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ChooseFI | Financial Independence Podcast
Mailbag | Backdoor Roth IRA, 4% Rule & 401k Strategies for Retirement Planning | With Rachael Camp | 521
01:07:26
Answering Listener Questions on asset allocation, retirement strategies, and the intricacies of real estate investing. With Brad Barrett and Rachael Camp. Whether you are pondering upon the backdoor Roth IRA strategy or seeking clarity on managing...
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- [00:00]
A
Hello and welcome to Choose a vi. Today on the show we have another mailbag episode and I'm lucky to have my friend Rachel Kemp, who's the cfp, joining me to answer the questions and answer questions we did. I think this is the most questions we've ever tackled on a mailbag. So, among other things, we talk about asset allocation, the backdoor Roth real estate investing versus 4% rule, and what do you do if you don't have 401k at work? This is going to be a really, really good one. I think you're going to enjoy it. And with that, welcome to Choose a Rachel. Welcome back. As always, thanks for being here.
- [00:39]
B
Thanks, Brad. Happy to be here again.
- [00:41]
A
Yeah. So you highlighted a whole bunch of questions as usual. And I want to put our little disclaimer out up front, which is you're a cfp. I am, I guess theoretically a cpa, but we are not giving financial advice to anybody. Of course, there's no way that with just an email question that we got that we could dive into everyone's very specific information and give the perfect answer. But that said, we're both very knowledgeable and I think we try to do the broadest application possible when we answer this. So we think obviously we wouldn't be recording this and wasting everybody's time if we didn't think it was really, really valuable. But you know, we have to give that, like, please don't rely on this for absolute ironclad financial advice. So that's critical. And other thing that I wanted to say was this is kind of like a public service announcement. And this is really interesting. I put this in my newsletter a couple weeks ago and people were like shocked that this existed. But there is this form called the Beneficial Ownership Information form and it's fincen.gov boi so f I n c e n.gov b o I and Rachel, we were talking about this before we had record and allegedly this is due by December 31st of this year by essentially as I'm reading it, because I own a bunch of legal entities. By pretty much every legal entity in the U.S. there are a bunch of carve outs. And this is actually part of the ambiguity right now is accountants don't know if this is due or if they should send it to people's attorney as attorneys aren't giving advice. So there's a lot of ambiguity. But what I wanted to do with this psa, since this isn't really giving too much specific info, is if you own a legal entity in any way Shape or form? Oh, you have an LLC for some business that you formed or oh, you have an LLC for maybe some real estate rentals. Just go to this website, we'll have it in the show notes and just take a look. There's a whole lot of information and honestly it actually takes about two minutes to submit this. It's really quite easy. And the penalties for non filing are like the craziest thing I've ever seen. Rachel was like $500 a day or something like that. And I think we're both dubious as to whether the December 31 deadline will get pushed back or not. But regardless, there are some significant repercussions if that deadline is in existence and you don't file it. So if you're a business owner in any way, just please take this PSA to heart and just at least look this up. So, okay, PSA over Rachel, let's. Well first, do you have any feedback on that or you think that pretty much covers it?
- [03:17]
B
I think that covers it. I mean there are exemptions from this. Like apparently I'm exempted from it being a financial advisor. Yeah. But even that remains a bit unclear. So I would reach out to accountants and hopefully they're familiar with this and I can at least point you in the right direction if they're not willing to do it. But that's what I've seen a lot of my clients doing is just reaching out to CPAs accountants and getting it done that way.
- [03:39]
A
Cool. Sounds good. Sounds good. So okay, let's get into the mailback question. So I'll read the first one that you highlighted. So this one came in from Mohit and they said, hi Brad, I've been listening to the podcast since May of last year and it's made a huge impact on the way I think about saving investment. I've been on a journey to get to FI and maximizing all the ladders to invest. What's been shared on the podcast? I had a question for you. My wife is working for a W2 for an employer who doesn't have a formal 401k setup or any retirement account set up. In this case, do you know how to invest in pre tax retirement account? Rachel? This is something we get a lot is what do I do if I don't have access to a 401k? Do I have any options or am I just kind of out of luck?
- [04:20]
B
Yeah, I think there's a lot of confusion around this as well. I've actually seen some people, they've have one spouse who's covered at work with a retirement plan, the other spouse that is not covered. So they assume with the spouse that's not covered that they could go and contribute to a traditional Iraq, get the full deduction. That's kind of where I see that the common misconception here is that if you have one spouse, in this case we have one spouse covered by a workplace retirement plan, there are still income limitations. So taking a step back, just thinking through what are my options for pre tax retirement accounts, first thing comes to mind is, okay, can we do the traditional ira? And what you'll want to do, and I have the numbers in front of me here as well, but you'll want to see what the income limitations are on this. Because while technically anybody can contribute to a traditional ira, the actual ability to take a tax deduction for that is a different story. It depends on your situation. So if neither you or your spouse are covered by a workplace retirement plan, we don't have to worry about income limitations. You are both eligible to contribute and get a full deduction for a traditional Iraq. Now it becomes different if you have one spouse who is covered by a workplace retirement plan. So if you are married filing jointly, you've got one spouse covered by workplace plan, the other one is not. Then you want to look at those income limitations. Like I said, I have them in front of me. So married, finally jointly, the full phase out is at 228,000 or more. So if you make at least 228 or above, you actually are phased out. You do not get to take a deduction for a traditional IRA contribution. The phase out starts at 218. So if you're under 218k in income, again married, filing jointly, then you're good, you can contribute to that traditional IRA and get the full deduction. So I want to mention that. And all of this is available on IRS website. Can send you the link Brad for these updated numbers. But that's some of the important things to look at when you are considering traditional ira because that's typically the first place we go when we realize we don't have access to a workplace retirement plan. A few other things we can mention, a few other accounts. Here is things like a health savings account, one of my favorite retirement accounts of all time because of the triple tax advantage. Definitely take advantage of that. If either of you have access to it. There is a limit, there's a single limit or family limit and the family limit is for both spouses. So it's 8,300 for 2024. So we don't get to double dip. We don't get one spouse that gets 8,300 and the other spouse gets another 8,300. It's 8,300 total. So that's another question I see come up a lot. But if you have access to the hsa, that's another thing I would look at finally just to kind of like check all the boxes on this one. If you have any type of side hustle or income coming from self employment then you can look into solo 401ks or SEP IRAs. Self Employed Retirement accounts are great. That being said, you do have to have a legitimate business with legitimate revenue. The contributions for these accounts depend on how much revenue is coming in the income from self employment. So it's not a hack where you can open up an LLC and now you have access to self employed retirement accounts. But I want to mention that because side hustles are really common now and if you have access to one it's worth looking into self employed retirement accounts too.
- [07:47]
A
Yep, very comprehensive answer. And interestingly I just got an email in our feedbackooseaway.com email address that has a similar question. So it's the other side of okay, it's not that I don't have a 401k but I actually have a bad one. And Rachel, I'm throwing this at you just kind of spitball off the top of your head but Jen said I just took a job with a terrible 401k and wondered if you have an episode on where to park your money until either the investment options change or you leave the company. I'd hate to leave cash on the table from the match but on the other hand I just can't stomach the high fees and low return. And like I said, you haven't heard this question before right the second cuz it literally just came in. But what do you tell somebody? And we're assuming I I don't know what Jen is saying here specifically. Does every fund have a 1:5% expense ratio or something crazy like that? Like is there still a case to be made to getting your match? Depending on what the terms of that company match. How would you respond? Just quick hit?
- [08:48]
B
Yeah I think when it comes to a company match, no matter what the fees are, it's worth it. So the company match is just one of the best deals you'll ever be handed in your lifetime. Often you get a hundred percent return on your investment. Like if you contribute 3% they match 3%. I don't really care what the fees are at that point. I'm going to take that 100% return on my investment. Now, after we get the match, we can start exploring. Okay, what's next? I still think there's a really good argument to be made for those pre tax dollars. When you consider the tax savings you're getting with a retirement plan that might more than make up for the fees that you're paying. And you know, to the point of the original question that we were answering, other options are really limited. I mentioned the traditional IRA, but that has a cap of $7,000 if you're under 50 or 8,000 if you're 50 or older. So still, we're not really getting a ton of dollars into that traditional IRA. I find the 401k workplace retirement plans really competitive, even with the fees. Yeah, we can look at brokerage account, we can look at health savings accounts, we can look at different account types. But that tax savings, I think you need to quantify that and see if it makes up for the fees.
- [10:01]
A
Totally agreed. Yeah. So the company match, unquestionably, I think almost any case that I could ever think of. You really want to get that match, right? So Rachel just called it essentially the best deal you could ever get. Totally free money. Don't pass it out because essentially once it's gone, it's gone. It's the same with any, like, once that year passes by. Okay. The ability for that match is gone. You can't retroactively get it. So you can. However, upon separation of service, you can roll your 401k into an IRA and get it into a low, low fee. But let's be clear, if you don't have the money sitting there, you can't do anything. So, Rachel, the other thing, which is a total aside, we've actually had a lot of people who have listened to this podcast over the last seven and a half years who have seen their terrible workplace 401ks and said, I'm actually going to try to make some change in the world here. Yeah, right. Like, which is awesome. They go to their HR department, they maybe take my old article of the Vanguard and the impact of fees on your investments over richmondsavers.com and show them like, hey, look, having these expense ratios of 1 to 2%, this is going to cost all of your employees, including you and including the people who run this company, essentially half of our net worth. So maybe it's time for us to not have these ridiculous fees. Let's get some index funds. And I've had countless emails come in from people that, wow, I can't believe I did this. I went to HR and they listened. And now we have these new fund options. So don't just give up. And I mean, not to be cliche, but be the change you want to see in the world.
- [11:31]
B
Yeah. How about your fellow employees as well? I've actually drafted emails for some of my clients to send to their HR because it's just, to be honest, it's a pretty simple change most of the time for the employer to find better investment options. And it also is, you know, you can phrase it in a way of this will make you a more competitive employer where people want to work here. Because, you know, of course we look at salary, we look at wages, but we also look at benefits when considering where to work or where to start working somewhere else. So if the employer cares about remaining competitive and you can kind of phrase it that it's in their favor as well, then that could be a really good argument that you make. I want to give one clarification here because I have the numbers in front of me, but I was looking at 2023. The publication for IRA deductions is, I want to say 590A for the IRS. And they don't have like the updated tables, but they do have updated numbers that I was able to find. So I mentioned before, the phase out for an IRA deduction if you have one spouse covered by a workplace plan starts at 218,000 and is fully phased out at 228,000. The updated numbers for 2024 starts at 230,000, fully phased out at 240,000. So if you're looking at it for this year, you'll want to pay attention to those numbers.
- [12:50]
A
Great clarification. And I think we move on to the next question, which came in from Scott, and Scott started saying, bookmark this for the next time you talk about backdoor Roth options for those of us who use it. He said. My accountant told me last year during a consult that there's some grumbling among accountants about how fast folks do the rollover to Roth IRA after funding the non deductible part. He offhandedly mentioned that I might want to consider waiting a while before moving the money from the non deductible IRA to the Roth ira. I usually just do a lump sum in January, and when hits, I immediately do the Rollover. But in 2023 and 2024, I've ascribed to adding a month plus one day once the money hits. So now it effectively happens in February. I'd love to see what, you know, what you can dig up, what your thoughts are. So, Rachel, that's. What are your thoughts on it? Yeah, there's a lot of thoughts, I'm sure. First, maybe like a quick overview for a lot of people who don't even have any idea what we're talking about.
- [13:48]
B
Yeah. So a backdoor Roth IRA is used when your income is too high, where you can't make just a regular Roth IRA contribution. So Roth IRA contributions aren't technically available for everyone. There is a income limitation on it. And when you make too much money, you are phased out of being able to do what I call a direct Roth IRA contribution. The backdoor Roth IRA is a way around this. It's a legal loophole. Each step in it is completely legal. And that's what I want to talk about here, is the different steps that it takes. So just to go through it quickly, to do a backdoor Roth, you make a non deductible IRA contribution. So you're going to send money to your traditional ira, you won't deduct it at tax time. And then you do a Roth conversion where you transfer the money from that IRA to the Roth ira. And because the dollars in the traditional IRA were post tax, that conversion should not be a taxable event. And you're going to report all of this at tax time on Form 8606. So you can tell your accountant what you did, or if you file yourself, just remember to fill out that form 8606 so you can document the steps that you took. Now, the question here, actually, I do get it sometimes, and it's something I've thought about. So I thought maybe we could talk about it just for a second. But the point is, like I said, every step here is legal. You can make a non deductible IRA contribution, you can do as many or as much Roth conversions as you want. But what happens is it's this rapid succession of events where hypothetically a court could look at this and say your intent was to make an impermissible Roth IRA contribution. And so the solution here is to not make it a rapid succession of events, to add some time between each step. Now, this is completely opinion based. And I've seen people have different opinions on this. Some people say, back to Roth is legal, it's a legal loophole. Congress is aware of it. They could close it at any second. They talk about closing it. So there's not much you need to worry about. Some people Say, let's just be safe and between the non deductible IRA contribution and the Roth conversion, add a little bit of time. How much time? That is completely subjective. We don't know what qualifies as enough time. Some people say to this listener's point, about a month and a day, some people say a year. And during that year you should invest the funds in your traditional IRA so that it's not a clear rapid succession of events to get it over to the Roth. Personally, the way that I've gone about this is it's changed most of the time. I just do it pretty quickly with the assumption that there's tons of people doing this and I'm just not that concerned. And this is a loophole that they are familiar with. But for anybody who is a little bit more concerned, I think like a month to a year, depending on your tolerance for risk here, I guess is appropriate. But that's kind of the point behind it, is that that rapid succession of events, they could argue that your intent was to make a Roth IRA contribution rather than a non deductible IRA contribution. And then later you decided to do a Roth conversion.
- [17:00]
A
Right. And the funny subtext is, of course, that was your intent. Right. Let's be clear. But right. Like you said, this is legal and certainly hundreds of thousands, I assume millions of people do this. And Rachel, it's funny like we all have our comfort level when it comes to certain things. And the backdoor Roth IRA has fallen below that bar for me for comfort level. And I just, it, it's not even like an ethical or more like a. It never seemed right to me, but it's, I'm not, not doing it because it just like there's just something about it that just doesn't sit well with me. And it like the juice never seemed to be worth the squeeze for me, I guess because there's also some other complexity, isn't there? Like if you have other IRA accounts, is there's some like significant complexity, right?
- [17:47]
B
Oh, yeah. I mean, you don't want to touch this. If you have any pre tax dollars in traditional ira, that's what subjects you to the pro rata rule. It makes that Roth conversion partially taxable. Not worth it. If you have pre tax dollars In a traditional IRA, to do this clean, you need an empty IRA. An empty IRA everywhere, because they consolidate the IRAs, some people try to get around it by saying, well, I've got an empty IRA here, let's just consider that one and ignore the 100,000. I have in this other IRA. That's not how it works. And then I see people not reported at tax time on Form 8606, and they've done it for like five years and have never reported it, which makes things even more complicated. So it's something that I see some people wanting to do, but you definitely have to make sure that you get it right. If there's any confusion or you're worried about the complexity, to your point, it might not be worth it.
- [18:39]
A
Yeah. And I do want to, just as we close this out, make a simple distinction also between this backdoor Roth IRA and the Roth IRA conversion ladder. Because I think a lot of it you said in there really quickly, Congress is aware of this and they talk about closing this loophole. And I think people conflate the two of this, the Roth IRA conversion ladder, which we talk about a lot, and this backdoor Roth ira. So this is my own kind of editorial, is, yes, of course they're going to close the backdoor Roth ira. Like, it's ridiculous, right? Like, it was clearly never meant to be this way. You're making a non deductible contribution and then you're moving it over to Roth just to circumvent these rules that very obviously exist. Let's be clear, like Rachel said repeatedly, this is legal. This is my editorial of like, come on, guys, let's use our common sense. This was not the intention. So of course it's eventually going to get closed. You have to expect that it may or may not. I mean, Congress moves at a glacial pace. So like, I'm not saying definitively it's going to happen next year or even 10 years from now, but if you use logic, it's going to be closed. Now contrast that with the actual important thing for the FI community, which is the Roth IRA conversion ladder, which you guys talked about, which is, I think, a very substantively different thing. Now, I could be wrong. I'm just one person. This is my opinion. But you are doing something where you're saying, hey, I have a traditional ira, I am essentially making this conversion to Roth and I'm paying the taxes on. So you're not circumventing anything. You're essentially saying to the government, this is a taxable event, I'm paying tax on it, and then it ends up in this Roth ira, and then it's subject to the Roth IRA rules. Like, to me, that was a very logical thing. Like, okay, I have it in this one. I'd like to make the conversion to this other Format, the Roth format. I'm very legally and appropriately paying the tax, or not, as it may be, but I'm putting it on my tax return as a taxable event, and that's that. Like that. To me, just from a logical standpoint, why would that go away? Congress wants to raise revenue, so why would they ever take away a perfectly valid way of saying, like, hey, guys, tax me on this? It just doesn't stand up to scrutiny. So I did want to create that separation here, Rachel, between the two. And again, we can never forecast the future. Logic doesn't always work when it comes to the government in Congress. Right, but just using my logical side of the brain, I think that makes sense. I'd love to hear your thought.
- [21:09]
B
No, I agree. Irs, Congress wants their tax revenue as quickly as they can get it. That's why we have required minimum distributions at a certain age. That's why when you inherit a traditional ira, a lot of new rules are forcing you to take that money out within 10 years. They want that tax revenue, so they don't want to delay it. So I agree that Roth conversions is a way that they can get this money taxed even quicker. Although to your point, sometimes it's not actually taxed if we're really strategic with how we do it. But I don't see that closing the backdoor Roth IRA loophole. It's a loophole to get around. It is, to me, just silly. They either need to close it or remove income limitations on Roth IRAs. The intent was never to allow higher earners to contribute to a Roth IRA. The limit is so low, though, the $7,000. To me, my thought process is, if you're not going to raise the limit significantly, just take income limitations off. I mean, I don't think anyone's getting really wealthy off of a $7,000 contribution every year. So it is a loophole. Probably going to be closed at some point. I don't know what's going to happen once they close it. But to your point, yeah, Roth conversions, I see. Staying on the table, I think they make sense.
- [22:24]
A
All right, well, we will stay tuned, as that means. Right.
- [22:29]
C
Thanks for listening to Choose a F and for all your support of our mission here. The absolute best way to support Choose a Buy is when you sign up for your next rewards credit card to use our cards page at choose a buy.com cards. I keep this page constantly updated, so it should always be the top resource for you. Thanks for being part of our community and for your support.
- [22:49]
A
All right, Rachel, so our next Questions. We have two actually that are both asset allocation related but I think we'll split them up here. So we'll start with Shane. So Shane said, I've been listening for a while. Was re listening to episode 176 with the 3.5% or 4% rule. What are the percents of your equity slash bonds for your taxable account to never dwindle down your main principal amount. Do you leave it in VTSAX forever? And since it follows S&P500 it will give a 8 to 9% average yearly return. Therefore you'll never run out. I know some years may have a 2% or even negative return but then others will have a plus 20% to counterbalance. Right now I invest monthly in VTSAX and I didn't know if I should stay in that for life or if I need to switch to more bonds as they get closer to my five number and five date. So Rich, I think this is, I mean the most fundamental. This is as broad of a question about asset allocation and safe withdrawal rate and such. I'm so fascinated to see how you took on a big one here. How are you going to answer this?
- [23:53]
B
I'm curious how I'm going to answer it too. This is the hardest type of question to answer and it's also one of the most common questions I get because asset allocation is really important. Timing it correctly to some extent is important as you approach retirement. And I notice most people delay it probably a little bit later than they should. You know, they might come to me within five years or one year away from retirement and they're still a hundred percent inequities and they say I want to retire. What do I do with my asset allocation? And it's difficult because it really is customized to each person. I was actually just listening to your drawdown episode with Carson and Fritz and even they, I could tell, had a really difficult time giving any type of rule of thumb for asset allocation. There's so many different ways we could go about it and it does depend on how much somebody is going to rely on the portfolio for income. Because somebody could have other income sources coming in, they could be pension, it could be just side hustles, it could be anything. And then other people might have a longer time horizon in retirement where some people are traditional 30 years, some people are 60 year time horizon that has a massive impact on what your asset allocation needs to be. The important thing is when you think about it, the 10 years leading up to retirement and then the first 10 years of retirement are really important for how your retirement is going to play out. So we do need to pay closer attention there. And within 10 years of retirement, we do need to start adding bonds. How much bonds completely depends on the person, their time horizon, other income sources, how big their portfolio is. But we do need to start creating safe buckets or just safe assets within your portfolio. Because what happens is when you're preparing and you're leading up to retirement, that, that 10 years, if we enter a down market, 10 years leading up to retirement, you know, it depends on when that happens, but that could have a negative impact on retirement. But then we know, because we've talked about this so much that that when you start retirement, what really matters is that first five to ten years with sequence of returns risk. And what we mean by that is if you have a bad order of returns, if you enter retirement and we experience a depression or just a few years of a down market, it could have a really negative impact on your portfolio. So the way that we solve this is by having different assets that are stable. So equities as we know, volatile, we have up years, we have big down year. So Shane here talks about can I stay in VTS X? The risk of staying in 100% equities and drawing on your portfolio is that you're drawing on your portfolio in a potential down market. We all know how great dollar cost averaging is into a down market. We love getting those cheaper prices in the stock market works really, really well when you're in the accumulation phase. But when you're in the retirement phase, it, it's potentially dangerous, really dangerous to your portfolio. So imagine how powerful dollar cost averaging is when you're buying into the market. It's really, really dangerous when you start taking money out of the market. So the way that we protect is by using bonds and cash as a sort of insurance for your equities. So if we have a really rough first five years, I mean what I see a lot of retirees do and what I think makes sense is build up a few years of a cash bucket so they go into retirement. First few years are rough, they can pull from that cash bucket and then we have maybe another 5 ish years of bonds, 5 to 7 years depends on the person where, if we continue to have a rough time in the market, we can pull from bonds and we can leave our equities alone. That's a really high level discussion on asset allocation. But to Shane's point here, yeah, I think it's easy for me to say leaving it in 100% equities is dangerous and I would not recommend that as you approach retirement.
- [27:53]
A
Yeah, well that is certainly a succinct way of putting it. I like the, like I said, I didn't know where you're going to go with that, but that effect covers it. And yeah, I think, you know, when it comes to this type of financial discussion and you know, I hate to call it advice because like this is not advice. But Rachel, I mean I've been doing this for a long time, you know, and the fear for me is when we make things too complex that people throw their hands up and they say I can't do it. And I think that's part of the allure of index funds. And let's be clear, Shane talked about BTS X. We are not dogmatic about BTS X. In fact, I'm trying to scream from every hill that I can. BTI Vanguard's ETF is to me a slightly better option than BTS X because I think people do silly things and they think of this dogma of BTS X so they try to buy it at like Fidelity or Schwab and they get hit by these crazy fees. Like please, if for some reason you've heard VTS X on this show or some other show or anywhere essentially like you could just buy VTI at this point and it's as good or better and you're not going to get hit with feeds. So please just like remember that if nothing else. But I think my fear is that when we try to make this too complicated again that like people just give up. And I think for most of us one of the beautiful things is that the path to phi is this simple path to wealth where it's just if I can save a significant amount of my income and I can invest it in low cost index funds, I can essentially set it and forget. And I think there's a huge oh to that. But like this question gets to and like Rachel's answer so eloquently says, like you can't just blindly do that forever. And I think that's where there is a little more complexity. But I don't think it needs to be overwhelming because honestly like my skin crawls when I think about like how many funds do I need to have? Do I need to start having buckets and all this? Like, frankly I don't really want to deal with that, all that belly. So I'm fine keeping the vast majority of my personal net worth in vti. I think a good friend of Mine like Frank Vasquez who has the incredible podcast Risk Parity Radio. P A R I T Y Risk Parity Radio. I mean if you are looking to dive into like real complexity, go there, go to somebody like Carsten at early retirement. Now like if you want that, the information is out there. But like Rachel saying, like there are things to think about for me when you're, let's say five years before five. I think that is where in my own mind if I had zero dollars of income coming in. And this is another thing, Rachel also is for people who have, let's say pensions or people who have real estate income or people who have businesses in some way, like it does change the calculus entirely because you're not relying on 100% of your FI income, if you will, on just your network. So I think like that's yet another layer of this is if you have other income sources, well it mitigates the need for like your sequence of return risk and your safe withdrawal rate to be exactly picture perfect. You have a lot more potential aggressiveness because as I see it, it doesn't necessarily change your timeline. But like in my mind it's like changing my timeline in the sense of like when I truly need to rely on my net worth to cover all of my expenses. And frankly a lot of us are going to be in a situation like that where we have some extra income coming in. So how would you think about that? Like as the strategy changes when you have other income, albeit it could be a small portion but a non insignificant portion.
- [31:35]
B
Yeah, you know, it's difficult because I do run simulations, but also there are a lot of simulations out there that people can access for free too. And I know Carson has some too that you can look into. But I think that point is so important because when we blindly follow rule of thumbs, it can really, you know, delay retirement or push us to be too afraid to do something because we don't have it perfectly set out. I have clients where we start off with a higher withdrawal rate, might be like a 5% withdrawal rate, but then they have rental income really kicking in because their mortgages are going to be paid off on the rental properties in five years. And then once that rental income really kicks in, almost a hundred percent of their expenses are covered. So we can afford to start off with that higher withdrawal rate. But for that client we might need to also start off pretty heavy in cash and bonds to make sure we can make it to that point. What we want to be able to do is to participate in A recovery. If we enter a down market in retirement, we need to have cash, we need to have money in equities in order to participate in the eventual recovery. So the way that I think about it, I actually do like to back into asset allocation. And I think a lot of times people confuse this with like the bucket strategy. But I think it's a helpful exercise to say, all right, I have income kicking in at year eight of retirement. I need eight years of living expenses that I can really rely on, and then we can break that up. Three years cash, five years of bonds, something like that. And I do find from a psychological perspective, I get clients who love that, they love talking about it. And I've got eight years where I don't have to worry about it, and then I've got my pension kicking in, or I'm age 59 and a half at that point and I can start accessing retirement accounts. I know. Next question. We're going to get into taxable versus retirement accounts in the context of this question. But I think it's a helpful strategy to just start with your situation. How many years of living expenses do I want to make sure that I have? And we can't make it like 15 years because we might start getting too conservative at that point. But first, five to 10 years, if we can make sure that we've got that covered between cash and bonds, that helps with a lot of the risk here. So when we talk about, and Carson mentioned this, Kitchen has great research on it, but it's this rising equity glide path. So something I think people get confused quite a bit is if you look at a target date fund, like if you look up Vanguard or Fidelity target date funds, and you can do this, you can see how the target date fund shift and they get more conservative as you enter retirement. And even through retirement, they continue to get more conservative. But if the first 10 to 15 years of retirement are the riskiest, we actually should start most conservative for those first 10 to 15 years. And then we can start adding equities and get more aggressive later in retirement. That's kind of a difficult idea to bring up because it goes against so much knowledge that's out there, goes against what target date funds do. But Kichus has research on this for the 30 year time horizon, the traditional retirement. And Carson expanded on that research and he looked at it for the early retiree. They both kind of came to the conclusion that, yeah, it makes sense to start off conservative and start off with more cash and bonds and then increase equity throughout retirement. As we get out of those risky 10 to 15 years of initial retirement, you can look at how they do it. But if you say I want to eventually get to a 70, 30 portfolio, start out, you know, at 50, 50, calculate I want to get to 70, 30 in 15 years. And when you do your rebalancing every year, you start to add equities every year. So this works really well because in a down market, your dollar cost averaging into equities, you're buying more equities if your retirement starts off a little rocky. Now on the upside, say you, you enter retirement and market does really well. Well, you don't get to participate in the upside as much. But then we're just, we're gambling with our gains there, where it's a difference of am I going to end with 5 million or 7 million at that point? So it's really a risk mitigation strategy. But I find it really interesting and the research is out there and I don't see many people follow that.
- [35:58]
A
Yeah, that is really appealing to me. That's super interesting. All right, we're going to have to follow up on that. Yeah, maybe we could do a roundtable with them about it because that would be really, really cool. So. Okay, Rachel, I think we. It's funny, we actually loosely answered a little portion of each of the next three questions, but let's go through them nevertheless. So you alluded to Jennifer's question, which was, I have a question about funding early retirement with a brokerage account. I'm hoping to retire early in about 10 years. At age 52, I'm planning to fund my early retirement from a brokerage account. I have a Roth IRA and a traditional retirement account that I can access at 59 and a half. Plus I will have a pension at age 60 since I'm a government employee. So my question is, if I experience a down market in my early retirement, where should I poke funds from if I don't want to sell when stocks are down, Should I create a large cash account? I like the simplicity of J.L. khan's plan, holding just one stock fund and one bond fund in your portfolio. But how does that work when you're funding early retirement from a brokerage account? Since we know it's not wise from a tax perspective to hold bonds in.
- [37:01]
B
That account, I was really excited to tackle this one because asset location. I was curious to get kind of your opinion on this because we talk all the time about know, put your bonds in traditional IRAs, shelter the interest. It's a tax Efficiency strategy. When we're using that now, I find a lot of people ignore municipal bonds, which the interest is exempt from federal tax and state tax if the bond is issued in the state that you live in. So looking at municipal bonds and placing them in a brokerage account could be a strategy. But to take a step back here to really answer her question, and again, we're kind of piggybacking off of the last one. But she says, if I experience a down market in early retirement, where do I pull funds from? So we just talked about this. But that's what your cash and your bonds are for. You can think about them in terms of buckets. You could think about them like, I have 30% of my portfolio in cash and bonds. Doesn't really matter. But I like to look at them as insurance for your equities, if equities are down. Or stocks, another word for equities, if those are down, we don't want to touch them. We want to let them recover because we don't want to do reverse dollar cost averaging. So a lot of people. A strategy I like, and I see in practice that makes people feel really comfortable is in the final years leading up to retirement, they start to really build up their cash, and they like to go into retirement with two to three years of cash. I like that strategy. I don't think throughout retirement, you need to keep two to three years of cash. And I think one year of cash is fine as you go and rebalance every year. But I know that makes a lot of people feel comfortable, especially if they don't want to go back to work. If we're really trying to eliminate that scenario of you have to return to work and we want to make sure that you can stay retired, then we have to be a bit more conservative, build up the cash, introduce the bonds. And so just to answer that question, very simply for Jennifer, you'd pull from bonds or cash in that situation, if equities are down, and then if equities are up, you kind of have the option to take some gains off the table if you want, or still, you know, spend on that cash bucket. Depends on the person.
- [39:12]
A
Yeah, there's so much here. So first off, when you say one to three years of cash, so just for anybody who's new to the podcast, that means essentially you look at your life expenses. So that's what one year of cash is. Okay. This is what my life costs an entire year. How much is the cash? I would need to cover that for one year, or in this case, Two or three years. So just very simply, Rachel, I do want to ask you about reverse dollar cost averaging. You snuck that in there real quick. I'm sure that piqued some interest because I'm sure a lot of people don't know what that means. But yeah, this is what's so interesting about a question like this is there's so many layers and that's what makes this fun doing episodes like this. But it makes it really frustrating and complex because you want to give the perfect answer, but you really, you just can't. Like Jennifer in this instance, just snuck in there. Plus I will have a pension at age 60 since I'm a government employee and I assume as well would have Social Security, which would either kick in sometime in her 60s as well. So just doing the math here. She's 42, she has a pension and Social Security coming in under 20 years. I mean that if you were sitting down with her as a client, that changes the entire complexion of how someone would look at their 4%, their safe withdrawal rate. Because I suspect that we'll never know. I suspect Jennifer has enough net worth to cover her FI number just in net worth, not to mention this pension and Social Security. Right? And in which case she doesn't have to worry about a 3 1/2% stable draw rate on that money. Like she could do dramatically higher. So I suspect strongly, and this is just a guess, that she could reach fi well in advance of 10 years from now, just based on back of the envelope, knowing how conservative people are. I think like that's actually one of my concerns. And again, this is what it's so tough because I know most people in the world are not saving anything, right? So the funny thing about the FI community is we're the exact opposite. We oversafe, we work too many years. We're worried about getting the chance of success as close to 100% as possible. When realistically you run 10,000 simulations in Monte Carlo and you get a 91% success rate, that's essentially 100, right? Because you're going to make tiny little changes. You're not going to lemming style run off a cliff to $0. There's no chance of that. So I fear in the back of my mind that people are one more year syndroming. They're staying too long at their job, they're being too conservative in every way possible. That's actually a bigger fear of mine than us just running off a cliff and running out of money and being destitute and eating cat Food, Like, I find that so hard to believe. And yeah, that's why what I'm taking this couple of minutes here, Rachel, to talk about is like, I want us to think about our holistic financial situation. And I think a lot of us just assume, oh, zero dollars of Social Security. Likelihood of zero dollars. Social Security is almost zero. Right. So, like it might be cut from the current benefits, but it's not going to be cut that much to account for. It is zero is really silly in my opinion. A lot of us don't consider any of this other income that's coming in. Like, you have to consider it. The whole point here is to, like you've said repeatedly those first five years is where the issue is once you retire and you're making no income, and that's when seeking a return risk. But it's if you can mitigate that by having 10, 20, 50% of your expenses covered, it changes the entire game of this because as Shane said, and we didn't really go over this, but Shane said this in the prior question, like kind of the whole back of the envelope math of this, of compounding and our fine numbers is that we're expecting a rough 8% annualized return every year. Now, of course, we can't guarantee, like he said, there could be some years where it's fantastic, plus 20. There's some years where it's minus 20. Right. But we're expecting that rough 8% and you're pulling out 3, 4, maybe 5% at most. So you're counting a little bit for inflation in there. There's some wiggle room. Right. Like that's kind of, again, very back of the envelope. I'm not giving, like, this is not a math seminar here. This is just trying to conceptually understand there's some wiggle room for, hey, maybe those first couple of years were not that great. But if you can mitigate that by not needing to cover 100% of your expenses from your net worth, it just makes it dramatically easier. So conceptual framework over. I'd love to hear your thoughts.
- [43:42]
B
Yeah, I mean, I think the worst thing we could do here is scare anyone away from retirement because of sequence of returns risk. Because to your point, in practice, I almost like laugh sometimes when we obsess so much about withdrawal rates. Because when I see what people are actually spending in retirement when Social Security kicks in and sometimes pensions or any other types of income that come in, their withdrawal rate is so, so low. I never think about it in terms of we're taking out 3% of your, your portfolio every year because they have other sources coming in that, that cover that. Now that being said, I do think we start to pay attention to withdrawal rate a little bit more because not many of us have pensions anymore. Many of us don't have guaranteed income. Yes, we have Social Security and I know there's concerns about that, but I agree with you, Brad. The likelihood that we've been paying into Social Security our entire careers and that we're not going to ever see a dollar from that, I think is a little silly. So I do think we can rely on Social Security to some extent. But we are getting more concerned because we are having to create income ourselves now from our portfolio. So I get the concern and I get the stress. Pensions were great because they were able to take some of the mental load off of all of this. We're all thinking about it a lot more because we are the ones that have to create our pensions now. So I think it's important. But we also cannot ignore income that's going to come in and we always ignore that. We say I need 25 years of expenses saved. And that assumes that you will be living 100% off your portfolio all throughout retirement. What I see happen in practice a lot is when Social Security starts and when pensions kick in, it covers such a large percentage of their living expenses that the likelihood of failure is extremely low. So just again to point out and kind of try to answer Jennifer's question here, what we are doing in that first five to 10 years, because no matter if you have pensions coming in or Social Security, many people have a good 10 years where they need to bridge to something, bridge to Social Security or bridge to age 59 and a half when they can start taking from retirement accounts. That's where we want to make sure. And you asked about reverse dollar cost averaging. All that means is we retire, we enter down market, say we're 100% in equities and now I need my income so my million dollar portfolio is worth 700,000. Now I need to take out 40k from that. For example, we are really exacerbating the problem there because portfolio is dropping and we are selling shares and we're taking it back out. So that's what I mean by reverse dollar cost averaging. If you're saving for retirement, you're buying those low prices. If you're in retirement, you're selling at those low prices. That's the situation that we want to avoid. That's what's really dangerous to your portfolio. But like I said, I don't want to scare anyone here because it's a fairly simple thing to solve for. There's a solution there. And that's why we have bonds and cash in our portfolio. It's to protect against the sequence of returns risk. It's not to optimize returns. Equities are always going to be bonds and cash. But I just encourage everybody to think about bonds and cash as insurance for your equities.
- [47:00]
A
Awesome. Thank you for the clarification. I think that's going to be very helpful for a lot of people. Let's move on. I think we could do kind of a quick hit answer on the next two. We'll see how succinct we can be here. So Bob's question came in and Bob said, okay, I'd love your opinion and to shoot holes in my plan. My wife and I are 46. She has $1 million in retirement, mostly 4.3B 457. I also have $1 million in retirement. We own five rental properties that will be paid off in a couple of years. They will generate about $5,000 per month in net income after expenses. We currently spend about $15,000 a month in a high cost of living state where we will stay. My thought is that if I save up a million dollars in my brokerage account and have the five paid off rentals that we can both retire roughly at 48 years old, we'll have the 5k in rental income and I'd have to pull out about $10,000 a month from that million dollars in brokerage. According to online calculators, that means our brokerage will be depleted in about 13 years. But by that point we'll be over 59 and a half and can access our retirement accounts, which hopefully at that point should compound to over $4 million combined, which would at a 3% withdrawal rate get us the other $10,000 a month we need because they have the 5,000 in rental income they need to cover another $10,000 a month. I like this plan, but my wife is concerned about drawing down the brokerage account so much during that time. What am I getting right and what am I missing? I'm usually missing something. Bob says. So, yeah, what are they getting right? What are they missing?
- [48:31]
B
Yeah, this is, it's funny and I was telling you, Brad beforehand, I actually had a client where almost not the exact same, but very, very similar situation where they had rental properties I mentioned this earlier that were going to be fully paid off in a couple years. So that income was going to kick in and really help them. And then they had a decent amount retirement accounts and then decent amount of brokerage. But in order to get them to 59 and a half, we basically had to deplete the brokerage account. And at that point the retirement accounts were going to be worth and to his point it looks like they're going to be worth double when he gets there, which makes sense. And then you can start taking from there. This is a really hard thing to do. And in my simulations I like to show the clients like your brokerage account probably going to be depleted unless we have like a great sequence of returns. Market really does well, we're probably going to have a zero dollar balance by the time we get to age 59 and a half. But the important thing is to always look at your portfolio as a whole. So we're considering the fact they've got these retirement accounts there that we probably should leave a hundred percent in equities. What we have at least 10 years or at least close to it, I can't say for sure. That way they can really, really grow. Like the hole I would poke here is this might not work. Well, if your retirement accounts lean conservative, we need them to grow for the next 10 years so that they can take over in income. Other thing here we could poke a hole in is I want to get this exact amount. He said 13 years. Yeah, 13 years. So high chance those retirement accounts are going to grow, low chance that we hit a bad sequence of returns risk and they won't grow very much. That being said, we have had flat decades before, we've had decades where the return has been really minimal. You can look at 2000 to 2010 when we had the dot com bubble and the Great Recession, really bad decade. So that's kind of like a whole or just something to look at. If we hit a decade like that could be difficult. But that's the case for everybody's retirement plan. Right? Like if anybody enters into a decade like that, we might be in a little bit of trouble. We might have to decrease withdrawals or you know, look at some other type of income. But just back of the envelope math here, I don't see a problem with this. And in fact like I said at a client that almost as doing this exact scenario. But that would be the one thing where I say okay, brokerage count got to lean a little bit more conservative. So we can get through those 13 years retirement accounts, yeah, they should hypothetically double in 13 years. But we have to make sure that they're invested correctly invested aggressively to do that.
- [51:12]
A
Yeah, agreed. And so. Right. I am with you that on the surface, this plan seems sound to me. You can never tell, of course, where life and the markets are going to take us. But on the surface, Bob's plan sounds good. It makes sense. And I think also it's not even factoring in two things that we've alluded to both in this episode in the past, which are a, you can access retirement accounts before 59 and a half. So we have talked about that in depth with Sean Mulaney on episode 475. So it's not like you literally can't touch that money until you're exactly 59 and a half. Like, there clearly are ways to access that money. So let's not be worried about that. There are ways also. Not everybody's doing the math along with us here, Rachel. But. But they're assuming. So once they reach a 15 and a half, they need another $10,000 a month. So that's $120,000 a year. And interestingly, the 4 million that they're expecting is the 3% withdrawal rate from that 4 million gets you to the 120,000. So, frankly, 3% withdrawal rate is very, very low. I mean, even Carsten has said 3.25 is basically like an absolute certainty. I mean, basically, I'm putting words in his mouth, but every scenario he's ran, again, my editorial is, barring a zombie apocalypse, is you're going to be fine with that. So realistically, it can be higher. They're not counting Social Security at all. So that almost undoubtedly is a couple extra thousand dollars a month. So that changes the calculus here entirely, too. And not for nothing, but again, with my kind of like, you're not going to be lemmings just running off a hill when you spend $15,000 a month, $180,000 a year, in an odd bizarro way, you have more flexibility, right? Because whereas somebody who's saying, like, I'm only spending $30,000 a year, like, they really can't cut that much. There's not that much to cut if something goes terribly awry. Whereas somebody spending $180,000 a year, almost undoubtedly, if the option was going back to work or running out of money to unpalatable options, maybe spending $10,000 less that year or $20,000 less that year is a much better option than either of those two. So they have, in this bizarre way, a little more flexibility there. So I think, again, back of the envelope, Bob's plan seems to work for me.
- [53:40]
B
Yeah, yeah, I was going to say the. It kind of comes back to asset allocation. That's the other thing they need to make sure they get right to the point of the client that I've been talking about. One thing that I asked them, that I ask a lot of clients when it comes to early retirement is, all right, let's say you retire terrible market, that brokerage account really drops. And again, that depends on the asset allocation by how much it's going to drop. Would you go back to work or could there be a way you earn other income because that will influence the asset allocation that I recommend here? In their case, they said, yeah, I would definitely go back to work. So we were able to be a bit more aggressive. And early retirement is difficult because we have to be conservative to protect for that first 10 years for the sequence of returns risk. But if you have a long time horizon, you can't be too conservative. It starts to get really risky if throughout that time horizon you are really low on equities. So that's why I would encourage everyone to go read Carson's research on this because he talks about the rising equity glide path and he runs simulations here. Assuming you start out at 80, 20, and then you get it up to 100. The other one he mentions has a high success rate is 60, 40, you eventually get it up to a hundred percent equities. Those two had the highest success rates with the rising equity glide path. So those would be some other questions I would ask myself in this situation because that will inform asset allocation. It will inform how conservative do we have to be. Because if their answer is, if we retire, I don't want to assume that we ever have to make income again. I don't ever want to have to go back to work. That will make a difference on their asset allocation. And. And I would direct them to Carson's research if they want to start finalizing their asset allocation to see what's. What's a good plan for them.
- [55:29]
A
Wonderful. Totally agreed. All right, let's move on to our second to last question here. So Uthman sent this in and said, I have a burning fi question that I can't find an answer to. Traditional fight thinking is predicated on the 4% rule. Assuming a portfolio of index funds, et cetera, what if I amass a real estate portfolio that generates a 6% net yield, post management fees, insurance, et cetera? In theory, this reduces. And this part, Rachel, I'm a little unclear. In theory, this reduces the need to save 25x of annual spend to around 16x6% and therefore the number of years working drastically reduces. Is this feasible and is there something I'm missing? I'm curious to know why everyone isn't following this expedited strategy. Instead, 6% net yield isn't too hard to come by, especially in places like Dubai, where they are. Would love your thoughts. And if I'm missing something that could radically alter my working life. So my first thought, and this actually goes back to what we said in our most recent mailbag episode, which was episode 513. We call that make your own dividend. We got we. And by we, I mean me, mostly got a little bit spicy on. This is when you think you found some grand answer. And this is not about Uthman. I'm not, I'm not saying this specifically, but I would counsel when you believe that you've found some genius way that, like, circumvents all the other rules. I would just assume that there are, like, millions of other people who are really, really smart too, and, like, the likelihood of you having come up with like, this grand answer that you're outsmarting like dividend stocks or bitcoin or real estate investing. I have never, I've looked at these numbers so many times. Like, there's no just silver bullet answer of like, oh, if you put all your money in bitcoin, it's guaranteed to double every couple years. Like, there's no guarantees in life, guys. There's really. I promise you there's not. So, okay, I don't want to get another soapbox here, Razor, but let's just talk eye level. What is Uthman missing it?
- [57:24]
B
So there's really two different questions here because they talk about real estate and then they talk about, like, just trying to get a 6% net yield. Now it's impossible for us to comment on their real estate portfolio here. Sounds great. I have to rely on numbers here. You get a 6% net yield. Great. But when we talk about 4% rule, we have to remember we are talking about stock market there. We're not talking about real estate. We're not talking about a business. 4% rule relates to bonds and stocks. So that's what we have to distinguish here. First. When I have clients that come in with a real estate portfolio, you know, I really have to rely on them to give me the numbers. This is what the cash flow is. This is what it is after expenses. And so with real estate, I just rely on, on that cash flow that they tell me. I don't look at it and say, okay, you own 2 million in real estate. Let's assume 4% off of that you can take. Because it depends on the market. Depends where you're. You're located there in Dubai here. So I have no idea what the real estate market is like there. I don't know if this is typical or if this seems higher than normal, but for real estate, yeah, I do rely on that. The cash flow. Now, the question of why doesn't everybody just go after 6% net yield is something we did talk a lot about in the dividend episode, because that's what a lot of dividend investors say. Like, while you're doing a 4% withdrawal rate, I'm building up a 6% dividend yield. So my portfolio has to be much lower than yours has to be, and I get to retire much quicker. We poked a lot of holes into that, and that's not necessarily a great idea. And I'll just reiterate the point. But returns, safe withdrawal rates, they're two different things. I think I've said sequence of returns, risk in this episode 100 times already. But that's why they're different is because it's not the average return that matters, it's the order of returns that matters. So there's a low correlation between a safe withdrawal rate and an average rate of return. So that's why we can't just say, I'm just going to chase a 6% dividend yield and that is what I will live off of. That's fine if you can get a 6% dividend yield, but there's other big piece of puzzle here, which is appreciation or depreciation that we simply cannot ignore. And so, yeah, I mean, like I said, Brad, these are two different things. Real estate is one thing. If you're getting good cash flow on that, that's great. But to recommend that everybody go chase an easy 6% net yield is just not realistic.
- [59:53]
A
Yep, totally agreed, I think. So let's talk about this in terms of that 6% net yield first and then in terms of what we talked about before. So I'm going to start there, actually, which is, let's assume that your annual expenses are $60,000 and you have $20,000 of real estate rental income, net rental income. So after all expenses. Yes, the 5 calculation is very different then. Okay, and that's, that's fine. And this gets to the heart of the question, I think, which is you don't have to do any multiplication of safe withdrawal rates. It's a totally different thing, as Rachel just said you would take. All right, my life costs $60,000. I have $20,000 coming in, so I actually now only need to cover another 40,000. Okay. And that would be true if that $20,000 was not. We're not talking about dividends, because you and I think those are separate. We're talking about if it was a pension, if it was a side hustle, if it was Social Security, if it was, in this case, rental income that just gets subtracted, and then what's left over is what you need to then cover by the assets you have in stocks and bonds, etc. So that's really important. And yeah. So the question. If your life costs $60,000 and you had $60,000 of rental income, you're at 5, as far as I can tell. I mean, barring something else that we just simply don't know. And you're not talking about, like, okay, this is in the absolute best year, and I'm not accounting for vacancies, and I'm not accounting for any expenses, and I'm not accounting for this and that. If you're being smart with the actual business income statement for your rental business, which is what it is, let's be clear, that's a real estate rental business. If you are accounting for all those things. And what we like to say, and I'm very liberally borrowing from bigger pockets here, is in a perfect world, I think, for a lot of real estate investors here in the US you're looking for that 1% rule, okay? Which is I'm getting 1% of the purchase price in gross rent per month. So let's say I'm buying $100,000 house and I'm getting $1,000 in rent every month. Okay? So, Rachel, that 1% per month is a 12% gross return per year. Now, most people anywhere in the US find it very difficult to find a 1% rural house. There obviously are places in the south and et cetera, where you can find those. But if you just look at your neighborhood, you're not even close. So let's be clear, these are not just falling off trees. They exist, but they're not falling off trees. So this gets to the question as well. We can't just, like, pin the next house next door and say, I'm going to get 1%. Doesn't work. So you have to find it. But you can find it. So that gets you to 12% gross return. And then Bigger Pocket says you should generally say 50% of that is going to be expenses, all the expenses that are incurred, property management, taxes, like I said, these vacancies, the air conditioner breaks, you have insurance, everything that goes along. So if you're just saying, like pie in the sky, I have no expenses, or it's just the couple bucks that I spent this year, you know, those expenses are coming. You have to account for them. So that gets you down 50%. That gets you down to a 6% net income. Now, that still can be wonderful if you can find that 1% rule. And that does change the game, because instead, then on, let's say you have $2 million and you just happen to find a bunch of properties that meet that rule, you could get 6% on that, which would be $120,000 of net income every year. Whereas if you put $2 million on the market and you relied on a 4% rule, that's $80,000. So at the heart of the question, I do understand, like, could this conceivably. And this is not even talking leverage, which almost every real estate person would instantly be yelling at me, but taking, like, the fi. Accountants version of this, right. And saying, like, all right, look, yeah, I get it. I mean, like, there is a case to be made for that. It's not even counting any of the equity, obviously, because that's a separate thing or appreciation. Like, yeah, your net worth might be going up, but we're just talking about that income, the income stream from these properties. So that's how I approach it. Yeah, it could potentially expedite, but I think it's in a very different way than the question is ultimately getting.
- [64:04]
B
Yeah, like I said, it's kind of two different questions here, which is why I think we had to answer both of them. In my mind, real estate should give you the better deal because it's more work and there's more risk and there's so much more due diligence you have to do. So if I'm going into real estate, it better be stock market, as far as what I can rely on for returns. But that's why I emphasize that these are two different things. We've got your index fund investors going in the stock market. They don't want to touch it. They don't want to do any work. And then you've got real estate investors who do want to try to get a better return. They feel comfortable going into real estate. Both sound methods, but in my mind, yeah, we can expedite fi by going into real estate, but it's also just going to be more work. So There's a lot of people that don't want to go down that road because real estate makes them nervous or they don't want to be landlords or there's a lot of different issues with it. But the overarching point here is that these are separate things that we're talking about. So, yeah, we could chase a 6% net yield. I mean, I could chase a great yield on my business. There's multiple different types of investments that we could go after that could beat the stock market. But we have to look at them separately. And we can't conflate a 6% net yield with a 6% dividend yield. That's the real important point here.
- [65:17]
A
Nice. All right, I think we covered that nicely. So the last question, and you said this is going to be a land speed record for the brevity of the answer. So Robert's question. It might take longer to ask the question here. I was listening to your deep dive on Roth conversion withdrawals. I currently work for a local municipality and they offer multiple retirement plans. 401, Roth 401, 457, and Roth 457. I also contribute to a Roth IRA which has been open for 12 years. If I contribute to a Roth 401K and or a Roth 457 and roll those funds into my Roth IRA after leaving my employer, do those funds and any earnings immediately count as a, quote, contribution and can be pulled out at any time from my Roth ira, since my Roth IRA has been open for more than five years.
- [66:04]
B
So they don't count as a contribution. It's just a rollover. But the funds adopt the age of the account. So to answer this really Quickly, your Roth IRA has been open for 12 years. Those funds are going to be seen as having been in there for 12 years. So you're good to go. That five year requirement has been met.
- [66:22]
A
Nice.
- [66:23]
B
Okay, I could say more, but that's as simple as it gets.
- [66:27]
A
Absolutely. Love it. All right, Rachel, this is fun. We answered a whole lot of questions, and as always, I appreciate you being here.
- [66:34]
B
It's been a great time. I hope nothing was too complex. Some of these questions are so hard to answer because it really depends on the person. But if you are willing to do some research, especially on asset allocation, I think everybody can get there and decide on a framework that works for them.
- [66:49]
A
Totally agreed. So, as always, and as you can tell, we are fielding these questions, I quite literally got that other question essentially while we were recording this and was able to read it. So currently feedbackhoosed by.com is the best way to send them in or really to reply to my newsletter that comes straight to me. We are going to and maybe by the time this goes live we might have a new feedback form on our website which is going to be really robust and enable you to categorize where the feedback goes to and the specific type of questions. So I'm hoping to make it easier to streamline everything. So keep an eye on that. Choose a buy. Com should be a much better viewing experience in the coming days, weeks and months. So stay tuned on that. Rachel, where can people find you?
- [67:34]
B
Yeah, website is Rachel camp wealth.com it's camp underscore wealth on X or Twitter and Camp wealth basically on every other social media platform.
- [67:42]
A
Beautiful. All right, until next time. Thanks for being here.
- [67:45]
C
Thanks thank you for listening to today's show and for being part of the Choose a 5 community if you haven't already. The best ways to get involved are first subscribe to the podcast. So you're listening to this on a podcast player and just hit subscribe and then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand and I send it out Tuesday morning. So just head over to choose if I.com subscribe and it's really, really easy to get on the newsletter list right there and I would greatly appreciate it. It's the best way to get in touch with me. You can actually just hit reply to any of those emails and it comes directly to my inbox. So that's the way that I keep a pulse of the community and how we keep this the ultimate crowdsourced personal finance show. And finally, if you're looking to join an in real life community, we have choose a vi local groups in 300 plus cities all around the world. So head to choose a vi.com local and you'll find a list of all of Those cities in 20 plus countries all across the world. And if you're just getting started with VI or you have a family member or a friend who you think would be interested, two easy ways choose a Fi episode 100 is kind of our welcome to the Fi community and even though it's a couple years old at this point it still stands up and it's a really great just starting point to get an understanding of what is financial independence. What are we doing here? Why are we looking to live a more intentional life where we save money and use it as a springboard to live a better life and then choose if I created a Financial Independence 101 course that's entirely free. Just head to choose fi.comfi101 and again, thanks for listening.