#5 - Q&A Session
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Morgen Rochard: 00:00 You're listening to episode five of the Money Owners Podcast with me, Morgen Rochard.
MR: 00:15 Money Owners as a group financial coaching program that takes all the information in this podcast to the next level, providing you with live help for your financial needs. The money owners podcast is designed to help you sort out who you are financially, the issues you're having with money, and how to tackle them to be the best version of yourself. And we can't do all of this in one episode. You'll get some good old fashioned information. I'm being financially awesome and as a side note, this podcast does not provide any investment advice and nothing in this podcast should be misconstrued to be investment advice. If you'd like more information on money owners coaching, the podcast, the homework and everything I have to offer, visit money owners.com.
Hello there! I'm super excited to have our first Q&A episode, so a few weeks back I had an ask on twitter and on facebook for people to send in their questions and ask us about everything that they wanted to know regarding their finances and we got tons of questions and we're super excited to launch the first Q&A today. So I have my cohost here, Mark Guastaferri, who's going to walk me through all the questions that you guys have. Mark is fantastic. And has been in finance for the last decade, so he probably knows more than me about all this stuff and I'm sure we'll have good insights on everything that you guys want to hear about. So with that Mark take it away.
Mark Guastaferri: 01:35 Thank you, Morgen. That's really kind of you. I appreciate the intro. Um, so let's start with the first question here. Um, Morgen, I already started my small business and I am a couple of years in. I really wish someone would have told me all the things I needed to know about finances prior to starting a business. Can you share this information for those who are just starting out also, what are some of the things I should be thinking about now that I'm two years in? In cash is still tight. Thank you.
MR: 02:04 Alright. So this is a fantastic question and I think is really good for our listeners, which are mostly small business owners. So I would say the number one thing you need to know before you start a small business is that your personal expenses will drown you. It is never the, it's never your business expenses. I mean you should definitely come up with a business plan and have a good idea of what your expenses are going into it, but that said like if you're good at keeping track of what you do, having a good idea of what's coming in and what's going out. It's the personal expenses I would say for the most part that ended up drowning businesses because they just can't keep their lifestyle afloat while they're trying to get this business up and running off the ground. Mark, would you say that that tends to be true?
MG: 02:45 Yeah, I would totally agree. I mean, having gone through it right now in the middle of it, that's absolutely true and that's something that most people don't account for, right? Because you're so focused and so tied up in the business and all the expenses and trying to optimize that you do about your lifestyle and you have to be willing to make adjustments.
MR: 03:04 Yeah. Yeah, for sure. Um, and I would say like it's really important to be vigilant about managing your cash is both in the business and personally. So like a lot of what we've talked about in the last couple of episodes, it's just kind of managing your mind around your money and making sure that like you don't just, you know, spend unintentionally about things. Um, and it's the same that goes into your business. So you want to make sure that you're intentionally spending in your business, that you're making investments in things that actually matter in the business rather than just kind of throwing darts at a board and hoping that something will stick. I've seen that quite a bit and for some of my clients where they're not really sure what will make them money so they might spend on multiple things hoping that something will be the thing and that's fine if you've planned really well going into your business, but if you haven't in cash flow is tight going in like you need to be a lot more conscious about what you're spending money on.
MG: 03:53 Yeah, I would totally agree. Uh, you know, at this point to, to kind of address what the listener here is talking about already. She already, it seems like took the launch and started and perhaps cash is still a bit tight I would say don't ever be afraid to do part time work if you can as well to just generate some additional cash flows just to kind of keep it going if you need to.
MR: 04:18 Yeah, that's a great point. So something that's kind of underplayed is, is doing some part time work or finding some cash flows on the side while you make it work in your business. I would say like that is definitely a great place to start because like you want to price yourself accordingly in the business that you're trying to build and you don't want to just take on clients because you need clients. You want to be coming from a place of abundance rather than scarcity, which we talked about in our last episode. And the best way to do that is to not feel like you're desperate to get business all the time. Um, so yeah, I mean I would say it's something I kind of wish that I did was instead of taking on maybe not the right fit and not the right clientele for me, um, maybe if I had done some, some words on the side, I wouldn't have had to do that. But instead I put myself in a situation where I ended up having to, to like to get rid of clients later on that warrant a good fit for my, for my business.
MR: 05:09 And I would also say like hangups about your finances are kind of, they're usually more about your thoughts and what you're making those things mean rather than anything else. So while it is really important to like to actually manage your cashflow as well and be pretty vigilant about keeping a spreadsheet of what's coming in and what's going out or using quickbooks or some other software to help you, I would say like what you're making your income or your expenses mean as usually like a thing that could drown your business and if you think for, if you think that like it's not something that you can do, right? If like in your brain you say, okay, I'm not good at finances. Like I'm, I'm great at the thing that I'm launching my business for, but I'm not really good at the finance part. That may or may not be true. But if you believe that to be true then it will be true and it will become a self fulfilling prophecy. So that's the, at that point, like even early on in where cash flow is tight and it does make sense to hire a bookkeeper or somebody else. I'm a planner to come help in help with managing your cash flows and kind of keeping you honest with yourself.
MG: 06:12 Wonderful.
MG: 06:15 So let's move onto question two. Um, Hey Morgen, I was curious to hear a thoughtful discussion around life insurance specifically how much coverage and how long to get I know the rule of start with 10 times your net income and also think about what liabilities look like, for example, mortgage, future, college tuition, etc. Should you give consideration to padding that figure a bit to make sure your spouse is completely financially independent or are you risking being over insured at that point in terms of length of time. My thinking is you want to coverage through the end of college for your youngest kid. Does it make sense to push a bit further and get coverage for when your youngest child is into the mid-twenties? Again, don't want to risk being over insured. Thanks so much.
MR: 07:01 Yeah, so this is a great question and I hate to start this question with. It depends. So a lot of like, a lot of financial questions are really. We're going to start with it depends. Um, and I'm sure our listeners can like create a drinking game about or something, but it really does depend on what you want to cover, um, and what, what you want your life after your life to look like. Right? So you get married and you have a wife or husband and you can get and you have kids and that's usually a good place to start when you're thinking about life insurance, I'm generally like liabilities that you want to cover or is there a reason to get life insurance? So if you're just married, maybe you don't want to have life insurance on each other, kind of depends on, on what you're thinking, but specifically when kids come into play, it's a, it's a good place to start.
MR: 07:49 Um, but that said, it depends on how you want it to look like after, after you die. so I think I'll give you an idea. So if you both have life insurance and you were covered properly, then you probably will be over insured if you both die. And that's okay. Like that's not necessarily an issue. Um, I would say that that makes them, that makes sense and is the least likely scenario to happen. Is that like you, you, your spouse and your kids all day at the same time? Um, so yeah, I would, I wouldn't worry about that. But that said like, it depends on how you want the outcome to look. So let's, you want your spouse to be able to, let's say retire early and by retire, I use that term loosely. I mean, like they can live off of the income from their investments that way they don't feel like they have to go out there and pound the pavement to get a bunch of income and while also raising your children.
MR: 08:45 Um, so there are ways to think about it where like you can use a sweet safe withdrawal rate. So let's say you're, your expenses are something like 80 grand a year. I'm the safe withdrawal rate that people use and we can get into like what a safe withdrawal rate is and what that means and all that other good stuff. But let's just assume that the safe withdrawal rate is four percent. And not get into all the details about it. So if safe withdrawal rate is four percent and you want to spend $80,000 a year, you want your spouse to be able to spend $80,000 a year, then you would need $2,000,000 in coverage that said that's probably the max that you would need in coverage. Um, and I say that because like the safe withdrawal rate, it's actually a pretty, like the minimum that you will be able to take out, um, and like that, those assets would actually probably grow overtime and your spouse might actually end up with an estate planning problem.
MR: 09:33 So if you don't want to risk being over insured, I would probably start with that number and back down. Um, but there are other ways to do it. So like you can ladder policies where you have a 10 year policy attendance at 20 or 30 year policy that way, like the terms sort of expire. So you probably need the most coverage at the beginning when your kids are really, really young. Um, and maybe even a bunch more coverage when I'm at the 20 year term because you probably want to cover school, but the 30 year you'd probably just have as like a little extra something that can like help out the family if something did happen to you later on in your life. Um, so that's kind of another way to think about it. And there's some good calculators online. I saw one on nerd wallet that I liked, so I'll link to that in the show notes. But ultimately it's really what you feel comfortable with. Like it's probably okay to be a little bit over insured, right? It's better to be over insured than underinsured or uninsured it all right. I mean our uninsured,
MG: 10:28 right? I mean the reality is people don't really like to talk about death and insurance. It's just, it's tough to talk about and think through and so they don't do it. um, and Morgen, I, I love the idea of laddering, you know, some of some of the policies, right? Because the idea here is, you know, if you're listening to this podcast, then presumably you're looking to take control of your financial situation, which is great and likely 25, 30 years from now you'll have really built up your net worth to a number where you're pretty comfortable and can probably self-insure a lot of it. So to have it, to have most of it upfront is, is, is great when you really need it.
MR: 11:10 Yeah, definitely. And also these policies like a ten year policy is a lot cheaper to buy than a 30 year policy. So you'll be able to by laddering, you'll have actually a cheaper, cheaper premiums essentially, and you'll be able to save more. That will ultimately help you self-insure later, which is the whole idea. like you want to get to a point where you are self-insuring that you don't actually need the income from that your spouse doesn't actually think that you're worth more dead than alive. Right. That would be the worst case scenario, right? Um, yeah. And then also like to go to the, to the part about the 10 times your net income. I don't like that metric because it doesn't take into account any assets that you already have, so I think you're most likely to be over insured if use that rule and you have assets if you don't have any assets when I was probably a great rule of thumb, but if you, if you do have assets, then maybe you could start with 10 times your income and then subtract off the assets and include some future liabilities for sure.
MR: 12:08 Um, but then again, it kinda goes back to your goals. Like if you died, do you want to be able to cover 100 percent of your kid's college or if you die, do you want your spouse to live in your home without a mortgage or maybe you don't own property. So like if you died, maybe you want your spouse to be able to buy a piece of property so that they don't have to worry about paying rent. so there are a lot of things that go into it, which is why I like, I kind of started this with it depends. um, and it does actually, I think makes sense to talk to somebody who is like a quality life insurance person who won't lead you down a dark path of what I call whole life investments and I don't want to go too much into that because I think that that's giving investment advice and that's like, that's taboo here,
MG: 12:56 Morgen, you know, what they can do is there are plenty of CFPs® that work on a fee base, a project based situation and perhaps you know, for four or $500 plus someone can take a look at, you know, do a onetime financial plan, someone that's your trusted qualified, uh, that can really take a look at your situation and provide some insight and some advice and then you can revisit it. So you're not tied into a, to an ongoing annual situation. Maybe you just need one time, right?
MR: 13:28 Yeah, definitely. And not to like to plug XY planning network. But they are a great resource for something like this. There are a lot of really experienced planners who are all fiduciary is on that website who I there. I'm sure there's a, there's a bunch of them, I don't know what percentage of them are actually onetime fee, only planners, but um, there are definitely people on there to do hourly or who just have like a, you know, $500 console where you get like exactly what you need done.
MG: 13:54 Right. Great.
MR: 13:57 Yeah. And I guess I wanted to add one more note on that. So my husband and I specifically, we were talking about this because um, we just recently did our estate planning and um, because we have a nine month old at home and honestly it's actually kind of embarrassing that we didn't do it earlier but that doesn't matter. But anyway, so like they ask you, oh, I like how much do you have in life insurance because it actually matters for your estate plan. Like if we do both die, you know, then like we have this amazing estate or whatever, which I don't think it's actually true, but like by New York state standards, we do. So, um, and we were thinking about it, which is why I kind of brought this up of like if you both die, you're probably over insured, like we're totally over insured, like are nine months old, will be like stinking rich. We both die but like he would be like all alone without parents. So, um, I think that like sometimes when you think about these life insurance numbers, you also actually have to think about your estate planning on the other side and how you want to handle it because like if you and your spouse will die, like it is really important that you have a plan for what, what would, what would happen to that money.
MG: 14:55 Great point. Great point.
MG: 14:58 Okay. Let's move on to the next question. Morgen. I love the podcast. I'm wondering. My husband and I are in our thirties. We both work and we have kids. We spend our money like everyone else and we own a home. I feel like we're doing everything, quote unquote. Right. How do I know if I'm saving enough? How much money should I have saved if I'm in my thirties?
MR: 15:23 Yeah. So this is a great question and when I get quite a lot, and again this one depends like yeah, like really, really depends and I think that the more people send in Q&A and the more I say it depends, people will realize hey actually it pays, it makes sense to work with a planner, but I digress. So yeah, it depends on what your goals are and it's really hard to know if you're saving enough if you don't have goals laid out. And I don't like just using the term goals because like goals implies. Okay. Like I hit that hurdle and then nothing else matters after that point because I already hit my goal. So who cares? So there's like, I think there's a difference and we should probably do a whole episode on this between goals and systems. Um, and but specifically for like am I saving enough goals really matter.
MR: 16:09 Okay. it has like for instance, an example of somebody who wants to retire at 65, it looks really different than somebody who wants to retire at 45 and is currently in their thirties. Like how much they have to have saved, although depending on what they're spending is, it actually might not look that different. Right. So like it's kind of one of these things where it's really hard to know without knowing other pieces of the puzzle that said there are rules of thumbs a out there. And I actually, I kind of liked fidelity's that they put out, um, but like there are some caveats and I will highlight those after the fact, but they had one where, um, by, by the age of 30, you should have one time salary saved, um, and combined salary of married. So if You and your spouse each make 100 grand, 200 grand saved by the time you're 30 and this is specifically for retirement, I should put that in there.
MR: 16:59 So not like if you have any other goals like buying a house or sending your kids to school or you want your kids go to private school. Like this is specifically for retirement. Um, so yeah, so they said one time salary by 33 times salary by 46 times by 58 times by 60 and 10 times by 67, which is the full retirement age. So I think these numbers are probably light, um, but they're like a good guideline. But if you also work in that you were getting social security as well. I think that the numbers probably worked out. So if we go back to using like that safe withdrawal rate, let's say you made 100 grand and at 67 you had a million saved because that would be 10 times salary. That's safe withdrawal rate of four percent would mean that you can spend 40 grand a year. So I don't know what you're spending looks like, but we're making 100 grand a year. You're spending is probably somewhere 40 to 50 grand a year, maybe a little bit higher. Um, so if you include social security would work out. That said like, I'm in my thirties, I don't know if we're getting social security. So I don't know whether or not to bank on that. And whether or not this will all of them really applies or how you feel about that Mark.
MG: 18:07 Yeah, yeah, I think it's a really great question and I think it really comes down to a preferences. What are you saving for? I think identifying exactly that, you know, if you're looking for some sort of level of financial independence where you have, you know, a several million saved and you're living off of passive income, right? And you're using the four percent distribution rate, the now it's just simply a function of math, right? I mean if you, if you assume certain compounding rate of return, you can figure out what your savings rate needs to be if you want to hit that million dollar mark so that you can live on 40 grand a year and now that, that really just depends on, on how aggressive you want to get, right? I mean presumably if you're, if you, if you save zero then you know you'll never retire and if you save 100 percent of your income within, technically you're retired now.
MG: 18:59 And so it's finding a balance there. And I think another thing to point out too, because I know as this movement becomes bigger, looking at financial independence, retiring early, that's a hot topic I think for most millennials is, hey, I hate my job. It sucks. How do I get out of it? And I think one thing to consider is you don't want to burn out, right? Because that almost happened to me where you go so hard and you know, maybe you hit a point where you're, you're in deprivation mode, just chasing a number. And I think at that point we need to really think deeper because the math doesn't save you, right? You still need to think about what you'll do with your time. If you do hit that number and it, it, it never hurts to look again at maybe part time income. Because if you do, you get halfway to your number and you don't like your job, well then maybe that's enough for you to go off and do something that you really enjoy. Right? And so you can, you can take a hit on your income. So that's another way to look at it too, is don't just focus so much on what, how much you have saved, but also are there other ways you can make money that you enjoy doing?
MR: 20:02 Yeah, I think that's a fantastic point. I couldn't agree more. Um, yeah, like I think the, one of the things that's missed in the fire movement, so financial independence, retire early, is the fact that if you really do retire, let's say 30 or 40 and you don't have anything to do with your time, you will go insane. And I've heard this from people where they're like, no, like I took six months off and I did yoga every day and I bike rode. I rode my bike and I traveled. And it's like, okay, you did that for six months. Could you do that every six months for the next like 50 years. And for most people that's no, like for most people, the thing that that actually does bring them the most joy in their life is having a reason to get out of bed. And it's more than just like going to play.
MR: 20:47 It's like they get out of bed because they, there's something out there that needs them. There's something out there that is, there's an impact that they can, they can give back in their life. Like I'm like, I know I find a lot of meaning in my work and with working with people, um, and even doing this podcast for, I mean we don't know how many people are listening, but maybe we do touch a lot of people's lives, um, with the questions that we're answering today and like that gives me meaning and something for me to get out of bed in the morning and I feel like it significantly affects how much you need to save if you're able to have a part time job. So lIke you said, like even if you're, so let's say you were normally bringing 100 grand in income. If you're able to bring in 50 grand in income, that's significantly less that you have to save. Um, I mean really for every, every 50 grand that you bring in an income, it's like a million less that you have to save for retirement. So you can think about it that way, or like, I mean, that's been using a five percent withdrawal rate now the four percent, but I mean, you kind of get the point that like it all adds up. So, um, even 25 grand a year, now you only, you can say $500,000 less
MG: 21:50 and that might take you an additional decade of work doing something you really don't enjoy. Right? So now you have to balance it. Is it worth, is it worth it? Um, that's a, that's a great point. The other thing too, Morgen, as you know, we've look at at savings rates, you know, there's a, there's a double benefit to living within your means. The first thing of course, is that you can save more money, which is wonderful, but, but secondly, it also means that you need to save less, right? You need less money, which is another thing that most people don't think about. You don't need 200 grand. You might need 50 if you, if you can really avoid some lifestyle inflation at least early on if you're, if you're younger and you're just coming out of college.
MR: 22:35 Yeah, that's super true. So, um, there's actually, I did some work on this, I wrote a piece a couple of years ago now about kind of the rules around saving. So, um, I would say like as far as whether or not you're saying you've saved enough up to this point, these rules won't want, won't apply, but like as far as what you should be saving going forward, these are some good rules to think about. So saving at least 10 percent of your pretax income will help you retire by the full retirement age. If you save 22 and a half percent of your income like that, I know that number sounds really precise, but 22 and a half percent gets you. We even with no savings right now, get you retired in 20 years. So like, obviously that number can move up or down based on like the 20 year number can move up or down based on how many, how much you haven't assets now.
MR: 23:21 Um, and the number one thing to look at is really how much you want to spend when you're retired because like you're spending in retirement can actually look really different than you're spending now depending on what you want to do. So, um, I'll give you an example. One of my clients has been talking to me about this. They want to work part time, um, during the warm months of the year and then they want to be retired and traveling to warm places during the cold months of the year. Um, which makes perfect sense, right when you've worked your whole life and you're in your sixties and it gets really cold when you get older. It's really cool for me now. So I can't imagine what's going to be like when, when I'm 67. But um, but yeah, so like they, they don't want to be basically in New York during the freezing cold winter. And I totally hear that.
MR: 24:05 I'm so bright, but like just by adding that part time work during the warm months significantly changes what it looks like for him, but like what they would need to save, but that said they want to spend so much more on their travel then they would be normally doing like in their day to day life right now that we actually had I like totally look at what expenses will look like in retirement and reframe it for what it would look like for them going forward, how much they would have to save all that other stuff. So it's a good idea to look specifically at what like, what you want your expenses to look like in retirement because they can be very different than what they are today.
MG: 24:39 Great. Great. And I, I would also add, just to be careful, you know, when you're comparing, right? Because it's another thing, you don't want to maybe compare too much, right? Like living, you know, keeping up with the joneses. I think again, it really depends. Are you comfortable? Um, but I think to, to, to also point out the authors of the millionaire next door, I think Darko and Stanley I think are the authors of that book and they, they took some time and created a, some sort of calculation to give you an idea of how you stack up with, with your peers that are in the same age group, right? And the in, in income level. Um, and I, and I want to say what they're trying to figure out is, are you a, are you a wealth accumulator or are you not? Right. And I went to the calculation is your age. So you take your age and you and you multiply it by your realize pretax income, household income minus inheritances, and then you divide it by 10 and that is on average where you were, your net worth should be.
MR: 25:44 Okay. Yeah. You know what we'll do. Um, and I love that you brought that up. I read that a while back and that's a great point to put in for this question. We'll put a link to that in the show notes. That way people can calculate where they stack up. right?
MG: 25:55 Great. It's thing to note more than just on that is I think until you hit 40 years old, it looks pretty crappy, right? The reality here is that if you're, if you're 24 and you make 75 grand a year, you're not gonna have that net worth, right? Uh, it, it takes a little while,
MG: 26:13 uh, for it to really play out. But I think it'll give you a pretty good idea of how you stack up in really forget about what other people are doing. I think it'll be a pretty good indicator for you. Like, hey, am I saving enough money my, am I going to accumulate wealth or am I just going to spend it all? And I think that's something that you really want to kind of take control of is try to identify where you are and how you can improve.
MR: 26:39 Yeah, definitely. And to that point as well, like it matters what your goals are for your legacy. So like you might not want to die penniless, right? You might want to give money to your kids, you might have philanthropic goals, you might have certain charities that have meant something to you throughout your life that you really, that you would love to donate to 'em and leave a legacy after you pass a. These are the things that yoU actually need to be thinking about now, which I know is really hard to do when we're in our thirties. Um, I know it's hard for me to imagine that and what I would want to give to and what goals I would want to have, but I'm like, if you know that education is really important to you, like it might be important to you to start a scholarship for even one child. I'm right. But like that's something that's actually really expensive and something that you would need to start planning for now. so like, not to bring it back to what we said at the beginning about it depending, but it really does depend on what you want to do and, and how you want your life to look and the impact you want to leave even after you die.
MG: 27:38 Yeah. The reality is, you know, as a culture, we're pretty bad at saving money. I want to show the average is three percent and you save about three percent on average. And I know that's just, it's really sad. it's a. Yeah, it's really, that's really, really bad. So I, I would, I would try to improve that. Um, and, and you said Morgen, you'd like to target a minimum of 10 percent.
MR: 28:02 Minimum of 10 percent is a, is a good thing to target because like that does ensure that you will retire on time, um, or at least were to retire on time compared to your peers who are assuming that they'll retire the full retirement age, which right now set by the government is age 67. So yeah, I would say 10 percent of your pretax income. So not after tax. Um, and then the other thing is regarding, should like, um, and I know that I talk about this, I have talked about this a lot in past podcasts, but like don't beat yourself up about it if you're not getting these numbers right. Like you might go to the millionaire next door calculator and then feel like total crap when you find out that like you're not wealthy and you know what? That's okay. Like, that's just, it doesn't matter.
MR: 28:45 It doesn't matter what you did in the past. Uh, it doesn't matter. All those stupid things you spent money on, we all have them. We've all done them, right? We've all made mistakes. It doesn't matter the bad investments you've made, it doesn't matter that you will and your brother like $90,000 and you didn't pay you back. I mean, maybe you should have done that, but like it doesn't matter in the grand scheme of things, what matters is your here right now, you're willing to make changes right now you're listening to us because you want to make changes in your life. Like that's what matters. And it doesn't even matter what age you are. You could make it happen if you're willing to make changes right now.
MG: 29:17 Wonderful. Cool. All right, next question. Any other points?
MR: 29:24 No, I think, uh, I think we hammered that one home. Okay, great. Great.
MG: 29:29 Okay. Now we'll transition to retirement accounts, a Roth versus traditional for IRAs or 401ks, which is better.
MR: 29:39 I love this question and it doesn't depend. That's the best part. Yeah. I get this question a lot. Um, okay. So here's the mind blowing thing about Roth versus traditional. It doesn't matter. I know you don't believe me guys, I know it's really hard to even fathom. How could it not matter? It doesn't matter. So here's the thing about these accounts. If your tax rate stays the same your entire life, which I know is like a huge assumption and probably won't happen, that's a, it's really hard to know whether or not your tax rate is gonna go up or down and we can talk about that in this question. Um, but yeah, just hear me out. If your tax rate stays the same right now throughout your entire life. So right now, and then into your retirement, you have the same exact tax rate. It doesn't matter if you put it into a Roth or a traditional IRA.
MR: 30:25 Um, so it's kind of irrelevant because we don't really know. It's a bet on your tax rate, um, and there have been studies on it, right? So like you can kind of look, there's some, there's like this graph I looked at online and we can link to in the show notes which basically says like, your tax rates are definitely going to go up and that's great. Like based on historical data, but um, I like to say past performance doesn't equal present performance or future results and we see that a lot on disclosures and it's actually true about tax rates to and probably everything. Things that have happened in the past. Yeah. They might dictate a little bit of what's going to go on in the future, but we don't necessarily know with certainty what will happen. So because we don't know, I think it's better to diversify across these accounts if you have the option that way. like you're actually more likely to have the same tax rate if you're able to put into both a Roth or traditional or like if you have the option of a raw 401k at work to maybe split the entire contribution between the two accounts that way. Like you have this blended tax rate in retirement much which will probably look much like the tax rate you have today.
MG: 31:29 I would say for those that are looking to retire early, you may want to consider a traditional IRA a right. If you've got five or 10 years and your income's high and you plan on living off of passive income and your income is not going to be high five or 10 years from now, you might want to take the deduction now and then you can always convert it over into a Roth ira when your income is low. So that's one little trick for those, for those that are looking to retire early versus of course paying the taxes now in a Roth account. And then of course you're done, right? You've already paid the taxes, there's no hack there.
MR: 32:07 yeah, for sure. Um, and I would also say like we're not going to put an income limits are like what you can put into these accounts on this podcast just because they're always changing. But I would say the one thing that's really kind of bizarre is the low income limit on the traditional IRA. So I think when I last looked, it was like $61,000 is the max you could make as a single person to put into a traditional IRA and actually take the deduction. um, and that's kind of funny to me because your tax rate's really low in which case, like it doesn't really make sense to take to take the deduction. Right? Correct me if I'm wrong here, but yeah, so what I would say is probably good to take advantage of the Roth for as long as you can just because like at some point your income will probably be higher than whatever the limit is at that point. You won't be able to put into it anymore. And then it's a good way to diversify between accounts to have that blended tax rate later on. Um, and like just check it every single year because the IRS, they change their rules all the time. So you might not be eligible when you are, but if they raise the income limit and then you don't really get much of a raise or whatever, then you probably could contribute to a Roth at here.
MG: 33:14 Right. Another thing to keep in mind too is that the penalties are pretty stiff for accessing the funds sooner than your retirement age. Right? Which is 59 and a half at this point in one grade. Option with the Roth IRA is that you can pull your contributions out at any time and that's just a, just a specified, that's just the contributions tax free. you can take them out at any time if you, if you run into a financial hardship or you just need the funds, uh, the earnings within the Roth IRA, there's actually a five year rule. The funds need to be invested for five years before you can access the earnings on those contributions. But that's another cool little feature that the Roth IRA has that the traditional IRA does not have.
MR: 33:53 Yeah, definitely. I would say it's probably a better tool. Well, there's this other role too, which I like. I'm even feels like silly saying on a podcast because it's like, it was mind blowing when I read it, my CFP® textbook. So the role is even on a traditional IRA that if you take. So like, let me preface this, let me go back a little bit. So right now the rules are, you can't, as mark said, you can't take out from a traditional IRA before the age of 59 and a half without penalties and the penalties are steep and you are required to take what's called required minimum distributions by the age of 70. So something to think about. That’s 70.5. Excuse me, I'm sorry I should edit that out but we won’t um, so yeah, so 70 and a half.
MR: 34:39 But there is this loophole which nobody really talks about because it's kind of confusing. And basically if you take out the same amount every single year or you used the IRS’s distribution schedule for your age, then you're taking what's called an annuity, how to the account and the IRS doesn't actually consider that to be a penalty. So you probably have to put in a lot of paperwork the first year that you do it, but you can equally distribute the traditional IRA throughout your lifetime. If let's say you retire early, you could, you do, you could have access to those funds if you do it right. And should probably consult an accountant, a CPA before you do anything. I would not do this on turbo tax.
MG: 35:23 Great. Great. Also, since you mentioned it, another advantage with the Roth is that you don't have RMDs when you, when you turn 70 and a half, right? So that's a great. Now you start talking about do you want to pass assets down to heirs and that's another wonderful thing to do because you don't actually have to begin taking distributions when you turn 70 and a half and you can actually continue to put money into your Roth IRA after 70 and a half. Whereas with the traditional IRA, there's a hard stop there. You can no longer continue to invest in that account. Not that most people want to continue investing in their IRA when they're five years old, but it's just another technicality.
MR: 36:03 Yeah, for sure. No, it's a great point. Mark. Um, I would say the other thing is, so I'm probably because I'm just assuming our listeners are exactly like me and they have children and are probably thinking about their estate plan. You don't want any minors as a beneficiary on your account. I know this wasn't asked specifically in the question, but um, if you named your minor child as a beneficiary on the account and you and let's say your spouse who was the primary, like if you named your child as the contingent beneficiary and your spouse is the primary beneficiary, you and your spouse both die. There are rules around how that a minor can't really get the assets in that account and they wouldn't get paid on the same schedule, same tax advantage schedule that traditional IRAs are known for. The account actually gets paid out in five years. So it's a really good idea when you're going through the estate planning process to make sure that you name that you create a testamentary trust that gets created upon your death and that, that is named as the contingent beneficiary for your children.
Speaker 3: 37:05 Great point.
MG: 37:08 Alright, anything else on these retirement accounts?
MR: 37:11 Um, no. I think why don't we just do one more question and yeah, I know we had a bunch more questions so we'll kind of keep them for another Q&A episode and definitely keep sending in your questions. So if you have questions that you want to get answered, you can, you can be that. You can reach me at twitter or you can reach me on the website. So if you want to go to the website and go to moneyowners.com, you scroll down to the bottom, you can submit a question through the contact page at the bottom. Um, I'm working on adding an “Ask Morgen” page, but I haven't done that yet. So until then just scroll down to the bottom and put it in the contact or you can reach me @morgenrochard. You just DM me or ask a question on twitter or you can also send it to the money owners twitter @money_owners on twitter. Um, and we'll add them to our queue. And with that I think let's just do question number five and then we'll wrap up here.
MG: 38:10 Great. So question five, Morgen, we have a large sum of money. We need to put somewhere from the sale of her house last week. We would like to buy a home with the funds, but we aren't ready to make this decision. We want the funds to make money for us while it's sitting in an account, but we're not sure how long it'll sit there before we use it to buy a home. What do we do?
MR: 38:34 Yeah. So this a great question I think probably applies to a lot of people, whether or not they want to buy a home or they want to buy something else that's a large purchase relatively soon. Um, and without going too deep into it, because we don't give investment advice on this podcast, especially without knowing everything about you and nobody should give investment advice to anybody without knowing everything about that person. And I know that that's not typically done, but I'm going to say it here. Um, but yeah, typically things that are going to be purchased in anything under three years should not really be invested. Um, and it's basically this. So regardless of your risk tolerance or like regardless of what you think your risk tolerance is, right? Like you can have the highest risk tolerance known to man, you could want to put 100 percent of your assets and cryptocurrency at any given time, right? And swing for the fences and then try to go buy a home in three years. That's not generally recommended in the financial planning world. Right? So like we consider anything that's short term liability, a goal even that you're going to be putting money towards it. Then the next three years, in which case you really kinda want to keep that money in cash. Um, and there are good. Um, there are good. Sorry, savings accounts. I don't know why I had trouble saying that there are good savings accounts out there. Um, they're called the, they're the high yield, um, interest savings accounts. Um, off the top of my head. Goldman Sachs has one, it's called Marcus. Barclays bank has one. Um, I have a couple of clients that have an account at Ally, I believe capital one has them too. There are a bunch of banks out there.
MR: 40:07 You can, you can basically go, I think Amex has one and like they're all basically yielding somewhere around one point eight to two percent. Um, and basically I would say that's the best place to put your cash, so you can definitely do a CD or something like that. But that said like, if you're not actually sure when you're going to use the money to go buy a new home, right? If you sold your home and you want to go buy another home with the funds, but you're not, you're not ready to make the decision. That can mean that you're going to make it in three months, six months, a year, three years. You don't really know. So it wouldn't necessarily make sense to have it be locked up in a CD for, for any given period of time, just to get an extra couple of basis points return as we like to say, so an extra couple of percent or whatever it is.
MR: 40:48 It's not even that. It's like point something percent significant. Yeah, it would be insignificant given the penalties and other things that would occur when you go to take this out early. Um, and especially something like a home where you go into contract and then you know, go into closing and you actually have to have the funds available, like you're more likely to incur penalties than not. So I would say like if you're, if you're not sure when you're going to make this decision, but you know, it's not going to be for more than a year from now, maybe it makes sense to do some CD rolling. But otherwise I would say one of these high yield, um, interest savings accounts is probably good enough.
MG: I would agree there. They're super easy to work with their online and they are using two percent. Some of them are even a little bit higher as rates continue to creep up a little bit here as we speak. Right. So, uh, because it's, it's really a function of having liquidity, right? That's, that's really what's important here is that you have the funds when you need them. Um, and you know, the reality is that if you invest them in the market, there's variance, right? So it's just, it's, it's possible that within the three or four years you actually have a few down years, right. And you don't have 10 more years to get it back. Right?
MR: 41:57 Yeah, absolutely. That's a fantastic point. I'm also so they're like, you can think about bond funds and some of these other things too, and I don't want to get too nitty gritty and investment details, but same thing there, there is variance in bond funds as well. So if you were like really counting on a certain exact dollar amount for your down payment on your home. And I would say that's not a good way to go. Um, that said there are like through some of these, through a place like vanguard, if you didn't want to have like a high yield savings account and when I, these banks you can actually have it at, at vanguard themselves, um, and just invest in like their prime money market account, which is pretty similar. Um, as far as liquidity is concerned, it would just probably take a little bit longer to move funds from that account. Look like back to your bank accounts. There's like a time on, um, what they call an ach transfer to move money between these places and something that you should definitely take into account, uh, regardless of like where you end up putting this money.
MG: 42:55 Great.
MR: 42:57 Okay. Fantastic. We did it. All right. We stayed under an hour or two. We're at about like 45 minutes by the time this ends. So, um, I want to thank everybody for listening. Again, if you have questions that you want to answer it on, money owners podcasts, please send them in. We'll probably be doing this every 5 to 10 episodes or so depending on how many questions we get in. And also, depending on how many awesome topics I come up with, um, and also because mark is fabulous, we definitely want to have him back on. Um, yeah. So I just want to thank everybody for listening. Have a fantastic weekend and we will talk to you soon. Take care.