How to Avoid (or Escape) the Middle-Class Trap and Retire Early

Summary

BiggerPockets Money Podcast Episode Summary

Episode Title: How to Avoid (or Escape) the Middle-Class Trap and Retire Early
Date: November 4, 2025
Hosts: Mindy Jensen and Scott Trench

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Episode Overview

In this episode, Mindy Jensen and Scott Trench tackle the "middle-class trap"—a situation where people do everything right financially (saving, investing, living below their means), yet still feel “stuck” because their money seems inaccessible and they're tied to their jobs. They unpack why this happens to so many diligent savers, why it's controversial to call it a "trap," and, most importantly, concrete strategies to escape or avoid it—especially for listeners aspiring to retire early or achieve financial flexibility far before traditional retirement age.

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Key Discussion Points & Insights

1. Defining the Middle-Class Trap

• The episode starts by introducing “Sam,” a hypothetical 38-year-old, married with two kids, a combined household income of $165,000, a net worth of $1M (mostly in home equity and retirement accounts), and yearly expenses of $110,000.
• Key Problem: Despite doing everything financial advice recommends, Sam feels financially trapped. Most of his wealth is inaccessible—locked in retirement accounts or home equity. He must keep working for 10–20 more years to unlock real flexibility.
• Scott: “This is the middle class trap. Because even though he’s done everything right, it feels like he’s got no option but to keep grinding out his job for another 15 to 25 years.” [05:15]

2. Why Is the Middle-Class Trap Controversial?

• Debate exists within the financial community about whether being a “trapped millionaire” is a real problem or a “privilege complaint.”
• Scott: “This both angers some people...and it really resonates with, I would say, even more people who feel about their situation. And I think it hurts in a particularly deep way...doing the ‘right’ things but not feeling free.” [05:36–07:53]
• Mindy: “You're doing everything right for traditional retirement, but if you are focusing on something non-traditional, you're going to have to get there in non-traditional ways.” [07:53]

3. Sam’s Specific Sticking Points

• Home equity ($300K) is illiquid, especially in a high interest rate environment—he can’t refinance or easily tap that cash.
• Retirement accounts are earmarked for age 59½+, and many are unaware of advanced withdrawal strategies.
• Their expenses require both incomes, so neither spouse can safely take entrepreneurial or career risks.
• The $40K emergency fund is only a short buffer and doesn’t provide real flexibility for big life changes.
• Mindy: “Your net worth statement is not the same as your FI [Financial Independence] number.” [12:24]

4. Is Sam (and Listeners) Actually Trapped? Key Calculations

• Coast FI: Sam is likely Coast FI—he’s got enough saved for a comfortable traditional retirement without further contributions, assuming average market returns. If he contributes nothing more, $600K at 7% will grow to ~$4M by 65. [14:15–17:34]
• Most “trapped” savers are over-saving for retirement and not optimizing for flexibility and happiness right now.
• Sacrificing too much of your youth and prime working years for extreme long-term security may be a poor trade-off.

5. Strategies to Escape the Middle-Class Trap

a. Coast FI: Pause Retirement Contributions and Focus on Accessible Wealth

• Stop or slow tax-advantaged retirement contributions; focus new savings in after-tax, liquid accounts, real estate, or business startups.
• Trade-off: Lose the immediate tax advantages, but gain accessibility and the possibility for more flexibility.
• Scott: “You don't have to just blow this money on a boat or your trip around the world. Just shifting that money...may provide multiple sets of benefits.” [14:15]

b. Use Advanced Withdrawal Strategies

• Roth Conversion Ladder: Move 401(k)/IRA money into Roth IRAs in early low-income years, paying taxes but avoiding penalties. Wait five years before accessing.
• 72(t) Distributions: Use IRS Rule 72(t) to take "substantially equal periodic payments" from retirement accounts penalty-free before age 59½.
  • Can be implemented with just a portion of your balance to manage risk.
• Mindy: “Both of those are great options and I would like to see more people doing these...I think a lot of Americans aren’t even aware that these options exist.” [29:05]

c. Extreme Frugality and Dual-Investing

• Spend much less: If expenses drop to $40K, not $110K, you can max all tax-advantaged accounts and build after-tax, accessible wealth for entrepreneurial or life goals.
• This is how many in the FIRE community “escape the trap”: Ultra-high savings rates, lower spending, and a split between account types.
• Mindy: “My husband and I wanted to get to financial independence as fast as we could. So we cut out all the things that we didn’t need or didn’t want...But it wasn’t a smooth ride.” [38:40]

6. Personal Anecdotes & Lessons

• Scott: In early years, prioritized after-tax savings to buy real estate and build cash reserves—not maxing retirement accounts right away. Enabled big career risks and more rapid wealth building.
  • “That made a huge difference...Those roommates paying my mortgage set me up to save a lot more and accumulate a lot more wealth…” [34:38]
• Mindy: Family followed frugal path, maxing retirement and after-tax accounts by cutting expenses to the bone, then intentionally invested “leftover” cash in higher-risk opportunities and alternative accounts.
  • “We were purposely investing in after-tax brokerage accounts because we wanted the flexibility.” [36:18]

7. Broader Takeaways and Mindsets

• Understand and define “enough”—don’t over-optimize for your 65-year-old self at your 38-year-old self’s expense.
• Be intentional: Don’t just blindly follow the standard order of operations. Adapt based on your specific goals, risk tolerance, and life priorities.
• Middle-class trap is most relevant for people wanting early retirement or “FI” (Financial Independence) long before traditional timelines.
• Scott: “You also have to contrast that with...it’s being a disservice to your present self if you amass so much more wealth for your 65, 75 or 85 year old self than you will ever want, need, to be able to spend or enjoy at the expense of not being there with your kids, not doing that business idea… That’s the trade-off.” [31:55]

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Notable Quotes & Memorable Moments

• Scott: “This person’s a millionaire…there are plenty of ways, plenty of mechanisms to access this money early. What are you talking about, Scott? Right. But...none of this money feels accessible in your life today.” [05:36]
• Mindy: “If you are trying to do something different, you’re going to have to take a different road to get to that different destination.” [33:56]
• Scott: “The middle class trap is a prison that is self-imposed on Sam because he’s building...so much more wealth than future Sam will ever need and foregoing the ability to live the life he wants right now.” [31:55]
• Mindy: "The middle class trap is really only an issue for people who want to retire early. If traditional retirement or, you know, not having alternative investments is not part of your journey, then this is probably not going to be a big issue for you.” [38:40]

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Timestamps for Key Sections

• What is the Middle Class Trap? [01:06–05:24]
• Why It's Controversial [05:24–09:05]
• Sam’s Situation—Details & Calculations [10:10–14:15]
• Coast FI & Over-Saving vs. Happiness Today [14:15–17:34]
• Advanced Withdrawal Strategies [24:44–29:28]
• Extreme Frugality & Dual-Investing [29:58–31:53]
• Hosts’ Personal Stories [34:38–38:11]
• Final Insights and Takeaways [38:40–41:34]

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Conclusion

The "middle-class trap" isn't just about numbers—it's a mindset, an opportunity cost, and a question of priorities. For those who want to retire early or unlock flexibility before age 60, being “stuck” is a real risk even when you’re technically winning at the personal finance game. Mindy and Scott emphasize intentional planning, understanding your own goals, and not sacrificing present-day fulfillment purely for future wealth. They encourage listeners to analyze their own situations, consider alternative approaches, and contribute their thoughts or questions to continue the conversation.

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Have More Ideas?

If you have suggestions for “Sam,” email [e-mail] or [e-mail], or leave a comment on the podcast’s YouTube video.

Transcript

[A]

You're doing everything right, saving, investing, living below your means. But you still feel completely trapped, like your money isn't accessible and you are chained to your day job. The middle class trap catches the people who are doing everything right and most people don't realize they're stuck or how to escape. In today's episode, we're revealing whether this is in fact a trap and exactly how to escape or avoid the middle class trap entirely. Hello, hello, hello, and welcome to the BiggerPockets Money Podcast. My name is Mindy, Mindy Jensen, and with me, as always, is my Not Trapped co host, Scott Trench.

[B]

Thanks, Mindy. Great to be here. Escaping to a great discussion once again with you. You said it today, Mindy. We're going to be talking about what the middle class trap is. It's a very controversial term. We'll also talk about the controversy behind it. We're going to talk about how to escape it if you're in it, and finally, how to avoid it from the get go. As everyone knows, I love a good PowerPoint and today I'm going to share my screen to walk through this. However, you will be able to follow along if you're listening to the audio only. We will explain everything.

[A]

All right, Scott, let's jump into it. What is the middle class trap? Scott?

[B]

All right, how to escape the middle class trap. Let's start off with what the trap is. And we thought we'd start with an example. So we've constructed Sam here. Sam is a diligent fellow. He's doing all the right things, all the things that personal finance advice tells you to do. Sam is 38 years old. He's married with two kids. He and his wife have a net worth of $1,000,000. They make $165,000 in combined household income per year and have yearly expenses of $110,000. These folks have $300,000 in a primary residence. That's equity in the primary residence. The house is worth $650,000 and it has a $350,000 mortgage attached to it. They have $600,000 in retirement accounts. That's $500,000 in their 401 and $100,000 in their Roth and HSAs. They've done that by diligently contributing to these accounts for a very long period of time. They have two paid off vehicles. They have no thousand dollars in an emergency fund. This is not a crazy situation. We've seen a lot of people on Bigger Pockets Money who have come in some version of this on the podcast. Here. Right.

[A]

Mindy, we have, and I want to point out Sam's doing great. Sam is setting himself up for a good life. Scott, does Sam want to retire early?

[B]

I think Sam, I think this situation is the challenge for a lot of folks. Right. Because we're kind of in this hybrid world here. Maybe, you know, Sam, sure. Sam could be part of the fire community, which we primarily talk about here on BiggerPockets Money, which is the financial independence slash retire early community fire. Or he could just be kind of working, enjoying his career and building towards a traditional retirement. But either way, I think the middle class trap speaks to Sam in the sense that Sam is kind of scratching his head. He's like, what the heck, I'm a millionaire, but if I stop working, I'm going to run out of my money, my $40,000 in emergency fund here in like a few months. And we can't sustain our lifesty on one, just one of our incomes here. And I think that's a very frustrating position that Sam finds himself in. And I think this situation obviously is a privilege. And obviously people are going to balk at the fact that we're talking about a millionaire here and calling him a middle class trap victim. But I think it's a pretty common problem inside of the circles of people who watch personal finance YouTube videos or listen to personal finance podcasts with their free time. I think a lot of people are in this boat in America today, and it's frustrating to not feel flexible or free despite having on paper done everything correct.

[A]

Yeah, I completely agree. It looks like he's doing great because he is doing great. He's just not financially independent yet.

[B]

I think the problem, in another way of phrasing this, is Sam is still set up to work at least another decade or two before he can really reap the tangible benefits of this sacrifice. The, the, the saving and accumulation that he has, he has put himself for, for probably 10, 15 years lead up to this point.

[A]

Sam's 38 years old, so he's been working probably 13 to 15 years. He's been doing everything right.

[B]

Yeah, absolutely. And, and the thing is though, that, that, that primary residence is going to have. He's going to have to pay that mortgage for another 15 to 20 years. Right. And he's got to earn income to pay that mortgage that entire way. So that $300,000 in primary residence equity is not helping him. It's not part of his financial portfolio. It's not providing flexibility into his life. Right now, it may be less expensive than renting at this point, I'm a similar type of residence, but it's still a major cash outlay for him. His retirement accounts are really, in his mind, not something he's going to access early. At this point, he's maybe not aware even that he can do that to a large degree. He's not going to sell off his vehicles. They're not crazy vehicles. I mean, sure, he could downgrade them to two Corollas or something like that, but it's not like he's got like, you know, two $60,000 vehicles. These are two reasonably safe, probably four wheel drive vehicles. These are the kind of vehicles you'd want to safely transport kids around here in here in a state like Colorado where there's snowy winters and hilly mountains and the emergency fund is very responsible. And I think that's, that's the core frustration. This is the middle class trap. Because even though he's done everything right, it feels like he's got no option but to keep grinding out his job for another 15 to 25 years.

[A]

So, Scott, why is the middle class trap so controversial? You, you alluded to the, the fact that you got into a bit of a debate in the Choose5 Facebook group.

[B]

Yes, yes. So we had, we had a very contentious debate about this because people first have a problem with this concept of trap. Right? What are we talking about? It's a trap. This person's a millionaire. There are plenty of ways, plenty of mechanisms to access this money early. What are you talking about, Scott? Right. The second component is that people who find themselves in this situation and this, this, so this, this both angers some people this term the middle class trap. And it really resonates with, I would say even more people who feel about their situation. And I think it hurts in a particularly deep way because so many money conscious people follow high quality and correct investing order of operations advice and do that over a very long period of time. Right. They build out that $1,000 emergency fund following baby steps like Dave Ramsey's. They attack their bad debt. They take their 401k match, they take free money from their employer. If there are specific benefits like an employee stock purchase plan, they fund their emergency account, they max out their HSA, they fully fund their 401k, they max out their Roth IRA, they contribute to our max 529 plans. And if there's anything left over, they invest in taxable, but they go through this list. But the issue for, I think most of middle and upper middle class American income earners is you can't go through that whole list. It's just you don't have enough income in order to do that.

[A]

Right.

[B]

I think the 401k contribution limits for 2026 are going to be 24,500 individually and you can double that if you're married. I think the Roth IRA contribution limits are 7,500 per individual and the HSA limit is like 8,550 for a family. Right. So if we add all that up, you're talking about what like 60, $70,000 in tax advantage retirement account savings. And very few people can, in addition to maxing out those and paying a mortgage, accumulate anything after tax that can provide some of that flexibility or more, more freeing feeling. That's the problem here is you're doing everything right and yet none of this money feels accessible in your life today. And that's why it's so controversial and I think that's why it creates such an emotive response from people when we talk about this, this concept.

[A]

I want to add to this, Scott. You're doing everything right for traditional retirement, but if you are focusing on something non traditional, you're going to have to get there in non traditional ways.

[B]

Yeah, absolutely. And I think there's an obvious point that sums all this up, right, which is if 100% of your disposable income beyond that which you are paying for your lifestyle is going towards your mortgage payment and these some version of the retirement account order of operations that I just discussed, then close to 100% of your wealth is going to be in your home and your retirement accounts. I mean it's just that simple and that hard. I think that it's again controversial here because the word trap and millionaire really rub some people the wrong way and it rubs some people the wrong way who have built this position and intend or know how to use it to access or free their lives up. And I think it's hitting other people and resonating with them so hard because it's exactly how they feel. They feel trapped and they feel surprised at having done all these things right for a very long period of time and still completely in their mind stuck at their date day job, not able to actually realize any benefits of this wealth.

[A]

We have to take a quick ad break but while we're away, we would love it if you would head on over to our YouTube and subscribe to our channel. That's YouTube.com BiggerPocketsMoney Support for BiggerPockets Money.

[B]

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[A]

Welcome back to the show. Let's go into why Sam is specifically stuck.

[B]

Scott so Sam is stuck because his primary residence again provides no liquidity at $300,000 in equity is actually more of even a trap today than it was when we first started talking about the middle class trap five or six years ago because he can't even refinance that property unless he wants to really jack up his mortgage payment. He's probably got a lower interest rate mortgage on that $350,000 remaining balance, right? So he can't access that equity. If he wants to borrow against his home, he's going to borrow at 7, you know, 6, 7, 8% for a HELOC. It's just, it's just inaccessible. The only way he could harness is if he sold the house, moved and pocketed the proceeds of that sale somehow redeploying them. That's not really realistic in his situation right now. Second, you know, all of his wealth is in his retirement accounts there and he's not really intending to use those. Those are for future Sam, at least in his mind, not for present day Sam. He have enough income to go through that order of operations that we just discussed and begin accumulating wealth after tax. Or at least he would feel irresponsible doing that because he's not taking advantage of the tax advantage retirement accounts, right? That'd be crazy. Forego the tax advantage advantages in order to accumulate that after tax. And because he spends more than one of the spouse's household incomes, they can't really afford to take risks. Like it's not like he or his, his spouse could go and start a business or take a sales and really ramp that up because they spend more than one income alone would provide. So they really need both jobs to stay afloat and not have to tap into that home equity or those retirement accounts. So that doesn't even enable him to take risks in his position. So, you know, a couple other things here. He has cash, he's responsible, but the liquidity is not enough to do anything more than be a buffer between an unexpected layoff or job problem. It's not really enabling him to take that year off and travel the world or shut that business. The mortgage, again, is a unrelenting payment that he has to make on there and is going to be a major fear, I think, inducement and motivation to continue getting a stable paycheck. So. And he's not financially independent as a result of this. And I think that's. That's the core problem. That's why Sam feels stuck. He feels like he has very little flexibility.

[A]

I think that's the bottom line. He is not yet financially independent, even though he has a net worth of $1 million. I think it's good to remind people your home equity should be counted in your net statement, but your net worth statement is not the same as your phi number.

[B]

Yeah, I think if we even go back here and we look at Sam's net worth. Right. A big kind of crushing reality that we need to tell Sam about is, hey, man, you shouldn't really count this $300,000 in your primary residence towards your financial portfolio. Count your net worth. But really, the thing that gives you freedom or flexibility is going to be your financial portfolio. And so you should exclude this home equity and you should exclude your vehicles unless you intend to sell them and redeploy them in either case. So really, Sam, you're worth $640,000, still doing great. That's a lot of better than a lot of people in America. But that's the reality of your position right now. Even 640 should be providing some kind of freedom. So let's help Sam here. Let's help him figure out what he can do to feel more free, to take advantage, some advantage of the great position in a lot of ways that he has built here. What do you think?

[A]

I think that's great.

[B]

All right, what do you think Sam's options are here, Mindy?

[A]

The first option is that he should run his numbers through a Coast Phi calculator. They will show him that he is Coast Phi. So it's not like all hope is lost. He's doing really great. Coast 5 means you have enough invested now so that you don't have to put more money into your retirement accounts in order to retire at traditional retirement age, which is about 65. I think that's really powerful for somebody to be able to look at this information and say, okay, I am doing well. Even though I think I'm in the middle class trap, I'm actually doing okay if I want a traditional age retirement.

[B]

If Sam does not do anything else and the market's return, the long term average 6,7% real returns over the next 27 years between his now age 38 and traditional retirement age at 65, he will have a real inflation adjusted retirement portfolio of $4 million, $3.95 million. So the core problem here is a lot of people who do follow this financial order of operations investing advice are over saving for retirement. It's a wild concept. Most of America is not saving enough for retirement. Sam may be over saving for retirement and that's not a bad thing, right? Having extra wealth in retirement. Except for Sam is 38. The prime of life is right now. His kids are young right now. He's feeling stuck and trapped right now. Right? And sacrificing 38 year old Sam so that 65 year old Sam can have $10 million instead of $4 million may not be a sensible trade off. Right. And we may be over optimizing for future Sam instead of current Sam. Again, this is not a common problem across America, but it is potentially common within the community of people who watch personal finance podcasts on middle class traps. Right. So this could be affecting many people watching this video, but it does not affect most people. So if that is the case, if he feels, you know, I'm going to play with this calculator, I'm going to try a 3%, I'm going to try 4%, I'm going to try 5%. I'm going to try more conservative, maybe even more aggressive portfolio considerations. But you know, future Sam's going to have a pretty good retirement really, one way or the other. I'm going to stop contributing entirely and begin doing something else with that money. Maybe I'll buy real estate after tax, maybe I'll build an after tax portfolio. Maybe I'll just stockpile cash and put it into a year long fund to start that business that I've always dreamed of that gives me flexibility to be self employed. And what I want to call out here is Sam will absolutely forego the tax advantages of a 401k or Roth IRA in this situation. That's a real risk to the advice that I'm suggesting here in this situation. But that Also has to be a weight against the fact that he can still invest those dollars. He's not getting the tax advantage today, but he might do really well with his real estate investment. As good or just as good, even when you consider the tax advantages of a 401k or a Roth outside of those accounts. And they'll produce cash flow that he might feel very comfortable spending for the next 30 years while he leads up to retirement. That business that he starts may do very well. It may pay him much more than his 80, 90, $100,000 salary within a few years. That could be a really handsome return compared to what he can get in the stock market. You don't have to just blow this money on a boat or your trip around the world. Just shifting that money from the retirement account. Contributions to these businesses that you can actively manage and investments you can actively manage may provide multiple sets of benefits that still enable Sam to have a huge. He's still going to have this, this potential portfolio here, this 4, 3, 4 3, $4 million retirement portfolio. And he can have plenty of after tax assets that will get added on top of that. So that's, that's the idea here around declaring coast fire and maybe stopping or slowing some of those retirement contributions.

[A]

Well, I see where you're coming up with this. What if Sam doesn't want to stop contributing to his retirement accounts? What do his numbers look like if he just keeps going?

[B]

Let's take a second here and let's put this into the calculator. This is a Nerd Wallet. Compound interest calculator is free. We have no affiliation with Nerd Wallet, but we'd love to. So if Nerdball, if you ever reach out, if you're interested, let us know. We'd love to work together, we'd love some of your products there. But this is a simple free compound interest calculator that we, we googled here and this is where we're getting this right? Sam has $600,000 in retirement accounts that balance, if he, if it grows at 7% for the next 27 years till his retirement age will grow to about $3.7 million, depending on, you know, 3.8, depending on whether you want to update it on a monthly or annual compounding basis here. So now your question was, Mindy, what if Sam keeps contributing to those accounts, right? So Sam is contributing, let's say he and his wife are contributing 24.5the max to each of their 401k plans, right? Such as $49,000 per year. Now that balance is going to go to 7 million. This is assuming a 10% nominal return from the stock market over the next 27 years and then haircutting 3% for inflation. You don't like that number, you can adjust it here and use a 5% or a 3% or whatever you think is the correct number here. So there is a component about what you believe here. But if Sam continues to contribute to this, then at some point I think with reasonable sets of expectations, you're going to have way, way more than you really need or want in retirement. And if the opportunity cost of doing that is feeling stuck between the ages of 38 and 48 so you can have extra millions at 65, it's a bad trade off for millions or maybe tens of millions of Americans. And I think Sam can then say, you know what, I'm going to start withdrawing from these accounts in five or six years when my balance will grow to well north of a million dollars at this point in time, if I continue contributing. All right, we're going to take a quick middle class break and when we come back we'll talk about how we can escape the middle class trap.

[A]

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[B]

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[B]

All right, that was about 72t seconds that we are away. We're back and excited to talk about more nerdy advanced tax strategies to get out of the middle class trap. This might be all well and good. You know there's, there's a. You keep contributing to these accounts but mechanically if you are going to continue maxing out these accounts Mindy, how do you actually begin withdrawing from them?

[A]

Them? Well you have two options Scott. You can start a Roth conversion ladder which is where you take your pre tax retirement accounts and you convert them which is a taxable event but not a penalty. You convert them to a Roth account and by doing that you are starting the conversion ladder. They have to be. The funds have to be in the account for five years before you can withdraw them. So he's starting that for a five year horizon. Or he can do a 72T distribution which is part of the tax code that allows you to take distributions from your pre tax accounts without penalty. But again you're paying taxes on these. There are three different ways that you can run the numbers to determine how much money you can take out. And you have to take these out for at least five years or until you turn 59 and a half, whichever is longer. So, so if he's 38 and he's starting to take these out in a few years, let's say he's 45, he'll have to take these for 14 and a half years, these distributions. So that's something that he needs to keep in the back of his mind.

[B]

These are advanced topics. Some tips or idea starters for Sam would be to, to really start with the 72T or SEP IRA distribution. It sounds pretty scary to lock yourself in for a very long period of time to withdrawing a percentage of a balance like this, right? Like, do I, do I really have to withdraw $20,000? What happens if the market goes up or down? What you know, all that kind of stuff? Well, what you can do is you can actually siphon off a portion of this. So let's say, let's say that Sam has a million dollars in his 401k in three or four years when he decides to begin implementing the 72t, he can take 100 or 200,000 of that and put that into a rollover Iraq, you know, in a new account, siphoning off from, from one existing account. And then he can take start a 72T distribution with 1 or 2% of that amount, you know, just a few thousand bucks a year that begins coming out of those accounts to begin that chain. And if he wants to layer on, he can do that so you don't have to, you know, lock yourself into something that's going to cause you to withdraw huge amounts of your portfolio early on in that journey. You can layer that, that with those kinds of advanced strategies. So that'd be one thing I'd encourage him to look into. And the second is with the Roth conversion ladder. You know, let's say that Sam stops working. Let's say Sam decides, you know what, I'm going to listen to Scott and Mindy here. I've always wanted to start that business or become self employed or try my hand at that for a few years. I know that first year I'm not going to earn very much money. So I'm going to amass a cash position. I'm going to build that cash position maybe to 50, 75 or $100,000 for a year or two and then what I'm going to do is in that first year when I know I'm going to have very low income or maybe no income, I'm going to take out 50 or $100,000 from my 401k, which is pre tax. I'm going to convert it into a Roth IRA. Now that conversion, that 50 or $100,000 in income will be a taxable income. There's no penalty associated with it, but it'll be taxable income. And then like Mindy said, it will have to season for several years before you can access it. But that could be a very good opportunity to move that money in a tax advantaged way from his pre tax or tax deferred account to his Roth, which will grow and compound tax free from there. And then of course, like many said, you can take the contribution amounts, the converted amounts, the basis of those accounts, and withdraw those tax and penalty free early after they've seasoned for about, for five years. That's a very advanced option. This is something that Sam is probably not seriously considering. Very few people in America are aware of these very advanced strategies. This is something he's going to want to talk to a financial advisor or a tax planner about before he engages in. He's going to want to do some homework and research this. Really thoughtful. But if he decides, you know what, I'm really comfortable with passive investing. I'm really comfortable with this order of operations that I've been doing and I still want that flexibility early in life. This is a great option for him.

[A]

Yeah, this is. Both of those are great options and I would like to see more people doing these. The 72T and the Roth conversion ladder are the top two methods that many people were recommending when we first started talking about the middle class trap, saying, oh, the middle class trap isn't a trap at all. You've got these options. I think like you said, a lot of Americans aren't even aware that these options exist.

[B]

Yeah, absolutely. And I think a lot of people who are aware of them haven't really seriously considered them. And it takes some kind of wake up call, some kind of like, like, shoot, I'm 38 and I'm stuck and what the heck is this? I want something different for them to really even begin seriously considering this because there is, there are trade offs that are associated with it. And you have to be very thoughtful. You have to plan out pretty far in advance and really kind of know what you're doing and have a pretty clear life plan. If you're going to exercise either of those options and have them be tax efficient. Okay, let's talk about option three.

[A]

Mindy, Option three is to go hardcore with both reducing your expenses and saving as much as possible. If Sam can just reset his spending, coming down another $30,000 in his spending, he could save so much more. He will be able to max out his 401k and max out his Roth IRA and max out his HSA and start contributing 30 to $40,000 to after tax investments so that he can do either stock market investments or he can do these real estate and small business options that Scott has been discussing.

[B]

So what Mindy's saying here is if you just are so frugal that you earn 160, $165,000 a year and you spend $40,000 of that by really drastically cutting back your other expenses, it obviates big chunks of this problem because you can kind of do both. You can go down pretty deep into that stack of tax advantaged accounts and still accumulate after tax. Right. So in this scenario, we would say, hey, Max and his wife might contribute half each to their 401ks, or max out one of their 401ks, they might max out one Roth IRA and then they might max out their HSA, their family HSA, to 8,550. And that would be somewhere in the ballpark of $40,000 in contributions. That would leave them another $40,000, perhaps after tax, to invest in alternatives that are liquid or accessible in the near term. So they can go down that tax advantage stack and still stockpile cash for that business side hustle, real estate or after tax brokerage position that they want to build. And so that that kind of overwhelms the problem. And I think this is how a lot of people in the fire community get around the middle class trap. In practice, those who are building after tax positions while still following a pretty advanced order of operations.

[A]

Yep, absolutely agree.

[B]

Let's kind of sum this up. Right? Escaping the trap here has to do with this concept of getting comfortable with enough. Right. And when I suggest that Sam is over saving for retirement, I think that's going to make a lot of people very uncomfortable because there's a risk there. What if projections don't go very well? What if AI both takes everyone's jobs and does not deliver corporate profits and I have to assume I can't get another job and there's no growth in the economy for the next 27 years? Right. Like, when do I stop top? At some point There's a trade off here or an assumption you have to make about whether you're on track or way above track to build more wealth, as much wealth as you need in retirement. And if you're in the personal finance community, there is a reasonable case to be made for many that you're already coast fire, you already have fully funded whatever your future retirement self would really reasonably need. If anything close to historical returns carry forward to traditional retirement on there. And so you can either slow or stop those and that's a comfort with enough that only you can make a determination for yourself on. But you also have to contrast that with it's being a disservice to your present self if you amass so much more wealth for your 65, 75 or 85 year old self than you will ever want, need to be able to spend or be able to enjoy at the expense of not being there with your kids, not not doing that business idea, not doing that trip that you always wanted to do that's available now when you're, you're young, healthy and energetic. And I think that's the trade off that you have to get comfortable with. And I think you have to weight both of those risks, you know, evenly if you're going to make the right choice for you about how to escape this middle class trap. Middle class trap is a prison that is self imposed on Sam because he's building with at least have used historical projections so much more wealth than future Sam will ever need and foregoing the ability to live the life he wants right now.

[A]

Scott, I said it before and I will say it again. If you are trying to do something different, you're going to have to take a different road to get to that different destination. So that includes looking at where your money is going now and where you want to your money to go and how you want to spend your life. It isn't just I'm going to throw a bunch of money at my 401k. I mean if that includes a sabbatical, that includes a sabbatical. And understanding that the sabbatical trade offs are down the road trade offs. I can take time off now so that I can, you know, work a little bit later. But I'm taking time off when my kids are little and still love me, not when they're teenagers and they're like oh, I'm so embarrassed that you're around.

[B]

That's something that the financial independence community grapples with and you know, to put to bring this home, you know, you and I both have done things to get around this problem and not have to withdraw from our 401ks or Roth IRAs early on there. And for me what that meant is in my first few years I did not follow that classic order of operations where I went down the retirement account stack. I instead amassed cash after tax and I used that cash to buy rental properties that I lived in, which by the way, you can't do even with a self directed ira. That made a huge difference. Those roommates paying my mortgage set me up to save a lot more and accumulate a lot more wealth in a general sense than I ever would have been able to do if I'd invested in a retirement account. And then I also, because I built a large cash position, felt very comfortable taking a chance on the start of startup that ended up being very successful and allowing me to scale my income pretty dramatically and have opportunities I might not have otherwise had access to. Now that said, after those first few years, I was able to then build my income and build up an after tax portfolio and I felt comfortable maxing out my retirement accounts, my traditional retirement accounts. And so just for a period of years I deprioritized that and then I went back to using these tax advantaged accounts and I probably will use these tax advantages accounts for the rest of my career career for the most part, you know, with maybe a few years exceptions here or there, depending on the ups and ebbs and flows. But that was my plan and that that's made all the difference for me in totally avoiding this problem and having most of my wealth built outside of these retirement accounts and outside of my primary home equity.

[A]

Scott, what I'm hearing you say is you did it on purpose. You didn't just not contribute to your retirement accounts, you chose not to contribute to your retirement accounts and instead save money to buy real estate. And I want to, I just want to make that point very clear. You had a plan and you followed your plan. For Carl and I, this plan included being extremely frugal for 10 to 15 years and prioritizing retirement accounts and maxing those out, intentionally investing in after tax brokerage accounts because we were so frugal and we had the, I don't want to say leftover income because there's no such thing as extra money. Every dollar should have a job job, but we had leftover money after we invested in our retirement accounts and after we spent on our lifestyle and we prioritized investing in individual stocks that were high risk, high reward in the tech sector. My husband worked A slightly risky job where he was a contractor instead of a W2 employee. And he started off as a W2 employee. And they said, hey, you're making X. We'll give you 2x if you go and be a contractor instead of a W2. And he. He's ran the numbers. It took like 12 seconds. And he's like, yes, please. They're going to give me so much more money for not that much more out of my own pocket. Like he. Then he had to pay his own taxes and his own health insurance, but it was still significantly less expensive than the 2x salary that he was going to get. So it was a great land for us. But again, we did it on purpose. We were purposely investing in after tax brokerage accounts because we wanted the flexibility. Because in our mind, we couldn't access that money until age 65. Even though it's really only 59 and a half, we couldn't access money, access that money till age 65. So we needed another plan.

[B]

Yeah. So, you know, I avoided this problem entirely by kind of going through a version of option one. It wasn't really coast fire, but just prioritizing other accounts for the first few years. Mindy avoided this problem by using option three that we discussed of being so hardcore, you know, that even with a single income and a good income in there, but a single income, you guys could just accumulate so much in maxing out all these accounts and after tax that you were able to build wealth in both categories.

[A]

Yeah. Scott, I think there are a couple of things to think to keep in mind. This isn't easy, but it's not impossible. You need to take a lot of factors into consideration based on your specific financial circumstances and your specific financial goals, your life goals. My husband and I wanted to get to financial independence tenants as fast as we could. So we cut out all the things that we didn't need or didn't want. Actually, that's not true. We cut out a lot of things we did want. We were bare bones. I'm gonna say. My husband was making $130,000. We were saving 40. So we were saving significantly more than we were spending. And what that got us was early financial freedom. However, what that didn't get us was a smooth ride. We had a lot of. Of late nights. We had a lot of work behind us. And it was, you know, looking back, I wish we would have done things differently. So not only are you looking at your specific situations, but look at what you really want to get out of life. And I wish that there had been somebody giving me this advice back then. So listen to me, do what I say, not as I do. And the middle class trap is really only an issue for people who want to retire early. If traditional retirement or, you know, not having alternative investments is not part of your, your journey, then this is probably not going to be a big issue for you.

[B]

And I think we also recognize that the, the middle class trap is. I get that it's controversial. I get that a millionaire or someone with a larger retirement account vehicle, you know, some people have an issue with calling that middle class. Some people have an issue calling a household with two middle class income earners that boil up to an upper middle class income middle class. But this is how people feel.

[A]

Deal.

[B]

Right. And this problem afflicts people who have done really good job with their finances for a very long period of time following a pretty sophisticated tax advantaged investment playbook. And the issue is that the risk of doing that is over saving for retirement at the expense of perhaps the next few years or the best few years, the best potential few years of your life.

[A]

Life.

[B]

And that's a hard trade off. There's no right answer. There's only long term assumptions. These are just the options if you feel stuck, if this resonates with you. These are three ways to potentially go about solving to feel differently and feel more flexible and feel good about the decision to maybe do some of the things that you've been wanting to do for years in your life Today.

[A]

Scott, you made a call for more options for Sam, our fictitious guy in this scenario. We would love to hear from you if you have different ideas for how Sam can handle his particular situation. So email [e-mail] or [e-mail] or if you're watching on YouTube, leave a comment below. All right, Scott, should we get out of here?

[B]

Let's do it.

[A]

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

[B]

Saying lights out like Mindy has had for the entire episode. She just recorded the entire thing in a dark closet.

[A]

It I never have my lights on in the back today.

[B]

It looks extra dark.

[A]

Oh.