Choose FI: Your Blueprint to Financial Independence authors Chris Mamula (CanIRetireYet.com), Brad Barrett and Jonathan Mendonsa (Choose FI) share principles to change your life and your idea of retirement. Plus, answers to your FIRE (financial independence / retire early) questions on bridging the gap between early retirement and tapping retirement accounts, balancing ACA subsidy eligibility against allocation decisions, options trading, and just how much Roth savings is right for you.
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- (01:45) Chris Mamula, Brad Barrett, and Jonathan Mendonsa: Choose FI – The Book
- (11:27) Chris Mamula, Brad Barrett, and Jonathan Mendonsa: Choose FI – The Book (part 2)
- (23:11) Where Can I Learn More About Big Ern’s Options Trading?
- (28:08) From Early Retirement to Tapping Retirement Accounts: How Do I Bridge the Gap?
- (34:39) Is Too Much Roth a Bad Thing?
- (40:23) How Should I Balance ACA Subsidy Eligibility Against Allocation Decisions in FIRE Scenarios?
Resources mentioned in this episode:
FIRE INSPIRATION | click the links to hear:
- Chris Mamula‘s story of retiring at 41 after a decade of retirement planning mistakes
- Grant Sabatier – how he side-hustled his way to being a millionaire in 5 years
- Jamila Souffrant – how she saved $85K a year
- Nick Loper shares 250 ways to make more money
- Karsten “Big Ern” Jeske‘s research on safe withdrawal rates for early retirees
- Tanja Hester wrote the book on making Work Optional
- Fritz Gilbert‘s 10 Commandments for Retirement
- Michael from FinanciallyAlert.com shared his FIRE story
- Travis Shakespeare on directing Playing with FIRE, the first documentary on the FIRE movement
September 27-October 4, 2019 ONLY: Download the 48-page companion DIY Retirement Planning Guide!
If you can say, “what choices can I make today that will position myself to be in a better place 5, 10 years from now?” That’s kind of the mindset that I want you to think of, not in terms of your absolute age. “Oh, I’m 40. If I found this when I was 20, yes, but I’m not going to do anything now because I didn’t find it when I was-“ No, no my friend! Right? Again, think about that 10-year future-self if you follow these principles. How are you going to feel about that decision? Because these principles, they do work over intermediate to short periods of time. – Jonathan Mendonsa, Choose FI
You probably know that was Jonathan Mendonsa, he and Brad Barrett are co-hosts of the wildly popular Choose FI podcast. Today on Your Money, Your Wealth, Jonathan, Brad, and Chris Mamula from CanIRetireYet.com share some of the financial independence and early retirement principles that could potentially change your life and your idea of retirement from their upcoming book, Choose FI: Your Blueprint to Financial Independence.
If you’re new to Your Money, Your Wealth®, welcome! YMYW is presented by Pure Financial Advisors and hosted by Joe Anderson, CFP® and Big Al Clopine, CPA. Every week, Joe and Big Al give you actionable strategies to design an investment portfolio that will last as long as you do, reduce your taxes as much as legally possible, and they answer your money questions while having a lot of fun along the way. Later in this episode, Joe and Al will answer some of your FIRE related questions on bridging the gap from early retirement to tapping retirement accounts, how much Roth savings is right for you, ACA subsidy eligibility, and more. I’m producer Andi Last. Let’s kick off this episode of Your Money, Your Wealth® at FinCon – that was a conference for money nerds earlier this month in Washington DC. I had a chance to talk with Chris Mamula, Jonathan Mendonsa, and Brad Barrett about their book, Choose FI: Your Blueprint to Financial Independence.
01:45 – Chris Mamula, Brad Barrett, and Jonathan Mendonsa: Choose FI – The Book
Andi: Guys, thank you very much for joining me.
Jonathan: Andi, thanks so much for having us.
Andi: We are going to be talking about the release of your upcoming book. Tell us all about it, Chris.
Chris: So the book was a couple years in the making and it’s something I’ve wanted to do since I found this message, and it’s changed my life, and I didn’t really quite know how to get the message out there. And so I just rolled the dice and I reached out to these guys and they were open to it. And so it’s been a process and it’s been a lot of fun and we’re excited to release it and spread this message to a new group of people.
Jonathan: I think at the heart of it is that if you know the rules, getting to the point where working is optional is doable. It’s not gonna look the same for everybody, but there is a playbook. There is a pattern when you see it you can’t unsee it, and it can be done in a relatively short period of time. And while get rich quick is usually a scheme that ends up with your money in someone else’s pocket and you a little bit bitter, you can get rich quick-ish every time. Because at its heart it’s based on simple math.
Andi: All right. So we have a blogger. We have an incredible podcast. And now it’s a book. What was the decision that went into deciding to take it to the book level?
Brad: I think we realized very early on that a podcast just isn’t linear. I mean we have hundreds of episodes but if you wanted a linear path you could not simply get that from the podcast. So when Chris approached us with this idea to take the first let’s say 60 or 70 episodes of our show and put together this linear path, truly this blueprint, it was just an obvious choice for us because we want this to be hey you can get into financial independence. It’s really easy. It makes sense. And here’s a path and a book just seemed like the perfect way to go about that.
Andi: Chris, tell me a little bit about the structure of it. Tell me how the book works.
Chris: So what we really wanted the book to be is Choose Your Own Adventure. So instead of saying, “this is what we did follow our 5 steps or 7 steps,” we really wanted to make it customized so you can pick and choose. So we took lessons from different people that were on the podcast and we tried to find principles that anybody can apply to their own life to mix and match and use the best things that would work for their situation.
Andi: And how was the process of writing it? Obviously you have written the blog for a long time but how is it different? How has this been new for you?
Chris: It’s a lot harder. You don’t get that immediate feedback so that’s been about 2 years in the making so I’m very excited to put it out there and see how it goes over and hopefully it’s gonna really help a lot of people.
Andi: So what’s the plan? The book comes out on October 1st I believe is the date. What happens next?
Jonathan: Yeah it is available for preorder now at ChooseFI.com/book. We actually have local groups all around the country and many people have been asking us for this, “Hey I love your content. I love your podcast. I have someone that’s interested in this information. They have never listened to a podcast. And I can’t get them to listen to a podcast. Is there something that you could give to me? Or that I could purchase for them to give them this information?” So first we’re going starting by promoting in our local groups and then promoting the outside of that. And October 1st is going to be the official date where you can buy it anywhere the books are sold.
Andi: And that is not the only thing that you guys – I mean, we just got done with the Playing with FIRE movie premiere and now that’s taken off and it’s seen all over the country. And then you also have something else in the works, don’t you?
Brad: Yeah. We are actually launching a not-for-profit foundation here. So it’s the Choose FI International Foundation and it’s really centered around financial literacy. We feel like we’ve hit on something that is just so fundamental to living a happy and satisfied life is understanding your finances. And I don’t know about you Andi, but I didn’t learn this in school. I didn’t learn about it growing up, I just got lucky in essence. And we don’t want people to have to get lucky in finding the right information. We want to present it to them. So we are creating curriculum for K through 12. We’re creating courses for military and underserved communities. We’re really trying to bring financial literacy and ultimately financial independence literacy to the world.
Jonathan: And at its heart, I feel like the Choose FI podcast almost by definition reaches people that listen to podcasts.. And maybe the people that need this the most don’t. They don’t have access to it. What does it look like to open up the doors to be able to get this information in front of those people? It’s going to look different. But I think it’s incredibly valuable, possibly even more valuable. What does it look like for our generation, the next generation when really you have that playbook? Not after you’ve made financial mistakes that maybe you’re trying to unwind $40,000, $60,000, $90,000, of student loan debt? What if you have a framework that builds on itself from a K through 12 level carries you through college you come out? When we look at one of the patterns that we see for individuals that have reached financial independence by the age of 30-ish, you know, some ridiculously young age, one of the patterns I see almost every time is that they somehow figured out a way to graduate school without massive student loan debt burden. You see that pattern over and over again and you would think well it must just be that their parents paid for it but by and far from the students and the people that we’ve talked to, that’s not the case. Maybe once out of 100 and so on. That there are ways to go through college, graduate get a degree, get a job and do it without incurring tens of thousands of dollars in student loan, if you can just figure out that piece of the puzzle, you’re ahead. But if you can then aggregate that by looking for the 80/20 of what types of jobs should I be looking for? What types of skills are in demand? Where does networking fall into this? What is a common sense investing strategy start to look like? If you can just start to land a few of these big ideas and not make the fatal financial mistakes. Wow, you’re going to end up in a fantastic place and your 10-year future self is going to be giving you a standing applause.
Andi: So you’ve got the K through 12 curriculum that is going to help people that have not even started on the path yet. Is there something in there that is going to address those people who are looking in the rearview mirror and going oh my gosh look what I’ve done?
Jonathan: Yeah that’s a great question. So you gotta start where you are. The best time to invest would have been 10, 20 years ago. The second best time, today. You gotta get started. And what I love about financial independence is that we think about things in terms of timelines, relatively short, intermediate timelines. So if you can say what choices can I make today that will position myself in a better place 5, 10 years from now? That’s kind of the mindset that I think- not in terms of your absolute age. Oh, I’m 40. If I found this when I was 20. Yes but I’m not going to do anything now because I didn’t find it when I was- No, no my friend. Again think about that 10-year future self if you follow these principles. How are you going to feel about that decision? Because these principles, they do work over intermediate to short periods of time.
Andi: Chris, remind us of your story. How did your path go?
Chris: Yes. So the reason I got into writing about personal finance and I’m so passionate about it is because I just had a horrible experience by not doing any due diligence and starting to invest. Because I was a good saver, I had substantial sums of money. And so I started investing without asking really any questions and essentially made $1,000,000 mistake by just following really bad advice and just kind of expand on that a little bit. I mean all 3 of us and we talk about in the book, but Jonathan started with six-figure student loan debt. Brad started with making pretty massive mistakes with real estate speculation and my investing mistakes. So you don’t have to be perfect, kind of going back to your earlier question, that you can definitely correct course by starting wherever you are today and that’s what we try to emphasize.
Andi: Tell us Brad a little bit about your mistakes.
Brad: Yeah, I think what Chris just said is really important is that none of us are perfect. Nobody out there is perfect. We’re all just trying to do the best we can. And move forward and make your life better tomorrow and every tomorrow thereafter. So for me, this was the worst possible time. It’s like 2005 I was 25 years old, it was the height of the real estate market and I had this brilliant idea to buy land and these golf course country club communities in North Carolina. And how could it go wrong? They were going up every month and you know I wasn’t intelligent enough I didn’t have the world knowledge to know this is purely speculation. And I bought a couple of these properties and I mean literally at the height they plummeted everything 90-plus percent. 90%! And they never recovered, making it was the worst real estate investment you could- in speculation that you could ever do. And that said, I still reached financial independence in my mid-30s. So you don’t have to get everything right. If you start with a strong savings game and you know this financial independence for us is about abundance. It’s not about deprivation. It’s not about living a miserly poor life. It’s about setting up a structure of a life that just doesn’t cost that much. So I mean I live this wonderful life and I still made that horrible mistake and yet I still reached financial independence at 35. And it’s because we don’t buy new cars. We lived in a less expensive house than we could have afforded by any measure. We don’t spend that much money on food but we love to travel so we do that. My wife and I are both big into fitness. So we spend money on that. So it’s about setting up this life that works for you but also where you can save money and save significantly.
For a goldmine of FIRE inspiration in previous episodes of YMYW, click the link in the description of this episode of YMYW in your podcast app. That’ll take you to the podcast show notes at YourMoneyYourWealth.com and links to hear Chris Mamula‘s story of retiring at 41 after a decade of retirement planning mistakes. How Grant Sabatier side-hustled his way to being a millionaire in 5 years. How Jamila Souffrant saved $85K a year. Karsten “Big Ern” Jeske‘s research on safe withdrawal rates for early retirees. Tanja Hester talks about writing the book on making Work Optional. Fritz Gilbert‘s 10 Commandments for Retirement. Michael from FinanciallyAlert.com shared his FIRE story and Travis Shakespeare on directing Playing with FIRE, the first documentary on the FIRE movement. Then, subscribe to the YMYW podcast to listen to new episodes with answers to listener’s questions on making the most of their investment portfolios. Now, back to my FinCon chat with Chris, Brad, and Jonathan:
11:27 – Chris Mamula, Brad Barrett, and Jonathan Mendonsa: Choose FI – The Book (part 2)
Andi: So for people who are listening to this and they go, “OK, I’ve got whatever this colossal mistake is in mind that I personally have made.” What do you say to them is the first step? Aside from, of course, buying the book.
Chris: I think the first thing for me was to stop making the mistake so just to realize that you can start educating yourself and you can start anew. And so I stopped and I started reading and before I started investing anymore I kind of figured out what is a strategy that makes sense for me. And I did my research and then you just have to undo and sometimes you have to take your medicine and it will set you back a little bit but that’s something that you can always make a turnaround if you’re willing to do what it takes.
Brad: And I think it’s- Don’t be embarrassed. Don’t beat yourself up. Mistakes are mistakes. You can’t undo them. In a lot of senses. I made that mistake. That doesn’t mean my life it’s over. It means I made that mistake and I have to move forward. So you have to be honest with yourself. Where are you today financially? Most people stick their heads in the sand. They’re embarrassed. They don’t want to face what they’ve done. They don’t wanna face the credit card debt. You’ve got to put it on a sheet of paper. Or open up Excel or Google Docs or something and just put down, what do you owe? What do you bring in every month? Where do you spend every month? And just be honest and then figure out, what are my goals for my life? Because ultimately as much as we don’t like it, money is a really essential part of your life. When you have it figured out it’s easy. I spend five or 10 minutes a month, no joke, minutes on my finances because it’s easy now. I have it set up on autopilot. But at the beginning, it wasn’t easy. When I was stressed about this real estate thing it wasn’t easy. But I figured it out. And life just works now. So I think you need to be brutally honest with yourself and say I want to make my life better. But in order to do that, I’ve got to put it on paper and I’ve got to figure out, how do I move from here to where I want to be?
Andi: So for the people who are thinking about what’s been going on in the market lately and market volatility and they’re thinking, “if I retire, whether it’s an early retirement or a traditional retirement, what is the market going to do to all of this work that I’ve put in?” What do you say to people who have that concern? They’re scared of what happens with market volatility.
Jonathan: Yeah, I think one is framing where you are in a period of time. So for instance, I think people have that fear that are at retirement. People have that fear that approaching retirement. People have that fear now, that don’t have anything in the market. For the individuals that are thinking in terms of 10, 15, 20 year timelines. What are you worried about? The market spends 90% of the time at or near the top. And then it goes down, and then it goes up, and then it goes down and then it goes up but it goes up inexorably over time. Do me a favorite people listening to this, Google “Is This The Top?” and look for images. There’s this fantastic image you will see show it tracking the index over any period of time in stock market inception and you will see a pattern very quickly. At any point, you could say, “oh wow that top, wow that dip looks scary,” but you just see what it does over time and I think instead of, “Get rich quick. Oh, I’ve run out of time. I need to sign up for this funnel with this exclusive offer that’s guaranteed to make it work. Bitcoin is about a runaway I’ll never have a chance again.” You need to think about things in terms of 10 or 15 year timelines. That’s, for most of your listeners, that’s where they are. They have that and they should take advantage of that. If the market goes down, what an opportunity. You still have a job. You’re still investing. You’re purchasing it on sale. Why is the stock market the only thing that when it’s 30% off, 40% off we freak out and we don’t want to touch it because it’s going down? No my friend, no. This is your opportunity. For those of you that are getting closer, you’re in that 5- it’s a different story. Some of your chips need to be off the table. You can’t handle that volatility. You need to look into strategies to make sure that your investing plan covers your particular risk tolerance and that is a longer conversation that’s outside the scope. But the fact that you know it’s a question that needs to be answered should direct your listeners to the type of information they need to be aggregating. Don’t wait until the market drops to start Googling what I’m gonna do. Come up with that answer ahead of time.
Andi: Jonathan is just a little bit passionate about that one.
Jonathan: I had this conversation with my aunt last week. My aunt was sitting at the dinner table, we’re having a meal. She’s talking about it. Wow, it looks like the markets- don’t know what’s going- this exact same conversation. Figure out where you are and then come up with a plan.
Andi: All right, let’s talk about health because that’s something else that again whether you retire early or if you’re retiring at a more traditional age. What happens with your health is a big question mark for so many people that perhaps they’re not necessarily planning for?
Chris: And so kind of like with almost everything that we talk about, with your finances too, you control the things that you can control. And so it’s not a guarantee that if you stop working and you retire that you’re going to be happier and healthier but you definitely can reduce your stress level. You definitely can free up time to just choose healthier activities to have more time to exercise. And just to not be sitting at a desk, sitting in a car. Spending your time commuting. So you can kind of build the lifestyle that you want to build. So yeah I mean I think that it plays into a healthy lifestyle if you choose to. But it’s something you still have to take effort to do.
Andi: Tell me big picture how your lives, individually, have changed since figuring this out. I mean we know the specifics and all of that, but how has your mindset changed?
Brad: That’s a really great question. For me, my mindset has changed dramatically from kind of this scarcity mindset of oh I have to win. Or I have to win at everything it’s a zero-sum game. If someone else wins I’m not. To the abundance mindset where I now view the most valuable part of my life, my relationships. And I’m thrilled when my friends and colleagues do well. I want to do everything I can to help them. Because I find that it just makes my life better and it just makes me happy seeing people succeed, helping them succeed. Maybe growing up I was that kind of competitive type A personality and my mindset has changed 180 degrees. I’m not that person anymore. And it feels wonderful. It feels liberating. It feels great to come to a conference like this and meet and see hundreds of people that I know, that I’ve met before and just make new friends. That wasn’t necessarily me. I was maybe I had this story that I was this introvert and I didn’t enjoy things like this and I love them now. I love events like this. I love meeting people. I love connecting with people and I think that’s been the biggest sea change in my life.
Andi: Do you think that that is something that is pushed on us? When you’re in that corporate culture, is that competitiveness and that introversion something that we get from being exposed to that?
Brad: I’ve never thought of it in terms of the introversion. But certainly the competitiveness, that was on me when it’s since I was in high school. I went through a very competitive high school and it was always about getting into the Ivy League schools and things like this. And I think with some perspective you realize that stuff doesn’t matter. It doesn’t matter at all. And whether you succeed or don’t “succeed” at that. Really nobody cares. Once you get into your first job did you ever ask where someone went to college? No, of course not, because nobody cares. You have a better perspective on life. So I can’t say that I had that necessarily the competitiveness in my jobs but I can certainly see that in many industries.
Andi: Chris, how has your mindset changed?
Chris: I think if I didn’t find this whole FIRE idea and the FI movement that I was on pace because I was a good saver. I probably would have “retired early” at 55 or 60, like what most people consider early retirement. Just cause I was a good saver. But that’s just kind of caused me to just question everything in life and to say why do I believe that? And why can’t I retire at 30 or 40? Or why can’t I save more? Or why can’t I manage my own investments? And it’s really, outside of finances, it’s caused me to question things and become a more inquisitive person. And just I think a better person overall who instead of just accepting “this is the way things are” that it really made me question things and it’s transcended finance for me.
Jonathan: I think for me when I started and I was researching for myself financial independence long before we were talking about it on the show, it was all about the destination, this number that I was going to hit and that it was all going to be OK. And I would say now, increasingly, I’ve realized it’s about the journey. And I don’t mean that as a platitude as much as I mean I feel like we in our community have kind of tapped into the secret of life and that as you reclaim bandwidth, you can start to figure out what it is that you want to do with your bandwidth long before you hit a number, you can just reclaim just a small percentage of that control. You get to put that time back into the activities that light you up and I think I get to satisfied, I get to happy. I just feel very content with my life now and my bank account becomes less urgent. Whereas when I was stuck in a job that increasingly was starting to feel toxic that didn’t light me up I was very concerned with getting to that number and that it was gonna be OK. And I think that’s really cool. I think there’s something there and it’s worth exploring further. But what does it look like to design your future? I think just thinking about this world view that is financial independence gives us the freedom to explore that.
Andi: Are your stories in the book?
Jonathan: They are. Absolutely.
Andi: All right, give me one example of somebody else’s story that’s in the book and what happens with that person.
Chris: Kind of just to what Jonathan was talking about. One that really impacted me was Brandon who writes the blog The Mad Fientist. And he talked kind of exactly about how he almost drove himself to depression and how his wife was kind of very unhappy just with the way things were because he was so obsessed with early retirement. And as he kind of stepped back and he ended up when he hit his number, he had kind of made himself happier because he used his growing financial independence to make his working conditions so good. So he ended up working a couple more years because by that point he was living abroad and I don’t even know that his company knew that he was. So eventually when they found out, they made him quit. But he worked a few years longer and he was already a happier person and that number didn’t change a thing. I found that exact parallel in my own life. And I give Jonathan credit for kind of figuring that out from learning through all these people who he’s interviewed and from hanging out and learning from Brad. But I think it’s a credit to him because it’s a key lesson that we bring out in the book that I think a lot of people miss and hopefully we’re going to shed light on that that retirement’s not the ultimate goal and the ultimate destination.
Andi: Any final thoughts?
Jonathan: It’s very exciting to be a part of this. I think that we kind of said this but financial independence to us is more than just a simple equation. It’s a way of looking at the world. And I encourage you if life is a series of choices, Choose FI.
Andi: The book is called Choose FI: Your Blueprint to Financial Independence. It comes out on October 1st and you can get it at?
Jonathan: Anywhere books are sold.
Andi: And also at ChooseFI.com/book. Jonathan Mendonsa, Brad Barrett, Chris Mamula, thank you so much for joining me on Your Money, Your Wealth®.
(All 3 in unison): Thank you.
Your Money, Your Wealth® isn’t just a podcast, it’s also a TV show! Check out the YMYW episode on DIY Planning for Retirement, I’ve put it in the podcast show notes for you – just click that link in your podcast app or visit YourMoneyYourWealth.com. I’ve also linked to our Special Offer, the companion DIY Retirement Guide, available for one week only starting Friday, September 27. The 48 page DIY Retirement Guide has steps to understand and plan your retirement income, strategies for choosing a tax-efficient distribution method, tips on preparing for the unexpected, and much more. It will only be available for download between September 27 and October 4, 2019, so don’t miss out. Click the link in your podcast app or visit YourMoneyYourWealth.com. Now it’s time to answer your FIRE-related questions, with the hosts of the Your Money, Your Wealth® podcast and TV show, Joe Anderson, CFP® and Big Al Clopine, CPA. Shortly, Pure Financial Advisors’ Director of Research, Brian Perry, CFP®, CFA will join us to provide some insight as well. If you’ve got questions on ANY personal finance topic, go to YourMoneyYourWealth.com, scroll down and click Ask Joe and Al On Air to send them as a voice message or an email and get your answer right here on YMYW.
23:11 – Where Can I Learn More About Big Ern’s Options Trading?
Joe: We got Jay from San Diego. He writes in. “Big Ern…” Actually I was really pleasantly surprised on Big Ern.
Al: Yeah I liked him too. Talked about the 4% rule, the distribution rate and there’s all kinds of resources on his website.
Joe: “So Big Ern said that he invests 35% of his assets in options trading. By collecting short term premiums he makes enough money to take care of his monthly expenses. I would like to know more about his method of investing. Where can I get his information?” Well, Jay let me tell you one thing. Big Ern is a Chartered Financial Analyst. He’s a Ph.D. and he was head of research and investment for one of the largest investment firms on the planet. So he’s got about 30 years of education behind him for him to be able to pull that off. If you’re listening to Your Money, Your Wealth® and writing in about Big Ern… I’m imagining that he doesn’t have the level of sophistication that Big Ern does. But you could go to Big Ern’s website, what’s his-?
Joe: EarlyRetirementNow.com. So I discourage anyone from trying to replicate what- Because, to be honest with you maybe 1% of the population can do that. You know what I mean? You watch Tiger Woods play golf and you think, “okay well let me play golf and I’m gonna be as good as-“
Al: “I can swing like him.”
Joe: There’s no way. I would say 90% of people that will probably do that strategy will lose their assets. They start trading. It gets exciting. You get a couple of wins and then you fall off your overall processes. Because if you follow certain processes and we talked about this with the Investment Policy Statement that’s why we have one that we have strict policy policies and guidelines that you follow through in regards to an investment structure. And if you want to get complicated such as options trading, can you make money? Absolutely. Big Ern is a testament to that. He’s killing it. But that doesn’t say big Ern’s never lost. That’s not saying that it’s easy to replicate. It’s so it’s so complex. I would just highly discourage people from going down that alternative way. But Jay if you’ve got the time, if you’ve got the passion, if you got the know-how just go talk to Big Ern himself. I’m sure he would help you out. Go to what?
Andi: EarlyRetirementNow. That’s how he got his name. EarlyRetirementNow.com. ERN.
Andi: I met Big Ern at FinCon. He came up and said hello to me and he said he recognized my voice before he actually saw me.
Joe: Oh wow.
Andi: And he said that a bunch of people have told him that they found him through YMYW.
Joe: Oh really?
Al: Oh how about that. So I did go to Big Ern’s website and sure enough, there are some articles on options trading.
Joe: Did you start trading some options?
Al: Yeah. I’ve got hundreds goin’.
Joe: How much did you lose?
Al: The whole thing. Well, I would agree with you. I know some people that have made money in options. I know more people that have lost money than have made money. Including I just repeat one story and this was during the Great Recession. This was the parents of a friend of Ann’s who had made a lot of money. Father had made a lot of money in stocks and options and during the Great Recession, I don’t know the exact amount, but I think the loss was in the neighborhood of $3,000,000, $4,000,000 because he had options. Now there’s a lot of ways to trade options. Some of them are much more risky than others. I would say for the average person it’s not something you should be doing because, although you can make money, unless you really know what you’re doing, you really can lose a lot of money quickly.
Joe: Right. You could do a simple covered call strategy. I’m sure maybe Big Ern does a little bit of that but Big Ern’s got a lot of money. It’s like he’s kind of not really involved in the FIRE movement. I don’t know Big Ern’s balance sheet but you know that guy was making seven figures for a long time so he’s probably got a nice big fat account. And 35% of it he could be very conservative in a simple covered call strategy that covers basic nut. Where maybe someone hears that and it’s like let me take 35% of my $100,000 portfolio. And then maybe that will cover my basic necessities that are $50,000 a year. It’s not going to work. So you’ve just got to put things in context. But Jay if you do want to learn more about options trading from Big Ern and you can go to his website. I’m sure he’d be more than happy to kind of explain anything. He loves talking about that stuff and he’s a great guy.
28:08 – From Early Retirement to Tapping Retirement Accounts: How Do I Bridge the Gap?
Andi: The next one comes from Maria. She says “What are some strategies for bridging the gap if I want to retire in my 50s until I can access traditional retirement funds?” She said she’s in her 30s. Her retirement is at least 20 years away and it’s hard to wrap her head around all of the unknowns. Changes to Social Security, the health care system. And she feels like she wants to develop a robust plan. She asked if we could interview Tanja Hester which we did in episode 211. And you can hear that at YourMoneyYourWealth.com. So how should she bridge the gap from her 50s until she can access her retirement funds?
Al: That’s a great question Maria because I think a lot of folks are wanting to retire earlier. I definitely was in that camp until I hit 50 and it’s like wait I got plenty of plenty of energy not enough funds.
Brian: The second part being the key, right? Not enough funds?
Al: That was the key actually.
Brian: Energy can be directed a lot of places.
Al: That’s true. So a couple thoughts I guess if you’re at least 20 years away from retiring. First of all let’s talk investing. So how might you suggest that Maria invest? Let’s start there and then we’ll go into taxation and how to draw the funds.
Brian: Well to be honest you should probably invest similar to somebody that was almost at call at age 50 or early 50s or planning on retiring in their mid-60s. Because she’s got essentially a 15 or 20 year time horizon. I think that’s what matters. And you know previous caller we were talking about 100 minus your age and I think that’s what it misses. It’s not how old you are it’s when you’re looking to retire. When you need the funds. So something in the realm of a moderately aggressive portfolio for somebody like Maria. She probably wants more stocks and bonds in there because she is relatively young but needs to keep a reasonable amount of assets safe as well. And then I think the bigger thing is going to be what investments does she put in, what kind of portfolios or what kind of buckets. And this is a classic tax diversification case.
Al: Yes. Maria if you’re thinking about retiring at 50 you probably should save some of your savings. You know you can call it retirement savings but outside of retirement accounts. Just in a non-qualified account because you can access those funds at any time.
Brian: Absolutely. That’s probably where she should concentrate her savings. The word non-qualified means non-regulated. So it has the least amount of restrictions. She might also, depending on when in her 50s she’s planning on retiring, contributing to a 401(k) and not rolling it out into an IRA might have some benefits where if she separates from service at age 55 she might be able to access the funds from a 401(k) as opposed to an IRA. But I think the good news on her side is that she’s still 15 years out or whatever it is she’s planning for this. Because where people get into trouble is they’re 50 and all of a sudden they’re like I’m done. I can’t take it anymore. I need to retire. All their money is an IRA or something like that and they have difficulty. They might have the money to retire but accessing it penalty-free can be a bit of a challenge. She has the opportunity given her age to build this right from the start.
Al: I think that’s the key. I think the more time you have to plan on anything the better it’s going to be. I would also add the 72T election and that’s a special election for an IRA where you can actually have access to your IRA before age 59 and a half without penalty. You still pay taxes on it but without penalty. But it’s not quite as good as you would think. You can’t just access anything you want. It’s calculated based upon your life expectancy at that age and you have to take that out from between let’s say age 50 in this example to age 59 and a half or 5 years whichever one is longer. In this case it would be it would be the term would be 9 and a half years that the money would have to come out and it’s a specified amount calculated. There’s different formulas for calculating it but you just can’t take anything you want.
Andi: Now something else that she says that is a concern for her is all of the unknowns. She’s only in her 30s. She wants to retire in her 50s. She’s concerned about changes to Social Security, the health care system, obviously tax changes. Those are all going to sunset in 2026. So how does somebody in their 30s make plans for things that are that unknown? And does that change where they put their investments?
Al: It’s an excellent question and I might give a little historical context. When I was probably… I’m going to say at least 30 years ago, maybe a little bit more, my Dad was complaining about the Social Security system, how he was putting in money that his mother and mother-in-law were collecting. And he was putting in a lot more than what they ever put in and they were reaping all the benefits. And his comment to me – and this was would probably be I’m gonna say in the 1980s, maybe even late 70s but let’s say early 80s – and his comment to me was “Well there’s gonna be no Social Security when I retire.” That’s what he said. That’s what he thought.
Andi: He believed that in the 80s.
Al: Yes he did.
Al: Now he is still around he’s 86. He’s been receiving Social Security benefits for over 20 years. And so I would say this to Maria and anyone listening. Social Security is here to stay. There’s gonna be changes, yes. And we don’t know exactly what these changes are going to be. Maybe there will have to be reduced benefits or maybe not. Maybe it’s the same benefits. But there’s going to be more money put into the system. Whether it’s increasing the retirement age, whether it’s increasing the amount that comes out of your paycheck, whether it’s means-testing. Means-testing meaning that if you have a lot of assets that you won’t be able to collect as much as someone else. So all those things are possible but it will be around. Health care, no idea. I mean health care is not going away. We need health care. But it’s just like ten years ago. Who knew that Obamacare and all these things and, who knows what it’s going to be ten years from now? It’s very hard to plan for other than the fact that there will be something.
Brian: I would actually take it a slightly different direction and say to beware ‘analysis paralysis’ on a lot of these things. Who knows what the future looks like 20 years out? I’m not sure I could predict what’s going to happen with the government in two years let alone 20. I’m about 15 years younger than Al, maybe a mid-40s and I look at it like yeah Social Security will probably be there in some form. I would agree with everything Al said. The rest of it I think you control the things you can control and it sounds like Maria is trying to do that in the sense of she’s going to save money to the right places. I think it’s really getting clear on what kind of money it’s going to take to retire? And then how much do you need to save each year? And then putting that aside and controlling that. Because even in a best-case scenario if you’re looking for financial independence by 50 or your early 50s, even if these programs are all around, you’re probably gonna have gap periods where you’re not eligible for them. And so I think it’s preparing financially as if they’re not going to be there. And then as you come closer seeing what the structure of them is like and adapting accordingly.
34:39 – Is Too Much Roth a Bad Thing?
Joe: Shane he writes in. Hamden.
Al: Hamden, Connecticut. Yeah.
Joe: Shane writes in a very interesting question there, Clopine. He writes, he goes: “Is too much Roth a bad thing?”
Al: That’s actually a great question. So let’s explore this.
Joe: Alright. “My wife and I are 31 and make $90,000 combined a year. We have been saving in Roth IRAs and Roth 401(k)s 100% of the time except for the employer match. But we can ignore that for now. We’ve accumulated $100,000 in our retirement accounts over the past five years. In two years when my wife finishes school and can work full time in addition to a likely promotion for me we expect to make a combined $180,000 dollars and we’ll be able to max on a Roth IRAs and 401(k)s $50,000 a year. We are the typical family, normal 9 to 5 jobs, own a home, have two little kids, daycare etc.. So if you need to make any assumptions, I’m sure we’ll fit those assumptions. We want to leave a legacy to our kids as well. So my main question is with tax rates where they are now, do you think we’re doing the right thing with going 100% Roth? Is too much Roth bad? Even at $180,000 dollar income tax rates are still relatively low. Obviously if they jump up considerably I will adjust accordingly but would love to get your thoughts and ideas of almost all our money possibly being robbed in retirement. Thanks guys and listen the show podcast every day replay your shows over and over. Never get tired of it.” Shane. Boom. Get a life.
Al: That’s very nice.
Joe: It is. Replay the show over and over. That’s just wow. I’ve never listened to one episode. I can barely listen to my voice right now.
Al: It’s tough to listen to your own voice.
Joe: What do you think? Is too much Roth a bad thing Alan?
Al: In this in this scenario the answer is absolutely not. I would go 100% Roth. Just what you’re doing. And here’s some reasons why. So first of all your combined income is currently $90,000 a year and in a few years maybe three or four or five years it could be as high as $180,000. So you’re in a much lower tax bracket now. The tax deductions aren’t going to help you very much. Get as much possible into the Roth.
Joe: So $90,000. He’s in the 12% tax bracket if that’s a gross number.
Al: Exactly because of the standard deduction of $25,000-ish.
Joe: So if you went pre-tax you would save 12% on that pre-tax which isn’t all that-
Al: It’s not worth it. You’re much better getting the tax-free growth.
Joe: Absolutely. At 30 years old?
Al: Now if you make $1,000,000 bucks, now you’re in a 37% federal plus state. That might be a little bit different story.
Joe: So $180,000. He goes up $180,000 married, couple years from now $180,000.
Al: He’s in the 22% bracket. I would still do Roth IRAs. Now when I might consider something different is when the tax law reverts back to the old tax law-
Joe: And that’s in 2025.
Al: Yeah, in 2025. Well 2026, the end of 2025. And so then we go back to the old rates which instead of 22% it’s 25%, instead of 24% it’s 28%. And those in the 20% bracket may hit alternative minimum tax because of state taxes paid. And so you can get actually to an effective rate of 35%. So that’s a little different story. But let’s do this for one second. Shane if you were to stay in a low bracket for the rest of your life, I’d rather have all your money going into Roth to the extent possible. Because then you have complete control over, you don’t have to be required minimum distributions other than your employer matches. So you have a little bit. But if you can keep your income low then less of your Social Security is going to be taxable and you can actually potentially get into a situation in retirement where you’re paying no taxes at all or very few.
Joe: So Shane he is 31 and let’s just say at 35, that’s when his income is going to go to $180,000. OK, so 35 he’s going to retire at 65. So that’s 30 years. And so if he went pre-tax and saved $50,000. And at the 24% rate, I don’t know what the state rate is in Connecticut.
Al: I think it’s pretty high.
Joe: So let’s say he saves 34% which is $17,000. That’s what he would save in tax savings. That’s a chunk of change that he has to consider.
Joe: That’s $17,000. So if you were going to put that in a pre-tax, $50,000 into a pre-tax account you save $17,000 in tax. Are you going to save an additional $17,000? Because if you put that $50,000 in pre-tax, you don’t do Roth you do pre-tax? 30 years 7%. That’s going to be $5,000,000. So but that’s all pre-tax money. That’s not all yours. So I mean the equivalent of that is half which is about $2,500,000, but if you put the same $50,000 in Roth, 30 years from now that’s $5,000,000 that’s all yours.
Joe: Tax-free. Do it, brother.
It’s entirely possible that Shane plays the podcasts over and over because this personal finance stuff is COMPLICATED. Download the free Roth IRA Basics guide from the podcast show notes at YourMoneyYourWealth.com to get up to speed on exactly that – the basics of what a Roth IRA is, how it works, and why Kiplinger calls the Roth one of the smartest money moves a young person can make. If you’re still left with more questions than answers, go to YourMoneyYourWealth.com, scroll down and click Ask Joe and Al On Air.
40:23 – How Should I Balance ACA Subsidy Eligibility Against Allocation Decisions in FIRE Scenarios?
Joe: We got Anthony calling in or writing in from San Diego, and he writes the most interesting email that I think I’ve read in quite some time. “How should I balance ACA subsidy eligibility against allocation decisions in FIRE scenarios?”
Andi: What does he mean Joe?
Joe: I have no idea. I could break it out. I can try to guess what he means. So ACA subsidy eligibility. So let’s start there. That’s the Affordable Care Act. So you get subsidies depending on your income and it starts at about 100% of poverty level and it goes up to 400% percent of poverty level. So if you’re a single person 100% of poverty level is about $12,140.
Andi: That’s the income you’re allowed to make.
Joe: That’s your adjusted gross income, you’re at 100% poverty level. And so depending on if you are over 400% of poverty level you do not receive any type of subsidies from the federal government to pay for health insurance premiums. If you are 100% to 400% in that range then you will receive a subsidy. The higher percentage of poverty level the lower the subsidy that you receive. And this is truly based on modified adjusted gross income and has nothing to do with the amount of assets that you have. So you could have millions of dollars in the bank and it doesn’t matter, it’s not asset-based.
Andi: You’d still be eligible for the subsidy if you’re not making an income.
Joe: Correct. I battle with this constantly with individuals because they might come in and let’s say they’re 60 years old and they can retire but they got a few million dollars in a retirement account. And it’s like, “you’re in a zero percent tax bracket. You could do conversions to get a lot of this money into a Roth IRA at a very low cheap tax cost. And we can push out Social Security, you have other assets to live off of.: And the planning is pretty good. Pretty perfect. But then they’ll say ‘well no then I’ll lose my subsidies’. Are you kidding me? You shouldn’t even get the subsidy to begin with in my opinion.
Andi: Because you’ve got a bunch of money.
Joe: You’ve got a bunch of money. That’s what this thing was designed for because everyone else is paying for, I’m paying for, the subsidies. Anyway, I digress. But if you want to do it you know it’s planning I guess if you’re looking to figure out the best way to do this stuff. But how we look at it is that if you lose the subsidy it’s just kind of like an added tax then. And the tax rate is still going to be low if you add in the added costs of the subsidy.
Andi: And who knows what’s going to happen in future whether or not the ACA is still going to even exist.
Joe: Exactly. So that’s the Affordable Care Act subsidy eligibility. I don’t know if Anthony is single, if he’s married, if he’s got children. So it’s a different level. The more people in the household, of course, then that income goes up at 100% and so on so forth. So Anthony if you’re single it’s $12,140 is 100%, 400% is $48,560. Really easy way to do this is you look at $12,140 and then you can multiply it by you know 150%, 200%, 250%, 300%, 400%, whatever to figure out what your percentage is. See how many-?
Andi: I’m so stoked you’re doing show prep here Joe.
Joe: Yes. All right. Now. So then he’s like OK allocation decisions and FIRE scenarios. Well FIRE is Financial Independence Retire Early.
Andi: Which we just got done talking about with the guys from ChooseFI.
Joe: Right. So he must have some cash. I’m just trying to back this thing out. So he’s got cash because he wants to retire early. And I don’t know what’s early for Anthony could be 45. I mean that’s what kind of most people look at is like you know if you retire at 51, you know you’re an old man right or old woman. So if you really want your subsidies Anthony and you have a boatload of cash that you can live off of, just make sure that your income is lower than $48,560 because that’s 400% of the poverty level. If you’re married, it is I don’t know $66,000, about something like that. So you can go online and you can just look at eligibility for federal poverty level for the ACA and or Covered California. You can go to that website and then that will give you the breakdown of the eligibility when it comes to modified adjusted gross income. So you just have to keep your income under those thresholds and then you would keep your subsidy or receive a subsidy.
Andi: I just realized something. He’s asking about balancing that eligibility against allocation decisions. Is he thinking that if he’s making dividends or something like that that that’s going to bump up and get him out of being eligible?
Joe: It could be. Then you want to be extremely tax efficient. But it’s I mean it’s- Yeah I really don’t know. But I mean I guess we’d need a little bit more information on really what he’s trying to accomplish. Is it allocation decisions on his portfolio allocations?
Andi: That’s what I was thinking.
Joe: I guess I need a little bit more information on truly what Anthony is trying to accomplish here.
Andi: But I think you’ve covered like the whole range of possibilities. It’s a good start.
Joe: Those two should not go together it seems like.
Andi: Exactly. Yeah.
Joe: You’ve got the Affordable Care Act which is trying to provide health care for everyone. Because you get a lot of people that are not necessarily insured and then they go to the hospital that are not insured and you know it’s kind of a big mess. I’m not a big fan of either way, I’m not being political I know a lot of people don’t necessarily like it. I know people love it. Whatever. I’m just explaining what the law is and why it was created. But what I don’t like in to some degrees is that because my taxes went up, your taxes went up to pay for this thing. That’s why people got pissed off because it was like almost a mandate. It like all right now I got to pay more tax and then people are working the system. So I got a bunch of money. If I want to FIRE, that means I’m saving a ton of money and not spending a lot of money.
Andi: Saving a ton of money with the intention of being super frugal perhaps.
Joe: But I guess what he’s saying is I want the subsidies because then I can not pay for my health insurance, which is fine. So if you want to retire early and get the subsidies just understand the poverty limit. So I mean if you’re a frugal spend less than $12,000. I mean I have less than $12,000-
Andi: Earn less than $12,000.
Joe: Of income. And then you got your full subsidy. So I get what he’s doing I guess. And you know I’m not here to judge or agree or disagree but that’s the planning that you need to do Anthony. Just try to keep your income in those levels you’ll still get your subsidy of course until the law changes. So I guess that’s it for us today. Hopefully enjoyed the show. The show is called Your Money, Your Wealth®.
Thanks to Chris Mamula, Brad Barrett and Jonathan Mendonsa for inspiring us to Choose FI – find links to their book in the show notes for today’s episode. And hey, thank you so much for listening to Your Money, Your Wealth® today! if you’re into outtakes and behind the scenes silliness, stick around to the end of the episode, I’ve got a short Derail that demonstrates how geographically challenged we are here at YMYW. Luckily, these fellas are not challenged when it comes to personal finance. Send in your money questions, follow us on social media, and share this episode with anyone who you will benefit from it – all the links you need are in the podcast show notes at YourMoneyYourWealth.com so click that link in the episode description in your podcast app.
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