Broke at 50? How to Retire On-Time (Or Early!)

Summary

BiggerPockets Money Podcast: Episode Summary

Title: Broke at 50? How to Retire On-Time (Or Early!)
Host/Author: BiggerPockets
Hosts: Mindy Jensen and Scott Trench
Release Date: December 20, 2024
Description: This episode tackles the crucial question: Can you retire on time or even early if you’re starting your retirement journey at 50 with little to no savings? Mindy Jensen and Scott Trench provide actionable strategies, mindset shifts, and detailed plans to help listeners achieve financial independence despite starting later in life.

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Introduction: Overcoming Late Starts in Retirement Planning

Mindy Jensen kicks off the episode by addressing the fears of listeners who are 50 years old and feel financially stranded, emphasizing that retirement is still achievable with the right approach.

Notable Quote:
“Even if you are 50 years old today with a $0 net worth, you can still have a comfortable retirement at age 65, maybe even a couple of years before.” — Mindy Jensen [00:36]

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Understanding FIRE and Setting Realistic Goals

Scott Trench introduces the concept of FIRE (Financial Independence, Retire Early) and outlines a foundational goal: accumulating $1 million by retirement to generate approximately $40,000 in annual income.

Key Points:

• FIRE Definition: Financial Independence, Retire Early.
• Monetary Goal: $1 million portfolio aimed to produce $40,000/year.
• Approach: Focus on saving, investing, and reducing expenses to meet this target.

Notable Quote:
“We don’t have to get all the way there. We’ll talk about other options, but I think that's where I’m going to be starting here.” — Scott Trench [01:17]

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Creating Personas: Barb and Sally

To personalize the strategies, Mindy and Scott introduce two personas:

1. Barb:

   • Age: 52
   • Situation: Recently divorced, former stay-at-home mom, starting with $0 net worth.
   • Goal: Retire by 65.

2. Sally:

   • Age: 55
   • Income: $100,000
   • Net Worth: $0
   • Goal: Similar retirement objectives as Barb.

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Step-by-Step Plan for Barb

1. Acknowledge Emotions:
Recognize and accept feelings of fear, regret, and apprehension.

2. Define "Enough":
Set a clear financial goal ($1 million) to aim for a sustainable retirement income.

3. Assess Current Financial Position:
Evaluate income, expenses, and existing assets.

Notable Quote:
“When you start from zero, you're not going to finish here. You need to start moving things forward.” — Scott Trench [02:31]

4. Secure Stable Income:

• Action: Seek entry or mid-level employment to generate a steady income (e.g., $45k–$55k/year).
• Side Hustles: Explore supplementary income streams such as Uber, TaskRabbit, or other feasible gigs.

5. Aggressive Saving:

• Target: Save $25,000 within the first year by living below means.
• Strategies: Reduce expenses, consider roommates, drive an older car, meal prep to cut costs.

6. Invest Wisely:

• Primary Focus: Real estate investments like house hacking to offset living costs.
• Long-Term: Reinvest savings and earnings to grow the investment portfolio.

Notable Quote:
“You are going to have to give something up in order to be able to take the money that you were spending on that thing and put it into your retirement accounts.” — Mindy Jensen [33:11]

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Step-by-Step Plan for Sally

1. Maximize Income Utilization:
With a higher income ($100k), Sally can allocate more towards savings and investments.

2. Diversify Investment Strategies:

• Real Estate: Engage in live-in flips or house hacking.
• Stock Market: Invest aggressively in index funds initially, then diversify as retirement approaches.

3. Leverage Retirement Accounts:

• 401(k) and Roth IRA: Utilize catch-up contributions available for those over 50.
• Health Savings Account (HSA): Contribute to reduce taxable income and cover medical expenses tax-free.

4. Manage Expenses:
Similar to Barb, Sally must critically assess and trim her expenses to increase her saving rate.

Notable Quote:
“With really hard work it will literally hurt probably for the first several months, but I think you can save up a couple hundred to maybe as much as $1,000 a month on top of a pretty healthy saving rate from that job.” — Scott Trench [15:54]

---

Investment Strategies: Aggressive vs. Diversified

Scott advocates for an aggressive investment approach initially, focusing on real estate investments like house hacking to generate income and build equity. As the portfolio grows, transitioning to a more diversified portfolio, such as a traditional 60:40 stock-to-bond ratio, becomes viable.

Notable Quote:
“I would invest fairly aggressively and I would do that in a 100% stock portfolio, for example, index funds or preferably.” — Scott Trench [35:59]

Mindy suggests starting with index funds to ensure manageable growth and reducing risk as investments accumulate.

Notable Quote:
“I would want them in index funds. But index funds don’t have the super high growth that some, you know, well-picked individual stocks have.” — Mindy Jensen [34:01]

---

Overcoming Debt and Financial Obstacles

For listeners burdened with debt, Scott recommends prioritizing high-interest debts (over 8%) to eliminate financial anchors before advancing with investments. Lower-interest debts (below 5%) might be managed concurrently with investment strategies, depending on personal circumstances.

Notable Quote:
“If you're in between, I don't know, the right call at that point depends on your personal preference level.” — Scott Trench [39:28]

---

Mindset Shifts: Embracing Sacrifices for Financial Freedom

Both hosts emphasize the necessity of lifestyle changes and sacrifices. This includes downsizing living arrangements, cutting unnecessary expenses, and dedicating time to side hustles and financial education.

Notable Quote:
“You are going to have to give something up in order to be able to take the money that you were spending on that thing and put it into your retirement accounts.” — Mindy Jensen [33:11]

“The lifestyle that you're used to right now is going to have to change.” — Mindy Jensen [33:49]

---

Educational Commitment: Building Financial Literacy

Scott encourages listeners to commit to extensive self-education, recommending reading personal finance books to build a robust understanding of investing and financial management.

Notable Quote:
“Pick up a personal finance book every week, get a pair of earbuds, do it on Audible, go to the library, you can get free books from the library.” — Scott Trench [15:54]

---

Conclusion: Achieving Financial Independence at 50

Mindy and Scott conclude by reinforcing that achieving a comfortable retirement starting at 50 is challenging but attainable with disciplined saving, strategic investing, and significant lifestyle adjustments. They invite listeners to engage with the BiggerPockets community to share their experiences and seek further guidance.

Final Takeaways:

• Start Immediately: Even with limited time, proactive steps can lead to a secure retirement.
• Save Aggressively: Prioritize saving to build a substantial investment base.
• Invest Strategically: Focus on income-generating investments like real estate.
• Embrace Change: Adjust lifestyle and expenses to facilitate financial growth.
• Educate Continuously: Build financial literacy to make informed investment decisions.

Notable Quote:
“We know what’s next. We see that on average it takes about 10 years to amass a portfolio of approximately a million dollars.” — Mindy Jensen [00:36]

---

This episode serves as a comprehensive guide for individuals in their 50s aiming to secure their financial future despite starting late. By following the structured plans for personas like Barb and Sally, listeners can navigate their unique financial landscapes toward achieving retirement goals.

Transcript

[Mindy Jensen]

So you're 50, you're broke, and you're thinking to yourself, retirement is never going to happen, right? You're wrong. Today we are breaking down exactly how to get started. Even if you feel like you're starting from zero, we're covering actionable steps to take, mindset shifts and strategies to build wealth fast. Even if you're starting later in life. Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me, as always, is my not quite 50, still fi. Definitely someone you can learn from. Co host Scott Trench.

[Scott Trench]

Mindy, as far as your intros go, that one wasn't the most fire. Bigger pockets have the goal of creating 1 million millionaires. You're in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone no matter when or where or how old you're starting. I guess how old is when? Whatever we want to shout out in this episode, our sponsor, Connect Invest. With Connect Invest, real estate investing is simplified and within your reach. Now let's get into the show. Mindy, let's talk about, let's start with the basic question here. For someone starting at 50 who is broke, maybe earning a median or a little bit above median income, hopefully after a couple of decades of work experience, can they still fire?

[Mindy Jensen]

So fire means financially independent retire early. And I think if you are 50 years old and you don't have significant savings or even any savings, I think that the re part, the retire early part is not really going to be in the cards for you. However, retirement is still going to be in the cards for you. I know you've read these articles, Scott, where it says, oh, 90% of Americans will never, ever, ever be able to retire or whatever. I don't remember what the exact title is, but they're, they're designed to get you to click on them and make you scared. And I think even if you are 50 years old today with a $0 net worth, you can still have a comfortable retirement at age 65, maybe even a couple of years before. But you definitely need to be tempering your expectations and not comparing yourself to the 30 year olds that you're hearing from or the 40 year olds that you're hearing from because your story is not the same. Therefore you shouldn't compare them the two because you will feel bad and you shouldn't. You're at least thinking about money and that is an awesome step in the right direction. So, Scott, what would be the first step you would recommend to somebody who wakes up and says, wow, I'm 50 years old and my net worth is nothing.

[Scott Trench]

If I'm starting at age 50 with a $0 net worth, I'm. I think the first step is to acknowledge probably what the, the feelings that go along with that. Right. So there's probably fear, there's probably some regret, there's probably some apprehension about the unknown with finance and the journey that needs to be undertaken here. The second thing I do is I define what enough looks like, and I want to throw out a number there. For someone who's at 50 with a median income and wants to spend a percentage of that income on there. I'm going to throw out a million dollars, right. And why am I going to throw out a million dollars on. Well, a million dollars, according to a large body of traditional retirement advice, should throw off about $40,000 per year in spendable cash flow. You should be able to spend. Live a lifestyle of $40,000 a year. That may not be a very luxurious lifestyle, but that should be enough to cover the bases in retirement. And when we start adding in other components, the discussion that I know Mindy and I are about to have for the next couple of minutes here, I, um. We're going to be able to make that go pretty far, I believe, and that's a pretty good base. You're going to feel a lot better about retirement if you can begin approaching or ballparking away to getting to that path.

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Right.

[Scott Trench]

We don't have to get all the way there. We'll talk about other, other options, but I think that's where I'm going to be starting here. And then I'm going to be thinking about, you know, what do I have today, what is my income, what are my expenses, and what is my asset base? Probably most folks listening to this who are in this position are not truly starting from a zero or negative net worth at 50. Although if that's you, we can work with that, too. But we're probably starting with something. Where are those assets and how are they invested right now? How are they going to perform in the next couple years, and how are we going to take this income stream from your salary or your career minus the expenses you need to live your life and invest that? And now we're beginning to get a picture of what that model can look like over the next 10 to 15 years towards traditional retirement?

[Mindy Jensen]

Scott, you said something very interesting. You said you might have some fear, you might have some regret, you might have some apprehension if you're listening to this and you have those, those feelings. That's totally valid. Take a moment and just let those wash over you. This is a scary position to be in, according to everybody from the news. But we're not from the news. We have lots of episodes that we've recorded in the past. People like Susan and Norm, people like Fritz from Retirement Manifesto and Kathy from Baby Boomer Super Saver, they have showed time and time again that in about 10 years you can amass a portfolio of approximately $40,000 a year. This $1 million portfolio that Scott was talking about, and these are repeatable examples, they didn't do anything wild and out of the ordinary. What they did may not be what you do, but it's perfectly okay to have these fears because you don't know what's next. Scott and I know what's next. We see that on average it takes about 10 years to amass a portfolio of approximately a million dollars. So like you said, Scott, it's not $40,000 a year. Isn't this luxurious lifestyle, but it is still a retirement. Take a moment to, to have this fear and then let's move on. Scott, you also touched on expenses. If we're planning a $40,000 a year retirement, then we need to make sure that our expenses fall within that $40,000 a year. Tracking your expenses, if you have no idea how much you're spending, you don't know where it's going, that's going to be something. The first thing that I'm going to encourage our people to work on is looking at your expenses. When you take stock of your financial position, how much is going to where you want it to go and how much is going because you're not really paying attention. I think that's one of the biggest places people can cut back is just looking at their intentionality and where their money is actually going and where they want it to be going.

[Scott Trench]

Mindy, let's, let's create a Persona here and give them a plan for moving towards retirement. And I think here's my suggested Persona, right? This is someone who is 52 years old, is recently divorced, who has been a stay at home mom for the last 15 to 20 years with the kids on out of the house or on the way out of the house at this point, and they're starting truly with zero and don't have, you know, are questioning what their skill set is going to be valued at in the market. How's that for a tough situation? Do you think that's a good a Good person. Let's, let's help this person retire in 13 years.

[Mindy Jensen]

I've got this in 13 years. So this person will be 65 at retirement age.

[Scott Trench]

Yep.

[Mindy Jensen]

Okay, Scott, we need some income.

[Scott Trench]

That's right. So I, I think, I think that we're going to be applying for entry or middling level jobs here. So it's time to dust off the resume, populate with the skills, say, hey, we're going to be starting. We, you know, do. I'm going to assume this person has a college degree or some education from, from years ago, but hasn't applied it fully in the workplace for some time. And we're going to be applying for entry level jobs at this point and we're going to be assuming that we're going to be able to within a few weeks or a few months, earn a 45 to $55,000 a year annual income in that location. Mindy, how, how close am I, Is that, is that a realistic goal for this person?

[Mindy Jensen]

I think that's a very realistic goal. I want to introduce the idea of a side hustle. In my newsfeed yesterday was a couple of articles about people making a lot of money inside Hustles. So I started clicking through them because I was talking on the rookie show about how to save for your first investment property. And one of his articles that came up was somebody making $30,000 a month in a side hustle. So I clicked on the article and it was something about like running your own social media marketing company. I'm like, okay, that doesn't apply for me. That doesn't apply for a lot of people, but look at the potential. So I googled today trying to find those articles again. Side hustles $30,000 a month. And what comes up is TaskRabbit. Side hustle earns over 70,000amonth. Here's how to start. $30,000 a month. Australia's top earning side hustles. This 52 year old side hustle makes $30,000 a season. And this 17 year old makes $30,000 a month with an Amazon side hustle. So if you want to make money, if you want to make a lot.

[Scott Trench]

Of money, I want to just push back a little bit here.

[Mindy Jensen]

Hold on, I'm not done. You can push back in a second.

[Scott Trench]

If you can figure out how to make $70,000 a month going after this, after 20 years out of the workforce, then you know, game over, right? We got our plan here. Yes.

[Mindy Jensen]

Then we've got our plan.

[Scott Trench]

I don't know if I'M going to. If I've listened to this, I'm like, oh, my problem is now solved on that one.

[Mindy Jensen]

Well, I'm not saying that your problem is solved. If you would have not interrupted me, Scott, I would continue.

[Scott Trench]

All right, sorry about that. Keep going.

[Mindy Jensen]

We need to take a quick break, but while we're away, we want to hear from you. Did you get started on your fire journey later than you wish you had? Answer in the Spotify or YouTube app.

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[Mindy Jensen]

There is no shortage of side hustle ideas on the Internet and just googling it you will get like, you will fall into a rabbit hole. But some of these side hustles are not going to be valid at all. Like, I make side hustle money by fixing cars in my garage. Well, I'm not going to do that because I don't know how to fix cars. There was one TaskRabbit guy who makes $4,000 a month setting up IKEA furniture. Now that's probably not the best side hustle for you. Scott Trench, Maybe like, have you ever put together IKEA furniture?

[Scott Trench]

It is the activity I hate the most in all of my life is assembling furniture. But I can do it.

[Mindy Jensen]

So would you hire that out? Would you hire somebody to come in and set up the furniture for you? There's lots of people who do. There was a guy who is retired who is making $4,000 a month working as much as he feels like setting up IKEA furniture. There are side hustles that, there's a lot of side hustles that are never going to be anything you're interested in. But there's a lot of opportunity out there to make money either online or in person just by doing a little bit of research. If you are 52, let's call her Barb. Barb is 52 and she is recently divorced, was a stay at home mom. She's got kids in high school or college and she's starting with zero. Barb has skills that she can put to use as a side hustle and make a lot of money.

[Scott Trench]

I'm going to frame, zoom back out and go to a mindset shift here. We're going to, we're going to humble ourselves and we're going to get an entry level job because that's the starting point. We need a W2 to pay the bills. Then we're going to say, look, we have a big gap to close here. That entry level job at, let's call it $50,000 a year. If we save all of it over the 100% that we have, no expenses and no taxes, we save all of it. Over the next 13 years, we're going to have $650,000, which we might note is not a million there. So this is a starting point, right? We're not going to finish here. We're going to have to invest that and that's going to get us some of the compounding. We'll go through that math later on this, but really we need to figure out how to immediately trade a large gap between income and expenses from day one. And I want to quickly focus you on a first goal of getting to $25,000 saved. $25,000 saved is something that you can achieve if you're starting over, if you're willing to humble yourself, if you're willing to live well below your means, make sacrifices on what you eat, where you live, what you drive, you can still have a little bit of money left over for the good things in life, the trips to see the kids in college or a vacation or two a year. But you're going to have to make those cuts on those areas. And then absolutely, your nights and weekends, to some extent, to the extent able, are no longer going to be filled with tv. They're going to be filled with a side hustle. That side hustle, I'm going to bring us back down to what I think is more realistic goal is going to look something more like Uber or TaskRabbit or a delivery that's going to be amount to 15 to 20 bucks an hour. And then I want you absolutely to be exploring and thinking at all times about how to make more money per hour by layering in more creative side hustles that are relevant to your skill set, like what Mindy suggested here. But I think if you're willing to move into a very entry level apartment that is not what you're used to or what you like or what you would hope for, maybe even getting a roommate, which I would highly suggest for, for at least a year on this, if you're willing to drive a 10 year old economy car, if you're willing to pack lunch and meal prep every week, you're willing to go to work and you're willing to do a side hustle on the nights and weekends. I believe you can save up 20 to $25,000 within the next 12 months. And it will not be fun, but it will be a start that we can begin building off of. What's your reaction to that part, Mindy?

[Mindy Jensen]

I agree with that 100%. You should absolutely be looking for a W2 job first. And I don't mean to suggest that every side hustle is going to pay you $30,000 a month, but there is so many different ideas out there. Why settle for a $50 side hustle when you can find a $500 side hustle? So you know, I think taking stock of your skills is great. There's a lot of other things you can be doing that can generate additional money because you're not going to be able to save 100% of your $50,000 a year. Job, you're going to have to spend some of that. So you need other ways that you can generate income so that you can put that away for retirement.

[Scott Trench]

I completely agree with that. I think that with really hard work it will literally hurt probably for the first several months or for, for, for forever around there. But I think you can save up a couple hundred to maybe as much as $1,000 a month on top of a pretty healthy saving rate from that job. But that's, I think the reality of what I would ground folks in for the expectations for that first year. On top of that, I would suggest picking up a personal finance book every week, getting a pair of earbuds, doing it on audible, go to the library, you can get, you can get free books from the library both on audible, audio, physical or digital format. And I would start self educating. I think the mentality should be I'm going to read 50 books on personal finance and investing over the next year or two and I'm going to really begin building that skill set. Because the fundamental problem I believe that this person is going to face after the first year is that job is going to be the primary blocker to financial freedom. A side hustle is great, play your hand at side hustles but really you need the income from the main job to be higher in order for that to work. And the best way to do that at this point in your career is to self educate, read one book after another, be proactive, make good decisions, job hoping, add value to the extent that you, that you can. That's the first year I'm thinking to get to 2025, hopefully even beyond that in terms of savings. And I would go so far as in that year. Don't even worry about the retirement account. We need this cash to help us explore better options on a go forward basis in year two. But we'll get to that in a second. What do you think Cindy?

[Mindy Jensen]

Oh, I'm curious about this. Don't think about the retirement account. I will, I will say if you have the ability to have a high deductible savings plan. I'm sorry, a high deductible health insurance plan that comes with the health savings account. I mix those two together. If you have the ability to have those, I would sign up for that. You putting your money into your hsa, hopefully you don't have any big expenses. If you do, hopefully you can cash flow them. If you can't, you can at least pull from the HSA and you're paying for it with non taxed dollars. But if you can start growing that account, if you can start putting a little bit in your 401k or your Roth IRA, that that can be a great way to start building non taxed wealth while you're, you're paying taxes on the way in. And the over 50 catch up contributions can be quite significant. So being able to contribute to those, I mean Barb isn't going to be able to max out her 401k and her Roth IRA and she's just simply not making enough money. But if her side hustle starts coming up, if she's able to make additional money, she gets a better job, she gets more money, she gets a big raise, she gets a big bonus, that could be something someplace to put that money.

[Scott Trench]

Here's why I disagree Mindeep is because in year two I want Barb to buy a house hack. Right Barb? Barb is stuck right now. Barb is not. Barb hopefully can increase her income, but there's no guarantees on that front. If she can house hack by putting down, by doing an owner occupied loan on a duplex for example and Airbnb being the other side now, she's cleaning the other side for herself instead of for a client around there, she may be able to live for free. And if her rent is 1500 bucks and she's able to reduce that to zero effectively with a lot of hard work, that $18,000 starting then can now go into her retirement accounts. So I'm not saying to not invest in the retirement accounts in general. I'm saying that I'd rather Barb accumulate cold hard cash in the savings account and stockpile that in pursuit of a house hack. Most likely. I think that Barbara really needs that first real estate investment because it will make everything easier. And think about the like the flexibility, just the sigh of relief if, if even if nothing else happens over the next 15 years we only commute another dollar. We at least are able to get that expense for living close to zero with some hard work, with some part time effort. I think that's a really good stable foundation and, and Barb, the way you can do this is by taking that $25,000 and looking for a 4 to $500,000 house. This is the median purchase price the United States of America. That'll be a little low on the low end or not in the nice part of town if you're in a high cost living area. And it'll be in the very nice part of town if you're in a low cost living area. But finding that duplex, you could put 5% down on that property and that would be $25,000 and a $500,000 purchase. And you're beginning to get in business in terms of having an opportunity to defray some of those costs of living or maybe all of it if you're creative and use things like a short term rental.

[Mindy Jensen]

On this I we've now presented Barb with two different options and she can choose her own adventure. I do really like the idea of getting 50 books a year as a goal. Scott. I'm going to suggest that Barb start with yours. Set for Life by Scott Trench. Dominate Life, Money and the American Dream. Originally, like Scott said, he wrote this for a early 20s person, but really he wrote it for somebody who was just starting out on their financial journey. So Barb, you are just starting out on your financial journey. This book is for you.

[Scott Trench]

If you are 50 plus, I'm gonna go as far if you're 50 plus and you're interested in this concept and you're hearing this on or before January 31, 2025, email me at set for lifeggerpockets.com and you get it for free in whatever format you want around there.

[Mindy Jensen]

Oh, that's nice, Scott.

[Scott Trench]

I didn't write it for the 50 plus year old person. I wrote it for the 20 to 30 year old person. Just getting started in life wants to be super aggressive, but I think a lot of it applies and that way if you don't like it and you don't think it does apply, well, you got it for free. So we can go from there.

[Mindy Jensen]

Stay tuned after our final break.

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[Mindy Jensen]

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[Scott Trench]

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[Mindy Jensen]

Let's jump back in now. Let's talk about Sally. Sally's 55. She has $100,000 in income and $0 in net worth. Where she, where is she going to start?

[Scott Trench]

I think a lot of these concepts will still, will still apply to a large degree, right? I mean, it's is the net, is the net worth piece. That is, that is, that is bugging me here. So Sally's got 100k in income and no net worth. So same deal here. I still think we're in the same spot, right? So Sally, Sally saves 100% of her income. Now we're at 1.3 million. Income is still a primary driver for Sally, but we can begin thinking more about an overarching investment strategy. I still think that using housing is the ultimate killer app here, and I would encourage Sally to consider a live in flip. This is where perhaps we take that $500,000 duplex and we instead add value to it and then a couple years later sell it. The gain, let's say that we buy a house for 500,000. We put 50 to $75,000 into it, and a few years later we sell it for $700,000. The $125,000 capital gain is tax free and you do that two or three times and that's a major supplement, maybe as much as half a million dollars on the way to retirement that you can add in and, or you can rent out part of the house as a house hack like what we talked about earlier to defray those expenses during that time period. So I'm still thinking about using housing in there. I'm still leaning into my, my reading, but there's a little less pressure of like this is just not going to work. You can get pretty close. I think that, I think that Sally, if she saved 20, you know, 30 to 30% of her income, did one or two real estate investments and put the rest in her retirement accounts, she can get to about a million or reasonably, you know, within shouting distance by 65 at that point. And when we supplement that with Social Security and Medicare, we're beginning to look a lot more, a lot more reasonable with our, with our approach there. That, that Social Security chunk, let's say it's $3,000, you know, $2,000 a month on there. Well, that reduces the need for that 40,000 to 16,000. You only need a couple hundred thousand dollars in assets to get that 40,000 ish style lifestyle done. Under that plate, Sally will probably want more. She probably will not believe that all of that Social Security will be there for the rest of her life. She should probably only count on 75% of the Social Security benefit she's expecting, for example, at this point in time. But it's a lot more comforting to Even think about 50 or 75% of the Social Security benefit you're putting in there to defray that expense. What do you think, Mindy?

[Mindy Jensen]

I think that Sally has a better opportunity to contribute to her 401k, her Roth IRA, maybe even hit on some of the after tax, after 50 catch up contributions. But again, her, her income, I feel like such a snob saying this. Her income is only $100,000 with a $0 net worth. She's probably spending $100,000 a year. So she's going to need to make some big cuts or she's going to need to plan to work forever. And I bet she doesn't want to work forever. So she's going to need to look at her expenses, look at where her money's going, what it's doing for her and where she really wants it to go. Look at what kind of retirement she wants. The, I want to talk about the over 50 catch up contributions because they do apply for anybody who is able to contribute, but you know, and they're not small potatoes. The, well, the Roth one is the Roth IRA after 50 tax contribution or after 50 catch up contribution is $1000. Thanks IRS, that's so helpful. But it's still $1000. I'll take it. And I am over 50, so I will take that. The 401k over 50 catch up contributions. This is a little bit new to me. There's 7, $500 additional every year. So this year it's 23,000. So you can contribute up to 31,500 this year. But starting next year in 2025. This is the thing that I just Learned. People ages 60 to 63 can contribute up to $11,250 extra, but only for those three years. So if you are 59, you can't. If you're 64, you can't. I don't understand why those three years are so special. But whatever, when you're between 60 and 63, if you can't have the opportunity to do that, take advantage of it.

[Scott Trench]

I think that those, those retirement catch up, catch up contributions are great and they apply much more to Sally than they do to Barb in our example here. Because Sally has a higher income tax bracket at $100,000. And absolutely like if you're in a higher income tax bracket and you have a lower net worth and the kids are finally out of the house or whatever it is that is enabling you to save, definitely take advantage of these retirement contributions and get up there. I do think we've got some bad news for Sally though too, which is that she's not going to get to retirement unless she also humbles herself and probably degrades that lifestyle. Because if she's bringing in $100,000 in income and there's no net worth and we're not accumulating, that's the fundamental problem. And we're not going to be able to live the current lifestyle. We're going to have to downgrade into a place that you're not, not used to. And that's the, that's the challenge. I think that's the, really the, the biggest mindset shift between like my journey starting this, starting with some of the things I talked about doing for Barb at 22, 23. I'm coming out of the college lifestyle. Doesn't really matter to me at that point. Barb and Sally are probably going to have to make a change that's going to put them back in that, that, that world. And they're not going to like it because a reduction in lifestyle I think is way harder than just the continuation of what I was doing previously to a large extent. And so that's going to be the really, really big challenge. But you have to do it, in my view, because all of those retirement catch up prep opportunities are predicated on you not spending the money somewhere else. Right. If you're going to invest $11,250 in your 401k, for example, you can't spend that money whatever it would have been after tax. And that has to come out of your expense account there. And so I still think you're driving a car that is not the one you necessarily want to be driving and you're living in an apartment that's not the one you want to be living in or maybe even still have a roommate, even in Sally's position here. And you're packing lunch and meal prepping every week around this with Costco membership, not from Whole Foods or getting lunch out every day. But I think that those are, that's the trade off is I absolutely agree, take advantage of all of those, especially when you get into Sally's situation and beyond, but don't. But know that in order to do that, that's money you're not spending after tax on your lifestyle there.

[Mindy Jensen]

Well, I think that's the underlying issue here is if you want to be able to retire and you're in your 50s, you're in your anythings, if you want to be able to retire, you're going to have to be able to put some money away. So the lifestyle that you're used to right now is going to have to change. You are going to have to give something up in order to be able to take the money that you were spending on that thing and put it into your retirement accounts. And that is kind of the harsh truth here. And I don't, I don't want to discourage people and make it sound like, oh, you'll never retire, but you won't really retire until you make big changes.

[Scott Trench]

Now the other thing I want to talk about here is investment strategy. So, Mindy, how am I investing? Because I heard that when you're getting closer to retirement age, you should begin diversifying to a certain extent. Does that apply to Sally and Barb here?

[Mindy Jensen]

Well, they currently have zero investments, so their diversification is nothing. I would want them, I would want to see them in index funds. But index funds don't have the super high growth that some, you know, well, picked individual stocks have. That's okay. I, I want to preserve what they have and grow it more manageably than trying to bet on one super hot stock that may or may not take off.

[Scott Trench]

You know, the way I'd frame this question about how to invest is diversification to me is for people who have something to protect. You have nothing to protect here. There's no assets. Right. And 100 grand is not going to cut it for your retirement. So I would invest fairly aggressively and I would do that in a 100% stock portfolio, for example index funds or preferably. What I would do is I'd probably put it all into a real estate house hack or two in those early years because that will deck that has a chance to defray the cost of living. You can certainly lose what these investments, they can go down a lot. You can lose more than you invested in a real estate or house hack investment. But I think that the known is that if we don't invest and we don't begin moving some things forward, we're going to be completely broke at retirement retirement age. So in borrower's case, I like the house hack, for example, in that first couple of years. And I think that $25,000 outside of the retirement account to enable a house hack is absolutely critical in Sally's case with the higher income because we can get much closer to traditional retirement age. I might go more into stocks, perhaps 100% index fund in the early days and beginning to move more toward a diversified portfolio, a traditional 60:40 stock bond portfolio as I approach traditional retirement age at 65 and maybe cresting the 500 to $750,000 net worth mark at that point if I choose to go the more traditional route. But I think that the concentration is a key, is a feature, not a bug of the first couple of years of investing if we're truly starting from zero.

[Mindy Jensen]

You know what, Scott, I would love to hear from our audience on that because I have always advocated for diversification, but I can see your point there. So listeners, what do you think about diversification in Sally and Barb's situation? $0 net worth as they are starting to invest, where would you tell them to put their money? Would you tell them to diversify across a bunch of different investment options or would you tell them to concentrate? You can answer in our Facebook group or down below if you're watching us on YouTube.

[Scott Trench]

And one other thing I assume here is I'm assuming that Sally and Barb are super motivated because they're listening to this podcast to become much smarter financially.

[Mindy Jensen]

Right.

[Scott Trench]

And if we're broke at 50. It's because things didn't go well and we didn't accumulate a lot here. But we're changing that at this point. And I'm not going to give like a woo, woo, you know, put it, get handed over to a financial advisor and start saving 10% of your income thing here. I'm assuming that you have a pit of fear in your stomach and you want to go after real, a real amount of wealth that can actually defray retirement accounts so you're not dependent on the safety net of Medicare and Social Security in retirement at traditional retirement age and that you're willing to read 50 books and become an expert on this that can talk about it very intelligently and move after it. And so if that's not you, don't do what I'm talking about here. Go, go, go talk to a financial planner and try to accumulate 100, $200,000 to defray the Social Security stuff. But if we want, we want to build a portfolio capable of generating a serious supplement to Social Security over the next 10 to 15 years. I think you need to go all out and we should, we should treat you as if you're an expert or will become quickly an expert in personal finance. At least a, you know, high school graduate, college, college student level expertise with personal finance and investing.

[Mindy Jensen]

Scott, I have nothing to add. I really like that. What about debt? Neither one of our ladies has debt. What would you advise somebody who does have debt with a similar net worth to our ladies just deciding to figure out their, their finances?

[Scott Trench]

You know, we recently did a show on the average and median net worth for people by age category. And Even the bottom 10% of folks in their 50s did not have a negative net worth at that point. If that's you, you're going to have to make a trade off between paying off that debt and investing in the stock market. So I would, I would say first, hopefully this problem does not apply to the vast, vast majority of Sally's and Barbs that are starting out in the situation that we have articulated. But I think that the, I think that if I have debt, I'm probably thinking if the interest rate on the debt is over about 8%, got to pay that off. It's just too big of an anchor to do anything else about. If it's less than 2%, I might still push Barb to accumulate cash in the bank and get ready to buy a house hack or similar type of starter level real estate investment. Because I think the returns you can generate and the opportunity to defray housing expenses is going to far outpace the lower interest rate. So I'd say if you're less than 5%, I'm biasing towards the house hack. If you're over 8%, I am telling you, I'm saying pay it off, it's an emergency. And if you're in between, you're in between. And I don't know, the right call at that point depends on your personal preference level.

[Mindy Jensen]

I really can't argue with you there, Scott. I think that there are going to be some people who will say, I, I'm so sick of being in debt, I can't wait to pay it all off. And there are other people who are going to say, I don't mind the debt, I really want to start investing, I really want to start saving for my house hack. I really want to start all of these different things. So it, it really does depend on your personal preference until you get into like the, the high interest rates. And then I say pay those off.

[Scott Trench]

Mindy, I want to call out that the median net worth. So we've articulated this as an approach for Sally and Barb, who have nothing, but Even the bottom 25th percentile has $84,000 in net worth in their 50s if they have a home, or $15,000 in net worth if they don't have a home. $15,000 in the context of our million dollar goal is so little that the approach that we articulated for Barb I think applies. But the 84,000 is getting, is getting more. And the median amount of net worth for these two groups is 321,000 for the homeowner population and 131,000 for the non homeowner population. So it's more realistic, I think to some degree that Sally and Barb are going to have between 100 and $300,000 in net worth and be feeling like that's not enough to get to retirement. And I think now we have a more nuanced approach. A lot of the themes that we apply it earlier are there, but we can apply the rule of 72 and assume that $300,000 could double twice between now and retritional retirement age for Barb, for example, and maybe a similar concept for Sally and $300,000. And that assumes though that you're invested in stocks in a fairly aggressive portfolio for that. And so I think now there's another thought consideration that we'll have to explore in a future episode about how to break apart that asset base because I bet you A lot of that is in the home equity and a lot of it is in the retirement accounts, very little in cash. And we still have the same game of how are we going to reallocate those dollars in a tax efficient way into investments that can sustain retirement and how are we going to invest the income stream, my income minus my expenses on top of that, in a really productive way?

[Mindy Jensen]

Yeah, that is, that is a much better position to be starting from. I'm wondering how that's the median. I'm wondering, does it say what the average is?

[Scott Trench]

The average is much better. So the average for 50s is 1.4 million and for a homeowner in terms of total Net worth and 1.1 million for the non homeowner in their 50s, the average is pulled up because the wealthy have so much more wealth that it pulls the average up, which is why me median is such a, such a much better, more useful tool. The 75th percentile, for example, is $700,000 for the non homeowner and 1.1 for the homeowner in terms of total net worth. So the average is skewing that way is skewed up tremendously by the top 1% or the wealthiest folks in the country.

[Mindy Jensen]

Yeah, you're right.

[Scott Trench]

Am I a true nerd or what? Mindy?

[Mindy Jensen]

Yeah, I already knew that. Scott.

[Scott Trench]

Well, look, we, we want more feedback on this. This is a starting point for, for talking, for talking about this. We know that there's a number of people out there that are looking to catch up to traditional retirement. Bigger pockets Money has been largely about financial independence. Retire early for folks trying to retire in their 30s, 40s, 50s, maybe even 20s, in some cases less about the traditional retirement path to their 60s. But let us know what you thought of this episode and whether you'd like more content on this and for us to maybe build this Persona of the of let's call her, let's call her Karen here, who's got a several hundred thousand dollars net worth. The median for the, for, for this person and maybe a little bit above the median household income as well, because I think a lot of the folks that maybe listen to biggerpockets money or in that median category later in their careers are probably earning the median for 50 year olds, which is higher than the median for all Americans that work. So I think that's probably a good Persona for us to do next. But we'd love to hear your thoughts Bigger Pockets of Money listeners and let's talk about it if that would be interesting.

[Mindy Jensen]

All right, Scott, should we get out of here?

[Scott Trench]

Let's do it.

[Mindy Jensen]

That wraps up this episode of the Bigger Pockets Money podcast. He is the Scott Trench, and I am Mindy Jensen. Saying goodbye, Dragonfly.