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BiggerPockets Money Podcast
The Middle Class Trap: Why $750,000 Doesn't Feel Like Enough (Financial Plan)
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A
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- [03:40]
A
Thanks Mindy. Even more than a good financial plan is my love for duking it out fully employed with kids Duking it out about the best approaches for the Middle Class Trap. We are super excited to be joined today by David Jackson from Domain Money. David is a CFP with Domain Money and biggerpockets Money is lucky enough to be partnering with Domain Money and David. David is also my CFP and is working on the financial plan for me and Virginia. It's the first time I have worked with ACFP. We are promoting domain money here at BiggerPockets money on a go forward basis. We have an affiliate relationship with them and if you work with domain money, BiggerPockets money will get paid. We hope that you are impressed with David and that you choose to interview Domain Money as at least one of the financial planners that you consider. We believe that he's very aligned with fire real estate investing and all the things that we talk about here on BiggerPockets Money. We're going to talk about today the Middle Class Trap. This concept that Mindy and I have talked about several times here on BiggerPockets money and we've invented a average of the Middle Class Trap as it relates to the Bigger Pockets Money audience. We know that a lot of you are duly employed with kids in your 30s and you have built up a substantial net worth. You have a good income, but it doesn't feel flexible. It feels like it's all trapped in your home equity and your retirement accounts. We're going to attempt to articulate that problem and then the consequences of a strategic choice to stop maxing out the 401k and instead pay taxes and do something else. That we're going to mark that plan by David Jackson here for his professional input. So looking forward to that. Without further ado, actually with one more further ado, big shout out to David here as well. David is getting married today, March 10th when this episode releases Tuesday, March 10th, 2026. Yes, on a Tuesday. This is his wedding day. Congratulations David. He will be responding to any comments or follow ups and following that, you know, to, you know, Wednesday or the next week or whatever in here if you drop a comment in the, in the YouTube channel. But please give him a big shout out. Congratulations. Congratulations David to you and your, your wonderful bride here. So thank you so much for joining us. And without further ado, let's get into it.
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Scott, we have one more disclaimer. 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 or related to his promotional activity. This is not personalized investment advice. For the full disclosures please visit biggerpocketsmoney.com/cfp
- [06:16]
A
with that lengthy disclaimer. David, thank you so much for joining us.
- [06:19]
C
Thanks Scott. Thanks Mindy. I'm excited to be here.
- [06:21]
B
I am excited to introduce you to our fake couple. This is a couple that Scott and I made up based on some ideas from the people that listen to our show and have reached out to us. So Scott, do you want to give our overview of who we're talking about?
- [06:37]
A
Yes.
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B
Are we going to go through your lfoff? We're going to just make up acronyms. Here we go. Liquidy First Optionality Framework lafaff.
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A
Okay. The Liquidity First Optionality Framework Lafar as Mindy has called it, otherwise known as the middle class trap. Right. So this is what do I do if all of my net worth is stuck in my 401k and my home equity and I'm approaching millionaire status, but I don't feel free. Right? This is a very common problem for the bigger pockets money listener. We have chosen this Persona. This is a Duke duly employed with Kids. D e w k biggerpocketsmoney.com d e w K if you want to check out this plan, they're high income, $175,000 in household net income. They're strong at savings, they invest in index funds, they've done a lot of things right. But the problem is that their $750,000 net worth is almost entirely in their home equity and their retirement accounts. So they have a choice to make over the next couple of years. Are they going to continue doing that and continue to stash away almost all of their wealth in their 401k or their home equity? Or are they going to make a pivot? Are they going to make a trade off, a conscious trade off that is going to come with real costs that could enable some optionality earlier in life. So you with us so far, David, is this something that you commonly come across?
- [07:54]
C
Oh, 100%, yeah. I mean, I primarily work with folks who are high earners, have kids, but there's a liquidity problem. Right. So this is right in my wheelhouse.
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A
So let's talk about the balance sheet for this couple. They've got a primary residence with $300,000 in equity. They've got $350,000 in their retirement accounts. They have their three to six month cash and emergency reserve of 35,000. And they've got a little bit in their taxable brokerage, about $65,000, giving them a total net worth of $750,000 right there in their mid-30s with two young kids. So this is a good result. Right? This is a strong financial position. But again, it comes down to this liquidity crunch. So the cash flow situation is we have $175,000 in gross income. Both spouses are maxing out their 401k contributions. That's why they've amassed so much in their 401k. They're taking home about 97,600 after those 401k matches and their taxes. And essentially all of that is then being spent on lifestyle, maybe saving a few thousand bucks every year. And that's how they've amassed the after tax brokerage account. So their spending pattern is not very unusual. About 34,000 on housing, 21,000 on childcare and kids, 15,000 on food and household, 10,000 on transportation, 7,200 on health care and insurance, 3,000 on phones, Internet and subscriptions, 4,800 on clothing giving and other miscellaneous categories, and 2,800 on travel and family fund. This is very consistent for a household of four in a medium cost of living area per BLS data. So again, the result here is we've got a very limited surplus in our lives with these numbers. So the problem that we've diagnosed here at Biggerpockets Money is that this person is basically committing all of their wealth to their 401k and their home equity, and the result is that they just don't feel free. And what this does is this is a very efficient way to build for maximum retirement level net worth. But most people on listening to Biggerpockets Money want something more than that. They want liquidity earlier in life, they want optionality earlier in life, and they don't want to feel stuck for the entirety of the time that their kids, for example, might be growing up. So, David, so far, are we reasonably accurate with this Persona in your experience with, you know, a mid-30s couple that's reasonably good with finance and, you know, starting a young family?
- [10:14]
C
100%, yeah. I see these types of clients all the time.
- [10:17]
B
So, Scott, the problem that we have is that our fictitious customer, the Dukes, are actually wanting to retire early. They want some relief from the, the stress of constantly putting money away, and they don't have a lot of money to play with. Their income is about 97,000 after all of their contributions, and they're spending 95,000. There's not a lot of room in their budget. If they did have a big emergency, of course, they could pause their 401k contributions so that they would have the money to do it, but they don't have a huge emergency fund, just a couple of months. They don't have a lot of flexibility in their reality. The goal here, they want to save up $2.5 million for their retirement, but they're in the, what do we call this, the boring middle, the, the slog. The part of the financial independence journey where you have discovered financial independence, you're the right moves and you're not there yet. And that, that time period can be 10 or 15 years. And they're finding themselves without a lot of fun in their lives, for lack of a better term. And they're, they're kind of stuck in their jobs. If one of them leaves their job, then all of this plan kind of goes away.
- [11:40]
A
This plan is all or nothing. It's get to the end number or it doesn't work at the end of the day because if one spouse stops earning, you can't really withdraw from the 401k at that point because that puts you in a high income tax bracket and is terribly inefficient or crazy almost to set up a 72T at that point. You can't really begin doing Roth conversions if one spouse is still working and take advantage of these tax optimized brackets. So it's really finished the plate at 2.5 million in five. And in the meantime, it's going to feel really tight the entire way through. And that is what we call the middle class trap, because this couple is on the very upper end of the middle class for sure and they're approaching millionaire status. But this is what the logical end result of following a order of operations, for example, like the foo order of operations, financial order of operations from the Money Guy show, or the ones that we've talked about here at Biggerpockets Money, this is the obvious end result for an excellent adherence to a structure like that. And it's a problem. And I think that's the question is how do we create a new path that gives us some psychological relief, some ability to feel like, hey, I'm almost a millionaire. Why are things so tight in my household right now? That's the challenge. And at BiggerPockets Money we have kind of like three options that we've come up with. And this is what we're going to debate with David, a real CFP here today, right? Or debate or we're going to get feedback from David on we said, okay, the three options that you have are first, just keep doing what you're doing and feel good about it.
- [13:05]
C
Right?
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A
You're doing great. You're approaching millionaire status. You're doing the optimal approach from a tax planning perspective, arguably over a very long period of time. If you just keep maxing out your retirement except your thin liquidity, your stress is going to slowly age off on this approach over the next 10 to 15 years. And the reason that's going to happen is because your housing costs, your mortgage are going to stay flat relative to inflation and eventually that will roll off and get paid off. You are probably going to get some kind of raise or some kind of promotion or some kind of advancement at work. And if you keep your again, housing costs and other fixed costs flat, that's going to create the option for more liquidity to come into your life and increase your savings rate in a natural sense over those 10 to 15 years. That's option one. That's lot of people take, not really a very complex or difficult diagnosis or something that's difficult to understand, but something that's very reasonable. The second step is one you know, and this goes, this goes back to things that I talked about in Set for Life. People think I'm anti retirement accounts. I'm not anti retirement accounts. I just think that for one to three years if you don't max out the retirement account and instead apply those funds elsewhere, you're going to, at some opportunity cost, some theoretical will try to quantify this one a little bit. But at a small opportunity cost, you're actually going to bring in a lot of liquidity into your life. You're going to build a major buffer and you're going to feel much better about your option set, whether that's taking a riskier job, taking a lower paying job like a riskier, like a job at a startup for example, that has upside but has lower base pay, entrepreneurship, all those kinds of things. So this is my bias here, is that hey, just declare coast fire to some degree and stop maxing out the 401k. Either don't contribute at all for one to three years or contribute at a much lower capacity. Of course I'll take the match during this period. We're going to take free money, but, but just deprioritize that and pay your taxes and rack up some after tax liquidity. I believe that that is the fundamental solution to the middle class trap. As hard as it is to give up that tax optimization for that period of time. And I believe that that will translate to really powerful optionality for this person. A very simple and powerful diagnosis. And the number one thing I want to beat up here with, with David. And then the third option is to just go whole hog at this level of income. If you could house hack or sell and you know, downgrade to economy vehicles or relocate to a very low cost of living area or go into some kind of high risk business venture sales job that produces enough income or cuts expenses enough to obviate the problem entirely. You can, you can kind of have your cake and eat it too, right? You can max out the entire retirement stack and accumulate a tremendous amount of liquidity, bringing that freedom into your life or that optionality into your life sooner. Very few people are willing to do this, but we should acknowledge it as a possibility. So, so I'll stop here for a second and say, David, how do you feel about this diagnosis of the option set for the middle class trap?
- [15:53]
C
No, Scott, I think it's spot on. I would say in the decade plus that I've been working in financial planning, the typical model is fork one. Hey, continue to max out 401s where you can let's get all that pre tax deduction on your current taxes and then once you retire then we can talk about Roth conversions between retirement and requirement of distribution. Age RMD Age Currently at age 75 but again as we're going to talk as the more we go into this, fork two is typically my recommended strategy, especially for folks that are biggerpockets, money listeners who are more self directed and driven to say hey, I want to be a good saver but I also want to enjoy life with my kids. And you can do both. I think a lot of people say you got to grind it out and there's still some grind there of course, but it's not to the point of where fork 3 might be. And again, kudos to those people who can do fork three but it's not so disruptive to your life that it's causing extra stressors and forcing a major decision or defining moment in your life. So again I think, yeah, really focusing on how do we start to make that turn and discuss how we can diversify not just our investments but our income strategies in early retirement too.
- [17:11]
A
Awesome. And so the core strategic insight for fork two is you have this liquidity in your life, it's just all going to your 401k. So what we're going to do is we're going to switch for a period of time, one to three years, perhaps stopping all excess contributions to the 401k. In this particular example, this captures the employer match. You're going to take your employer match, but it's not blindly maxing out the 401k to its limit every year to the amount of discretionary spending that you can put in there. Everything else, because you're not maxing out the 401k is going to go to your taxable brokerage account. We're specifically not prioritizing the Roth here either because this is a liquidity challenge. The diagnosis is you're going to get rich either way. Stop blindly adhering to the most tax efficient strategy and take some suboptimal approach for a couple of years to bring optionality into your life during the prime of your life, while your kids are still young, while your family's still young, while you can still enjoy some of that liquidity. So you're not going to end up with a huge pile of money you can never spend at retirement. Right? And again, this diagnosis is only for the pretty strongly positioned student of personal finance who is in this problem, who is already coast fi, who is already likely to build a huge retirement account balance at traditional retirement age and can afford to take some sub optimization to get that balance of trade off here. This amount that we're going to max into our taxable brokerage brokerage, we're going to call this the optionality fund which is going to give us again that optionality, that feeling of peace or freedom or flexibility in our life that we're lacking with the current approach. The cost of this transition is real. There is a real tax drag that we're going to assume at retirement. And David, I think this is actually where you analyzing the situation might push back a little bit. But I calculated this as you're going to pay taxes now instead of investing in your 401k and at the end of your journey that's going to result in a lower terminal net worth if you just take those funds and invest them them in your brokerage account, for example in the same types of low fee index funds at the end of that journey. But David, I think you have a different opinion on this. You think that the opportunity cost is not the 50 to $90,000 that I'm estimating this to be for each year that you deprioritize the 401k and instead invest in your after tax brokerage account.
- [19:24]
C
I can appreciate the model and the thought behind it. I think where the opportunity lies is for most people it may not be as tax efficient now, but in working with a financial planner, yes, we do care about your tax efficiency today, but we also care about your tax efficiency tomorrow. And so what is the best way to give you the highest level of tax optimization over your entire livelihood is more so what we're talking about here? So yeah Scott, just as you pointed out, you're going to give up a little bit on the tax efficiency in the current year. But as we're going to discuss, and what I discuss a lot with my clients is hey, would you be willing to give up a certain level of tax efficiency while still taking your current marginal income tax bracket into effect? That's, that's important. But are you willing to do that now so that when you get to retirement you are not in the same position as unfortunately a lot of retirees who all they've been told is just save, save, put it away and it's in pre tax money and now they're paying way more in taxes than they ever thought they should be in retirement when if we would have just had a more diverse approach like we're talking about here, we could spread out that tax liability over time instead of taking it all at the end. So I think in a way is it less tax optimal in the current moment? Yes, but it could create a more tax optimal position over the course of your entire life.
- [20:53]
B
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- [22:17]
A
I think it's an important point that I didn't, I didn't actually model through correctly when I did this the first time until I submitted to you for feedback. But I basically said, hey, you're going to go in at a pretty high marginal tax bracket today and you're going to come out at a lower tax bracket at traditional retirement under this approach. And you're saying that that may not be true, that your marginal income tax bracket may be much higher in this situation than what I originally called for? Can you explain that dynamic one more time without, you know, getting, getting so far in the weeds that it's hard to follow?
- [22:46]
C
For a listener, I certainly can. So, you know, in our example, we have a household making about 175,000 and taking out going away with all the extra math of standard deductions and things that puts them right in the middle of the 22% tax bracket. So it doesn't really matter if they're putting into their 401ks or not, they're going to be in the 22% marginal bracket. Of course their effective rate would drop or be raised if they did or didn't contribute to their pre tax 401ks. But the whole point is if we say, okay, let's back off on 401ks a little bit for now, let's instead put that into your taxable brokerage accounts. Well, when you get into early retirement and you are pre age 55, pre age 50 even and you're retiring, well, yes, we can do 72T, we can do substantially equal periodic payments or sepp. We can do that with our retirement assets and we probably will to a point. But our goal is during that time a lot of our cash flow should come from these taxable brokerage accounts. Because the IRS does not see those taxable brokerage accounts, those long term capital gains, they don't see that as ordinary income. So when you're looking at tax brackets, it's very likely that if you do this the right way, you could be in the 12% marginal income tax bracket, which means any long term capital gains taxes are 0%. And that's a massive after tax win based on current tax law. That's, that's a huge part of the strategy.
- [24:16]
B
Yeah, I think what a lot of people forget is that when you sell that $100 stock, a hundred dollars isn't your capital gain. It's the difference between what you paid for the stock and what you're selling it. Now if even if you paid a dollar for it and it grew $99, you're still not paying taxes on that hundred dollars. Although most people aren't having such luck. They're buying it at 75 and selling at 100. So you're paying taxes on $25 and, but you're getting all $100. So when you're thinking about selling stocks to pay for your lifestyle, your after tax brokerage, you're looking at a tax bill that's far less than you might be thinking about 100%.
- [24:58]
A
So David, this, this actually changes some things in the head because you know, I like being intentionally right, not accidentally right on the middle class chapter.
- [25:05]
C
It's good to be right.
- [25:07]
A
What I'm hearing is I took it for granted. Granted when I've been articulating this mechanism that by foregoing the 401K or the Pre tax deferral, I'm going to be sacrificing some tax efficiency. But again, you're saying that in this situation, again, a person who is very heavily concentrated in the pre tax 401k already that in their early retirement or certainly traditional retirement, they may actually be better off or the opportunity costs may be very small or negligible for going into a taxable brokerage account because of the different tax treatment of capital gains and qualified dividends versus ordinary income that will come out eventually of the, the, the pre tax accounts. Is that the right way to kind of put a pin in it for why the opportunity cost is not nearly as much as it might be at first glance in modeling it out?
- [25:59]
C
It is, yeah. And Scott, to that point I think the biggest thing that some people miss is well, I'm going to have to pay taxes anyway. And, and honestly that's just really not true necessarily. It really depends on your tax situation, both now but also in early retirement.
- [26:13]
A
The next question I have is for the Roth piece, I'm certainly because I'm intentionally not giving up the current tax break in the 401, the current tax deferral in the 401. I am also in this situation not getting the Roth benefit. That is a real opportunity cost. Right. That we should acknowledge as part of this plan if I choose to put it in the after tax account instead of the Roth. Is that right?
- [26:39]
C
That's right, yeah. And I think that there is an opportunity if you're working one on one, you know, with clients who I work one on one with, that's something I can certainly model out for them. Right. I mean from a general standpoint it's hard to say because obviously the tax free growth against potential tax efficient growth in a brokerage account, whether it's 0% cap gains or 15%, that is something that, that you really need to get into the weeds to model out for. Sure.
- [27:06]
A
I really think this is a breakthrough. It's very technical and I'm probably losing some folks. I got to state it one last time before I move on here is if you follow the financial order of operations logic too far and too blindly and too well across a personal finance journey, you may actually be under optimizing relative to for some years a small percentage of those years contributing to an after tax brokerage account instead. Is that actually a true statement for a good portion of the personal finance community here, including those pursuing financial independence retire early.
- [27:41]
C
David, I would. Yeah, especially in your client base and those bigger pockets, money listeners that are in that allocation, I would say to kind of close the loop on it. In my experience over the past decade, roughly half of retirees that I helped coach and helped helped provide plans for were paying required minimum Distributions in excess of what they actually needed. And so it actually can be less beneficial to do it the traditional way. So I'm excited to talk about a more modern structured approach.
- [28:10]
A
Awesome. And by the way, a bunch of the stuff we talked about is even prior to factoring in RMDs which are often discussed as hey, that's an overblown risk or whatever, I think they're pretty real for someone who is optimized on the pre tax side for a lifetime and shouldn't be dismissed. But even discounting those, your logic holds for a portion of the fire community who wants to heavily rely on the pre tax accounts in early retirement.
- [28:33]
C
Yeah, those pre tax accounts are key to the bridge years. Right. Bridging the gap between the rule of 55 if you're going to retire at 55 or just 59 and a half without taking into account 72T and SEPP distributions for sure.
- [28:45]
A
Great. And then one last qualification here I'd like to make because. Because I think we're going to get some really good feedback on this or I hope we get some really good feedback on this. This is the logic that we're talking about here applies to somebody more in the two and a half million and perhaps more fire target number for a lean fire portfolio, someone who is looking to spend less than $40,000 a year and build a million dollar portfolio. I don't think our argument holds and I think that you should contribute the max to the pre tax retirement accounts in your high income earning years because you're bait your plan and implicitly assumes a super low spending target and therefore super low withdrawals from these accounts. Would you agree with that?
- [29:25]
C
I would actually disagree, Scott. Respectfully. I would say that, I would argue that it can be still beneficial for someone who is only in that lean million dollar portfolio.
- [29:37]
A
It can be beneficial to not contribute to the 401k, not max out the 401k for a small number of years. That's what you're saying?
- [29:44]
C
Yes. I'm sorry. Yes, that's correct. Yeah. So if you, if you don't max out, it really depends on the age at which you're retiring and of course when those retirement assets can be in full force.
- [29:56]
A
Got it. Okay. And again I want to keep hammering this thing here. We're not saying that it's bad to max out the 401k much or even most of the time. Right. We're saying that if you have only done that across your entire career and you're blind to these other dynamics, you May or you have a very good chance of being under optimized despite thinking that you're pursuing an optimal approach. That's what we're saying here, right David?
- [30:22]
C
That's correct.
- [30:23]
B
I'm feeling real seen here, Scott.
- [30:26]
A
I feel seen as well here. And again I feel like this is something that I could intuit in a lot of situations. I don't think I could have modeled out hey, that there's optimal. I think until today I've been approaching approaching this as yeah, you know, sometimes being suboptimal on the terminal net worth number is actually a boost to your freedom life optionality. All the things that we want here in the fire community to learn that it actually may be a boost to your terminal net worth or fire number or help you accelerate financial independence is actually pretty, pretty awesome here and pretty, pretty validating. Again, it depends on circumstances here, but I think that makes sense in the way that David's explained it here that there just needs to be other sources of wealth. It can't all be in one one place or we're going to be suboptimal. And I also think that depending on what you believe about future tax regimes and benefits like ACA subsidy evolutions and those types of things, the flexibility word is going to be absolutely critical to a financial independence journey. And having money in various buckets, including the Roth, the pre tax and the post tax account is going to be the name of the game in that which no one can model out or assign probabilistically at this point in time. Time. Okay, so let's talk about what enough means in terms of feeling a lived experience in someone's behavioral change. So David, you work with clients all the time. I've hypothesized that this couple would feel better about with a hundred thousand dollars in after tax assets that are reasonably liquid, they begin to not fear a job loss at $250,000. And if they got to the $400,000 mark, then the entrepreneurial half of the couple is going to have a very credible and serious case to the non entrepreneurial spouse. Hey, I should probably go out and start this business. I could lose, but I could also win. And it's not gonna, it's not gonna disrupt their lifestyle. If we treat this as a, as a fallback fund for us, is that the right way to think about it? How would you benchmark these stepping stones in terms of the amount of liquidity needed to feel or see a lived change in your client's experience?
- [32:29]
C
Yeah, Scott, I see this all the Time where folks, even in our example plan here, clients, a lot of times are grinding it out. They're doing what they feel like they should be doing, building up this net worth. Liquidity is key. Liquidity is key. And I can't say that enough because I have clients right now who have great real estate portfolios and they should. There's nothing wrong with real estate, but at the same time, they have a liquidity crisis. And I'll say, well, you can't really take a brick out of your home and go sell it to pay a medical payment, right? Having that diversification across liquid assets and non liquid assets. Those non liquid assets are good, but more liquidity definitely speaks for sure.
- [33:12]
A
What would you kind of advise someone in terms of how much is enough? This couple has been very clear for us, this fictional couple. They said, we want to feel like we have options in our life and we don't right now, even though we have a $750,000 net worth and a pretty good household income here. How would you quantify that feeling for them?
- [33:35]
C
To some degree, the quantifying piece is really unique to the individual and the advisor relationship. It's. You've probably heard the difference between risk tolerance and risk capacity when it comes to investments, but it's the same thing here with liquidity risk. Right. I could throw out a number and one couple will say that feels comfortable to me. Another couple says, that does. So I think listening to, you know, what are your priorities? Is it just an emergency fund and you just want to make sure that you don't go into debt again? Okay, well, that number is probably going to be lower versus someone who is more entrepreneurial. Right. Or maybe wants to expand their real estate portfolio or other. Other goals, non retirement goals. That number is going to be higher based on that because again, the liquidity risk is greater depending on that situation. But also how they feel about the flexibility and the diversification across those accounts to make it liquid is also going to be important there. So to quantify it is to also speak to the qualitative aspects of that plan.
- [34:36]
A
We have a different range in terms of lived experiences here. I've tried to quantify it as if I were this couple. I would feel pretty good about that entrepreneurial bet. If I had 400k in after tax liquidity, I'd feel okay about a job loss. I wouldn't fear that to the same extent at 250k. And I would still feel personally fairly anxious at $100,000 if one spouse lost a job. But I wouldn't feel like that was quite enough. And so to me this implies a two to five year intentional flow of liquidity to building after tax liquidity at the opportunity cost of maxing out the 401. And they're at an annual opportunity cost that I had calculated at 50 to $90,000. You say much, it might be much, much lower. That may change depending on the timeline and how, how long they, they decide to deprioritize the 401k. But the model actually will be closer in many cases than what I, what I estimated here over their retirement. Let's kind of zoom out here for a second and say what are the aspects of a good financial plan here and how do you describe what are the ingredients to a good plan?
- [35:37]
C
I really appreciate the question because it's so core to my values and a lot of advisors, values that are trying to help people. So I think, I think honestly that the core values of a good financial plan is truly the plan being holistic and not just focus on investments. Investments are important, but they are a piece of the puzzle, right? What we're talking about here is how these clients are feeling about their freedom, their liquidity, how the money is actually going to be impactful to still do things with their family, still make experiences for their kids and with their kids, but still be able to retire at the age in which they want to. Right? That is a much more impactful plan and a sustainable plan than simply talking about, well, here's the numbers around investments. And again, I don't want to diminish that it's important, but it's not holistic. So really coming at it from all angles and saying, how is this part of the plan impacting another and what are your priorities? Getting that and laying that out in a holistic plan is of, of the highest importance.
- [36:37]
A
When I think about strategy at Biggerpockets as a CEO, a good strategy basically contains kind of three ingredients plus a bonus one, right? Which is a clear diagnosis of the problem. We understand the factual current situation in crystal clear detail, including strengths, weaknesses, opportunities, threats, and income. In this case, balance sheet. The second is a set of guiding principles. Implicit in that diagnosis is where do we want to get to? So we know where we're at and we know exactly where we want to get to. A clear set of goals is imperative. Otherwise, if you don't know where you want to get to, there's a million paths you can take and from there there's a set of guiding principles. Right? Is my plan going to be maximizing my retirement account assets at age 65, is it going to be flexibility in my 30s, 40s and 50s? Is it going to be, I'm going to make dang sure I have enough at 65. And once I'm dang sure, then I'm going to maximize freedom in my 30, 40s and 50s. Those have to be clearly outlined. And once those guiding principles are set now, we can move into specific action which diagnoses exactly how and models out how what these decisions are going to look like in terms of taxes paid today, taxes paid tomorrow, investment return assumptions under, under these guidelines. The last component of a strategy in this context, a financial plan in this context is a checklist, right? There's a bunch of things that are common to every financial plan, like insurance, like estate planning, those types of things that we put in there. And you and I and Mindy have worked on a very detailed checklist for this Persona of things here that, you know, walk us through what you think are those checklist items now that we've kind of articulated the starting point, the goal and the core diagnosis here, which is stop putting all your money in the 401k for some time and you'll have more freedom in your life here. Very simple. That is good strategy at the end of the day, right? Is a clear diagnosis and very simple or almost obvious output from that strategy. But deriving from that now are a number of decisions we need to make in a checklist form to really complete our financial plan. So can you walk us through what you think are the most important checklist items that this couple should now put in place to implement this plan?
- [38:46]
C
Yeah, Scott, So for this client in particular, and of course, a lot of our clients fall into this category, number one is insurance. I'm looking at their life insurance, right? Are their kids protected if, heaven forbid, something should happen to them? So I'm going to recommend like a term ladder, a 10 year term and 20, 20 year term policies that reduce over time for health insurance if they're healthy. We're going to go with a high deductible plan with an hsa, right? We're going to max that out because again, you can use that even in early retirement years for qualified medical expense expenses and get the triple tax break there. We've already talked about retirement assets, but I'm going to double down and say, hey, let's get the match, let's get that free money. But then let's also put in any excess cash flow into these tax efficient direct indexing types of accounts. Or even if you don't like the direct indexing approach, something that has tax loss harvesting available to maximize after tax returns. That's where I'm starting with, with these clients.
- [39:39]
A
What about estate planning? What are some things that you're looking for at a very baseline level for this type of person?
- [39:44]
C
I think for estate planning, I honestly personally really dig into estate planning. I think it's hyper important, especially if you're a homeowner, have kids, it's something that you're going to want to put together definitely at least a will. Advanced directives, I know advance directives are not something or a living will people, some people call it are not attractive. But your loved ones are going to want a piece of paper in their hand. They do not want to guess when they're going through situations in which you can't tell them what your wishes are. Powers of attorney, things like that are very important. And of course if you have assets like a home and your net worth is in this case, you're approaching a million, you may want to discuss with an estate attorney a trust or of course with your financial planner, a trust to discuss those non retirement, those non investment assets and how to accurately leave them according to your wishes to your heirs.
- [40:34]
A
What do you recommend in terms of the cadence for this couple, in terms of approaching their finances?
- [40:39]
C
Yeah, Scott, so it really depends on are they doing it themselves or do they have somebody doing it for them? And of course I think we're in the same boat. We, we like the do it yourselfers. I know I give specific guidance. Let's, let's do low cost index funds. Let's make sure we're rebalancing as appropriate to keep the portfolio the way it should be. Even if you're a do it yourselfer, I would say at a minimum you're probably going to want to meet with your financial planner and rebalance at least four times a year is, is key if, if you can't do four times a year, at least two times a year. But I think every quarter is important just to make sure that the portfolio is set up the way it needs to go.
- [41:18]
A
What are the other categories of kind of this checklist like what are some other things you're looking for? Or how do I know that I'm, I'm set if I'm a DIY personal finance student that's applying a plan along these lines.
- [41:29]
C
The biggest things again are if you have kids, what does that look like for you? Right. So I was challenge you and if you have anybody else in your life, a partner, spouse who's helping with the kids. I would say talk, have a discussion about how you want that experience to be for your kids. Do you want to fund fully, public or private? Do you want them to take on some of that? So that's part of that checklist. And then, of course, meeting with a financial planner to determine the best vehicles, like 529s versus ESAs versus taxable accounts. Typically, I'm recommending 529s. There's also the tax picture, right? Taxes change all the time. We've seen that even with this year. We've already talked about a few things that have changed with ACA credits and things in the cliff there. So it's really important to stay up to date with somebody who's in this all the time. And I'm talking with clients all the time about those tax implications, both now and in the future. We're playing chess, not checkers, right? So how can we be tax optimal across their entire life versus just in the current year?
- [42:29]
A
Awesome.
- [42:30]
B
I want to talk about education planning because this is something where I fell very short because of a misunderstanding about how the 529 plan worked. And I don't know if it just was different 20 years ago and has changed. I mean, I'm sure that's the case, but I was under the impression that if you put money into a 529 plan, let's say I put a total of 10,000 in and it grew to 100,000, and then my kids didn't go to college. College, or I didn't have kids or whatever. I was under the assumption that I lost that $90,000 and all I could get was that 10,000 back. So my thought was, why would I chance that? I'll just continue to invest in after tax brokerage and then I'll deal with it when I get there. And now I've got a kid in college. She's in her freshman year of college, and I've saved $0 for her college fund. And I feel like this is something that maybe everybody else understands it and I just made the mistake reading it, but I feel like people aren't contributing enough or they're over contributing to the 529 plan in a way that is detrimental to their retirement and their liquidity plans.
- [43:36]
A
I'll actually chime in here and I'll say Virginia and I had this discussion with David last Friday, right? Like four, four or five days ago from when we recorded this. Our decision is to max out those Contributions like an absurd five times the annual contribution limit that you can put in, which we're not going to do, but we're going to take the maximum contribution, which is somewhere in the ballpark of $38,000, and put that in for both girls this year into our 529 and then call it a day. Because with that contribution plus the ones we made in previous years, by the time our 3 year old and infant turning one this year go to college, that should be more than enough to cover many of the base expenses there's there and I can call it a day. And that, that does two things for me. One, it gives me the Colorado tax break and two, it allows that growth to grow and if, if used for college, be used tax free on that. But we just had that debate yesterday. Give me your assessment of, of where we ended up. Did I articulate it reasonably well? Why, why we like that approach.
- [44:35]
C
Yeah. I'm impressed, Scott. Yo, you remembered a lot, which is good. I'm glad that something stuck with you. No, it, it was good. I could literally, literally talk for an entire podcast episode about 529 plans and education savings. So to really slim it down. Right. I think especially in today, there are a lot more exit strategies, if you will, for 529 plans that are, excuse me, 529 funds that don't get used than there have been in the past. And so number one, it's important to have that conversation just like Scott and Virginia did, you know, with me, me, it's really important to have that conversation with your financial planner to determine really what's, what's the goal? Right. You know, are we talking public or private and full or partial funding. But to your point, Mindy, it's really. Okay, let's say we get into a situation, the 529s are funded and we're funding them and. Oh, shoot. Well, my daughter, my son just got a scholarship, which is great. But now I have all of this excess in my 529 plan. What do I do? Number one, the 529 plan, under current tax law, you can roll $35,000 of unused 529 funds into a Roth IRA for that beneficiary. So if your daughter or your son is out of college and they've got 35,000 left in their 529, that's just a jump start on their retirement. Right. So that's an excellent way to use that. The other thing to keep in mind is there's something called intra Family portability and there are IRS guidelines around this, but essentially what it means is that any immediate family member, including any future descendants that that beneficiary may have, so if they have kids, you can actually save those 529 funds in that 529 plan and give them to a sibling, back to a parent, if the parents are going to grad school late in life and they're switching careers or even to their children one day if and when they should have children. Children. So there is some flexibility versus taking it out and incurring the tax and penalty there. To you.
- [46:32]
B
Is it a taxable event to roll it from the 529 to the Roth IRA?
- [46:38]
C
It's not. No, it is not a taxable event up to that $35,000 threshold. And that's once in a lifetime. So just to be clear, it's not, it's not an annual limit. It is a lifetime limit, but it's still a pretty significant event.
- [46:50]
A
David, at the, at the strategy level though, it comes back to these funds are no longer yours, right? They're not part of your fire portfolio. Once you have, have used them, once you have Contributed to your Kids 529 plan, they're now your beneficiaries funds. Right. I include them in a, in a tracking of my net worth. That's, that's one of the reasons why I created the personal financial statement@biggerpocketsmoney.com resources. How about that plug? That's free, by the way. No email required. That separates out those kinds of things. Right. Your 529 plans are not part of your fire portfolio. They're going to go to your beneficiary at some point in life and there's a strategic trade off there about your fire destination and your children's education fund, which I think today the question is like what Mindy asked right around, is there going to be a scholarship or something that offsets those, those funds? And do you see some people that, that take this, you know, too far way over funding those, those accounts at a significant opportunity cost? Is that fairly common in your experience?
- [47:48]
C
I would say it can be common. A lot of the folks that I work with right now at least, are again in their 30s and 40s. They still have kids that are in elementary, high school, but in the instances where I've worked with retirees who are in retirement, yes, I mean their kids still would have these 529 funds and they're typically now using that for their children. So it works out, I think the biggest thing, Scott, that we need to talk about, and it's something that I do a lot with clients. I actually just had a client who, who had 529 accounts for their kids, upwards of a million dollars. And they said, yeah, we could pay for 10 years of private school. And we kind of laughed about it. Right. So yes, it does happen, but I think that's then generational wealth that. Right. That you can pass down to, to your kids if and when you get there. Do we want to avoid that? Absolutely, for sure. Right. But that really comes down to what is more important to you as a client. Right. Is it.
- [48:43]
B
It?
- [48:43]
C
I really want to make sure that college is funded and I would rather over fund a little bit than underfund. Or is it. No, I want to really focus on my retirement. I'm going to do the best I can for my kids, but if they've got to take on a little bit of this, hopefully I can help them with cash flow during college. But if not, we can help them in different ways pay that off over the years afterwards. So it's, it's really a matter of perspective at that point.
- [49:06]
A
That's kind of my plan. Here is what you just stated, right. Which is I'm gonna, I'm gonna. Yeah, I think I funded it based on reasonable assumption returns and hopefully it's just a hair short. That means I've nailed it and I pay just a little bit with non 529 plans for college in there. Hopefully it's short enough where I can transfer that 35,000 rollover to their Roths or something like that. Well, let's go back to this couple. Right? So because this is a real kind of additional fork here is do I max out my 401k, do I amass after tax liquidity, or do I begin funding kids education? I can't do all of them, right? I can't. I do not have the liquidity to max out the 401k, max out the Roth, max out the HSA, max out the 529 plans. I have to choose here in my early 30s. What is kind of the bias you would bring to the situation, given what we know about our fake couple in this situation and knowing the cost that Mindy is now paying because she's paid tax, this is all after tax dollars that are going to her children's education costs here.
- [50:10]
C
I think fork two still fits really well for a multitude of reasons. Right. Number one, if we go fork one maxing out 401ks, yes, there's a tax optimization for current year. But then we have to get into 72T distributions, SEPP, all that stuff. And what a lot of people don't realize is you don't get to determine the amount of your 72T distributions. There are tests that the IRS allows you to do and you could only do. There are three different ways you can take them, and so there are limits. So to say that you could fully pay for your early retirement using those is a lot of times inaccurate. So it gives you a lot more space, it gives you a lot more freedom. Again, diversification's a hot word, right? Not just investments, but in income, but also to your point, Scott, let's say we get to the point where Mindy is right. Ten years down the road, this couple that we're talking about, they may have had better jobs, are in a much better cash flow position, and all of a sudden they say, oh well, shoot, we forgot about the kids or we didn't know about this for our kids. Well, they have built up a massive liquid account to where now they can front load five years if they want to, right? So priorities change, things change, tax law changes. The importance of Fork 2 is that it gives you the diversification and the ability to mitigate risks when it comes to the future because you have different buckets you can take from. So I'll, I guess I'll end it by saying this. My worst cliche, or best cliche, depending on if you like cliches, is if clients will say, well, what's tax law going to be like in five years? I say, oh, shoot, I forgot my crystal ball in the trunk. You know, my fault. We, we don't know. But at least this empowers us and gives us the flexibility we need for the future. Going down that fork two paths path.
- [51:52]
A
I think that that's an interesting take and I want to address the seriousness of that decision because I think this is a hard choice for this person and this is a lived experience for many people who listen to personal financial podcasts on their way to work or at the gym instead of the chain smokers. Here is you are reasonably optimized and there's a decision, right? It's a 401k, it's the after tax brokerage account, it's the Roth, or it's the 529. And I think that the recommendation that we're coming with for this particular financial plan for the reasons we stated, is after tax brokerage, build the flexibility and come back to the maxing out of the 529 or the 401k at a future point, after we've amassed some liquidity to give ourselves a really nice buffer against the world over the next five to 10 years. That's the hard trade off of strategy that is the result of good strategy. Bad strategy is doing a balance of across all of those things every year. Good strategy is the decision based on your goals and the objectives and the forced rank ordering of that. And I think that's. That's where we should leave it here. Right, that's, that's where it comes down to. And there's many right answers to the question here. But that is the strategy that we've put together in this document. Again, this will be available at biggerpocketsmoney.com Duke D E W K Dually employed with kids D E W K. You can Also find the us all this at the broader resource library at biggerpocketsmoney.com resources and if you'd like to chat with David, who works not just with Dukes, of course, but with a variety of situations, including very complex real estate positions and those types of things, you can go to biggerpocketsmoney.com CFP and yes, we are partnered with Domain money. And yes, BiggerPockets money will profit financially, including me and Mindy, if you do choose to work with David. But we really appreciate the partnership. Endorse David and look forward to continuing to work with him. Yeah.
- [53:38]
C
Thanks, Kevin. Mindy, this was fun.
- [53:39]
B
Thank you, David. This was a lot of fun. I learned a lot. And I really love learning more about finances. And I have already shot off a email to my husband saying we need to talk about 529 plans for both girls. So thank you.
- [53:55]
C
That's great.
- [53:55]
A
Yeah.
- [53:56]
B
All right, Scott, that was a fantastic episode with David Jackson. I learned a lot. I'm sure you learned something, too. What did you think of his advice?
- [54:05]
A
I love being accidentally right, Mindy. I like being it right on purpose more than more than being right by accident. But I have not thought through the entire implications of what is likely to be, again, likely to be true for somebody who has amassed essentially all of their wealth, all of their financial portfolio, at least inside of a retirement account, and how having a balance can actually dramatically change the tax profile that you're going to experience in a lived fire or traditional retirement. So I think that was a really interesting piece there and I think that the modeling there is going to be very complex and that's going to be something I need to add to my vibe coding toolkit and modeling approach here. But I think that's, that's a really interesting point and I had not considered that. Our approach does come with a clear opportunity cost in terms of the tax advantages of the Roth ira.
- [54:50]
B
However, I had also not considered the tax implications at the end where I'm starting to withdraw from my 401k account accounts and I will be facing RMDs. And I know, boohoo, what a, what a horrible problem to have. But I didn't optimize for my entire life's tax burden. I optimized in the beginning of our savings and investing for reducing my taxable income now versus reducing my taxable income later. I think I'm gonna ultimately be paying a lot more taxes over my lifetime because I optimized incorrectly. Thanks a lot, David. Wish I would have talked to you 20 years ago.
- [55:29]
A
I want to call out where and why you are in this position and why it applies. Because your strategy never fully really actually considered the fact that you did and were going to win. And I think this is a huge problem in the fire community. People start out, they're making 50 grand a year and they can't see, they don't understand that if they apply themselves, if they listen to financial podcasts instead of the chain smokers for a thousand or five thousand hours over the course of the next 20 years and that's what they like doing and they apply themselves at work and they take advantage of the tax efficient ways to invest and they invest in low cost mutual funds that reasonably reflect long term average returns that they're going to do much better than the baseline plan suggests because they're going to get a raise at some point. They're going to be, they're going to find some opportunity that comes their way over time and that is not modeled into most people's plans. And because of that, many people are going to end up with way more wealth than they initially bargained for. The 4% rule is already implicitly extremely conservative. This is why I can be so optimistic. On average across many conversations, not everyone will win. But the more likely situation is that people will win far greater and at far, far faster than their baseline conservative assumptions put in there. And for this reason, this is why I never prioritized the 401k until I was in a very high income tax bracket. Very high income tax bracket. It's because I'm arrogant enough and also, you know, I think reasonably educated enough as a personal finance to say I probably am going to win. I'm probably going to win in the sense that my long term wealth is going to be very high and that's going to produce a very high tax burden if it's all, especially if it's all inside of a pre tax retirement account. And, and further on top of that comes my bias towards David doesn't have his crystal ball. But I'm going to pull up my crystal ball here and say that you got to be really bold to think that this is going to be the highest tax bracket environment of your lifetime. Donald Trump's administration right here in 2026 I believe is going to be one of the more favorable tax environments someone like me in the fire community or building a substantial net worth and earning a good income is going to experience. I think that that is a very reasonable bet to make and I am willing to play that out from a logic perspective. And I would rather pay taxes now on average than in whatever the future tax brackets come my way. So that is a controversial stance. People can disagree. I would love to discuss that with you. But that is, that is certainly informing parts of my strategy here. So those are the reasons why you're now in this situation, Mindy. And I think a lot of people are who are listening to this could find themselves at risk of that as well as they're over optimized for that and they don't. They're not really understanding or internalizing the fact that they could win in a really real way that will be suboptimal from a tax perspective. Sorry for my rant.
- [58:13]
B
No, I always thought that RMDs were just something you paid. But if you set up your accounts correctly, you don't have to pay any RMDs and still win.
- [58:24]
A
RMDs are the, the end result of a lifetime of enormous winning of money not spent. Right. So that's, that's the other, other one there. So maybe you should start spending now.
- [58:33]
B
Yeah. Money not spent.
- [58:34]
A
I'll say this actually. Let's put this one out there for feedback. Mindy, your net worth, you're not shy about this is a pro. Is going to approach the eight figure mark within the next few years, within the next year. And the bulk of that's in your pre tax retirement accounts. Right.
- [58:48]
B
I would have to look up exactly where it all is. But yeah, I've got a lot in pre tax retirement accounts.
- [58:53]
A
I think that if you pay taxes now, now, you're gonna really thank yourself later. Even if you're paying them at the top possible marginal tax bracket for federal and State right now because I do not believe that whoever. The pendulum swings in politics and one day somebody's gonna get in power who's going to change those rules at some point. I'll put that out there. That's a serious assertion and I would love feedback on that from the comments here. But I would be really interested to see how you and Carl, if you, if you sit down and say that is the bet you are making right now. You're saying if I believe historical returns are going to take place in 20 years, this number is going to double three times and then I'm going to be maybe two and a half times in real terms, inflation adjusted terms and I'm going to be withdrawing those from an RMD perspective. That's your bet you're making by keeping that in there. Is that the right way to frame it?
- [59:42]
B
Yeah, we're looking into 72 Ts but I'm also having like record income years. I know. Poor Mindy. Boo hoo. But it's like which one of these levers do I pull? Oh my goodness, Scott. It's almost like I need somebody with professional experience to help me out.
- [59:58]
A
Mindy, by the way, you've won. So this is, this is, this is like, this is like. But it's perfect to talk to you here about this because if you were in this situation the answer would have been don't max out the 401k 20 years ago. Right. It would have been keep, put it, put them in the after tax bucket here and we wouldn't have this, this item here. So you've won. And, and I think that's a good illustration of this. And I don't think this is, is widely understood by, by the personal finance community.
- [60:21]
B
You know Scott, I think you are correct. I didn't have a 401k match at any company except one that I worked at like 30 years ago. And the match, well, this was back when I think the contribution limits were super low. But like the match was like $6,000. And I think I was the only person in my department that was getting the match. I mean I don't, I don't think anybody was even contributing to their 401k at the time. But even if I just did that, that would have been great. But then we went above, I mean we maxed out Carl's, we maxed out mine for years and. Because that's what you do. But if we had not, if we had paid the taxes on it back then and who knows what the tax bracket was 20 years ago. I mean the Internet does, but I'm not going to look it up. Our RMD situation would be much different because we still would have invested. We just would have invested in the things, things that we were already investing in in after tax accounts. So yeah, it's interesting. All right, well, if you listen to all of this, we really appreciate you. You're our favorite. Thank you so much for listening to us. He is Scott Trench. I am Mindy Jensen saying bye bye apple pie. I love math Said no one ever. Nobody starts a business thinking you know what would make this more fun? Calculating quarterly estimated taxes. But somehow every small business owner ends up doing it. Your dreams of creating, selling and growing get replaced by late nights chasing rece, juggling invoices and wondering if that bad sushi lunch with Scott counts as a write off. Change all that with Found. Found is a business banking platform built to take the pain out of managing money. It automatically tracks expenses, organizes invoices, and even preps you for tax season without you doing the heavy lifting. You can set aside money for business goals, control spending with virtual cards, and find tax write offs you didn't even know existed. It saves time, money and probably a few years of life expectancy. Found has over 30,000 5 star reviews from owners who say Found makes everything easier. Expenses, income, profits, taxes, invoices even. So reclaim your time and your sanity. Open a Found account for free@found.com that's f o u n d dot com. Found is a financial technology company, not a bank. Banking services are provided by lead bank member fdic. Don't put this one off. Join thousands of small business owners who have streamlined their finances with foundation.