December 28, 2025 • 33 mins
Hour 2: Many real estate investors are finding themselves in a tight spot right now as market conditions soften.
Ask HTM: Rajet might need to move back to India to take care of his parents. How should he prepare financially?
The gamblification of America is getting worse, including supposed '100% cash back credit cards.' Matt and Joel issue a warning.
Ask HTM: Ethan wants to know if he should opt for a Roth or traditional account.
See omnystudio.com/listener for privacy information.
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Episode Transcript
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Speaker 1 (00:00):
Kf I AM six forty. You're listening to how to
Money on demand on the iHeartRadio app.
Speaker 2 (00:10):
All Joel and Matt want to do is help you save,
invest and enjoy more of what matters. This is how
to Money with Joel Lar's Guard and Matt.
Speaker 1 (00:21):
Altmix KFI AM six forty live everywhere on the iHeartRadio app.
(00:48):
This is how to Money.
Speaker 3 (00:49):
I'm your host, Joe lars Guard and I am the
other host, Matt Altmix. And if you have a money question,
we'll send it our way. All you have to do
is record your question on the voice memo app there
your phone and send it over via email. You can
find the simple instructions at how toomoney dot com, forward
slash ask. We got to get to the ludicrous headline
of the week. This one comes from Business Insider and
(01:10):
it reads the wanta be real estate locals going bust?
And this story hits home for a newish crop of
real estate investors who took risky bets, who made overly
rosie projections, and who didn't keep enough cash on the sidelines. Matt,
when we talked about real estate investing, there's so much
hype out there, and there's so many people on the
(01:31):
socials trying to tell you how much money you're going
to make as a real estate investor, often hiding the
reality behind the scenes that it's a lot harder than
you might think, and there's a lot you have to
be prepared for if you enter into that space as
an investor. And so Business Insider had this article documenting
how landlords are using something known as DSCR loans to
(01:51):
buy properties that would cash flow without having to prove
credit worthiness and so basically they're getting loans based upon projection. Yeah,
I think that this single family home I'm buying is
going to get three thousand dollars a month in rent
and the mortgage is only twenty five hundred dollars, and
so the lenders like, great, let's go, And so people
are finding themselves between a rock and a hard place.
(02:14):
It makes me think of the Great Recession too, met
that even these loans are available to people, that it's
a risky bet for a lender to make, and then
for people who want to be landlords, just because you
are offered this loan doesn't mean you should take it,
because for a lot of people, the pre purchased guestamates
have fallen short and the rental market has slowed down meaningfully,
which means an uptick in vacancy on expected repairs or
(02:35):
some declining rents, or a mix of all three of
those things creates highly unstable footing switcing just a lot
of landlords like, yeah, I'm in this loan. I'm losing
money every month on this rental property that I thought
was going to be a financial win for me. Yeah,
and we are all about eliminating the jargon. So DSCR,
he said, that's what they are, right. The DSCR loans
(02:56):
stands for debt service coverage ratio loans, where they are Yeah,
they're seeing the loans not on how much money you
have in the bank, or how much money you make
and how much debt you're servicing, but just on the
simple projections. And I'll be honest, especially for someone who's
been self employed, man, getting any of my properties, but
certainly that very first one was so freaking hard.
Speaker 4 (03:16):
You had to prove a lot.
Speaker 3 (03:17):
Oh my gosh, the amount of information that the bank
was reaching out to us about like it was incessant,
it was NonStop, Like, okay, prove your income okay, proove,
Oh are you sure these are all.
Speaker 4 (03:29):
The accounts you have?
Speaker 3 (03:30):
Show us how much money you got in the bank,
Like I was halfway expecting like a full body cavity search.
Speaker 4 (03:36):
Like like are there any debts in there? Like they
were wanting to know everything.
Speaker 1 (03:39):
You're also expecting a little Rumpelstiltskin like put your first born.
Speaker 3 (03:42):
Yeah, And I was, And I get it though, because
they are trying to mitigate that risk, and so I like, honestly,
had I been aware of those back in the day,
like I may have been tempted a little bit to say,
you know what, let's just bypass all of that headache
and instead, let's let's get one of these DCR loans
to where we can.
Speaker 1 (03:58):
Avoid that all together, which I I agree it sounds
nice in principle as the investor, but especially hear if
your projections are too rosy, like, it's much riskier for
the banks and for the person doing the borrowing. And
so as somebody who wants to get into rental real estate,
you've got to be really really careful before jumping in
on one of these loans because it can come back
to bite you. It's just been really interesting, like Warren
(04:20):
Buffett has that quote about when the tide goes out,
we see who'swimming naked. And that's really what's happening in
a lot of the real estate space right now, where
people who bought at the top of the market projecting
just continued year over year increases of the rents or
thinking that the market where they were buying was going
to just continue to be red hot. Well, a lot
(04:41):
of those projections have proved to be untrue, and so
they're finding themselves with their pants down.
Speaker 3 (04:46):
Yeah, I think, or when just swiming naked, your pants
aren't down, they're just missing.
Speaker 4 (04:50):
They're just gone. Yeah.
Speaker 3 (04:53):
I think the biggest problem with real estate specifically is
when you have like a trifecta of bad things happen,
right Like, if you have declining rents in a given
area A, then you have on top of that, maybe
you've got a big expense on your specific property that
b But then let's say you've got some vacancy right
like something like that. When you have like a trifecta,
a multiplying effect, that's when it really can come back
(05:14):
to bite you, I think, and cause like you can
take this like similar risks with a stock market, right,
Like you can have overly rosy projections and you're like,
all right, I'm going to expect to earn ten percent
in retirement, maybe earlier and in five percent, But that's
just a singular factor where you can be like, Okay,
we need change that, like moving forward, we haven't been
earning the rate that we're expecting, and yeah, it just
(05:37):
feels a bit more under within your control because like
a lot of times, like how do you combat that
when you are in retirement, it's by modifying your spending
as well as opposed to some of these outside of
your control things like what is the market, the housing
market overall doing. Oh I wasn't expecting that perfectly healthy
looking tree to get exploded and go through my roof.
(05:57):
Like there are some of these out of your sphere
influence factors that when all stacked up together, yeah, it.
Speaker 4 (06:04):
Can really mess you up financially.
Speaker 1 (06:05):
There's an article two this week specifically about real estate
flippers and how they're having a tough time, which makes
sense because as home prices are moderating, homes are sitting longer,
the prices are going up of basically everything on the
renovation front. At flipping, which has always been a risky endeavor.
They're facing a really tough climate. So if your house
sits for let's say five months instead of one month, like,
(06:28):
that's a lot of extra money that you are just leaking.
It's leaking like a sieve. And so I think the
moral of the story here is that real estate investing
isn't for everyone, and this is a particularly tough climate
to get into real estate investing, whereas like ten twelve
years ago, it was just so much easier, like the
deck wasn't stacked against you nearly the same way. Can
(06:49):
you still be a successful real estate investor in twenty
twenty five, twenty twenty six, Yes, but it's just going
to take a lot more due diligence and a lot
more preparation for potential risk.
Speaker 3 (07:01):
Yeah, that's right. You are listening to how to Money.
I am six forty. You're listening to how to Money
on demand on the iHeartRadio app. This is how to Money.
I'm Joe Larsgaard and I am Matt Altmix. If you
are over on Facebook and you want to join a
group of like minded folks who have money questions and insight,
(07:22):
please go ahead and join the how to Money Facebook group.
Speaker 1 (07:25):
This question is from a listener who has a lot
of things in flux right now.
Speaker 5 (07:29):
Hey, Madam Joel, I hope you guys are doing well.
My name is Rochet and I live in Denver, Colorado
with my wife and two pets, a doc and a cat.
My questions today might be a little bit different and
involve moving internationally. So my parents live in India. I'm
originally from India. I've been in the States for the
last eight years, and my parents they are in their
(07:52):
mid seventies, so there's a high probability that my wife
and I may need to move to India for a
few years to take care of them. My sisters are
in the same city as my parents and they care
of them as needed. But you know, in our culture,
it's kind of like my responsibility to take care of them.
So my questions are around what if any changes to
(08:14):
future investments in savings, You guys would suggest I should
start thinking about if I know that we may have
to move to India for a few years, but since
we don't know when we'll move, how long we will
need to move for, and whether or not we will
work while in India and what income would look like
when we are there. My wife and I just turned
(08:35):
thirty this year. We don't have any kids, but we
do plan on starting a family in the next year.
Today we make around two hundred thousand dollars a year
and contribute to various retirement accounts, but we don't max
them out. We have six months of emergency funds saved
up and have no credit card debt. My wife has
around thirteen thousand student loan debt with interest rate around
(08:57):
or under four point three percent that are current in
forbearance and we make monthly payments of arm five hundred
dollars for them or towards them, and soon a new
home loan of around seventy five thousand dollars at an
interest rate between seven point seven to eight point five
percent for a house in India that I'm aiming to
purchase by the end of December for my parents. As
(09:20):
there are quite a lot of unknowns and no defined timeline,
I would love to get your thoughts or advice on
how I should start thinking about the possibility of moving
to India and make changes to retirement accounts, investments, and savings.
I love the show. If you guys are ever in Denver?
Hit me up. My wife and I would love to
host you guys and prepare some street Indian street food.
(09:42):
I mean, thank you for taking my question.
Speaker 4 (09:45):
Oh Joe, do you like Indian street food? I don't know.
Speaker 1 (09:49):
I'm not very cultured, so I don't know if I've
ever had Indian street food.
Speaker 3 (09:52):
I've never been to India and I have rarely had
Indian food.
Speaker 4 (09:56):
But I'm down.
Speaker 3 (09:57):
I've had some great I'd like me some curry curry before.
But yeah, I don't what what is Indian tree? Do
you get curry in a bowl and as Indian street
food or is it more like meat.
Speaker 4 (10:06):
On a stick or something? I don't like a kebab.
I don't know.
Speaker 1 (10:09):
I need Reject to enlighten Minty to come hang out, Hey,
hang on Denver and have them whip them up for you.
You know what I'm gonna Maybe I should email this
to Reject to he he's got multiple pets, he said,
and where's he gonna put the pets if he moves
to India?
Speaker 4 (10:23):
Like?
Speaker 1 (10:23):
Do you want me to volunteer your house as a
place where you can We are.
Speaker 4 (10:26):
Currently a pet free zone.
Speaker 3 (10:28):
We've we decided Kate and I, Oh my gosh, did
I tell you about this?
Speaker 4 (10:32):
We talk about this on the show. Some friends of
ours they what kind of dog do they have?
Speaker 3 (10:37):
I can't remember if they have the poodle or if
they have the Burmese mountain dog, but they they when
you mate it with another and they create these you're
making me think of dumb and dumber right now. What
do you get when he made a bulldog and a shit?
I think they're like Burma doodles or something. I don't know,
but they're just like the fluffiest, most hypo allergenic, like
(10:57):
cute little fluffy puppies. And some friends of ours they
had a litter and they always try to get a
bunch of their friends to experience the delights of having
this beautiful puppy. And Kate and I were just like,
we can't even bring this up to the kids. Listen,
this is a non this is a non starter. I'm
not gonna touch it someday later life. Unlike you, y'all
got at least two cats, multiple chickens.
Speaker 1 (11:20):
Sorry, I'm going to divulge. Just go for one more
second on a weird tangent. My cat one of the
cats likes to hide in our bathroom vanity. Like she'll
open the drawer and like somehow shove her way back
in there.
Speaker 4 (11:34):
It gets up underneath.
Speaker 3 (11:35):
Every once in a while she can't get out, So
I'll go to the bathroom last died it like before
I go to bed, and I hear like.
Speaker 1 (11:41):
The cat basically being like, let me out. It's really funny.
Speaker 3 (11:45):
Okay, let's get to this is what you're missing on
on if you don't have pets in your life.
Speaker 1 (11:48):
Yes, is right, that's right. The cats are great, but
no dog for us right now. And Jette like, this
is a great question. I love too. I have so
much respect for your culture and for the emphasis that
it seems to be placed on taking care of parents,
and totally that's something that I think is just less
common here in the states Man, and.
Speaker 3 (12:08):
It's less Yeah, it's less common. I do think I
am hearing more families who are doing that though. Yeah,
like I'm sure return back to some of those. Yeah,
the multi generational household conversation is one that I've had
more and more, and I love hearing that because I
think it makes sense on so many on so many friends.
Obviously from a financial standpoint, you're kind of pooling your
resources to a certain extent, but from a relational standpoint,
(12:30):
for kids to grow up with their grandparents, like truly
getting to know them, and for them to truly get
to know the kids. I didn't have that, Yeah, I mean, like, yeah,
grandma and grandpa man, they lived on the other side
of the country, so.
Speaker 1 (12:41):
Same with me.
Speaker 4 (12:42):
Yeah.
Speaker 1 (12:43):
And I think the book Being Mortal by an American
Indian doctor really kind of helps cement that home for
me too a little bit, where I was like, oh, actually,
like I see the beauty in that. That's something that
like feels culturally different than what I've experienced, but it's
something I'm fond of and family.
Speaker 3 (12:59):
It's a creative solution to a tough problem that a
lot of people have. Yeah, Like, it truly does make
sense on almost all fronts.
Speaker 1 (13:06):
I'm seeing my neighbors do it right now. Like my
neighbor next door, she's one hundred years old, her son
lives across the street, and she's got a point where
she can't even even though they live really close to
each other, she can't live alone at all, and so
somebody spends the night with her. Basically every night and
this is kind of like elder planning in American culture.
It's gotten really really expensive and you almost have to
(13:28):
think outside of the box and live your life a
little differently so you can avoid some of those crazy
long term care cross.
Speaker 3 (13:34):
That's right, yeah, and Rajet he also talked about how
much money he said he's got six months worth of
emergency funds set aside, and the ability for him to
at some point go and help take care of his
folks is I think one of the best uses of
not only emergency fund but with it being a potentially
extended period of time of what you might call peace
(13:55):
out money or just a degree of financial independence. It's
not just us for traveling the world and for ditching
work for a sabbatical, but being able to take care
of the people in your life. It's far less stressful
if you have a strong financial buffer, or if you
can just reduce work, you know, take some time away.
I think amassing more investments and having that liquid cash
(14:17):
is going to give you Rejet the ability to make
the life changes that you but you need to make,
but the ones that you truly just want to be
able to make. Here giving you the flexibility to make
some of these bigger changes if need be, depending on
how long you're going to be over there. Like you said,
so many unknowns. But if that was me, I would
want to have more though than just the six months
(14:38):
worth of living expenses I would want to have.
Speaker 4 (14:41):
I'd want to basically beef that up.
Speaker 3 (14:43):
I'd be living on a lot less in order to
essentially build up like this war chest to just give
you the options to stay over there maybe longer then
you might normally feel comfortable. But I having more cash
like this on hand, it just is going to decrease
the level of stress that you and your family is
going to experience. I will say based on he mentioned
the house that he's sounds like maybe purchasing for his parents.
(15:07):
I know that the cost of living in India is
substantially less than in America on average. So one benefit though,
is that you've got the ability to have your dollars
go a whole lot further while you're over there.
Speaker 4 (15:20):
So yeah, just one of the factors to keep in mind.
Speaker 1 (15:22):
Yeah, And I think what you're getting at too, is
that money isn't just to buy. The smart saving and
investing over a long period of time isn't just to
buy your own freedom, or to buy fancy vacations or
anything like that. But it can really facilitate the kind
of life you want to live, especially with your family.
And makes me think of like, you know, Matt, you know,
(15:42):
and I've talked a lot about this. My mom is
not doing so great right now, and I've had a
lot more time, a lot more time flexibility, partly because
over a lot of years I've earned it, over a
lot of years of hard work with my money, and
so I've been able to spend a lot of time
with her, take her to a doctor's appointment, grab a
random lunch or coffee or something like that, and that matters.
(16:03):
Like what Richard is doing here, I'm doing it on
like a smaller scale, right, I'm not moving across the
country to be with They're already liberally close by.
Speaker 3 (16:10):
But I think that's not Indiana Joel Dah I know, yeah, okay, yeah,
just making sure.
Speaker 1 (16:14):
So I just love that. I think I would love
to see more people be able to experience that sort
of flexibility that money can buy.
Speaker 4 (16:22):
Yeah, yeah, and you would.
Speaker 3 (16:23):
It would be much harder to handle that situation if
let's say you didn't invest at all in your twenties
or your thirties, and you're like, Okay, now some time
to buckle up and finally grow up and start setting
money aside in my four one k Yeah, you'd be like, well, no,
we can't, like I can't not work, But you can
say no, no, no, I can not work for the
things that matter.
Speaker 1 (16:43):
The most in the here now. Yeah, you're spot on,
my friend. All right, Hey, we got more money saving
information to get to. This is Joel Larscard and Matt
Altmis and you're listening to k IF. I am six
forty how to Money on demand on the iHeartRadio app.
Speaker 4 (16:57):
This is how to Money. I am Matt Altmix.
Speaker 1 (17:00):
And I'm Joel Larscard. Don't forget to sign up for
the how to Money newsletter. You can find that up
at how tomoney dot com slash newsletter.
Speaker 3 (17:06):
Joe, we haven't talked about gambling in a while, and unfortunately,
it seems like all signs are pointing to everything getting
worse on that front. Like I'm thinking about like the
the NBA arrests, which I don't think we've we talked
about on the show, right, Yeah, But in addition to that,
we've seen like the meteoric rise of just different prediction websites, which,
let's just be honest, are gambling by another name. But
(17:28):
there's been an influx of calls to the National Problem
Gambling Helpline, particularly in states where gambling has been legalized,
But there's also been a significant rise in bankruptcies in
debt collection efforts in those states as well. Are they
perfectly correlated, Maybe not, but I do think it is
evidence of more more problematic behavior because it's just really
(17:51):
hard to watch a sporting event and not be swayed
by the tsunami of ads that you see to encourage
you to participate in all these different, different.
Speaker 4 (18:02):
Kind of bets.
Speaker 1 (18:02):
Plus you're gonna give you free money to get started, right,
So it's like, here's a free hundred dollars.
Speaker 3 (18:06):
To place your first bet, and it feels like you'd
be a total dummy to not take them up on
that offer, and then they've of course got their hooks
in you. But in an economy that feels a little
bit less robust, I think we're just seeing more people
out there just partake in betting in the hopes of like, oh,
maybe I can actually use my knowledge of the game, like.
Speaker 4 (18:27):
I actually watch a lot of basketball. You know, I
watched a good amount of football.
Speaker 3 (18:30):
Maybe I can I can make a buck while I'm
also entertaining myself.
Speaker 4 (18:34):
And it's not panning.
Speaker 1 (18:35):
Out for a lot of folks. No, it's not. Yeah,
And so I think it's especially nefarious when it's in
your pocket twenty four to seven you can access at
any time. And then on top of that, there are
parlay and prop bets that are because it's less just
like which team is going to win today? I think
the Bills are going to win, And now it's getting like, well,
is what about a misfree throw or a quarterback in completion?
(18:57):
You can bet on stuff as minuscule in a game
and the potential outcome as a drop ball, Yeah, which
is insane to think about. Yeah, which is where this
is where the Robin Hood story comes in, because.
Speaker 4 (19:09):
They are enabling this kind of behavior. They are unfortunately.
Speaker 1 (19:12):
Yeah, they've they've launched NFL parlay and prop bets on
their prediction market platform, and those I think are a
big part of the problem. And so it's just it's
kind of like fantasy football. It's like it did make
the game more interesting to watch. I think for a
lot of people. But this is a way that gets
you more heavily involved in the outcome of the game,
(19:32):
but and in every little thing that's happening along the way.
But the downside of you losing is that you're losing money,
not that you're losing pride amongst your fantasy community. Right,
so the stakes are a lot different.
Speaker 3 (19:44):
Or your inability to be forced to wear a dress
like while holding a sign saying that you lost the
what is it like, the yeah, the fantasy pool, that's right,
that's right, or having to wear the jersey of the
team that you hate, or something which seems much more wholesome.
Oh my gosh, you compare to just folks who are
ruining their financial lives.
Speaker 1 (20:00):
And it feels like we're entering this like gamblification of society.
And what makes me say that is not just the
things we've talked about. But there was another an app
or a website that we found out about this week
called Covered and this website bills their service as paying
bills made fun. Matt, when's the last time bill paying
was a joy for you?
Speaker 4 (20:19):
Yes? I don't know. I like to cross it off
my list.
Speaker 3 (20:22):
Yeah, but not in the way that they're advertising, right, Yes, yeah,
my red flags are already up when I read that
this covered is being sold as a credit card with
gaming features embedded, or you can win back your purchases.
You can get, as they say, up to one hundred
percent cash back. Oh Matt, make sure thirty percent robin
Hood card looks super lame. If you get one hundred percent.
Speaker 4 (20:42):
Cashback, says back, Yeah, sign me up. I'd be a
duty not to, right.
Speaker 1 (20:46):
So you used a covered card to buy stuff, and
then you hope right that you can game, which is
gamble for the chance to win back the money you spent,
while likely going deeper into debt in the process. We
thought buy now Payle was bad, Well this app it's
invested in by a prominent venture capital company. It's just
a more wretched sign of the time.
Speaker 4 (21:08):
Well in addition to that, so you moved pretty quickly
to Cover.
Speaker 3 (21:11):
But Robinhood is actually even doing And we haven't talked
about this on the show, and no journalist has written
about it yet, So I'm just going to have to
dig and.
Speaker 4 (21:18):
Share from my own experience. But they are so.
Speaker 3 (21:21):
Yes, the three percent is real, and I'm using that
card pretty much NonStop. But they are encouraging you to
parlay the points that you are earning into the points
that you can then essentially roll a dice and win
bigger stuff. So there is a gamification element to the
Robinhood card too, because it's got the separate app. It's
(21:42):
not the Robinhood training app. It's a separate Robinhood credit
card app. And within that it's like, oh, you could
you have the chance of winning more cash back or
oh you have a chance of winning a literal bar
of gold, right, and so your eyes get wide and
you think, oh my gosh, and some of it it's
not even a chance to win it. It's just, oh,
you will earn this once you accrue so many points.
And so, if I'll be honest, I was like, oh,
(22:04):
an ounce of gold or whatever it was, and so
I just ran the price on it, like you're way
over paying based on what those points are worth. And
so if you haven't done the math, then they're not
counting on folks to be smart and logical about this. Yeah,
you're completely losing out. And though you were attracted by
the three percent cash back, and you know that your
eyes were filled with the three percent dollars you know
(22:25):
the three percent sign instead, In fact, what is actually
happening is your behavior is getting thwarted by the gamification
of it.
Speaker 1 (22:31):
You're not actually getting the three percent because you're using
You're falling prey to Robinhood's traps on the back, you're
risking it.
Speaker 4 (22:36):
Yeah, I trys to me think of a do.
Speaker 1 (22:37):
You remember the penny bid websites where you would buy
like a bunch of tokens essentially, and you would make
place bids on a bunch of items. Then if someone
else placed a bid, well then the clock restarted. And
so it was just this way where yeah, maybe somebody
won the PlayStation for twenty two dollars, but it wasn't
going to be you. You were just going to waste
a lot of money bidding on these products in the process.
(22:59):
And so yeah, these what Robinhood's doing, we think stinks.
What Covered is is worse than stinks. That's like all
they are.
Speaker 3 (23:07):
Yeah, like they are, Yeah, and I don't want to
like judge, but I also I was clicking around the
Covered website and then looked over to the.
Speaker 1 (23:13):
Under Machine Man.
Speaker 3 (23:14):
Yeah, like the whole website is set up that way,
and you see the guys that started this thing, and
they don't.
Speaker 1 (23:17):
Look like they're happy about what they're doing.
Speaker 3 (23:19):
But like, there's no argument to be made right about
what it is that you're providing. Right, Like with Rott Robinhood,
you can be like, no, we're we're trying to democratize investing.
Oh this is They do have some good products for sure. Yeah,
oh this is the three percent card. And like a
lot of tools that exist in the gray financial space,
you have to make sure that you're using them correctly.
Speaker 1 (23:40):
All right, We've got actually more to get to on
today's show.
Speaker 3 (23:43):
This is Matt Altmix and Joelar's Guard and you are
listening to kf I am six forty money on demand
on the iHeartRadio app.
Speaker 1 (23:52):
This is how to Money.
Speaker 3 (23:53):
I am one of your hosts, Joelar's Guard and I
am Matt at Mixed. By the way, you can always
find more money saving andformation over at howtomoney dot Com.
Speaker 1 (24:02):
Simy gets to our next question. This one is kind
of one of the most classic personal finance questions out there,
but it's always fun to revisit.
Speaker 4 (24:10):
Hi.
Speaker 6 (24:10):
This is Ethan from Denver, and I am wondering if
I should wroth or not WROTH. This upcoming year, I
am in the twenty four percent tax bracket. Married filing
jointly with all W two income, I normally max out
o roth ira, and in the last few years I
have been doing the back door wroth. I also contribute
to a ROTH four O one K. I dream of
a partial retirement someday, but it feels impossible to know
(24:33):
for sure what tax bracket I'll be in when I
want to start withdrawing contributions, so I can't decide if
I should pay the twenty four percent tax on the
contributions now or if I should wait until I'm in
the next tax bracket before switching to traditional.
Speaker 3 (24:47):
Appreciate the advice, Thank you man. It sounds like Ethan
is in the messy middle. He's realizing that, oh, it
used to make all the sense in the world to wroth,
but he's probably yeah, he's talking about tax brackets and
his income increase. He's trying to figure out what is
the most optimized moved to make. So I'll just cut
to the I'll cut to the chase. A wroth ira
(25:09):
and a traditional four one K is what we typically
recommend and for somebody will spend the rest of this
time explaining why.
Speaker 1 (25:16):
Yeah, somebody in this situation in particular because he is
in that middle spot.
Speaker 3 (25:20):
Right.
Speaker 1 (25:20):
Let's say you are really early on in your wealth
building trajectory and your first job out of college or something,
and you're like, ma am, I my salary is not awesome,
but gosh, I'm being frugal and I'm attempting to do
but contributions significant contributions to my IRA into my four
one K. What should I do? The answer is probably
going to be wroth both of them. Right, But let's
(25:42):
say then the further along you get in your career
you're crushing it. The more that your income goes up,
the more traditional can make sense. And it's just impossible
here to make a perfect decision because we're dealing with
unknowns around future tax rates as a society. But we're
also dealing with unknowns about are individual tax rates. Where
will my individual effective tax rate be? It's hard to know, right,
(26:07):
It's hard to specify. For people who are incredible savers
and investors, you might find that it's higher in retirement,
But what most people find is that, especially if they're
high earners, now, the likelihood is strong that you're going
to be in a lower tax bracket in retirement, and
that actually makes traditional contributions, especially in that four O
(26:27):
one K make more sense.
Speaker 6 (26:28):
Now.
Speaker 3 (26:29):
Yeah, I hear what you're saying, which is that, like,
if you know you're making bank right now and that
you are like, oh man, I am working really hard,
I'm getting after it. Yes, then you might know that
you are unlikely to continue to generate an income like that.
But it also depends on how much you invest. Yeah,
Because if you are I mean, making a ton of
money right now, but then you're investing like crazy, there's
(26:51):
a good chance that the money you have on hand
later and down the road and the kind of lifestyle
essentially that you are requiring of your money means that
you have to withdraw more money, which means not necessarily
a higher cost of living from the income that you're
drawing down, but possibly a similar similar expenses to what
you're experiencing in there today.
Speaker 1 (27:13):
When you look at the vast majority of retirees, though,
I think you see that on average, they end up
paying a reasonably lower overall effective tax rate in their
retirement years.
Speaker 3 (27:25):
But what I'm saying is, I think a lot of
times they have to do with the fact that they
haven't set aside a ton of money, which means that
they're drawing down less so so much of the behavioral
aspect of it. How much are you investing now and
then how much are you going to draw on that? Yeah,
you're pointing to like the lived reality of a lot
of folks, which I totally agree with.
Speaker 4 (27:41):
But it's definitely true.
Speaker 1 (27:42):
You're right like you if you're an incredible savor and investor,
there's a chance there's a reasonable chance that you're going
to end up just as high of an effective tax rate,
if not higher, if you're like balling out and saving
a massively high percentage of what you bring in.
Speaker 3 (27:55):
I think there's a chance Ethan might follow in that count.
And there's a chance based on two Dumdumble references in
one episode, the frequency in which Joe talks about Jim
Carrey folks is hot just aside as you would expect.
Speaker 1 (28:09):
He's still my hero. Yeah, when I was a kid,
that's why I wanted to be more than everybody.
Speaker 4 (28:12):
He told me.
Speaker 1 (28:13):
But the listeners did another. Yeah, So the roth I
rate traditional four O ONEK combo allows you, I'd say
to take the burden the hand that's taken some future
tax exposure off the table, while also getting a current
tax break on another chunk of your retirement dollars. It
also allows you to turn traditional dollars into Roth dollars
down the road, so you retain flexibility. So, for example,
(28:37):
if you retire early as is as is your goal Ethan,
the likelihood that you'll have a lower income is quite high.
You can then do roth conversions, likely in a ladder form,
to turn traditional dollars into Roth dollars at a far
lower tax rate because you're not bringing money in anymore.
So one of the things you can do is then
you turn those traditional dollars into Roth dollars v a
(29:00):
conversion and having more traditional dollars create less certainty, which
is one of the things that you mentioned in your question.
You like the idea of that certainty, but it allows
more of an ability to reduce your overall tax exposure.
Speaker 3 (29:13):
Yeah. Yeah, I will say. So you said something about
retiring early. I heard him say partially retiring, which I
guess is that technically the same thing retiring early. Spectrum
it's not a spectrum, but I when I hear partial
retireingment that tells me that he's still planning to work,
he's still planning to generate an income. But I guess
that's also similar to coast fire. There's all varying degrees there,
(29:35):
which actually so it makes me think. One of the
things he said, it almost sounded like that getting this problem,
like striking it perfectly, was what was going to allow
him to partially retire or to not partially retire, he
called it. He's just like, I want to achieve the
dream of partially retiring someday, but I don't know, well,
my taxes are going to be and Ethan, I'm just
(29:56):
here to let you know that you don't have to
nail it perfectly, and it is very unlikely that you
are going to be able to hit it right on
the nose, and you still can partially retire off in
the future. You still can coast fire at some point
in time. You're not going to partially retire. I think
there's a good chance you're going to fully retire, And
so I just want you to take a little bit
of pressure off this specific decision because there are so
(30:18):
many other factors that play into whether or not you
can partially or fully retire.
Speaker 1 (30:23):
Then nailing your tax rate.
Speaker 3 (30:26):
Here versus your tax rate later down the road finding
the right mix of which tax to pay.
Speaker 1 (30:31):
Another perk by the way of having accounts in that
are post tax and pre tax, having both those to
draw from, is that you can kind of create your
own tax bracket in retirement based on which account you
draw from and when and how much. It's like those
Choose your Own Adventure books, Matt. You remember those when
we were kids.
Speaker 4 (30:48):
Loved them.
Speaker 1 (30:48):
That was pretty fun, and you'd be like, oh, turn
to page sixty two and then you're like, you just
got killed by pirates. You like, my adventure's over, I guess,
but hopefully that doesn't happen in Ethan's case. But like,
this allows you to kind of choose your own tax rate,
and yere's where you've got less income coming in, you
can tap those traditional accounts more heavily. When the opposite
is true, you can lean more on your wroth accounts,
(31:09):
and then ultimately you know for other how to money listeners,
this question is far easier if you're in either the
lowest or the highest tax bracket. If you're just starting
out incomes meager, the wroth is the way to go
as you ramp up your income, if you're in that
like thirty two, thirty five, thirty seven percent tax bracket,
that's when the traditional makes even more, is even more appealing.
Speaker 4 (31:29):
Totally.
Speaker 3 (31:30):
Yeah, Okay, So while you're talking about tax brackets, it
makes me think about the fact too that he's it
seems like he was also agonizing over like, well, I'm
in the twenty four percent? Is that that's what he said, right?
Twenty four percent? And should I go ahead and take
the break now by going with pre tax to avoid
paying tax on that now? But just the way he
(31:51):
was talking about it makes me think that there might
be a slight chance that he's a little bit confused
between marginal tax rate and effective tax rate. And you're
only tax at that twenty five four percent on dollars
above that like two hundred and five thousand dollars threshold.
Everything below that is taxed at twenty two percent. That's
for couple or verifying jointly or less, and don't I
(32:13):
don't know going from twenty two to twenty four Like,
trust me, I don't like paying taxes, But that's not
too bad.
Speaker 4 (32:18):
There's a much bigger difference.
Speaker 3 (32:20):
I would say between jumping from that twenty four percent
bracket up to thirty two percent, I would most definitely
be looking to maybe optimize ways to not pay that
jump in tax.
Speaker 4 (32:31):
But just keep that in mind too, that if you.
Speaker 3 (32:33):
Got two hundred and thirty thousand dollars, like, you're paying an
additional two percent on maybe twenty five thousand dollars as
opposed to if you lets you're earning three hundred and
fifty k Okay, I hear where you're coming from. That's
a lot, that's a lot more. You're paying two percent
more on many more dollars.
Speaker 4 (32:50):
Yeah, but I just.
Speaker 3 (32:51):
Wanted to highlight that and just point that out as well.
I think your head's in the right place and get
informed now, and I think that can continue to help
you to make wise decisions, especially if you are expecting
to continue to increase your earning where you you know,
where you are looking at potentially entering into that thirty
two percent bracket, because that's when it that's when it
really is going to start to hurt.
Speaker 1 (33:09):
Yeah, totally, Okay, Thank you as always for listening to
the show. We appreciate your time and attention. You can
always find more money saving information up on our website
at Howtomoney dot com. We'll see you back here next week.
You're listening to how to Money on KFI AM six forty.
You've been listening to how to Money with Joel, Larscard
and Matt A'll mix and you can always hear us
(33:30):
live on kf I Am six forty twelve to two
pm on Sunday and anytime on the iHeartRadio app
Kf I AM six forty. You're listening to how to
Money on demand on the iHeartRadio app.
Speaker 2 (00:10):
All Joel and Matt want to do is help you save,
invest and enjoy more of what matters. This is how
to Money with Joel Lar's Guard and Matt.
Speaker 1 (00:21):
Altmix KFI AM six forty live everywhere on the iHeartRadio app.
(00:48):
This is how to Money.
Speaker 3 (00:49):
I'm your host, Joe lars Guard and I am the
other host, Matt Altmix. And if you have a money question,
we'll send it our way. All you have to do
is record your question on the voice memo app there
your phone and send it over via email. You can
find the simple instructions at how toomoney dot com, forward
slash ask. We got to get to the ludicrous headline
of the week. This one comes from Business Insider and
(01:10):
it reads the wanta be real estate locals going bust?
And this story hits home for a newish crop of
real estate investors who took risky bets, who made overly
rosie projections, and who didn't keep enough cash on the sidelines. Matt,
when we talked about real estate investing, there's so much
hype out there, and there's so many people on the
(01:31):
socials trying to tell you how much money you're going
to make as a real estate investor, often hiding the
reality behind the scenes that it's a lot harder than
you might think, and there's a lot you have to
be prepared for if you enter into that space as
an investor. And so Business Insider had this article documenting
how landlords are using something known as DSCR loans to
(01:51):
buy properties that would cash flow without having to prove
credit worthiness and so basically they're getting loans based upon projection. Yeah,
I think that this single family home I'm buying is
going to get three thousand dollars a month in rent
and the mortgage is only twenty five hundred dollars, and
so the lenders like, great, let's go, And so people
are finding themselves between a rock and a hard place.
(02:14):
It makes me think of the Great Recession too, met
that even these loans are available to people, that it's
a risky bet for a lender to make, and then
for people who want to be landlords, just because you
are offered this loan doesn't mean you should take it,
because for a lot of people, the pre purchased guestamates
have fallen short and the rental market has slowed down meaningfully,
which means an uptick in vacancy on expected repairs or
(02:35):
some declining rents, or a mix of all three of
those things creates highly unstable footing switcing just a lot
of landlords like, yeah, I'm in this loan. I'm losing
money every month on this rental property that I thought
was going to be a financial win for me. Yeah,
and we are all about eliminating the jargon. So DSCR,
he said, that's what they are, right. The DSCR loans
(02:56):
stands for debt service coverage ratio loans, where they are Yeah,
they're seeing the loans not on how much money you
have in the bank, or how much money you make
and how much debt you're servicing, but just on the
simple projections. And I'll be honest, especially for someone who's
been self employed, man, getting any of my properties, but
certainly that very first one was so freaking hard.
Speaker 4 (03:16):
You had to prove a lot.
Speaker 3 (03:17):
Oh my gosh, the amount of information that the bank
was reaching out to us about like it was incessant,
it was NonStop, Like, okay, prove your income okay, proove,
Oh are you sure these are all.
Speaker 4 (03:29):
The accounts you have?
Speaker 3 (03:30):
Show us how much money you got in the bank,
Like I was halfway expecting like a full body cavity search.
Speaker 4 (03:36):
Like like are there any debts in there? Like they
were wanting to know everything.
Speaker 1 (03:39):
You're also expecting a little Rumpelstiltskin like put your first born.
Speaker 3 (03:42):
Yeah, And I was, And I get it though, because
they are trying to mitigate that risk, and so I like, honestly,
had I been aware of those back in the day,
like I may have been tempted a little bit to say,
you know what, let's just bypass all of that headache
and instead, let's let's get one of these DCR loans
to where we can.
Speaker 1 (03:58):
Avoid that all together, which I I agree it sounds
nice in principle as the investor, but especially hear if
your projections are too rosy, like, it's much riskier for
the banks and for the person doing the borrowing. And
so as somebody who wants to get into rental real estate,
you've got to be really really careful before jumping in
on one of these loans because it can come back
to bite you. It's just been really interesting, like Warren
(04:20):
Buffett has that quote about when the tide goes out,
we see who'swimming naked. And that's really what's happening in
a lot of the real estate space right now, where
people who bought at the top of the market projecting
just continued year over year increases of the rents or
thinking that the market where they were buying was going
to just continue to be red hot. Well, a lot
(04:41):
of those projections have proved to be untrue, and so
they're finding themselves with their pants down.
Speaker 3 (04:46):
Yeah, I think, or when just swiming naked, your pants
aren't down, they're just missing.
Speaker 4 (04:50):
They're just gone. Yeah.
Speaker 3 (04:53):
I think the biggest problem with real estate specifically is
when you have like a trifecta of bad things happen,
right Like, if you have declining rents in a given
area A, then you have on top of that, maybe
you've got a big expense on your specific property that
b But then let's say you've got some vacancy right
like something like that. When you have like a trifecta,
a multiplying effect, that's when it really can come back
(05:14):
to bite you, I think, and cause like you can
take this like similar risks with a stock market, right,
Like you can have overly rosy projections and you're like,
all right, I'm going to expect to earn ten percent
in retirement, maybe earlier and in five percent, But that's
just a singular factor where you can be like, Okay,
we need change that, like moving forward, we haven't been
earning the rate that we're expecting, and yeah, it just
(05:37):
feels a bit more under within your control because like
a lot of times, like how do you combat that
when you are in retirement, it's by modifying your spending
as well as opposed to some of these outside of
your control things like what is the market, the housing
market overall doing. Oh I wasn't expecting that perfectly healthy
looking tree to get exploded and go through my roof.
(05:57):
Like there are some of these out of your sphere
influence factors that when all stacked up together, yeah, it.
Speaker 4 (06:04):
Can really mess you up financially.
Speaker 1 (06:05):
There's an article two this week specifically about real estate
flippers and how they're having a tough time, which makes
sense because as home prices are moderating, homes are sitting longer,
the prices are going up of basically everything on the
renovation front. At flipping, which has always been a risky endeavor.
They're facing a really tough climate. So if your house
sits for let's say five months instead of one month, like,
(06:28):
that's a lot of extra money that you are just leaking.
It's leaking like a sieve. And so I think the
moral of the story here is that real estate investing
isn't for everyone, and this is a particularly tough climate
to get into real estate investing, whereas like ten twelve
years ago, it was just so much easier, like the
deck wasn't stacked against you nearly the same way. Can
(06:49):
you still be a successful real estate investor in twenty
twenty five, twenty twenty six, Yes, but it's just going
to take a lot more due diligence and a lot
more preparation for potential risk.
Speaker 3 (07:01):
Yeah, that's right. You are listening to how to Money.
I am six forty. You're listening to how to Money
on demand on the iHeartRadio app. This is how to Money.
I'm Joe Larsgaard and I am Matt Altmix. If you
are over on Facebook and you want to join a
group of like minded folks who have money questions and insight,
(07:22):
please go ahead and join the how to Money Facebook group.
Speaker 1 (07:25):
This question is from a listener who has a lot
of things in flux right now.
Speaker 5 (07:29):
Hey, Madam Joel, I hope you guys are doing well.
My name is Rochet and I live in Denver, Colorado
with my wife and two pets, a doc and a cat.
My questions today might be a little bit different and
involve moving internationally. So my parents live in India. I'm
originally from India. I've been in the States for the
last eight years, and my parents they are in their
(07:52):
mid seventies, so there's a high probability that my wife
and I may need to move to India for a
few years to take care of them. My sisters are
in the same city as my parents and they care
of them as needed. But you know, in our culture,
it's kind of like my responsibility to take care of them.
So my questions are around what if any changes to
(08:14):
future investments in savings, You guys would suggest I should
start thinking about if I know that we may have
to move to India for a few years, but since
we don't know when we'll move, how long we will
need to move for, and whether or not we will
work while in India and what income would look like
when we are there. My wife and I just turned
(08:35):
thirty this year. We don't have any kids, but we
do plan on starting a family in the next year.
Today we make around two hundred thousand dollars a year
and contribute to various retirement accounts, but we don't max
them out. We have six months of emergency funds saved
up and have no credit card debt. My wife has
around thirteen thousand student loan debt with interest rate around
(08:57):
or under four point three percent that are current in
forbearance and we make monthly payments of arm five hundred
dollars for them or towards them, and soon a new
home loan of around seventy five thousand dollars at an
interest rate between seven point seven to eight point five
percent for a house in India that I'm aiming to
purchase by the end of December for my parents. As
(09:20):
there are quite a lot of unknowns and no defined timeline,
I would love to get your thoughts or advice on
how I should start thinking about the possibility of moving
to India and make changes to retirement accounts, investments, and savings.
I love the show. If you guys are ever in Denver?
Hit me up. My wife and I would love to
host you guys and prepare some street Indian street food.
(09:42):
I mean, thank you for taking my question.
Speaker 4 (09:45):
Oh Joe, do you like Indian street food? I don't know.
Speaker 1 (09:49):
I'm not very cultured, so I don't know if I've
ever had Indian street food.
Speaker 3 (09:52):
I've never been to India and I have rarely had
Indian food.
Speaker 4 (09:56):
But I'm down.
Speaker 3 (09:57):
I've had some great I'd like me some curry curry before.
But yeah, I don't what what is Indian tree? Do
you get curry in a bowl and as Indian street
food or is it more like meat.
Speaker 4 (10:06):
On a stick or something? I don't like a kebab.
I don't know.
Speaker 1 (10:09):
I need Reject to enlighten Minty to come hang out, Hey,
hang on Denver and have them whip them up for you.
You know what I'm gonna Maybe I should email this
to Reject to he he's got multiple pets, he said,
and where's he gonna put the pets if he moves
to India?
Speaker 4 (10:23):
Like?
Speaker 1 (10:23):
Do you want me to volunteer your house as a
place where you can We are.
Speaker 4 (10:26):
Currently a pet free zone.
Speaker 3 (10:28):
We've we decided Kate and I, Oh my gosh, did
I tell you about this?
Speaker 4 (10:32):
We talk about this on the show. Some friends of
ours they what kind of dog do they have?
Speaker 3 (10:37):
I can't remember if they have the poodle or if
they have the Burmese mountain dog, but they they when
you mate it with another and they create these you're
making me think of dumb and dumber right now. What
do you get when he made a bulldog and a shit?
I think they're like Burma doodles or something. I don't know,
but they're just like the fluffiest, most hypo allergenic, like
(10:57):
cute little fluffy puppies. And some friends of ours they
had a litter and they always try to get a
bunch of their friends to experience the delights of having
this beautiful puppy. And Kate and I were just like,
we can't even bring this up to the kids. Listen,
this is a non this is a non starter. I'm
not gonna touch it someday later life. Unlike you, y'all
got at least two cats, multiple chickens.
Speaker 1 (11:20):
Sorry, I'm going to divulge. Just go for one more
second on a weird tangent. My cat one of the
cats likes to hide in our bathroom vanity. Like she'll
open the drawer and like somehow shove her way back
in there.
Speaker 4 (11:34):
It gets up underneath.
Speaker 3 (11:35):
Every once in a while she can't get out, So
I'll go to the bathroom last died it like before
I go to bed, and I hear like.
Speaker 1 (11:41):
The cat basically being like, let me out. It's really funny.
Speaker 3 (11:45):
Okay, let's get to this is what you're missing on
on if you don't have pets in your life.
Speaker 1 (11:48):
Yes, is right, that's right. The cats are great, but
no dog for us right now. And Jette like, this
is a great question. I love too. I have so
much respect for your culture and for the emphasis that
it seems to be placed on taking care of parents,
and totally that's something that I think is just less
common here in the states Man, and.
Speaker 3 (12:08):
It's less Yeah, it's less common. I do think I
am hearing more families who are doing that though. Yeah,
like I'm sure return back to some of those. Yeah,
the multi generational household conversation is one that I've had
more and more, and I love hearing that because I
think it makes sense on so many on so many friends.
Obviously from a financial standpoint, you're kind of pooling your
resources to a certain extent, but from a relational standpoint,
(12:30):
for kids to grow up with their grandparents, like truly
getting to know them, and for them to truly get
to know the kids. I didn't have that, Yeah, I mean, like, yeah,
grandma and grandpa man, they lived on the other side
of the country, so.
Speaker 1 (12:41):
Same with me.
Speaker 4 (12:42):
Yeah.
Speaker 1 (12:43):
And I think the book Being Mortal by an American
Indian doctor really kind of helps cement that home for
me too a little bit, where I was like, oh, actually,
like I see the beauty in that. That's something that
like feels culturally different than what I've experienced, but it's
something I'm fond of and family.
Speaker 3 (12:59):
It's a creative solution to a tough problem that a
lot of people have. Yeah, Like, it truly does make
sense on almost all fronts.
Speaker 1 (13:06):
I'm seeing my neighbors do it right now. Like my
neighbor next door, she's one hundred years old, her son
lives across the street, and she's got a point where
she can't even even though they live really close to
each other, she can't live alone at all, and so
somebody spends the night with her. Basically every night and
this is kind of like elder planning in American culture.
It's gotten really really expensive and you almost have to
(13:28):
think outside of the box and live your life a
little differently so you can avoid some of those crazy
long term care cross.
Speaker 3 (13:34):
That's right, yeah, and Rajet he also talked about how
much money he said he's got six months worth of
emergency funds set aside, and the ability for him to
at some point go and help take care of his
folks is I think one of the best uses of
not only emergency fund but with it being a potentially
extended period of time of what you might call peace
(13:55):
out money or just a degree of financial independence. It's
not just us for traveling the world and for ditching
work for a sabbatical, but being able to take care
of the people in your life. It's far less stressful
if you have a strong financial buffer, or if you
can just reduce work, you know, take some time away.
I think amassing more investments and having that liquid cash
(14:17):
is going to give you Rejet the ability to make
the life changes that you but you need to make,
but the ones that you truly just want to be
able to make. Here giving you the flexibility to make
some of these bigger changes if need be, depending on
how long you're going to be over there. Like you said,
so many unknowns. But if that was me, I would
want to have more though than just the six months
(14:38):
worth of living expenses I would want to have.
Speaker 4 (14:41):
I'd want to basically beef that up.
Speaker 3 (14:43):
I'd be living on a lot less in order to
essentially build up like this war chest to just give
you the options to stay over there maybe longer then
you might normally feel comfortable. But I having more cash
like this on hand, it just is going to decrease
the level of stress that you and your family is
going to experience. I will say based on he mentioned
the house that he's sounds like maybe purchasing for his parents.
(15:07):
I know that the cost of living in India is
substantially less than in America on average. So one benefit though,
is that you've got the ability to have your dollars
go a whole lot further while you're over there.
Speaker 4 (15:20):
So yeah, just one of the factors to keep in mind.
Speaker 1 (15:22):
Yeah, And I think what you're getting at too, is
that money isn't just to buy. The smart saving and
investing over a long period of time isn't just to
buy your own freedom, or to buy fancy vacations or
anything like that. But it can really facilitate the kind
of life you want to live, especially with your family.
And makes me think of like, you know, Matt, you know,
(15:42):
and I've talked a lot about this. My mom is
not doing so great right now, and I've had a
lot more time, a lot more time flexibility, partly because
over a lot of years I've earned it, over a
lot of years of hard work with my money, and
so I've been able to spend a lot of time
with her, take her to a doctor's appointment, grab a
random lunch or coffee or something like that, and that matters.
(16:03):
Like what Richard is doing here, I'm doing it on
like a smaller scale, right, I'm not moving across the
country to be with They're already liberally close by.
Speaker 3 (16:10):
But I think that's not Indiana Joel Dah I know, yeah, okay, yeah,
just making sure.
Speaker 1 (16:14):
So I just love that. I think I would love
to see more people be able to experience that sort
of flexibility that money can buy.
Speaker 4 (16:22):
Yeah, yeah, and you would.
Speaker 3 (16:23):
It would be much harder to handle that situation if
let's say you didn't invest at all in your twenties
or your thirties, and you're like, Okay, now some time
to buckle up and finally grow up and start setting
money aside in my four one k Yeah, you'd be like, well, no,
we can't, like I can't not work, But you can
say no, no, no, I can not work for the
things that matter.
Speaker 1 (16:43):
The most in the here now. Yeah, you're spot on,
my friend. All right, Hey, we got more money saving
information to get to. This is Joel Larscard and Matt
Altmis and you're listening to k IF. I am six
forty how to Money on demand on the iHeartRadio app.
Speaker 4 (16:57):
This is how to Money. I am Matt Altmix.
Speaker 1 (17:00):
And I'm Joel Larscard. Don't forget to sign up for
the how to Money newsletter. You can find that up
at how tomoney dot com slash newsletter.
Speaker 3 (17:06):
Joe, we haven't talked about gambling in a while, and unfortunately,
it seems like all signs are pointing to everything getting
worse on that front. Like I'm thinking about like the
the NBA arrests, which I don't think we've we talked
about on the show, right, Yeah, But in addition to that,
we've seen like the meteoric rise of just different prediction websites, which,
let's just be honest, are gambling by another name. But
(17:28):
there's been an influx of calls to the National Problem
Gambling Helpline, particularly in states where gambling has been legalized,
But there's also been a significant rise in bankruptcies in
debt collection efforts in those states as well. Are they
perfectly correlated, Maybe not, but I do think it is
evidence of more more problematic behavior because it's just really
(17:51):
hard to watch a sporting event and not be swayed
by the tsunami of ads that you see to encourage
you to participate in all these different, different.
Speaker 4 (18:02):
Kind of bets.
Speaker 1 (18:02):
Plus you're gonna give you free money to get started, right,
So it's like, here's a free hundred dollars.
Speaker 3 (18:06):
To place your first bet, and it feels like you'd
be a total dummy to not take them up on
that offer, and then they've of course got their hooks
in you. But in an economy that feels a little
bit less robust, I think we're just seeing more people
out there just partake in betting in the hopes of like, oh,
maybe I can actually use my knowledge of the game, like.
Speaker 4 (18:27):
I actually watch a lot of basketball. You know, I
watched a good amount of football.
Speaker 3 (18:30):
Maybe I can I can make a buck while I'm
also entertaining myself.
Speaker 4 (18:34):
And it's not panning.
Speaker 1 (18:35):
Out for a lot of folks. No, it's not. Yeah,
And so I think it's especially nefarious when it's in
your pocket twenty four to seven you can access at
any time. And then on top of that, there are
parlay and prop bets that are because it's less just
like which team is going to win today? I think
the Bills are going to win, And now it's getting like, well,
is what about a misfree throw or a quarterback in completion?
(18:57):
You can bet on stuff as minuscule in a game
and the potential outcome as a drop ball, Yeah, which
is insane to think about. Yeah, which is where this
is where the Robin Hood story comes in, because.
Speaker 4 (19:09):
They are enabling this kind of behavior. They are unfortunately.
Speaker 1 (19:12):
Yeah, they've they've launched NFL parlay and prop bets on
their prediction market platform, and those I think are a
big part of the problem. And so it's just it's
kind of like fantasy football. It's like it did make
the game more interesting to watch. I think for a
lot of people. But this is a way that gets
you more heavily involved in the outcome of the game,
(19:32):
but and in every little thing that's happening along the way.
But the downside of you losing is that you're losing money,
not that you're losing pride amongst your fantasy community. Right,
so the stakes are a lot different.
Speaker 3 (19:44):
Or your inability to be forced to wear a dress
like while holding a sign saying that you lost the
what is it like, the yeah, the fantasy pool, that's right,
that's right, or having to wear the jersey of the
team that you hate, or something which seems much more wholesome.
Oh my gosh, you compare to just folks who are
ruining their financial lives.
Speaker 1 (20:00):
And it feels like we're entering this like gamblification of society.
And what makes me say that is not just the
things we've talked about. But there was another an app
or a website that we found out about this week
called Covered and this website bills their service as paying
bills made fun. Matt, when's the last time bill paying
was a joy for you?
Speaker 4 (20:19):
Yes? I don't know. I like to cross it off
my list.
Speaker 3 (20:22):
Yeah, but not in the way that they're advertising, right, Yes, yeah,
my red flags are already up when I read that
this covered is being sold as a credit card with
gaming features embedded, or you can win back your purchases.
You can get, as they say, up to one hundred
percent cash back. Oh Matt, make sure thirty percent robin
Hood card looks super lame. If you get one hundred percent.
Speaker 4 (20:42):
Cashback, says back, Yeah, sign me up. I'd be a
duty not to, right.
Speaker 1 (20:46):
So you used a covered card to buy stuff, and
then you hope right that you can game, which is
gamble for the chance to win back the money you spent,
while likely going deeper into debt in the process. We
thought buy now Payle was bad, Well this app it's
invested in by a prominent venture capital company. It's just
a more wretched sign of the time.
Speaker 4 (21:08):
Well in addition to that, so you moved pretty quickly
to Cover.
Speaker 3 (21:11):
But Robinhood is actually even doing And we haven't talked
about this on the show, and no journalist has written
about it yet, So I'm just going to have to
dig and.
Speaker 4 (21:18):
Share from my own experience. But they are so.
Speaker 3 (21:21):
Yes, the three percent is real, and I'm using that
card pretty much NonStop. But they are encouraging you to
parlay the points that you are earning into the points
that you can then essentially roll a dice and win
bigger stuff. So there is a gamification element to the
Robinhood card too, because it's got the separate app. It's
(21:42):
not the Robinhood training app. It's a separate Robinhood credit
card app. And within that it's like, oh, you could
you have the chance of winning more cash back or
oh you have a chance of winning a literal bar
of gold, right, and so your eyes get wide and
you think, oh my gosh, and some of it it's
not even a chance to win it. It's just, oh,
you will earn this once you accrue so many points.
And so, if I'll be honest, I was like, oh,
(22:04):
an ounce of gold or whatever it was, and so
I just ran the price on it, like you're way
over paying based on what those points are worth. And
so if you haven't done the math, then they're not
counting on folks to be smart and logical about this. Yeah,
you're completely losing out. And though you were attracted by
the three percent cash back, and you know that your
eyes were filled with the three percent dollars you know
(22:25):
the three percent sign instead, In fact, what is actually
happening is your behavior is getting thwarted by the gamification
of it.
Speaker 1 (22:31):
You're not actually getting the three percent because you're using
You're falling prey to Robinhood's traps on the back, you're
risking it.
Speaker 4 (22:36):
Yeah, I trys to me think of a do.
Speaker 1 (22:37):
You remember the penny bid websites where you would buy
like a bunch of tokens essentially, and you would make
place bids on a bunch of items. Then if someone
else placed a bid, well then the clock restarted. And
so it was just this way where yeah, maybe somebody
won the PlayStation for twenty two dollars, but it wasn't
going to be you. You were just going to waste
a lot of money bidding on these products in the process.
(22:59):
And so yeah, these what Robinhood's doing, we think stinks.
What Covered is is worse than stinks. That's like all
they are.
Speaker 3 (23:07):
Yeah, like they are, Yeah, and I don't want to
like judge, but I also I was clicking around the
Covered website and then looked over to the.
Speaker 1 (23:13):
Under Machine Man.
Speaker 3 (23:14):
Yeah, like the whole website is set up that way,
and you see the guys that started this thing, and
they don't.
Speaker 1 (23:17):
Look like they're happy about what they're doing.
Speaker 3 (23:19):
But like, there's no argument to be made right about
what it is that you're providing. Right, Like with Rott Robinhood,
you can be like, no, we're we're trying to democratize investing.
Oh this is They do have some good products for sure. Yeah,
oh this is the three percent card. And like a
lot of tools that exist in the gray financial space,
you have to make sure that you're using them correctly.
Speaker 1 (23:40):
All right, We've got actually more to get to on
today's show.
Speaker 3 (23:43):
This is Matt Altmix and Joelar's Guard and you are
listening to kf I am six forty money on demand
on the iHeartRadio app.
Speaker 1 (23:52):
This is how to Money.
Speaker 3 (23:53):
I am one of your hosts, Joelar's Guard and I
am Matt at Mixed. By the way, you can always
find more money saving andformation over at howtomoney dot Com.
Speaker 1 (24:02):
Simy gets to our next question. This one is kind
of one of the most classic personal finance questions out there,
but it's always fun to revisit.
Speaker 4 (24:10):
Hi.
Speaker 6 (24:10):
This is Ethan from Denver, and I am wondering if
I should wroth or not WROTH. This upcoming year, I
am in the twenty four percent tax bracket. Married filing
jointly with all W two income, I normally max out
o roth ira, and in the last few years I
have been doing the back door wroth. I also contribute
to a ROTH four O one K. I dream of
a partial retirement someday, but it feels impossible to know
(24:33):
for sure what tax bracket I'll be in when I
want to start withdrawing contributions, so I can't decide if
I should pay the twenty four percent tax on the
contributions now or if I should wait until I'm in
the next tax bracket before switching to traditional.
Speaker 3 (24:47):
Appreciate the advice, Thank you man. It sounds like Ethan
is in the messy middle. He's realizing that, oh, it
used to make all the sense in the world to wroth,
but he's probably yeah, he's talking about tax brackets and
his income increase. He's trying to figure out what is
the most optimized moved to make. So I'll just cut
to the I'll cut to the chase. A wroth ira
(25:09):
and a traditional four one K is what we typically
recommend and for somebody will spend the rest of this
time explaining why.
Speaker 1 (25:16):
Yeah, somebody in this situation in particular because he is
in that middle spot.
Speaker 3 (25:20):
Right.
Speaker 1 (25:20):
Let's say you are really early on in your wealth
building trajectory and your first job out of college or something,
and you're like, ma am, I my salary is not awesome,
but gosh, I'm being frugal and I'm attempting to do
but contributions significant contributions to my IRA into my four
one K. What should I do? The answer is probably
going to be wroth both of them. Right, But let's
(25:42):
say then the further along you get in your career
you're crushing it. The more that your income goes up,
the more traditional can make sense. And it's just impossible
here to make a perfect decision because we're dealing with
unknowns around future tax rates as a society. But we're
also dealing with unknowns about are individual tax rates. Where
will my individual effective tax rate be? It's hard to know, right,
(26:07):
It's hard to specify. For people who are incredible savers
and investors, you might find that it's higher in retirement,
But what most people find is that, especially if they're
high earners, now, the likelihood is strong that you're going
to be in a lower tax bracket in retirement, and
that actually makes traditional contributions, especially in that four O
(26:27):
one K make more sense.
Speaker 6 (26:28):
Now.
Speaker 3 (26:29):
Yeah, I hear what you're saying, which is that, like,
if you know you're making bank right now and that
you are like, oh man, I am working really hard,
I'm getting after it. Yes, then you might know that
you are unlikely to continue to generate an income like that.
But it also depends on how much you invest. Yeah,
Because if you are I mean, making a ton of
money right now, but then you're investing like crazy, there's
(26:51):
a good chance that the money you have on hand
later and down the road and the kind of lifestyle
essentially that you are requiring of your money means that
you have to withdraw more money, which means not necessarily
a higher cost of living from the income that you're
drawing down, but possibly a similar similar expenses to what
you're experiencing in there today.
Speaker 1 (27:13):
When you look at the vast majority of retirees, though,
I think you see that on average, they end up
paying a reasonably lower overall effective tax rate in their
retirement years.
Speaker 3 (27:25):
But what I'm saying is, I think a lot of
times they have to do with the fact that they
haven't set aside a ton of money, which means that
they're drawing down less so so much of the behavioral
aspect of it. How much are you investing now and
then how much are you going to draw on that? Yeah,
you're pointing to like the lived reality of a lot
of folks, which I totally agree with.
Speaker 4 (27:41):
But it's definitely true.
Speaker 1 (27:42):
You're right like you if you're an incredible savor and investor,
there's a chance there's a reasonable chance that you're going
to end up just as high of an effective tax rate,
if not higher, if you're like balling out and saving
a massively high percentage of what you bring in.
Speaker 3 (27:55):
I think there's a chance Ethan might follow in that count.
And there's a chance based on two Dumdumble references in
one episode, the frequency in which Joe talks about Jim
Carrey folks is hot just aside as you would expect.
Speaker 1 (28:09):
He's still my hero. Yeah, when I was a kid,
that's why I wanted to be more than everybody.
Speaker 4 (28:12):
He told me.
Speaker 1 (28:13):
But the listeners did another. Yeah, So the roth I
rate traditional four O ONEK combo allows you, I'd say
to take the burden the hand that's taken some future
tax exposure off the table, while also getting a current
tax break on another chunk of your retirement dollars. It
also allows you to turn traditional dollars into Roth dollars
down the road, so you retain flexibility. So, for example,
(28:37):
if you retire early as is as is your goal Ethan,
the likelihood that you'll have a lower income is quite high.
You can then do roth conversions, likely in a ladder form,
to turn traditional dollars into Roth dollars at a far
lower tax rate because you're not bringing money in anymore.
So one of the things you can do is then
you turn those traditional dollars into Roth dollars v a
(29:00):
conversion and having more traditional dollars create less certainty, which
is one of the things that you mentioned in your question.
You like the idea of that certainty, but it allows
more of an ability to reduce your overall tax exposure.
Speaker 3 (29:13):
Yeah. Yeah, I will say. So you said something about
retiring early. I heard him say partially retiring, which I
guess is that technically the same thing retiring early. Spectrum
it's not a spectrum, but I when I hear partial
retireingment that tells me that he's still planning to work,
he's still planning to generate an income. But I guess
that's also similar to coast fire. There's all varying degrees there,
(29:35):
which actually so it makes me think. One of the
things he said, it almost sounded like that getting this problem,
like striking it perfectly, was what was going to allow
him to partially retire or to not partially retire, he
called it. He's just like, I want to achieve the
dream of partially retiring someday, but I don't know, well,
my taxes are going to be and Ethan, I'm just
(29:56):
here to let you know that you don't have to
nail it perfectly, and it is very unlikely that you
are going to be able to hit it right on
the nose, and you still can partially retire off in
the future. You still can coast fire at some point
in time. You're not going to partially retire. I think
there's a good chance you're going to fully retire, And
so I just want you to take a little bit
of pressure off this specific decision because there are so
(30:18):
many other factors that play into whether or not you
can partially or fully retire.
Speaker 1 (30:23):
Then nailing your tax rate.
Speaker 3 (30:26):
Here versus your tax rate later down the road finding
the right mix of which tax to pay.
Speaker 1 (30:31):
Another perk by the way of having accounts in that
are post tax and pre tax, having both those to
draw from, is that you can kind of create your
own tax bracket in retirement based on which account you
draw from and when and how much. It's like those
Choose your Own Adventure books, Matt. You remember those when
we were kids.
Speaker 4 (30:48):
Loved them.
Speaker 1 (30:48):
That was pretty fun, and you'd be like, oh, turn
to page sixty two and then you're like, you just
got killed by pirates. You like, my adventure's over, I guess,
but hopefully that doesn't happen in Ethan's case. But like,
this allows you to kind of choose your own tax rate,
and yere's where you've got less income coming in, you
can tap those traditional accounts more heavily. When the opposite
is true, you can lean more on your wroth accounts,
(31:09):
and then ultimately you know for other how to money listeners,
this question is far easier if you're in either the
lowest or the highest tax bracket. If you're just starting
out incomes meager, the wroth is the way to go
as you ramp up your income, if you're in that
like thirty two, thirty five, thirty seven percent tax bracket,
that's when the traditional makes even more, is even more appealing.
Speaker 4 (31:29):
Totally.
Speaker 3 (31:30):
Yeah, Okay, So while you're talking about tax brackets, it
makes me think about the fact too that he's it
seems like he was also agonizing over like, well, I'm
in the twenty four percent? Is that that's what he said, right?
Twenty four percent? And should I go ahead and take
the break now by going with pre tax to avoid
paying tax on that now? But just the way he
(31:51):
was talking about it makes me think that there might
be a slight chance that he's a little bit confused
between marginal tax rate and effective tax rate. And you're
only tax at that twenty five four percent on dollars
above that like two hundred and five thousand dollars threshold.
Everything below that is taxed at twenty two percent. That's
for couple or verifying jointly or less, and don't I
(32:13):
don't know going from twenty two to twenty four Like,
trust me, I don't like paying taxes, But that's not
too bad.
Speaker 4 (32:18):
There's a much bigger difference.
Speaker 3 (32:20):
I would say between jumping from that twenty four percent
bracket up to thirty two percent, I would most definitely
be looking to maybe optimize ways to not pay that
jump in tax.
Speaker 4 (32:31):
But just keep that in mind too, that if you.
Speaker 3 (32:33):
Got two hundred and thirty thousand dollars, like, you're paying an
additional two percent on maybe twenty five thousand dollars as
opposed to if you lets you're earning three hundred and
fifty k Okay, I hear where you're coming from. That's
a lot, that's a lot more. You're paying two percent
more on many more dollars.
Speaker 4 (32:50):
Yeah, but I just.
Speaker 3 (32:51):
Wanted to highlight that and just point that out as well.
I think your head's in the right place and get
informed now, and I think that can continue to help
you to make wise decisions, especially if you are expecting
to continue to increase your earning where you you know,
where you are looking at potentially entering into that thirty
two percent bracket, because that's when it that's when it
really is going to start to hurt.
Speaker 1 (33:09):
Yeah, totally, Okay, Thank you as always for listening to
the show. We appreciate your time and attention. You can
always find more money saving information up on our website
at Howtomoney dot com. We'll see you back here next week.
You're listening to how to Money on KFI AM six forty.
You've been listening to how to Money with Joel, Larscard
and Matt A'll mix and you can always hear us
(33:30):
live on kf I Am six forty twelve to two
pm on Sunday and anytime on the iHeartRadio app
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