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- [00:00]
A
Before we get into the show, we wanted to remind you, dear listeners, that this is a promotion for Domain Money, a registered investment Advisor with the SEC. BiggerPockets money may receive compensation if you choose to work with Domain Money as a client. Scott Trench is a current client of Domain Money and received non cash compensation related to his promotional activity. This is not personalized investment advice. For the full disclosures, visit biggerpocketsmoney.com CFP now let's get into the show. We all make mistakes, but we want to help you avoid them. In today's episode. Episode, we're breaking down some of the biggest mistakes you should avoid on your fire journey. Hello, hello, hello, and welcome to the Bigger Pockets Money podcast. My name is Mindy Jensen and with me, as always, is my Has Never made a Mistake co host, Scott Trench.
- [00:50]
B
Mindy, that framing is just perfect. I couldn't be more excited to be joined today by Adriana Adams, a CFP from Domain Money, which is a partner of Bigger Pockets Money here. Adriana, welcome to the Bigger Pockets Money podcast.
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C
Scott and Mindy, thank you so much for having me. I'm so excited to chat today.
- [01:05]
B
Adriana, I'm sure you've seen all different types of mistakes. What do you think are the biggest mistakes or the biggest mistake that people are making in the financial independence world right now?
- [01:14]
D
As a professionally trained financial planner, I love this question.
- [01:18]
C
I see a lot of mistakes, but mistakes is how we learn from what we've done in the past and how to get better. So a lot of these mistakes are not irreversible, so to speak. The first one I would say that really resonates the most with me is when clients are not optimizing for their life, they're just optimizing for a number, which I feel like makes a ton of sense and is huge in the fire community because it's all about the math and this number that you're targeting. But I've sat across from clients who hit their fire number and felt literally nothing because they didn't ask what the number was actually for after that. Does that make sense?
- [01:54]
A
Makes a lot of sense. I've seen people hit their number, they're like, okay, now what?
- [01:58]
C
Exactly. And the fire community is historically very good at math and maybe not as savvy at the design part of it. Right. That's what I tend to see, at least in a lot of our clients that are on their fire journey. So a lot of energy goes into accumulation and what it looks like while you're building up and then Once you get there, all of a sudden it's like, oh, now what? And the clients that struggle the most in early retirement, in my experience, are the ones who retired from something rather than retiring.
- [02:28]
B
Man, where have we heard that before? Mindy, is that something that you've. You've come across?
- [02:31]
A
It kind of sounds like something that has come out of my mouth at least once on this show, Scott. Yeah, and this is what I am seeing in. I go to a lot of FI events. I live in Longmont, which is like the center of fi, and I see a lot of people who haven't optimized for the life that they want to live. They're just like, every dollar, every dollar. And I see this also when I look in the mirror too. So I'm not throwing everybody else under the bus. I'll throw myself and my husband under the bus too. We hit our. My husband retired and he's like, oh, now I have to fill every minute of every day and like, frantically trying to figure it out. He's been retired for 10 years. I want to say in the last two or three years, he started getting into a real groove with what he wanted his retirement to be.
- [03:14]
C
Can I please play therapist for a second? Because this is what I do all day, every day. One of the most valuable things that a CFP can add to a client's life is being a neutral third party for clients. Because if you think about it, in most households, you guys are going to have two different goals. And ideally they're somewhat the same path, right? Or you have the same values, things like that. But in the end of the day, there's always going to be some differences. And figuring out how to map out a plan that works for both of you can be very tricky to do alone.
- [03:45]
B
So let me ask you this as like a practical financial planning question. If someone comes to you and it's like, very clear they have no idea what they want to do with their life from a fiduciary standpoint, do you have to then maximize net worth as the approach if that goal is not plainly stated?
- [04:00]
C
That's a really great question. I would argue that as a fiduciary, giving the client the best outcome is helping them figure out what they want to do. So I'll give you an example. I was literally on a client. I can't make this up. I was on a client call today at 11am and he retired in November of 2025. So he's about six, seven months into it. He has way more money than he Needs. He reached his fire goal. He's not spending any of it. And he originally was like, yeah, I want to do some travel, I want to do a couple of things right. And he could not figure out how to actually get himself to spend the. Which is what brought him to our door. Right? One, he wanted to know what blind spots he had. And two, he was like, what am I doing with all of this money? And as we were going through it in like subtle ways, you have to get it out of them of like what he really likes. So he started talking about this trip to Switzerland where he spent, I think it was six months before he ever went to college. And he's like, it would be so nostalgic to go back. Well, he has $30,000 extra in cash right now. He's sitting on 200k. We bucketed some of it for normal spending over the next, you know, 12 to 24 months. We bucketed some for emergencies and then there was a very clear bucket of $30,000. And by the end of the call, he was ready to start planning this trip with his friends because he needed like that. The psychology really helped give him the permission and the confidence to spend the money. But when you're just sitting there staring at the cash in your bank account, it's like analysis paralysis. I don't know what to do with it.
- [05:25]
A
Save it for a rainy day.
- [05:26]
C
No, go spend it and have fun.
- [05:28]
B
I think in Switzerland there's plenty of rainy days, right? We don't have those here in Colorado. We had David from from Domain on a while back. Talk about the duly employed with kids situation. And I think at bigger pockets of money, like we have some of these approaches and it's like, well, if you follow this approach, you're going to have less money. Like that's the point kind of. Right? Fire or any type of version of financial independence that you express, probably at least in some short term capacity, will
- [05:51]
D
make you less wealthy.
- [05:52]
B
That's the point, right? Is to begin drawing down the wealth and begin enjoying it instead of having to earn active income, which is a massive opportunity cost. And in that situation, the diagnosis was, hey, we've got a millionaire household or very close and it's all in the 401k and home equity. So you're going to be really rich because you're 35 right now. When you hit 65, if you just keep investing in your 401k, so wealthy, you probably will never be able to spend it. Based on your current spending and stated lifestyle goals, maybe you should Stop contributing to the 401k for a few years and build up some flexibility. And this was very controversial, right? People don't. People get very uncomfortable with those dynamics here. And then again, that makes it very hard to articulate the value of like, financial planning to somebody. Like, what is it going to do? Well, we're going to help you have less money, but maybe more of what you want in some capacities, to a certain degree. That's the fun part about money and why it's endlessly entertaining for me to study this and probably that that work is how you probably feel with a lot, a lot of these items as
- [06:45]
C
well when you're dealing with clients 100%. And I feel like you just perfectly teed me up for mistake number two. I don't know if you guys are ready for me to move on, but getting locked out of your own retirement. So a lot of times people will max out their 401k, like, that's the best savings vehicle, you know, tax deferral today. And then all of a sudden you're completely illiquid at 45. But on paper, it looks like you have enough money. And I will say you can take money out of the 401k, you're going to pay extra taxes and extra penalties, but, like, you can tap into it. Right? But there's ways, if we're thinking far enough ahead, to plan for that and then still avoid those penalties and not get to your fire number and be like handcuffed to the 401k world, if you will.
- [07:28]
A
Scott, we have a phrase for this.
- [07:30]
B
Yeah. What do you call it, Mindy?
- [07:31]
A
I call it my life. What do you call it?
- [07:35]
B
The middle class liquidity first optionality framework. I love to call it the middle class trap anymore.
- [07:39]
A
Yeah, we call it the middle class trap because like you said, you've done everything right. You were maxing out your 401k and contributing and doing such great things, and you're FI on paper, but once you get there, you're like, oh, I can't actually access that. I mean, you have seen far more people than I have in this particular situation. But in the FI community, nobody wants to pay a 1% penalty. They super don't want to pay a 10% penalty to access their, their money and then paying taxes on top of that. No, I want my money. It's my money and I want it now. Does anybody know the JG Wentworth ad?
- [08:13]
C
I actually do.
- [08:13]
A
I'm like, oh, I'm dating myself. But like, it is my money. I put it in there, I want to take it out. But that's money for when you're age 65 or 59 and a half or what. That' not money for when you're 45. So you have to make other plans. And this is something that my husband and I did not do. We're like, oh, we're going to prioritize current year tax deductions and max out our 401k. I want to reduce my taxable income. I can't tell you how many times I said that. And now I have a rather large amount of my net worth in my 401k. How do I get at it? I can do a 72T, which is great. If you're my. I'm 53. So the 72T you can you have to take for at least five years or until you turn 59 and a half. If you're 40, a 72T doesn't look like such a great idea.
- [09:02]
C
That is so true. And there's really two things that I see aside from the 401k just want to touch on too. So many people build up so much equity in their home that they never tap into either. And there is a psychological aspect of being like, I know I don't have a mortgage payment. I never have to worry about a roof over my head. But there's also real liquidity in a home or like the equity in your home that can help this lifestyle as well. So that's another one that I love to help people think through, is tapping into that. And this might not be quite the case as much anymore because I find people are moving around a little bit more. They're maybe not staying in the same home for 30 years, but when you have a house that you've basically paid off, you can't eat a shingle, right? And so it's like, well, maybe it wasn't the greatest idea to aggressively pay that down before we retired because now we have less capital to tap into. But I want to circle back to the 401k that you were saying many, because, Scott, you also mentioned this. There's ways to save money and plan for that early retirement. And sometimes you need somebody to basically give you the permission to not max out one of these accounts or something so that you can have a better plan that fits you. I always say, and I'm sure I feel like you guys have probably said this before too, like personal finance is like 80% personal, 20% finance, right? So there is so much that goes into it that is about you and what you're trying to achieve rather than just maxing out every single tax deduction and like riding that wave your whole life.
- [10:25]
D
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- [11:41]
B
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D
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- [12:21]
B
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- [12:23]
D
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- [13:31]
B
You said something interesting. You know, turning your home into a source of liquidity. I have a paid off home and realizing any liquidity from that is very unattractive to me from what I can see right now. I have literally got, the other day, got a quote for a HELOC because I want that option to exist. I've looked at cash out refinances but like that's pretty expensive. And one thing that bugs me about tapping into the home in my particular situation instead of a rental property is that I will almost certainly claim the standard deduction unless I go pretty big on one of these. And so my interest on my, on borrowing against my home for example, is effectively like a, like a post tax rate, right? Like, like I'd have to, I'm not able to deduct that, that interest because I'm taking the standard deduction whereas I am able to do it on a rental. So how do you overcome that problem for people when they're thinking about using their home when it's paid off or close to it as a liquidity source.
- [14:21]
C
So there's a few, few things that I want to touch on there. One, you compared it to tapping into a rental, which is like apples to oranges, right? Like that is an investment for you. You're not viewing your home as an investment. It is your place to live in. The roof over your head right now, right? And you've Got the rental property. So I first look at rental properties and like your primary residence very differently when we talk about finances. But again, it totally depends on the situation. So one example where we were working with a client and they were getting close to retirement and their house was basically paid off, but they were going to be moving and they were downsizing, not less expensive, but to a smaller house that was a ranch that they could grow old and. Right. And that was going to be their forever home. Instead of turning around and putting all of the $700,000 they were cashing out of their first property to basically buy the next one in cash with a very small mortgage for them where the interest rates were at the time, it actually did make sense to invest a lot of that cash that they cashed out from the sale of that home and get the mortgage. But. But to your point, it totally depends on the math and what your tax situation looks like and if you're going to benefit from the mortgage interest deduction and the SALT deductions or not. And also what else you have liquid and what other income sources do you have. So it's definitely not like a one size fits all, but it's just something I want people to think about that you could, especially if you're getting close to retirement and you're not quite to your goal yet, but you're planning to move like that could be a way. Whereas if the interest rate is low enough that you're actually going to end up with more money in the end of the day, if you get a mortgage and take those tax deductions. But the math does not always work out that way. I'll be the first to admit, Scott.
- [15:55]
A
I remember the first time that we did a finance Friday and said if we were in your situation, we might stop contributing to the 401k. They were looking to do an adoption. They were still really young. And we're like, we might consider, you know, pausing the 401k contributions and funneling the money into something else house temporarily and then come back to it. And I remember feeling like, wow, I can't believe I've ever said to anybody, don't contribute to your 401k. That is, it has always been the opposite. Like, yeah, put every dollar you can in there. I think having somebody give you permission or give you other options because it's not like, oh, I'm either going to contribute to my 401k or I'm going to go blow the money. It's, you know, you're just putting it Someplace else. And having these other someplace else's can be really, really powerful for your long term.
- [16:43]
B
Adrian, One problem I think that comes up frequently that Mindy's example highlights is I think that a lot of like the core fire strategy in math has this concept of max out the retirement accounts. Build, build, build, build, build, stop, go to zero. And I think in practice I find that, that to be very rare, relatively rare, like not. There's certainly people who do it. It's not, it's not, it's not like you can't find them, but it's not the norm. The norm is one spouse continues to work or a business is started, or a side hustle exists of some sort, or I've got a pension or I've got a rental and it's none of those are the majority. But together as a group, they're more common. They are the majority relative to just stop and income goes to zero. And when that happens now my 401k and home equity are a real problem, relatively speaking, as an inaccessible liquidity source, because I'm not going to roth convert my 401k or start a 72t or pay the penalty and a high marginal tax rate to tap into that when one spouse stops working. And that puts me in a fairly high income tax bracket. So do you see that problem with your clients in some form or other emerging in their 30s and 40s, for example?
- [17:57]
C
Yeah, all the time. So I think that's why it's so important to have both clients on the initial goal setting call too, to really understand like what this looks like. I'm sure you guys have seen this like a lot of times in the fire community. Like one person's all in and the other person might just kind of be along for the ride. And if you just build the plan around, I could have two people in this, two couples, let's say, in the same exact situation. One that they're both on board for the fire movement, right. And one where there's a little hesitation from one of the spouses and I'm going to build two completely different plans for them because we're building it around what's going to work for them. So it's really important to understand, like is your goal to literally stop working and move to, you know, Switzerland and do whatever you want, or is your goal to be financially independent so you can start the business you've always dreamed of? And then once I understand the types of options we're working with, that can help me determine the best course of action for you. Because almost every single, actually I would venture to say every single plan needs some sort of flexibility or I don't know if we're allowed to. Are we allowed to swear on here?
- [19:05]
B
We bleep it out. It's a, it's family friendly. Mindy has said oh shucks a billion times.
- [19:10]
C
I usually call it the oh plan, but the oh shucks plan, right. Like you need. There's always going to be some other things that we're planning for or thinking about. And so I think that's what's most important and can help guide us on our decision. Almost always the math will say one specific thing, but I would say a lot of the time you're not actually doing what the math says is the best situation. It's about what's actually going to make your life what you want it to be and provide you the most happiness. Right. So it's the same thing as like the 401k situation. If you need to build up a taxable brokerage account or save some money to do your entrepreneur idea or your startup, whatever it might be, it might be well worth the extra tax dollars you're giving up. Right? Like if you think about it as like a trade off, I think that's what really can help people get over the line of like what decision is going to make the most sense for them.
- [19:58]
B
I'm a big fan of this, this liquidity component and building that after tax position that you can harvest again, excluding the Roth and excluding the HSA and the 401k at some point. And if you accept that premise, then the next I think chain from that line of reasoning is do that early. Because if you're going to pay tax, pay tax when you pay less tax. Right. I think that's Cody Garrett and I'm butchering a Cody Garrett and Sean Mulaney quote there. But pay tax when you pay less tax, right? And that's going to be early in your journey, I think, for most people. So the earlier you can do that, the lower your relative income is going to be and the better that advantage is going to compound. And I think that's really important because I think that there's a huge probability that all but the most passionate followers of the FI pure script are going to want some flexibility at some point along the journey rather than a crash and an end of that journey at the very end where they begin a very complicated five year Roth conversion ladder, for example. So I think that's where I stand. Do you think that's Right, Adriana, as a bias or would you push back?
- [20:57]
C
No, I agree with it, but I'm gonna. I guess where I would push back is, again, I feel like I'm sounding like a broken record now, so please stop me. But I'm like, it totally depends on the person and the state you're in. All of these different things. Right. Because there are some examples where it might make sense to really max out every pre tax dollar and then do more of those Roth conversions later. And there might be some clients that that does not make sense for. So it really depends on what you have going. What rental income do you have? Is one spouse going to work for a while, like, and then we can really figure it out from there. And also, how far are you? Right. Like, how young are you? I think the younger you are, the more options you have. So a lot of times we'll want to build in additional flexibility to keep your options open. Whereas if you're like close to five years away, we're working with a much shorter time frame, so we may actually have less options as well. Right. So I do generally align with you, Scott, on that, but I've seen it both ways.
- [21:55]
B
All right, so, Adriana, tell us about the next mistake folks make in the financial independence world, in your view.
- [21:59]
C
Another big one is that the market doesn't care about when you're going to retire. There's like a lot of these, like, back of the napkin math numbers that people will look at sometimes, and you have to have a solid plan for how you're going to actually fund your income needs. It can't just be that you're going to ride it out in equities for forever. And the 4% rule might not work for everybody. You know, when you're modeling out retirement for 55 years, it looks a little different for someone that was modeling it out for 25 or 30 years, if that makes sense.
- [22:31]
B
Yeah, it does make a lot of sense. And you know, I think that the people who grasp all this stuff, they would love to retire after a large market crash. And that opportunity has not come yet from the markets. Right now. What you don't want to do is retire right before a big market crash. And that's a fear people continue to have at all times when their things are near peak. So how do you reconcile that and what's the solution to this problem?
- [22:56]
C
So there's a few different mitigation strategies, if you will. One of them is like a cash or bond buffer. Right. Something that is a little bit more liquid and might not be moving as directly with the equity market. So if there is a big crash, you have time for the rest of your money to recover. Right. So a lot of times it makes sense to have two to three years of liquid assets at any given time, which to a lot of people also sounds like way too much.
- [23:22]
B
Two to three years of liquid assets being including your bond position. You think about your bond position as part of that liquidity.
- [23:28]
C
It depends on the client. It can, I would say it depends on your risk tolerance and how aggressive you are with the rest of your portfolio. So I have some clients who are in, have a much lower risk tolerance and are, let's say 60% equities and 40% bonds. And between the dividend income and their bond interest and the bond stability, they don't need as much cash on hand because they've got more stability in the bond portfolio and they've got income coming in that's replenishing the cash they're spending. And then I've got some clients who are like, I want to stay invested in a more growth oriented portfolio and the bulk of their money is still in growth oriented or just generally in stocks. And in that situation we might want to have a little bit more in cash so that you can ride out those waves, if that makes sense. So kind of depends. There is no like hard invest, like everyone just keeps three years of cash on hand rule. But we need to determine how much your other income sources are able to fund your lifestyle. And how much do we need to fund from your portfolio? Right, so if you've got $50,000 coming in from your rental income and you only spend 100,000, well, we don't need to have three years of $100,000 in cash because you've got something else in another diversified part of the market, if you will, or another type of investment that is also providing some stability there.
- [24:44]
B
We've had very smart people who have done original research or spent thousands of hours researching portfolio construction that disagree on the right approach for early retirees. And so this is confusing to me, I'm sure confusing to everyone else. But we've got on the one hand folks like Ben Felix and Paul Merriman who have offered up all equity portfolios with factor tilts as a potential solution to a portfolio problem in early retirement. And then we've got guests we've had like Frank Vasquez who have recommended a golden ratio portfolio with stocks, bonds, gold, managed futures and international exposure in descending weighting to allow for higher withdrawal rates. And he withdrawals at 5%. So how do you think about that for somebody with an early retirement goal is beginning to withdraw? Do you think there's a portfolio that supports 5% in your view, for example?
- [25:41]
C
I do. I think that there are a lot of ways to do this and I have my own kind of biasness towards certain ways of investing as well. Right.
- [25:51]
D
What are your biases?
- [25:52]
C
So I am very much like a passive track the index investor. So there's a lot of research out there too that shows, you know, like having a mutual fund or a professional money manager that's trying to beat the market over very long periods of time, they're not as successful or it's very hard to find someone who consistently can outperform. Right. So I'm much more in the camp of building a diversified portfolio that is allocated to a bunch of areas. And the other piece I also quick plug for direct indexing because I'm a huge direct indexing fan rather than just like an ETF so that you can get additional tax loss harvesting. I feel like we could talk for another hour on that.
- [26:31]
B
Yes, I do want to talk about that. I want to go on a nice tangent there after you do. Yeah.
- [26:34]
C
What I would actually say here matters the most in my experience and opinion is the emotional side of the investor. So there are certain portfolios that might be guaranteed or guaranteed is a very risky word to say in investing, but there are going to be certain portfolios that maybe have a better track record of producing better returns. But keeping clients invested and in their portfolio and their allocation is one of the most important things we do. So when the markets get chopped because if the markets get choppy and you get scared, you miss there's the stat like if you miss the ten best days, your rate of return is like cut in half over a ten year time period. Right. So you can build the best portfolio ever. But if you don't actually stick with the long term plan, you could be in a really, really poor position from a rate of return perspective. So kind of goes back to what I was saying about like I'm just a big believer in like buying the index and like let me help you manage the emotional side of it. Right. And make sure that you stay invested. We do have CL that have other portfolio philosophies. One of the cool things about Domain is that we can help you with your assets whether they're under our management or not. So we can give you guidance on your allocation and thoughts and then you can take them and implement them yourself or we even have some clients who have a portfolio manager but come to us for the planning help. So there's a lot of different ways to do this and we just try to keep a really open mind and make sure that what we're recommending in the final plan we put together really takes into consideration the person and what they believe in and what's going to work for them.
- [28:04]
B
I have a question about direct indexing. As I've obsessed about tax for the last year, I've just spent so much time because I was weak on it a year or two ago. And so I built this like crazy tax engine that stacks, you know, all these different things, moves through every state and, and federal, all that kind of stuff. I've thought about real estate tax and the challenges there with depreciation recapture and long term capital gains on sales trans, you know, how to get that equity out. I thought about Roth conversions and my conclusion with tax and this was direct indexing. My conclusion is direct indexing is great. There's actually, there's real advantages for it. But like a cost segregation or like a Roth conversion, there's opportune moments to do it, right? So like when I sell my property, like let's say I have five parentals, when I sell my loser, the one that's annoying and the real pain in the rear, and I have my gain on it, it that's when I want to do my cost tags in the other two properties, right, to offset that bill or I want to save those shots in the chamber for that year, you know, for the year where it's going to matter. That's how I feel about direct indexing. It's a great thing, but it's going to probably result in losses in that first year. That's the point. And so you want to do that in years when you're going to have some other kind of gain to offset or your income is going to be otherwise high to maximize it. What's your thought process reaction to that? That bias I've constructed over the last year.
- [29:23]
C
I love that you brought that up because there's, I feel like there are people in the camp of direct indexing is the greatest thing ever and it works every time and everyone should be doing it. But then in reality when you're working with clients, right, like if you have a client who has a $500,000 mature portfolio with $250,000 of gains and they're now in spend down phase, how do you transition that ETF portfolio into direct indexing and have it be worthwhile like you might not be able to. So it does really depend and I really, really love it. I think it's almost a no brainer if you are younger and you're starting to save your taxable money. Because over time this engine will work for you. Because if there's one thing that is certain in investing, it's there's going to be volatility. Right. So there's going to be stocks that are down. And if you own the etf, right, you can't sell it unless the entire s and P500 is down. Where when I was looking the other day, like 200 of the 500 stocks in the S&P 500 are negative this year. So there's opportunity there. Right. So that's where we need to take a look at that. But back to your original question, Scott. It really does depend on where you're at in your journey, what your portfolio looks like today. I would say if you're just starting out or you have a good chunk of cash to invest, it can be a great time to put it to work in something like that. But it's not always the best. If you're closer to the end of the journey and you've already got a lot of your portfolio mature and built up, does that make sense?
- [30:43]
B
Yeah. So just for those who need a refresher on direct indexing, a very popular strategy in the financial independence community and broader personal finance is buying index index funds, right? So this is a fund that contains a usually a market cap weighted allocation to every company that is publicly traded in the United States or in the S&P 500 or another index. And what a direct indexing portfolio does is it instead of buying a fund that owns all those stocks, it actually buys every one of those stocks on your behalf. And the advantage of that is that when some go down or lose money, that's when you can sell those and that results in a realized loss which produces a real tax benefit. And I believe that the research shows that that advantage kind of reverts to not being very meaningful after a period of years. But it is meaningful for the first few years of the time when you're holding those direct indexing because over time the gains begin to overwhelm it and go over there and it reverts to a normal index. So there's a real use case for doing that. And so my bias then with direct indexing is if you know that the next few years are going to be years where you're going to have high capital Gains or qualified dividends or other things, things that can be offset with those losses. That's the time to take basis and move it, you know, not make a big tax event or maybe make some sort of tax event because there will be some offset presumably in that year to move it into direction indexing, but use it as a bullet in the chamber. Don't just immediately move to direct indexing. It would be a shame to get those advantages when you're in the 0% long term capital gains tax bracket, for example. So complicated tax stuff. But that's my bias on the direct indexing component for it.
- [32:16]
C
I have a couple of things I want to add there. One, I definitely have examples where it doesn't make sense. I have a client who did direct indexing for a long time before we ever started working together. He had accumulated about $5 million in his direct indexing portfolio and about $250,000 of losses that were locked in. So he was harvesting them along the way and he didn't have gains to offset them. So he just built up this really large bucket of money. And now when his portfolio is out of whack and he was really a little bit too heavily tilted towards emerging markets and we wanted to rebalance things a little bit so that he had a better allocation overall, we were able to sell a lot of funds in his portfolio and he didn't have to pay much tax at all because those losses rolled forward with him. So it is one of those things too that's kind of hard to turn on or off year over year for this client in particular, like he does not do direct indexing anymore because he's not adding to it, he's spending it down. There's really not much because of the gains, like you were saying, Scott, but him doing it, you know, 10 years ago when he wasn't even sure he needed the losses really paid off for him long term. Like there's so many ways to think about it if that makes sense and like when it's going to work. Because sometimes these things do need to be a little bit more seasoned to start accumulating some of the losses too.
- [33:36]
B
Adriana, if I have a large position I've masked over 15 years investing in, you know, Voo, like a standard index fund, do I have a taxable event when I attempt to move that into the direct indexing?
- [33:51]
C
You do. So that's where it's often not as impactful because you in theory could move that position in and try to get it transitioned over. So like one example is you can set like a capital gains budget in your account, right? So you can say I want this direct indexing portfolio as my overlay, but I'm moving in this position and I only want to realize $3,000 worth of gains a year. It's going to take decades for that portfolio to automatically transition because it can only realize so many gains per year. Now it still might make sense, especially if you're young enough and you do want to transition it. The other thing that I don't think we've touched on yet today too though is especially, and this actually is a whole nother mistake that we'll get into I guess in a moment. But there are going to be certain windows where you might be able to realize capital gains at that 0% tax bracket. Scott, I think you may have started to hint at that earlier today too. So you really have to think of all of these things together and how they're going to work and then how they all like co mingle, right? Like Roth conversions worth realizing capital gains and not paying any tax on them. And like what's the trade off? Which one are we going to do? So I think we could spend another three hours on just this one.
- [34:58]
B
So. Well, major, let's leave that discussion for another time. Tell us about the last mistake that you've highlighted here. For folks in the financial independence community,
- [35:06]
C
this is one of the most fun for me because there is a lot of planning and like architecture that kind of goes into this one. But it's how valuable of a window you have when you retire early and you haven't started RMDs or Social Security yet. And Scott, to your point earlier, you might not have no income, but you might have some rental income or some other tax advantage income or some dividends. But if you're no longer earning that W2 salary, there's a lot that we can do. And this is something I see clients miss so often is maxing out every tax advantage and tax window you can in that early retirement phase. So most often this is right when you retire all the way up until either 67 or 70 or 73 whenever you start collecting Social Security and have to start taking those RMDs. So it's leveraging a couple of different things together. Roth conversions, right? So we were talking very early on today about how a lot of people build up their 401k and all of a sudden they have this massive pre tax account. Well if you keep letting that grow and you're just living on your brokerage account until 59 and a half, 60 or maybe you don't even want to touch it until you're 73 or 75 when you have to start taking RMDs. You could be bumped up into the 37 tax bracket based on what the government is going to force you to take out. So Roth conversion strategies, in that phase, we look at what income you already have, have, what are your capital gains or what are your dividends, what is your rental income and how much more room do we have in the 12% bracket or the 22% bracket to convert some of that pre tax money into Roth today so that you never have to pay tax on it again? And keeping you like in that example, I was just saying we could max out the 22% tax bracket and your effective rate could still be about 15% depending on your state and whatnot. Right. So it's about getting really savvy with, with those different thresholds and levers. And one thing I will say that I think gets missed here too is this has to be an annual calculation because the amount you might want to convert this year might be very different from what you want to convert next year if you have a liquidity event or you sell one of your properties or something. So it can't just be, okay, the next 20 years we're going to convert a hundred thousand dollars every year. Another thing, the tax codes change all the time. I could also talk about this one for hours, like such a conspiracy on, like they just make it so complicated. So for, for what reason? Right. But like they change them all the time and you have to keep up with that. And know if I convert this much, it actually might trigger something else that I wasn't expecting, like IRMAA taxes and things like that. So you do have to be careful. But there is a lot you can do in that like golden window where your income is tapering off.
- [37:44]
B
Adriana, do you suppose that if you're, let's say, let's take a hypothetical here, you're 50 and you have four and a half million dollars in your four and you know you have plenty of additional assets on top of that because you've, you know, listened to fire podcasts for a very long period of time, built a huge net worth and then blew past your number by just staying invested. Suppose you're in that situation. Do you think that the tax code will treat that person more or less favorably in future administrations than the current administration?
- [38:12]
C
My blanket answer is less favorably because I don't see tax rates coming down significantly they might tweak them, and they might make it look like it's coming down over here, but then they add something back in over here. So I am kind of in the belief that if we have, like, a relatively lower tax rate today or we know what we're getting into, I like to bet on what we know is real today, knowing that it may be much higher later. I feel like this could be very debatable, though. I'm curious what you think, Scott.
- [38:40]
B
I think the answer is yes. Like. Like the plan has to be that the next administration is going. Like future administrations are going to. To who are they going to go after? They're going to go after that person, right. From a tax perspective, in my view. Now, here's my solution to this that I want to hear. It's kind of wacky, but I love your opinion here. Suppose this person was an active real estate agent that was actively helping people buy and sell houses and made significant income at this activity set on an annual basis. And it's a fairly deep buyer's market in this person's specialized area that they spend all this time helping other people buy and sell properties with. My hypothesis for this person might be to buy a rental property and aggressively depreciate that property and then use that opportunity to roll over a significant portion of that 401k into the Roth in a given year, maybe do that one, two or three times. And now we've moved, you know, half of that thing out in a year or two, all in one big lump up to maybe the 22 or 24% tax bracket in order to move that over. What do you think of this plan, Adriana?
- [39:43]
C
I generally really love the idea, and I feel like you've gotten really savvy with it and creative. I will say depreciation can be a whole nother beast. And so typically, when we start talking about depreciation and bonus depreciation, I love to bring in a classic tax advisor or a CPA who can really help us button those two things up together. But I have seen this work with clients that have businesses or real estate that we can leverage to use other tax moves. So, generally speaking, I love it. But I think we would need a CPA to sign off to make sure that our bonus depreciation and everything is all nice and clean and we're not going to run into any issues with that.
- [40:23]
B
Mindy, what do you think of this concept?
- [40:25]
A
Well, hey, Scott, in this completely hypothetical situation that you're talking about, would you be able to take enough Depreciation on a single family home to make this work or would you need a larger property in order to get enough depreciation?
- [40:44]
B
Well, I think you could get one or several properties. So you can get a collection of single families or on a small apartment complex or duplex, quadplex, anything in between. Right.
- [40:53]
A
And it seems to me that when you massive depreciate this property then you, if you sell that property you would have to recapture some of that depreciation.
- [41:02]
B
You would, yes.
- [41:03]
C
So a great idea for that property then would maybe to be like the inheritance bucket. If you've got a family member that you want to leave some money to let that property step up in basis at your death and then they don't pay taxes on it. Again, all depends on your goals. But if you are planning to hold it for long term, like you could use that strategy and still not end up having to pay capital gains on the real estate or that depreciation.
- [41:27]
B
And here's the other thing though. Here's the other thing. So this position, let's, let's take our four and a half million hypothetical, right? We, it's going to double and at 57, it's going to double again at 65. So we're at 9. Then we're at 18, then it's going to double again at 74 and now we're at, you know, so the rule 72 right for all this. So you got 36 million. That's a big deal inside the pre tax that will compound reasonably, you know, depending on how much you lever up the rentals at a different rate post tax. So it's a very, very different estate situation I think in that, in this particular hypothetical example where you'd have that money out in there and in those situations as well because a rental sale could be in an environment, it could be controlled at your, at your discretion later in life. So you can sell it in a year where there's offsetting items there or that the tax bracket is different versus the RMDs will be required when they, when they're required.
- [42:18]
D
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B
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B
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- [45:21]
A
What if you weren't planning on holding this property long term? I mean, I guess you could get a property manager to make it far more passive. No, it needs to be active income for rep status, doesn't it?
- [45:31]
B
If your income's going to be super high in the highest bracket for life, then none of this matters, right? It's just like, okay, there you go, like you're going to pay them. But if you can, if the timing can change, change, then, then that's where the advantages come. And I think in this case there's plenty of years where the income might be in lower than max tax brackets before the RMD bill comes due.
- [45:49]
A
I would take this completely hypothetical situation and say if you're planning on Mr. 50 Year Old, if you're planning on leaving money to your children, a $36 million 401k is like, wow, what a horrible problem to have. But on the other hand, if you're leaving this to your child who might be be 19 right now when you're 50 and then in 20 years we'll be 39 and maybe in big earning years as well, and they have 10 years to take it out. So 39 to 49, they're now taking out this and it's got another 10 years to grow. So it's 36 million and now it's on comp. I mean this is just ridiculous numbers. Or you could mitigate some of that by having a rental property that you have a manager for and don't really have to deal with so much. What a great point, Scott. You should talk to both people in this hypothetical couple that you're discussing with this with Mindy.
- [46:44]
C
I love that you said that. That's exactly where my brain was going too, is like the inherited RMD on those accounts can be crushing as well. But I also am a huge fan of like let's optimize your life today. So first priority is what do you want to do and what do we want to do to maximize your life. But then there's this entire secondary layer that we haven't even really scratch the surface on today of okay, how do we get tax efficient for the next like 100 years, because a massive 401k when your child or the person who inherits this account is likely in their highest income earning years, you're just writing bigger and bigger checks to the government at that point. So there's a lot that we can do if we start thinking really long term.
- [47:23]
A
Yeah. And I think that having more of that in the Roth is a great plan because when they inherit the Roth, they still have 10 years to take it out, but they can leave it in there for the whole 10 years, but pull it out at the end and it's all tax free. If only that person would have contributed to a Roth 401k when they had the opportunity.
- [47:41]
B
I think one of the themes here is this most valuable tax window you'll ever have. I agree. I think that that's right right after you stop working, even, even if you decide to have a side hustle or a business, it's likely that you're going to have a year or three or five at some point where your income may drop relative to your peak earning years before you retire early or declare financial independence. And that's a valuable window. But I also think that to fully take advantage of that, a little bit of entrepreneurial spirit goes a huge way. Right. Like if that year for this hypothetical person, they finally do actually do the 750 hours of real estate hustle to get that rep status and then they save a million dollars on taxes via the depreciation from those purchases. That's a huge deal in that particular situation. That's worth three to five years of extra, maybe more of actually working at a full time job at peak earnings in some of these situations. So I think a lot of people are very averse to that little bit of entrepreneurial effort. But if, when you price it out like that, maybe it'll change people's perspective. Do you find that to be the case in a lot of these situations?
- [48:44]
C
Yeah, I 100% agree. And it's also really important to do tax planning all the time, but really at the end of the year because I want to see exactly what happens this year. Year. One important thing that I have seen people make mistakes on too is doing like Roth conversions or something too early in the year and then another liquidity event happens. You want, you really have to sell a house and you gotta get out of it. And now you've got this huge capital gain from the property. Right. And oh crap, we've already realized a bunch of Roth conversion income tax and now we have this capital gain. So this is a Huge thing to look at like November time frame and put all of your like year to date numbers in and figure out like what you can do for that year. Because also maybe that's the year where you're right, like you hit that 750 threshold and all of a sudden now you open up this window. Make sure you're checking everything before December 31, because once that time has come and gone, you can't do anything about it. January 5th. Right. Like you've got to get that done by the deadlines. So something to keep in mind for everyone, like put a little calendar reminder on now for like November, mid November, November 1 and make sure that you are looking at this, this at the end of the year before it's too late.
- [49:49]
B
I love that point. I think that that's so important is realize your income at the end of the year or if you have to realize it, realize, you know, very conservatively early in the year so you can true it up at the end of the year. Because especially like, like another thing, another point for this is healthcare. If you go, if you realize a dollar over the healthcare cliffs here, you don't get any premium tax credits. So if you're going to go over the cliff, cliff for Magi, for example, then you might as well go way over and use that year to convert all the Roth, you know, to do your Roth conversion, for example, up to like a higher tax bracket or whatever it is that you're going to be doing in that year. And if you're going to go under the cliff, you may want to like say, maybe I'll actually keep my income much lower so I can maximize my tax credit up to this point.
- [50:35]
C
Love that. Because I feel like so many times people are like, oh no, I went over the cliff. I have to pump the brakes on everything thing. That might be the best opportunity to do something else that you were planning to do. Because if not, if you do it next year, then your rates are also going to be higher than next year and things like that. So I think that is such a great call out. Scott, that is another, if we could add another mistake to the list is pumping the brakes right then and not realizing that that might be an opportunity to actually do some other things so that you don't have to double down and make the same mistake the next year or the next year. I love that.
- [51:03]
B
Well, cool. Well, Adriana, this has been awesome. There's been a lot of really good knowledge shared here and I think it's very hard for people to Find, find knowledgeable professionals that talk about this stuff. Can you tell us a little bit about how you got into the, this world of professional advice and specifically supporting people in the early retirement community?
- [51:21]
C
Yeah, absolutely. I don't know if we could call this a mistake, but it kind of ties into this. I ended up in this profession kind of by accident because I was studying corporate finance. I loved math and numbers and data and all of that. And I found myself in a room with people that were Talking about Roth IRAs, back to the whole Roth thing. So this is like a long time ago, right? And I'm like, what, what is a Roth ira? I've never heard of this before when I started talking to them and then I realized that there was this entire world of personal finance and tax planning and strategy. I switched my major and was like, I'm studying personal finance. I need to know every single thing about this. Not even necessarily just for myself, but because I was like, I need to tell all of my friends. Like nobody else I know knows this. No one's told me this. So I really got into it because I found it so fascinating and very underutilized. Just in like layman's terms. Like in most of the world, especially at a young age, I think once people start to accumulate money, all of a sudden they do more research and they figure this out. But if the more you know and the younger you start, the better you can set yourself up for long term success. So that was kind of the flip of the switch for me. I was like, I have to learn every single thing about this. I studied for my CFP back in college. I've worked at a couple of different firms, more traditional like the Morgan Stanley's of the world, right? Just in portfolio management and financial planning. And a lot of the world, which I think a lot of buyer people actually realize this, a lot of financial advisors are focused on portfolio construction and they can give you some tax strategy or they can, you know, comment on things here or there. But for me, I think the biggest impact that financial advisors can make is this planning piece of it and helping people think through this strategy. So that's what domain's all about. And that's why I've been here for I think three years now, since day one. But, but it's just been an awesome place because we can really help people make those everyday life decisions. And that's truly just what fuels me so much. Like giving people the confidence, the clarity to make these decisions and go live their life is just the most rewarding thing ever. So I'm really in it for, like, seeing what people are doing. People are texting me their photos from Ireland, things like that, you know, like, it's all about the people and what they do with their life. And so that's why I'm here.
- [53:29]
A
So the planning aspect is something that I wasn't aware cfps did. I mean, I know a certified financial planner, but I thought it was just about portfolio management. Here, put your money here. Put your money here. I don't need any help with that. I'm doing fine by myself. I do need help with the planning. I did need help with the planning. You're going through these mistakes. I'm like, yep, made it. Made it. Made it. Like, I host a money podcast for early retirees. I could write a book on all the mistakes that I have made in my journey. And I'm, you know. Scott, would you consider me successful? I would consider me successful on the fi journey, yeah.
- [54:04]
B
Wildly successful.
- [54:05]
C
I can't believe you're asking the question right now, Mindy.
- [54:08]
A
I'm terrible at the retirement part.
- [54:10]
B
You have great hypothetical problems, Mindy. You have very successful hypothetical problems.
- [54:14]
A
Hypothetical problems, yeah. If I would have made different choices, if I would have had somebody helping me, hey, don't do it like this. Do it like this. I mean, Scott even preached, I'm going to contribute to the Roth 401K. And I'm like, I am going to prioritize reducing my taxable income, so I'm not going to contribute to the Roth. I would have a very different scenario right now, and I wouldn't have potential issues to deal with if I would have listened to Scott. I guess the bottom line is listen to Scott about everything. Right, Scott?
- [54:43]
B
That's it. That's exactly right. I think it's. You have to have a worldview. Well, actually, here's. I think the lesson is. I think that this stuff is. Is in conflicting. I think it is the optimization there's optimized and there's options in your life, and those compete and freedom, like the flexibility in your life in your 30s or 40s is extremely expensive relative to the career earnings you could be having there or whatever that, you know, that is and requires suboptimal tax decisions to some degree. Unless you're very comfortable with a very low level of spending, for example, then you can kind of can have it all. If you want to spend 40 grand a year, there's not. You can. There's plenty of ways to do that.
- [55:21]
C
But then do you really have it all?
- [55:23]
B
Some people love that and they love their life at that level of spending. And that's great. We got a really fair pushback from a recent episode when we said that the goalposts had moved from 40 grand a year or a million dollar portfolio to $2.5 million and 100 grand for the baby money community, which they have. But many people are very happy with that and that's, that's totally fine. Then then this stuff doesn't apply I think nearly as much at that very low levels of spending because you can really manipulate your income to be zero across or very close to it across a huge portion of your life. But anyways, I think that's the challenge here and you have to, I think you have to really know this stuff well to be able to then engage a CFP effectively. A CFP was going to be very helpful to you if you know nothing, of course, but I think it'd become more and more and more helpful the more you have articulated clearly what you want and the trade offs that you're weighing in the space is my view.
- [56:11]
C
I agree with that. I think, you know, we can provide value in a lot of different ways. But one of the ways that again fuels me the most is like the education piece of it too. Right? It's not just like, okay, I'm going to tell you what to do now go do it. It's like, here's what the plan should be and why, based on what you've told me. And here's some of the weird, nuanced pieces of the tax code that come into play. And I thoroughly enjoy and love working so much with clients who are like, tell me more about that. Not just like, tell me what to do and I'll ride off into the sunset, but like the people who, who want to learn more and understand why we're doing certain things have the best conversations, I feel like, because it's kind of like what we're doing today, we're just nerding out on a bunch of like finance stuff. And that's the best way to do it, is like, let's just talk about it and figure out what works for you.
- [56:54]
A
Yeah, I have Google, but Google doesn't help me if I don't know what I'm searching on anyway. Like, I know several things, but there's all these other things that if I had known at different points in my life, I could have made different choices. And that's where I think the CFP is so beneficial to somebody. Like not at the end of the Journey in the middle of the journey. Start in the middle or even before the middle of your journey and get some advice. So you're not doing, I mean, we didn't even talk about capital gains harvesting in your after tax portfolio. We didn't talk about the 0% long term capital gains, like maxing that out every year that you can or as much as you can. There are several years that I could have done something like that and didn't because I'm so good with money.
- [57:39]
B
We are delighted and proud to partner with Domain Money and all the work you guys are doing over there before that. I think there's like maybe three, maybe four firms in the United States that are actually firms, not individual practitioners. We love individual practitioners too. There's plenty of really great ones out there that charge flat fees or hourly or advice only. But it's very hard to find a firm that, you know, hey, if somebody happens to your guy, you can work with somebody else at the firm as well over time. And you guys seem to be doing a great job with it. You've provided a really good plan for me as part of our partnership. So thank you for the complimentary plan for Virginia, and I really appreciated that and we're thrilled to partner with you guys and we've heard good things from our members so far about you. So thank you very much for coming on the show, sharing your knowledge with us, and we look forward to more opportunities to interact and learn from you.
- [58:25]
C
Sounds good. I love it. Yeah.
- [58:27]
A
Adriana, this was a lot of fun. I really appreciate your time today, and we will talk to you soon.
- [58:32]
C
Soon. Sounds good. Bye, guys.
- [58:34]
A
Scott, that was Adriana Adams, and that was so much fun. I really enjoy listening to mistakes that other people have made that she has seen other people make. So I don't feel so alone in all the mistakes that I have made in my own journey. How about you? Mr. Has never made a mistake in his life.
- [58:52]
B
Man, I've made plenty of mistakes. Also, we gotta call out the stock sale in February 2025, at least through, you know, July 2026. I'm trailing the stock market pretty heavily there. Now. I had other reasons for that reallocation, but that, that's a, that's, that's definitely a big opportunity cost for me right there.
- [59:10]
A
Do you regret it?
- [59:10]
B
No, I, I, I am very happy with my decision to make that there, and I think that the ball game will be called over 10 years or so. But I think that, yeah, if I get crushed by the market by 1, 2, 3 times on the investment, then, yeah, I'll call. That'll be a. That'll be a mistake for sure.
- [59:26]
C
Share.
- [59:26]
A
Okay. And. But I mean, you made a decision. You didn't make a whim decision. You made a decision based on your feelings on the stock market, based on a lot of research about past performance. And past performance is not indicative of future gains. But the past performance tells a story. And you looked at it and said, I think it's overvalued. I'm going to pull some money out. And you're right to say it's measured in 10 years, not in one year. I mean, anybody can have one great or, or one terrible year.
- [59:54]
D
Yeah. So we'll find out.
- [59:55]
B
I think we're a little over the first inning out of nine. Right. How the math works. Definitely down on that particular decision. We'll see how the ball game plays out over the next 10 years.
- [60:06]
C
Yeah.
- [60:06]
A
Have you ever been down in the first and then you came back to win the game? Scott?
- [60:10]
B
We'll see. But yes, I've made plenty of mistakes in my financial journey here. What I think was really refreshing about Adriana was, hey, this is a professional financial planner and I think there wasn't a ton new there that we, that we hadn't kind of uncovered in a lot of these things. It was really refreshing to hear professional agree, I think to a large extent, with a lot of the ways we've been framing mistakes and evolving our thinking here on bigger pockets money over the last year or two, especially with the optionality versus optimality. I think it's a very hard thing for a financial planner to say too, in some cases because the AUM guy is like, you bulk it well. Are you beating the market? Earnings not. And they're like, well, beating the market's not the goal. Well, this is a better articulation, I think, of what a financial planner may be able to do, which is, hey, there's a decision we want to make here. It's expensive. Can I make it less expensive? Can I get there sooner? Can I feel. Feel better about it? Anyways, I, I, like I said, I'm proud to partner with Domain Money because I think they're one of the few firms in the country where you can go and get a rotation of great CFPs that are flat fee and advice
- [61:11]
A
only with experience in the FI community. Scott. I think that's really important because what we're doing is different than what like the normies are doing.
- [61:20]
D
Absolutely.
- [61:20]
B
You can learn more@biggerpocketsmoney.com CFP by the way. So biggerpocketsmoney.com CFP is where you can get connected with Domain if you're interested in talking to one of their financial planners.
- [61:30]
D
Yes.
- [61:31]
A
And just because this episode is done doesn't mean that you're done learning. You can hop on over to biggerpocketsmoney.com and find resources, templates, calculators. We've got a blog. We have a newsletter. If you're not subscribed to our newsletter, change that by going to our website and signing up for the newsletter. We, we also have a forum. Scott, we've got so many good things happening. Our tech team is busy at work making awesome stuff for you to help you on your financial journey. So you can find all of that@biggerpocketsmoney.com
- [62:01]
B
youm know, I was thinking about, like, how to frame what we're doing there. And I think, Mindy, what we're really building with these resources and tools is how do we help you, our listeners, get a high quality rough draft, a financial decision. Like, we're not going to be the final source for that. We're not going to tell you to sell something or you, here's the portfolio that you should, you should own or here's your financial plan. But we can provide you templates and, you know, fictional Personas and calculators and these other things that provide directional estimates. They're not full tax planning, they're not full, you know, it's not a perfect healthcare quote, but hopefully it's a very good rough draft for you as you're thinking about these decisions. And they're free. We would give you a money back guarantee, but there's currently no way for you to take out your credit card and pay us on Bigger Pockets money.
- [62:42]
A
So, yes, everything is free on BiggerPockets money. We would love to have you over there.
- [62:46]
B
You get what you pay for.
- [62:48]
A
You get more than you pay for here. All right, Scott, should we get out of here?
- [62:52]
B
Let's do it.
- [62:52]
A
That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench. I am Mindy Jensen saying Beat the tax man Pelican.
- [62:59]
D
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