Q&A: Tackling Listener Questions | Bill & Jackie | 155 - Catching Up to FI: Financial Independence for Late Starters

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:02):
in the FI space, I always like tosay that the most valuable asset that
most fire people have is that they areyounger and they have more human capital.
At 75, you might not be wanting togo to work, but you know at 45, 55,
60 you have that human capital whereyou could still earn money and.
we talk about all forums of capitalin this show, and financial capital

(00:25):
is only one of at least eight.
There's the human capital, there'ssocial capital, there's spiritual
capital, and community capital,which is critical to retirement.
So, we need to talk about all of these
the psychological part, because youdon't know what you don't know, and you
could be in a space like I was wherenobody was talking about this stuff.

(00:48):
Nobody was investing in the stock market.
So just by listening to this podcastand starting to sort of get your
, mind around the fact that, hey.
I think I can start to change this.
I think I can move up the economic ladder.
I can start to save alittle something, so just.
In your mind, believing that, hey,it's possible maybe finding some

(01:10):
good people that are great, rolemodels or people that have done it.
Even like myself, if I inspire even oneperson, then I'm very happy and I feel
like, you know, my work has been worth it.
the trap is that now almost in two ways,you're kind of trapped by where you have
your assets that is not easily accessible

(01:31):
and your money's trapped in there.
So I actually have beena victim of this, bill.
I feel like I got caughtin the middle class trap.
So what does that look like?
So I retired early and I didhave some brokerage money.
I had some cash, but themajority of my money was either.
In my home equity or it was inretirement accounts so I didn't

(01:52):
have enough in my brokerage account

(02:25):
Hello and welcome backto Catching Up to FI.
I'm Bill Yount with Jackie CummingsKoski and we're gonna try something new.
We get so many questions from you andthe Facebook group, and we want to
get more responding to our newsletterand messaging us because we're gonna
start doing some q and a episodesjust to talk about the things that
are on your mind, right Jackie?

(02:47):
Yeah.
And we love getting questions.
So we're gonna talk through it.
We're gonna be just as transparentas we always are, and all of these
questions are very, very important.
And a lot of times when we're recordingour regular episodes, bill, we
really don't get into too many thingsthat we might be thinking about.
We wanna highlight our guests.
So now this is a chance tohighlight you and your questions.

(03:08):
Sure.
And where do you wanna start, Jackie?
Alright, well, you know, bill, before westart with some of the questions we've
gathered, I have a question for you.
You have, oh yeah.
You have talked about your story, right?
And part of that story you weresaying you got sold a whole life
insurance policy that you thoughtwas a bad idea once you started

(03:29):
waking up about your finances, right?
But you never really talk about how yougot out of that, what you did, and maybe
what you would suggest other people do.
So when you found out you were ina bad deal, whole life insurance
policy what did you do to fix it?
Well piggyback, you know, in med schoolwe had one lecture, just one lecture

(03:54):
on financial literacy from an insurancesalesman, and that's how I got hooked
into thinking the salesman from a bigfirm that is known for these things.
It could be our financial advisor.
No, this was a financial salesmanand quickly sold us insurance on a.

(04:17):
Well, whole life insurance was themain product, and is permanent life
insurance that lasts you for life.
And there's things that you can dowith it like infinite banking which
we aren't talking about today, but.
By and large, a whole life insurancepolicy is definitely not for our audience.
It's for generally the ultra wealthythat can use it for tax reasons

(04:42):
and disposition of an estate.
Having said that, I. That'snot why we bought it.
We bought it for life insuranceand there's a cash value to this.
And then there's commissions.
And the commissions are not small.
The commissions can be 80 to 110%
of the value of thepolicy in the first year.
I mean, we're talking things like 30to $50,000, so you're upside down Wow.

(05:07):
In this insurance policyright out of the gates.
And the returns you can expect forthese because they're invested, but
they're not invested necessarily wisely.
You don't even really know unlessyou ask what they're investing in.
And you can expect maybe athree, four, 5% return on the.
Growth portion of your policy, whichbarely keeps up with inflation.

(05:28):
So essentially there's no growthyou can borrow against them.
So there is sort of access to the cashat some level, but in the end there's a
sunk cost and I woke up to this few yearsdown the roads and the monthly expense.
These policies, unlike term policies,which we'll talk about, are in the
several hundreds of dollars dependingon the amount of insurance you buy.

(05:53):
So, you know, I realized thatthere was a problem here.
I don't know how many years intothis, maybe 5, 6, 7 years into it.
And I didn't research howto disposition this policy.
There are multiple ways you can do it.
If you're in the first five years of it,you can look at the cost of it as a sunk
cost and just terminate the policy, takethe cash value, and then you've got this

(06:15):
lump sum of cash to do something with.
It could have grown in the marketover that five, you know, however
many years you had the policy.
But, oh, well, this is the stupid tax.
You, you're paying the stupid taxand you can invest it in the market.
Well, again, I wasn't smart, you know,we were in the middle of a home rehab
and we were getting short on cash.

(06:36):
So guess what?
The money went into the rehab ofthe home, so it was inaccessible,
it was spent on excess 'causewe were renovating over the top.
So, the whole thing was a sunk cost to me.
And would I ever do it again?
No.
Would I ever deal with afinancial salesman again?
No.
Well, what would I do?

(06:57):
What should we do, Jackie?
That's what I wanna know, bill.
So thank you for being very open aboutwhat you did, even though hindsight
you don't think it was the best thing,but I was just curious about, you
know, what happened in that situation.
'cause I never knew.
So the alternative to that thatprobably is a great fit for most people.
Again, everything that we do is for.

(07:17):
Education and information purposes only.
And we just wanna give you as muchgood general information as we can.
For most people, a termpolicy will get it done.
And a couple of like key wordswhen you hear term policy would
be, you probably want level term.
That just means that the monthly amountis the same throughout the entire.

(07:39):
Period.
Now, the most common period fora term life policy is 30 years.
Is that right?
Because you want to get your kids grownand outta the house and things like that.
Have you seen Bill where, like,where the recommendation is?
Like there's a lot of differentschools of thought on how much.
Insurance you should have, I'veheard 10 x 10 times your income.

(08:00):
And you know, that to me isa, is a logical thing to do.
But term life insurance is so cheapthat you could probably get a million
dollar policy, a million and ahalf dollar policy for very little.
If you're in good health, your young.
It's probably the last time I checked.
Probably a healthy, 30-year-old womanhas a kid now they need insurance.

(08:22):
Like my daughter, she'sabout to have a kid.
She's 30.
She could probably get termlife insurance for 30 years.
A million dollar policy probablyfor around a hundred bucks.
So it depends on the company and
stuff
like that,
but absolutely, it's, really cheap.
First, as you mentioned who needs terminsurance or who needs life insurance?
Right?
Well, you need it when you havedependents, when somebody's
dependent on your income.

(08:44):
My son was recently tried, theytried to sell him life insurance and
he'd call me and said, Nope, Jake.
I said, Jake, you don't need it.
Not yet.
If you have somebodydependent on your income.
Like a child, like a spouse or a partner.
And then you need to look at that andyou need to look at it, not just for you,
but also for your spouse, because youmay be dependent on their income in a

(09:07):
dual income family, or that partner maybe working at home and have an imputed.
No income that needs to be covered sothat you can cover the costs of losing
that person should they unfortunately die.
And one way you can look at this is toladder your policies, which I did not
know about at the time I bought these.

(09:28):
So in, you know, your 10 x rule of thumbis good, but you're looking at the dime
method, which is what are your debts?
Okay, what is your income?
What is your mortgage andwhat are your expenses?
And that can include, for example,the big nut of education for your kids
should you want to fund their college.
And then the other thing is lifestyle.

(09:49):
So your partner or your spouse willneed to potentially maintain the
lifestyle that you're accustomed to.
So it's not just about payingyour debts, it's about covering,
you know, your current lifestyleexpenses for the remainder.
Of their lives.
So when you ladder policies, you can buy.
Two or three policies, say three policiesbecause as your net worth or your nest egg

(10:16):
increases, you need less life insurance.
Okay?
You could do a 30 year term, a20 year term, and a 10 year term,
for example, and they'll allpeel off as your assets increase.
So the total amount of insurancemay be, say, 5 million.
So you could do a two 20 yearterm policies and a 10 year

(10:39):
term policy or a 30 20 10.
If, depending on the number you need,divide it up into those policies
and let the 10 year peel off.
And by then hopefully youhave a net worth that's.
The amount of that portion of the policy.
And that's what I would've donebecause it would've automatically
decreased by life insurance costs.

(11:00):
Because what we did, you know, wewere carrying say, $5 million of life
insurance, but our assets, were nearthat at, at some point, say three to 4
million, and you don't need that much.
You need what you need toget to your fine number.
And right now, my wifeand I carry a million.
Dollars term on each of usbecause that comfortably gets the

(11:20):
other person to the lifestyle.
And our FI number, we have collegepaid for, our mortgage is paid
for it's really to cover expenses.
So that's what I would do now.
And, you know, different from level term.
My wife has a variable term policy,which was sold to her too by the same
company, and that's a little different.

(11:42):
It's a 70 year term where it goes toage 70 for her, but it's variable.
So the cost of it.
Early on is lower, but asshe ages the cost increase.
Oh.
And her policy, that's why
the level is important.
'cause it's the same amount.
Gotcha.
Her policy
is every year it's going up nowand it's the cost of, it's about
three times what the cost of my.

(12:04):
Monthly term policy is once Igot out of that company and into
another company we never got aroundto getting her out of her policy.
Because as you get older, you need aphysical, it isn't just a urine test.
It isn't just about smoking.
You gotta get these things when you'reyoung and healthy because they're cheaper.
Yeah, and let me mention this bill.
Since I work for Corporate America,normally most companies will offer

(12:27):
you term life insurance equal toone or two times your annual salary.
That's what I got whenI was working there.
Now I wouldn't suggest that otherpeople do this, but I didn't have any
other insurance beyond what my companyoffered, which probably wasn't enough.
So put me in that I didn'tknow boat, but today.
I'm retired.

(12:48):
I don't have any dependents anymore,and I have built up my assets.
So you know how much lifeinsurance I have right now,
the big zero,
I imagine zero.
I, I don't have any.
And for the longest bill, I thought thatyou needed to have insurance forever, but
it's really only until you build up yourassets that you really need it, because

(13:08):
again, the purpose is to cover expenses.
Or to cover the lifestyle of someonethat is dependent on your income.
So I don't have anyonedependent on my income.
I don't need to coveranyone else's expenses.
I do have an account set up to takecare of like final arrangements
and things like that already, butI don't have any insurance now.

(13:29):
Probably I was underinsured whenI just had my company's insurance.
So be sure to look at that.
And typically if you're working fora company or an organization, they
will let you buy extra insurancethrough them most of the time
without any type of physical or exam.
So that could be an easy wayto get term life insurance.
Bill, where else would people be ableto like, estimate what they need for

(13:53):
insurance or to get term life insurance?
Well, I mean, there's calculatorsall over the internet and they should
try and calculate or talk to somebodythat could help them calculate it.
The other thing you needto think of though, is you
gotta watch your beneficiary.
And you got divorced.
Your beneficiary was probablyyour husband at the time.
Right.
And when you get divorced,you've gotta change that.

(14:14):
'cause that can cause trouble and youwanna make your daughter your beneficiary.
And actually,
in early on, bill, my daughter wasa minor, so I really couldn't have
my daughter as the beneficiary.
So I ended up puttingsomeone else on there.
Now she's an adult, soobviously she would be the one.
But yeah, good point.
Good point.
Yeah, and you could carry, say youwanted to help out somebody else, if you

(14:35):
carried a policy and you didn't need itfor your family, but you knew somebody
else might be struggling, and if youwere to pass away, you could pay for,
their child's education or whatever.
I mean, there may be other reasonsto do it for estate planning
purposes or for benevolence purposes.
Right.
For your, for your own purposeswhen did you cancel it, Jackie,

(14:56):
when you were FI or before that?
You know, when I canceled it, Icanceled it when I left my job and I
retired, and I didn't have it throughmy company anymore, so I never had
any insurance outside of my company.
That wasn't the right thing to do.
I probably needed more insuranceor I could have at least gotten
more insurance through my company.
But again, I did not know.
But here's another tip and wecan hop to the next question,

(15:18):
but another tip is that.
When insurance pays out after you passaway, the beneficiary is not taxed.
So that is tax free money when you arethe beneficiary on a life insurance
policy and you get that money.
So there's that.
I mean, life insurance is critical.
Definitely do your research.
We recommend, for most people term lifeinsurance, that's what I would've done.

(15:43):
That's what most peopleprobably should do.
It's necessary.
The best thing you want to hearis that you didn't need it in
the end and you didn't die.
Mm-hmm.
Right.
'cause you've got to insureagainst catastrophic loss losses
that you cannot recover from.
And that goes along with disabilityinsurance, umbrella insurance, this

(16:04):
is why we have insurance and wedon't want it to pay out necessarily.
Yeah.
we gotta protect our assets.
We gotta protect our human capital.
What is human capital, Jackie?
Well, human capital is what?
It would take to cover what youcontributed while you were living
in terms of like an insurance term.

(16:26):
That's what I would say is human capital.
You might have a better answer for that.
Say for example, you earn a hundredthousand dollars a year and that
never escalates, which is going to,and you plan on working for 30 years.
Okay?
So you got $3 million there, you got $3million of lifetime human capital and
you wanna calculate how much of that.
Do I wanna save?

(16:47):
Mm-hmm.
How much of that goes towardssavings overall so that it can
grow and cover my expenses andhelp me reach to the fine number?
If you're paycheck to paycheck, youcan watch all of that get squandered.
Right?
You know, you don't wannasquander human capital 'cause
your human capital is like a bond.
Yeah, well in, in the FI space, Ialways like to say that the most

(17:09):
valuable asset that most firepeople have is that they are younger
and they have more human capital.
At 75, you might not be wanting togo to work, but you know at 45, 55,
60 you have that human capital whereyou could still earn money and.
we talk about all forums of capitalin this show, and financial capital
is only one of at least eight.

(17:31):
There's the human capital, there'ssocial capital, there's spiritual
capital, and community capital,which is critical to retirement.
So, we need to talk aboutall of these on the show.
And today, this life insurance is reallyabout your financial human capital.
So here's our next question, bill.
Alright, so this came fromone of our Facebook members.

(17:53):
Recently my husband was gifted $19,000by his mom and $19,000 by his dad.
Two separate checks.
We are in Texas.
I thought $17,000 was the limitfor gifts without tax implications.
And is it up to the limit?
For each person.
So everyone in your life couldgift you $19,000 and you still

(18:17):
wouldn't pay taxes on it.
What's the answer to that, bill?
This is a great way tomake sure that your wealth.
And like, you're not therichest person in the graveyard.
And as we reach more than our numberand as part of our estate or giving
plan or inheritance plan, you wannasee the money go to use while the
beneficiaries of this money need it most.

(18:40):
And that's gonna be, say in theirtwenties and thirties it's not gonna
be when you're 60, 65, 70 and your80, 90-year-old parent passes away.
You know, hopefully you'refinancially independent by then.
So the point here isif you can, don't wait.
And then the question here isabout how much can you gift?

(19:01):
Well, $19,000 is a tax free gift andit can come from anybody with a social
security number, and it can come fromboth grandparents, each giving you the
same amount, both parents all in one year.
Heck, they can give you hundreds ofthousands or millions of dollars and it
would be tax free, but it would come offof the total estate tax, and that now

(19:23):
is currently, what, about $14 million.
So you would have to file a form thatsaid, I gave away $200,000, and it'll
be subtracted from your lifetime.
Estate tax free gifts.
Yeah.
So the mechanical part of this questionis you mentioned $19,000 versus,
you said you thought it was 17,000.
So this annual amount getsadjusted for inflation every year.

(19:46):
So that might have been the discrepancy,but like Bill said, you can gift
up to $19,000 for any individual.
For instance, if you've gottwo parents with 10 kids.
One spouse can gift $19,000to all 10 kids and the other
spouse can do the same thing.
And the $19,000 for the annual amount,that sticks with a lot of people

(20:10):
because you don't have to file a form oranything, but I. If it's above $19,000
to any one individual, technically theIRS says you'll have to fill out this
form and you have to, calculate it.
Like Bill said, it gets addedto that really big $14 million.
Well, most people aren't evenclose to $14 million, so they
don't run the risk of that.
So you can certainly gift more,but technically you're supposed

(20:31):
to file a form to declare thatyou gifted someone over $19,000.
I mean, this is not supposedto be spent in my mind.
You know, if you've got a working son ordaughter or a grandchild that's working.
Max out their Roth IRA with someof this money, make sure that it

(20:53):
gets saved add to their wealth.
You know, and this could help payfor college for certain that that's,
you know, adding to human capitaland adding to wealth indirectly.
So, this is not for lifestyle inflation.
This is not to help pay your mortgage.
That's too expensivewhen you're house poor.
These gifts.

(21:13):
Are to help you increaseyour wealth in my mind.
Yeah, so, so good question.
Thank you for sending that in.
Here's our next question, bill.
Okay.
I'm soon to be 58 and planto retire at 63 and a half.
I have reached my FI number, but needreally good health insurance, so I work.
We hear that all the time, right?
Also, I'm in sales, so you're onlyas good as your last year, and I

(21:38):
have one full year of expenses savedin my high yield savings account.
Should I have two yearssaved by 63 and a half.
Love to hear your thoughts on how muchcash to have at the time of retirement.
Thanks in advance.
What'd he say, bill?
This is variable and this is personal.
Okay.

(21:59):
People talk about bucket strategies,and I think that's part of
what she's talking about here.
There are people that say,you know, buckets, flower
pots, garden hoses, and it's.
All the same, and itcan be hard to balance.
My rule of thumb is and this is whatI do no more than five to 10% of
your portfolio should be in cash.
Otherwise, you're gonna see significantdrag on your portfolio, which

(22:22):
means your returns will be lower.
We currently have one year ofexpenses in cash, and that's part
of our fixed income allocation.
And I plan on having.
Two years of cash in our portfolio thisis your part of your paycheck portfolio.
This is where you pay yourselfevery month or every quarter.

(22:44):
And then the other buckets carryforward and help fill up those.
If you're thinking about this with mentalaccounting, Jackie, what do you do?
Yeah, so I look at it alittle bit different now.
I, I am retired.
I have been retired since December,2019, and what I did in preparation for
retiring, so looks like she is, or heor she, I'm not sure, but they are looks

(23:07):
like five years away from retirement.
So what I ended up doing wasI had three years worth of.
Money that was not investedin the stock market.
It was safe money probably ina high yield savings account.
Maybe it was in CD or something like that.
But I felt comfortable with thatbecause I did not want anything to come

(23:28):
between me and my early retirement.
I retired at 49, so whatevermakes you feel comfortable.
And I feel like Bill, sincethis is a pivot point.
They may wanna have a little bit morecash than usual, but think about the fact
that you do not know what the stock marketis going to be doing when you retire and

(23:51):
you don't want anything to mess that up.
Also, bill, we would look at.
All of your accounts anddecide which account you will
probably be drawing out of.
And how much of that do you have in bonds?
Because bonds are safe enough to whereif you needed money to live off of, you

(24:12):
are not gonna have to worry about the.
Higher risk assets or thevolatilities that you see with stocks.
So that's when someone's approachingretirement, it makes sense to lighten up
on stocks and have a little bit more inbonds because you do need a little more
safety when you expect to use that money.
So that's something to takein consideration as well.

(24:32):
So Bill, you basically landed on twoyears worth of expenses and cash.
I had three years, so I wouldsay somewhere around that.
Is what probably would make senseand make you feel comfortable.
I mean, the fixed income part of yourportfolio is your paycheck portfolio.
And you know, most bear marketsare say two to three years, but the

(24:54):
stock market can be flat for 10 to15 and you're not gonna be able to
cover that with just fixed income.
You've gotta have growth assets.
So, you know, that's where thebucket approach can fall apart.
If you're trying to cover 10 yearsof expenses in fixed income or cash.
Generally you're gonna have short-termneeds, midterm needs, and long-term needs.

(25:16):
The stock market is for your,10 to 15 year long-term needs.
The middle portion is foryour two to seven year need.
And then the cash portionis for your immediate needs.
That's sort of thetraditional bucket strategy.
There are other strategies becausethere's as many retirement drawdown

(25:36):
portfolios as there are people.
In many ways we've talked in the pastwith Frank Vasquez about drawdown
and he promotes the risk parityportfolio, which is vastly different.
And go to that episode inorder to hear more about it.
We can't get into it today.
But you do have to look at how youstructure a drawdown or retirement

(26:00):
portfolio because it's gonna be differentthan your accumulation portfolio.
That's the critical thing.
It doesn't necessarily stay the same.
It may not be the best idea becauseyou want to have more diversification,
I think in a typical growth portfoliofor more rapid accumulation.
That's just my thought.
Yeah.
And Frank Vazquez, he'sa friend of the show.

(26:22):
He gets real fancy sometimes Youcan still do this very simply,
the most simple, the most commonasset classes, stocks, and bonds.
So you need to determinewhat your allocation is.
But one other thing in this question,bill, that stood out to me was this
person is looking to retire at.
63 and a half.
So I would also ask when do youplan on taking Social Security?
Because your gap might not be thatwide from the time that you retire to

(26:46):
the time you turn on Social Security.
Like if you turn it on at 67,you only have, a few years.
Before you do that.
So keep that in mind as well.
If you have a pension or somethinglike that, somewhere in the mix, again,
that's cash that would be flowing to you.
So all those are things that youshould take into consideration.
But great question.
And you definitely wanna gointo retirement with some cash

(27:07):
because you don't know whatthe market's gonna be doing.
Even bonds sometimes are a littlebit iffy, and the worst thing is
to have to, pull from your stocksor bonds while they're down and.
For me in particular, Iretired December, 2019.
Well, we know what happenedin March of 2020, so I'm glad
that I had that cash in hand,
but in some ways you can accumulate it.

(27:27):
It doesn't have to be just active income.
You can turn off the reinvestingof your dividends, right, and
accumulate those over the lastcouple years that you worked.
Now remember too, she is gonna be59 and a half, or he in a year and
a half if they needed to retire.
Now because they're in sales and thebottom falls out, they could create
a, 72 T set plan to bridge Yeah.

(27:48):
And cover their income untilthey're able to access their tax
protected accounts more easily.
There are many ways in a cat.
And there, there is as manythoughts on what to do with this.
There are people in the fire movement thatare 90 10 and 80 20 with stocks and fixed

(28:09):
income and who have high risk tolerances.
And then, it goes on down.
How do you sleep at night?
Well, that's probably how much you needto have in safe assets to cover the
gap that can occur with a bear market.
Yeah, and I totally feel the whole I wasin sales, so when they said , in sales
you're only as good as your last year.
Oh God, do I feel that?

(28:30):
So that's always a concern atwo and I totally understand
where you're coming from there.
Alright, bill, let's moveto the next question.
I'm 44 and very new to investing.
I have a 401k with my company, butpay a fee to have someone manage it.
I was looking into starting a Roth IRA.
Is now a good time to start one.

(28:51):
Appreciate the advice and suggestions.
I appreciate the question and you know,accumulation is relatively easy and
you can DIY that pretty easily witha little bit of education and not pay
those fees to have someone manage it.
You know, 2, 3, 4 funds.
You can manage those, you can rebalancethose and you can use portfolio

(29:15):
visualizer or portfolio charts to lookat what your expected returns are.
Get your trajectory to fire.
So at 44 I would invest in education.
And why pay somebody to do whateverybody who's an active earner
can do, there are a lot of smartpeople out there that earn $50,000.

(29:36):
Year.
And there are really dumb people likemyself that earn a significant income.
And we can all read the same books,listen to the same blogs or listen
to the same podcast like thisone, and learn the fundamentals.
Of investing.
Why pay somebody 1% tosend their kids to college?
When you can put it in your pocketand that 1%, which sounds little,

(30:00):
will compound and end up being say,a million dollars in your pocket.
Yeah, I know, bill, you kind ofgot burned with the whole high
fee advisor and things like that.
And when you're working, so you've gota 401k, so you're working for a company.
Typically if you don't do anything,the company is gonna default
you into a target date fund.
They're not all created equal.
But every 401k has a list of fundsthat are available, and typically

(30:25):
there's a link that you canclick that will give you a one.
Page snapshot so youcan see what's in there.
So I want you to knowwhat you're invested in.
So be sure to take a look at that.
Now, it depends.
I don't, when you've got somethingas simple as that, through a
workplace plan, you may find iteasy enough to do it yourself.

(30:45):
But if you do want.
This person to continue managing it.
I would challenge you to makesure you know what you're paying
them, not just for the percentage.
I want you to convert that to a dollaramount so you can better understand how
much you're giving up and is it worth it?
To have this person manage your money.

(31:06):
I will never say, you shouldnever, ever do it, but I want
you to know what you're paying.
Don't give up the match.
So make sure you'restill getting the match.
But you mentioned that you were, look,you were looking at starting a Roth IRA
and you were asking, is this a good time?
Is this a good time Bill?
Roth IRAs are always a good time.
Yeah, that's my answer.
It's always a good time.

(31:26):
It,
it's always a party.
It's not a big number, but it can make abig difference because it may go in after
tax, but it comes out tax free and youhave access to the capital you put in.
Not necessarily the gains tax free.
It can function even, and not thatyou want it to, but as a catastrophic
emergency fund for, and so you have accessto this money better than pre-tax money.

(31:51):
Not that I recommend that you wannaput, I think personally all what you
invest in, in Roth IRA should be growth.
It should be in my Roth IRA, Ihave a hundred percent equities.
I want that.
Money to grow.
It is gonna be part ofour inheritance plan.
Our estate plan, that money isprobably gonna go to our kids.
We have two of them becauseyou can have a spousal IRA.

(32:15):
Now remember, there are incomelimits for higher earners.
You may have to do the backdoor method,and we've talked about that before.
Just search backdoor Roth IRA, andit will take you through the steps.
It's not that complicated.
But don't forget your spousal.
IRA.
The limits or the amountand, and for late starters.
There's a catch up contribution.

(32:35):
It, it doesn't end at $7,000.
You can, I think, deposit $8,000into your Roth IRAs these days.
you get a thousand dollarscatchup contribution.
Yeah.
And she's 44, so you got six more years.
But that's always worth mentioning.
Now with the Roth IRA, I do wannastress what you mentioned, bill.
The way that it goes in after tax,but the contributions that you put in,

(32:58):
you can take those out at any time,tax and penalty free for anything.
Not that we're encouraging thatbecause this should be long-term
money, but I just wanna be clear.
I just want you to beclear on how that works.
Now another thing is, since youhave a 401k, most 4 0 1 Ks now.
Have a Roth option.
So I would check and I don't knowwho's, you know, for the person

(33:19):
that's managing it if he had thisconversation with you, but you can log
onto your account yourself fairly easy.
Or you can ask for instructions.
And typically there's an option to dopre-tax money, which is traditional.
Or you could do Roth.
Those are the two primary ones.
So a Roth IRA would be great, and I lovethe idea of at least mixing a little

(33:42):
pre-tax and a little bit of Roth, soI'm glad that you're trying to add
that to the mix, but it may even be.
More helpful to know if you havea Roth option through your 401k.
You actually have higher limits that way.
A Roth IRA bill, you said it'saround $8,000 or some 7,000 or
8,000 depending on the catch up.

(34:02):
Check, double checkthe IRS for the amount.
These amounts change every year and youknow, we don't have that photographic
remember, but but there you go.
But great question.
And our bottom line answer is that it is.
Always a great time to start a Roth.
Yeah.
And people talk about should IRoth or should I traditional?
There's a lot of math to that, but formy kids, for example, in your low income

(34:24):
years, Roth all day long, when yourtax brackets are low, far as far as tax
arbitrage, when you're paying 12, 15% taxon this money, you're, you're getting.
A great return on your Roth investment.
Now, in your higher incomeyears, like late starters, it
becomes trickier to decide.
And we've had shows on this and SeanMullaney recommends traditional all day

(34:47):
long for the, late starters for manyreasons because when you separate from
service, you can do, roth conversions soyou can catch up on Roth later in life.
When your tax bracket drops, as yourincome drops going into retirement.
High income years, probablytraditional early in life.

(35:07):
Roth all day long, later inlife, look at roth conversions.
So Roth money is important.
It's a great way and you want to have sortof the tax triangle balanced if you can.
You want your brokerage money, yourpost-tax money, your traditional
IRA money and your Roth moneybecause they're all treated
differently from a tax point of view.

(35:28):
You can end up with the traditional401k or IRA with a tax bomb we can
talk about someday as you get torequired minimum distributions.
And so.
Tax optimization is a complicatedtopic, and we have had a couple episodes
on it, but , you never talk about itenough and we can do more in the future.

(35:49):
Great question.
Great question.
So this other, this nextquestion came to us.
We were guests with the Doneganson their Rebel Finance School,
which is an awesome summer school.
They do, ooh, several sessions six orseven different sessions throughout
the summer, absolutely free.
We'll drop that in the show notes.
But we got a questionfrom someone there that.
Honestly, we get askedthis question a lot.

(36:10):
So what if you are lowincome and can barely save?
What do you do now?
I'm not gonna have the doctor answer that.
I'll answer that.
So I will answer that becauseI grew up poor, you know, as I
have talked about many times andI felt exactly this way, right?
When I was making nothing, barelymaking ends meet, I had nothing to save.

(36:35):
And I didn't know how to startto I guess move the needle.
And so, I discovered I was doingsomething I didn't realize I
was doing, so I was saving the.
$2 bills.
As you know, bill, I have these $2 billseverywhere from high school to college,
and as an adult, I was saving $2 billsbecause I thought that they were special.
Well, it turns out they're not.

(36:56):
They're only worth $2.
However, here's what that did do.
It started.
Me creating a habit very early ofsaving something, no matter how
small it was, and I was building thatmuscle and I was creating the habit.
So when you feel like you have nothingthat you can save, come up with some

(37:16):
small amount that you can muster up.
Even if it's $10 a week, $50 aweek, you are building the muscle.
So when you make more, you will save more.
And then ask yourself that importantquestion, if you're a low income
today, is that a permanent state?

(37:38):
What can you do to get outof the low income cycle?
Is that going to school?
Is that picking up a skill?
Is that a side hustle?
What does it look like?
Because we don't want you tostay in this low income state.
For me, I ended up goingto college after college.
You know, I had a couple of, youknow, not so great paying jobs.

(37:59):
And then finally I got a great, steadyjob and that was making the difference.
And I just naturally.
Started saving more because Ihad already built up the muscle.
So this is what I think you should do.
Because when you're low incomethe whole advice about cutting
expenses, well normally your expensesare down to the bone already, so

(38:20):
there's not a lot of room for that.
But I love this question and I don'twant low income people to feel left
out or feel that it's impossibleto start to move the needle.
Oh, Jackie, you never made morethan a hundred thousand dollars.
Maybe 89 $90,000 was your peak.
Your savings rate was somewhere between30 and 50% and you retired in 11 years.

(38:42):
Riding a bull market investingappropriately and aggressively you did it.
You are, an inspiration to ourcommunity and to this population.
You do have to increase your income.
If you want to get there,there's no doubt about it.
You can job hop and move up the ladder.
I agree with certifications or additionaleducation to increase your income.

(39:04):
You can only frugal down so muchand you wanna live a balanced life.
You know, it's not riceand beans for life.
It's not no vacation.
It may be going campinginstead of to Europe.
But you're gonna live a robust life.
And people on five figureincomes can absolutely do this.

(39:25):
We want to inspire you.
Build those savings muscles,build your income, and you
will move up the wealth ladder.
We're about to have a conversationwith Nick Majuli and his new book
coming out is all about climbingthis wealth ladder and how to get
there, so look forward to that one.
Yeah.
And the mindset stuff also is, is veryimportant, the psychological part, because

(39:46):
you don't know what you don't know, andyou could be in a space like I was where
nobody was talking about this stuff.
Nobody was investing in the stock market.
So just by listening to this podcastand starting to sort of get your
, mind around the fact that, hey.
I think I can start to change this.
I think I can move up the economic ladder.

(40:07):
I can start to save alittle something, so just.
In your mind, believing that, hey,it's possible maybe finding some
good people that are great, rolemodels or people that have done it.
Even like myself, if I inspire even oneperson, then I'm very happy and I feel
like, you know, my work has been worth it.
So yeah, hang in there.
And even low income earners atone point or time in their life

(40:30):
can start to make a difference inchanging their financial situation.
So,
One last question.
And this one has a lot of.
A few moving parts, but wehave been wanting to talk about
this, so I was glad to see it.
This is also from our Facebook group.
So can someone explain whata middle class mindset is?

(40:53):
It doesn't sound positive.
What does it apply to?
Does it apply to people with debtlike a mortgage 2.99% or 3%, a car?
I guess this is what they wereasking about their situation.
But, also having no credit carddebt, they mentioned that no consumer
debt, no student loans, six figureincome and a seven figure net worth.
So I guess they weretalking about themselves.

(41:14):
So just, the fact that I havethat debt put me in that mindset.
So I believe Bill, she's talkingabout the middle class trap.
Yeah, I mean, there's been some podcastson this and we've not talked about it.
And there is in a way, a bit of a trap.
The traditional American dream is,you know, a house, two kids, two cars

(41:35):
in the garage, new usually right orleased and probably overbuying and
house based on what the bank tellsyou you can afford and she talks
about net worth of seven figures.
I wanna know how muchof that is the house.
'cause you can't eat the drywall.
You can't eat the equity.
What is your nest egg is really whatyou want to know because that is liquid

(41:57):
and that is the wealth you reallywant to count towards your FI number.
And the middle class trap,you can be house poor.
Or an asset, poor andlook rich, but on paper.
It's not gonna get you tothe freedom you desire.
Jackie, what do you thinkabout the middle class trap?

(42:20):
Yeah, the way I think about the middleclass trap and the way the question was
asked, they did not even mention anythingabout their investments, but the middle
class trap is where to be middle class.
You're told to follow these directions.
Okay, buy a home.
Okay.
Invest in your 401k, invest in your IRAinvest in these tax advantage accounts.

(42:42):
Well, all of those that I mentioned,they kind of lock your money up.
Like if you've got equity in a home,let's say you got $400,000 equity
in your home, that is amazing.
But like you said, you can't pay yourbills with the equity in your home.
So that's kind of trapped.
Alright, the next part isthe tax advantage accounts.
Well, we know there's a few ways thatyou can get money out of your accounts

(43:02):
early, but that takes a little bitof digging, a little bit of research,
but generally a lot of that money youcan't even touch until 59 and a half.
So that's not easy to get to.
So now you're like, I have all thismoney in my retirement accounts.
I have all this money in my home equity.
Now what do I live on?
So the trap is that now almost intwo ways, you're kind of trapped

(43:26):
by where you have your assetsthat is not easily accessible
and your money's trapped in there.
So I actually have beena victim of this bill.
I feel like I got caughtin the middle class trap.
So what does that look like?
So I retired early and I didhave some brokerage money.
I had some cash, but themajority of my money was either.

(43:47):
In my home equity or it was inretirement accounts so I didn't have
enough in my brokerage account or or
in your massive HSA
or in my massive HSA now HSA, that'sa little bit of exception 'cause
there's no age difference, but , ithas to be used for medical stuff.
So yes, to your point, I've gotall these different pots of money,
including the equity in my home.

(44:08):
That I cannot easily access, whichis why I ended up having to do a 72
T. And I talk about that a littlebit in the episode with our 72 T guy.
having a brokerage accountcould help solve that problem
because there's no age limits.
The money's not, you know, trapped.
Maybe you have income from, real estateor property or something like that, but.

(44:28):
A lot of people that are middle class,they're told to do these things, and
now if you decide you wanna retireearly, you're kind of , bound by some
of these rules, which again, you canmaneuver through, but not easily.
And plans change because myplan changed with my home.
I thought I would be sellingmy home right after I retired.

(44:50):
I would have all this cash.
Well, I didn't sell the home,so the cash in the home, even
though it's almost always paidfor, I couldn't really use that.
So what do I go to next?
I started using most of my brokerageaccount money, which, that was gone in
a few years, or the majority of it was,and I had to start thinking about other.
Options.
And Bill, at first I was takingmoney out of my Roth Con.

(45:11):
I was taking my Roth contributionsand that's a no-no, right?
Hopefully
not.
Yeah.
That, that wasn't, so I realized thatwasn't a wise thing to do, right, bill?
I'm like, why am I spendingdown my Roth money?
I want that to grow as long as possible.
So I said, okay, what else can I do?
That's when I ended up setting upthe 72 T, which is basically where

(45:33):
I could set up equal payments.
It's.
Legal through the IRS set upequal payments with an IRA and
that money is coming to me everymonth and there is no penalty.
So I figured out all the, hoops youhad to jump through to set that up.
Wasn't as hard as I thought.
And so that's why I'm doing,this provision where I don't

(45:54):
have to pay a penalty, but Icould still get to my IRA money.
But aside from doing that, I was kindof stuck in that middle class trap
saying, where's my money coming from?
Because I'm still under 59 and a half.
So I couldn't easily get to it.
I had to figure out ways to do it.
So that is a middle class trap.
I celebrated my 59 and a half birthdayon April 27th, and I was like, woo hoo.

(46:19):
I know people don't necessarilythink that that's a big one, but
that's a, that's a freedom birthday.
You know, that's one of the advantages,late starters have, honestly, is that
they're gonna get there a little sooner.
And it is nice to be there.
After 59 and a half, I was unawarethat my money was locked up.
I was so ignorant financially thatI didn't pay attention to that.

(46:44):
And , we're gonna talk to Nick Majuliagain, who talks about Yeah, the 401k
isn't necessarily from a tax perspectiveas big of an advantage as people think.
And there's no shame in not.
You know, maxing that out necessarily.
If you wanna retire early especially,and buffing up that brokerage
account, that's gonna help youwith that bridge to 59 and a half.

(47:07):
If I could have done anythingdifferent, bill I would have put
more money in my brokerage accountand had a bigger brokerage account.
I wasn't intending to work, but, youknow, there was a little bit of income
from that, but you know, that wasn't.
Enough to like live on.
So you live and learn and you know,this whole middle class trap, I
think it makes sense, but there areways to move around it as I did.

(47:30):
So whenever a problem is presentedto you kind of start thinking about,
okay, is there any way to hack this?
Is there any way around this?
Is there a workaround?
But that is what peopleare usually talking about.
Since you didn't tell us like where yourassets were, we can't really like give you
a stamp of, yeah, this is a middle classtrap or not, but that's what that is.

(47:50):
And you can probably answerthat question for yourself.
Well, you could unlock some homeequity too by downsizing and
that was a big lever for us.
It downsizing, paying off a house incash, taking your proceeds from that
and investing them into a taxableside is a real lever that people can
pull to get a, a bunch more moneyinto accounts that they can access.

(48:13):
And we did it.
You can do it too.
It's hard.
It ain't easy to do that.
You can sell these expensive carsand buy, older cars for cash and free
up more money that you could invest.
Look, Bill's talking aboutme and my luxury Lexus.
I see you.
Yeah, I'm, me and my Subaru, right.
All paid off with, you know, gotout of the Audi and into the Subaru.

(48:36):
Can't complain there.
I'm happy as a clam.
my daughter, since she is having ababy now, she's in the market for a new
car, and her dad suggested a Subaru.
I'm like, well, why'dyour dad suggest that?
And her thought, and my thought tooabout Subarus is that it's something
that, like granola, people like to driveand stuff is mainly in the Northeast.

(48:57):
And so it's just kind of funnyhow she thought of, a Subaru,
but I'm like, they're good cars.
They're all four wheel drive, right?
Hmm.
Well, they last a long time.
Supposedly.
You gotta look at it, you gotta beintentional about those $30,000, a
hundred thousand dollars decisions.
You can have your lattes,but don't screw up the car.
You know?

(49:17):
Right.
Don't screw up.
Necessarily a, private collegeeducation when the state school
is perfectly reasonable toget you where you want to go.
There are big decisions that.
And help a late starter super, theirpath that you gotta be conscious of.
Yeah.
I'll have to give my daughter credit, she.

(49:38):
Got a new, it was a Kia that herdad brought for her when she started
college at 18 and now she's almost 30.
She still has the same car.
She never got another good forher, so she did a great job.
She deserves a new car.
I'm very proud of her and I never had totalk her into it or anything like that.
She's just like, my car runs fine.
And, and I remember she said shemet up with a good friend of hers

(50:00):
from high school and they're like,you're still driving that kitty car.
And she's like, I don't care.
Why
is she buying new or is shebuying new to her or you?
Well, that's another story.
I like to buy, I like to buy pre-ownedcars and she knows what my rule is.
Three, I do like a luxury car,but I typically get it three to
five years old in great condition.

(50:21):
Luxury car.
That's roughly about 50% of whatyou would buy at for brand new.
She's been looking at newer carsand she's got baby on her mind.
So she's thinking, I justwant the safest possible.
I don't wanna worry about maintenancebills and stuff like that.
So she hasn't gotten it yet, butshe's leaning toward a new car.
So mama still has to work on her.

(50:42):
Yeah, well we gotta have an episode onthis and no, this has been fun, Jackie.
It has.
I love it.
Bill, I love thank you for openingup about what you did with your whole
life insurance policy at the beginning.
I know I sprung that on you, but I wantedto know, and it sounds like you don't
think you did the right thing, but on theshow, we're vulnerable, we're open, and

(51:04):
thank you for being open and sharing that.
And thank you everyone that posteda question, we're able to scour
different places where we're at tosee the questions that you're asking.
But you can reply to ournewsletter with a question.
You can drop a questionin the Facebook group.
You can tag us on social media atcatching up to FI and say, this is a
question I'd love answered on the podcast.

(51:24):
And we very well may answeryour question on one of our
shows just like we did today.
Yeah, you can email us.
Just go to the contactpage on the website, but do
sign up for the newsletter.
We got a great new member of the teamthat's putting it out every month.
Just Yay Patrick.
Yeah, just, just respond to itand , these episodes are fun.
Another kind of episode we'relooking at doing is probably a

(51:46):
community episode at some point.
Not necessarily regularly,but it would be fun to have.
A couple of you guys on theshow to talk about questions
pertinent to the rest of us.
Oh, bill, we forgot to rememberyour favorite way to get a question.
Speak pipe.
Oh yeah.
We like those.
We love those.
Leave us a voice message and then we'llput you on the show with your voice.

(52:09):
There's lots of fun ways to get in touchwith us and we'll have more fun with
these episodes as the questions come in.
Yeah, and we gotta closewith a quick thank you.
You see, if you're on YouTube, you'reseeing my little marquis sign one.
We just recently passed 1 milliondownloads and we could have
never done that without you.
Our listeners, our guests, our Facebookgroup, our staff, everyone, we are

(52:32):
eternally grateful and we are rolling on,and we'll see you at the next 1 million.
But doing shows like.
This, we try to do different thingsto connect with our audience to make
sure that you know, that we listento you and what you have to say.
And your questions are so important to us.
Yeah, I mean, good questions.
Help others not make mistakes.

(52:53):
I still make mistakes.
Don't feel bad about mistakes.
You just don't want 'em to be big onesas a late starter, if at all possible.
But in, in asking questions, doingyour research trust, but verify.
You know, we, we do our best toanswer these questions accurately,
but trust, but verify for educationalpurposes only, and to have fun.
All right.
I've had fun today, Jackie, butit's time to scoot on outta here.

(53:16):
Yep.
We thank you for joining us and we willsee you next time on Catching up to FI.
Cheers.

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