down with her and talked to her about retirement withdrawal strategies. And one of my favorite tips that she offered was to have a dedicated bucket of money for some specific retirement goal and have a goal of spending down that entire bucket. Treat it almost like it's a flexible spending account. Use it or lose it. In that your goal for this bucket of money is that you want that bucket to be empty within X number of years. So maybe that's five years, maybe that's 10 years. But the value in having a particular bucket of money that you are committed to whittling down to zero is that, number one, mentally, it puts you in a very different state now. You're no longer thinking about growth. You're thinking about, I have to blow through this. My goal is to blow through this, this particular bucket of money. And what that does is it encourages you, especially at the beginning of your retirement when you are likely going to be in the best health and have the highest levels of energy that you have, it encourages you to do that spending upfront. So let's say that from the age of 59 and a half to the age of 64 and a half, during that five year window, you have some bucket, some portion of money that you're like, I must spend this. By the time I'm 64 and a half, if I turn 65 and there is even a dollar left, I will have failed in that goal. Right. By virtue of doing that, you end up living more life in those first five years of retirement. And when you're in your mid to late 80s and you can't travel in the way that you could when you were 61, 62, 63, you're likely going to be pretty happy that you did it.

[Joe Salcihai]

I love that approach. I also remember and I think, Paula, you and I may have discussed this before. So for people that are new to the show, I'm sure you haven't heard this though. And if you have heard it, I think it's a good reminder. I love Paul Meerman's approach too. When the market goes up, he and his partners, they travel the world and when the market goes down, they appreciate all the wonderful local things that are happening in their backyard, which is just a pretty fun way to gamify it as well.

[Paula Pant]

Right. And that's not too dissimilar to what working people do with their income. You know, if you're a working person with some type of volatility in your income, maybe there are certain years that you get big bonuses and certain years you don't. Certain years you get fat commission checks, certain years you don't. People often do this in an unplanned, ad hoc sort of way. People often just kind of spend more on the years that they make more and spend less in the years that they make less. That's sort of a natural response to shifting income. And so I think Paul Merriman's approach is just taking that natural response and then applying it to market withdrawals.

[Joe Salcihai]

The other thing I like about that too is it just creates this, this well rounded adventure. There's so many things Paul talks about travel. There's so many opportunities that are low cost and there's so many opportunities that cost a lot. Like, I feel like you get this, this fun buffet of high ticket items mixed with just zero cost. Fun like going on a hike or. You know what I mean? And they're all fantastic. And to have the serendipity to have it just happen as the market forces have it happen is pretty cool.

[Paula Pant]

Yeah, I mean, I. You think about enjoying New York City, you could go to a Broadway show which is hundreds and hundreds of dollars. You could take a long walk through Central Park. I frankly derive an equal amount of enjoyment from each. And I'm glad that my life is able to do both. But you know, certainly you can do one when the market's good and the other when the market's bad.

[Joe Salcihai]

Yeah, this is so fun. How about the. What's the one beautiful green space above the city? The High Line.

[Paula Pant]

Oh yeah, the High Line. The Chelsea High Line.

[Joe Salcihai]

Yeah. I mean, stuff like that, that was.

[Paula Pant]

Designed by the same architect who made the Atlanta beltline. So shout out to all my Atlanta people.

[Joe Salcihai]

Cool. Yeah. Really some fun stuff that you can do to your point for nothing. Next to nothing. And other things that. I mean, all the five star restaurants where you can, or Michelin star restaurants where you could spend a arm and.

[Paula Pant]

A leg, there's Michelin star restaurants and then there are also these like little hole in the wall places. Right. Yesterday I had a slice of pizza, like the kind that you have to eat standing up because there's nowhere to sit at the little counter. And I mean, I would recommend that anybody. Prince Street Pizza, anyone who comes to New York Heaven. Yeah. Grab a slice. It's great. There's nowhere to sit, but it's amazing. I'm talking about New York City because I think it's a microcosm of life in that way. There are so many things that you can enjoy that truly enjoy at every budget level, whether it's free, cheap on one end, or massively expensive on the other.

[Joe Salcihai]

And having the ability, like they will, to go back and forth, you know, to dabble, totally fits the Josal C. High approach to life. Like completely. Completely fits my add.

[Paula Pant]

Nice. Well, Joe, I think we've done it.

[Joe Salcihai]

No way. Already.

[Paula Pant]

Yeah, we have.

[Joe Salcihai]

And that was super fun.

[Paula Pant]

So speaking of you and your add, where can people find you if they would like to know more? And by the way, we are not cracking jokes. Both of us, both Joe and I have ADHD diagnoses.

[Joe Salcihai]

What?

[Paula Pant]

So just, just put that out there for anybody who thinks that we're cracking jokes about neurodivergence. We are not. We are not.

[Joe Salcihai]

Not at all.

[Paula Pant]

Yeah.

[Joe Salcihai]

Not in the least. Come out to dinner with the two of us.

[Paula Pant]

Yeah.

[Joe Salcihai]

It is a wide ranging squirrel conversation.

[Paula Pant]

Yeah, exactly.

[Joe Salcihai]

You know what I'd like to talk about, if you want to read my work, I have this book that CNN, the year that it came out, 2023, called the number one book on personal finance that you should read. It's called Stack your super serious guide to Modern Money Management. The reason I'm bringing this up today, Paula, is because of the fact I just found out that our local university here, Texas A and M Texarkana, is going to use it in their curriculum in the fall.

[Paula Pant]

Amazing.

[Joe Salcihai]

Which I have been hoping because as you've seen in the book, it's totally made for that. It's an end to end personal finance journey with lots of relaxed metaphors in it. So, by the way, if you are working with a university or a college and you want to talk to me about how to get that done or you want to have me come talk like I just did at UC Santa Barbara? Just write me [e-mail] so.

[Paula Pant]

Right.

[Joe Salcihai]

Yeah, how about that?

[Paula Pant]

If you read the book Stacked, pay particular attention to page 13.

[Joe Salcihai]

Lucky page 13.

[Paula Pant]

The best page in the book, I must say. Yes, you might notice somebody quoted and.

[Joe Salcihai]

Even after that quote, we do interviews with experts from across the field of personal finance. And the very first interview that we do from the show is actually it's funny, it's an Afford Anything segment with you and I talking to one of the Afford Anything listeners. Ah, so good stuff. Anyway, Stacked. And I'm super excited that this is going to appear in a university near me.

[Paula Pant]

That's amazing. Congratulations, Joe. Well, thank you to everyone in the afforder community for being part of this community. If you want to talk to your fellow peers, head to afford anything.com community. It is absolutely zero cost and it's a way for you to connect with other people in the space. You can talk about retirement, you can talk about debt, you can talk about student loans or savings for college or anything that's on your mind. Efficient frontier asset allocation. You name it. It's all in the Afford Anything community. Absolutely free. Afford anything.com community sign up for our newsletter afford anything.com newsletter where we send out special updates of things that we don't write anywhere else, so you only find it there afford anything.com newsletter also completely free. If you enjoyed today's episode, please share this with the people in your life. Your dog walker, your barista, your boss.

[Joe Salcihai]

Your podcast co host, your.

[Paula Pant]

Yeah, share it with your own podcast co host. Share this with your financial advisor. Share it with your accountant.

[Joe Salcihai]

Share it with your accountant's mom.

[Paula Pant]

Yo, I've never met my accountant's mom.

[Joe Salcihai]

Well, there's an opportunity.

[Paula Pant]

Oh now, now I've got an icebreaker. So yes, share this with all the people in your life. That's the single most important thing you can do to spread the message of great financial health. Make sure you're following us in your favorite podcast playing app. And while you're there, please leave us up to a five star review. Thank you again for being an afforder. I'm Paula Pant. I'm Joe Salsihai and we'll meet you in the next episode.