Ellie Kay and Bethany Bayless (Heroes at Home, The Money Millhouse podcast) share some of the financial challenges America’s military families face that civilians may not think about – along with some tips and benefits to help our armed forces make the most of their money. Plus, Joe and Al answer your money questions: when should you claim Social Security to avoid any changes for the worst that the government might make to the system? Is a Roth 401(k) or a traditional 401(k) better for dealing with taxes and inflation? And, Joe, Al, and Andi share their Cyber Monday shopping stories.
- (00:45) Ellie Kay and Bethany Bayless: Financial Challenges and Tips for Military Families part 1 (video)
- (10:11) Ellie Kay and Bethany Bayless: Financial Challenges and Benefits for Military Families part 2
- (21:44) When Should I Claim Social Security to Avoid Government Changes?
- (26:40) Roth 401(k) vs. Traditional 401(k): Which is Better for Taxes and Inflation? (video)
- (34:20) YMYW Love
- (35:58) Market Tidbits and Cyber Monday Stories
Today on Your Money, Your Wealth, you asked and we’re delivering a few financial strategies for our armed forces. Plus, Joe Anderson, CFP® and Big Al Clopine, CPA answer your money questions: when should you claim Social Security to avoid any changes for the worst that the government might make to the system? Is it better to contribute to a Roth 401(k) or a traditional 401(k) when dealing with taxes and inflation? And, Joe, Al and I go off on a total derail telling stories of Cyber Monday shopping and trips to Vegas and a whole bunch of other silly stuff. But first, our armed forces face some unique financial challenges civilians may not think about. Today, we’re bringing in the heavy artillery with some tips, and benefits available exclusively to our military members and their families.
00:45 – Ellie Kay and Bethany Bayless: Financial Challenges and Tips for Military Families (part 1)
Challenge 1: Continuity in military spouse employment
Challenge 2: Added costs and extra expenses with every move
- Tip 1: “mil-spouse-preneur-ship” (start a side hustle or portable career)
- Tip 2: Live within your means (don’t buy the shiny new Camaro)
- Tip 3: Make a part-time job out of learning where you can cut back and save
- Benefit 1: Military Family Readiness Centers
- Benefit 2: Blended Retirement System
- Benefit 3: Thrift Savings Plan (make sure you’re in the G Fund)
- Benefit 4: Savings Deposit Program
Joe: We’ve got two very special guests, Andi.
Andi: We do. I’m super excited about this. Bethany I actually met at FinCon, and we bonded, so I said we gotta have you guys on the show. So we have with us, Ellie Kay and Bethany Bayless. They’re the Founder and Director of Communications, respectively, of the non-profit Heroes at Home, which is a free financial education event that they’ve taken across the country and around the world for the last decade to provide financial education to help United States armed forces families pay off debt, build savings, and learn how to get more for less. Ellie Kay is America’s Family Financial Expert®. She’s the wife of the world’s greatest fighter pilot, I understand, she’s the bestselling author of 15 books and a popular media guest on Fox and ABC News, among others. Ellie and Bethany also host The Money Millhouse podcast where they share a cup of coffee, or four, over Ellie’s kitchen table and they brew up money saving tips and tricks for anyone’s lifestyle. Ladies, thank you so much for being with us today.
Bethany: Thank you for having us, this is so fun!
Ellie: Thanks, it’s great to be here.
Joe: You know, this is very cool and special to me. My best buddy is a senior chief in the United States Navy. His wife actually works with Andi and I, and he needs your help. Because he is fiscally irresponsible. (laughs) And he listens to this podcast, so I’m sure Mikey Martin will be happy for your help. So I really appreciate everything you do for the armed forces. We’re here in San Diego, and of course, it’s a big military town. So the work that you guys are doing is absolutely incredible. So it’s just an honor to have you both on the show.
Ellie: Well thank you, it’s great to be here. And with a friend like you guys, he ought to be doing better with his money. He’s got some good friends there. (laughs)
Joe: Yeah, he just does the opposite of everything that I tell him to do.
Bethany: Maybe you should use some reverse psychology on that one. (laughs)
Ellie: We’ve been working in this space for quite some time now and we founded the nonprofit which is actually USAFMR approved. So what that means is that we are certified on the highest levels of the DoD to be able to take financial education directly into the bases, where we can talk directly to military members. They trust us, everything we have submitted has been vetted, and they trust us not to sell. Because unfortunately in the past there have been some predatory presenters that have people sign up for their annuities on the spot, or other products. So that’s quite a distinction. We’re only one of three – only three organizations including the USA Ed Foundation and the First Command Ed Foundation and then us. And so we’re excited to have a place at the table to be able to do that. And it is our joy and privilege to be able to go and talk to these military members and their families. And primarily, we’re talking to the military members, so about 80 percent of our audiences are in uniform. And we do it during the duty day, and they come to us – sometimes it’s mandated, sometimes it’s that mandatory fun. And therein is the challenge for Bethany, as our high energy millennial MC, to get them all warmed up and to turn that crowd, which she does very effectively.
Bethany: (laughs) It’s a lot of fun. We love what we’re able to do for our military members and they have a very special place in our heart because, what my mom is not saying, is that we are a military family ourselves. It’s really fun for us to be able to go connect with our family and the people that are so close to us.
Andi: So tell us about The Money Millhouse podcast, that’s a little bit different, right?
Bethany: It is a little bit different. So we have a lot of coffee. We both love coffee, I think I got my love of coffee from my mom. We just sit over a cup of coffee and we just have conversations. We just have so much fun talking to each other and talking to our friends about money, and what it looks like to just live with that lens of financial responsibility, and that lens of being able to save. And so we have two generations, we have my generation, the millennials who are young professionals, they’re starting out, they’re saving, they’re learning about retirement, they’re learning things like, “oh, I’m an adult, I have to do this stuff? What?! What does that mean, what does that look like?” And then we also have the generation that is my mom’s generation. We touch a little bit on entrepreneurism because we are both entrepreneurs at heart. We have a fun, fun time talking about money. We like to say that we’re kind of like the gateway into financial literacy for people who don’t necessarily like talking about stocks – which are fine, like, we love stocks, they’re super fun, but maybe that’s not what you always want to listen to at 9:00 on Monday morning.
Joe: How did the passion for financial education come about?
Ellie: I think that kind of started with me. I was a born entrepreneur, had my first business at the age of seven. By the time I was 12 I paid for a trip to Spain to go see my cousins.
Andi: At 12!
Ellie: At 12, yes, through my own businesses. And by the time I was 15 I paid cash for my first car. So I was kind of a born entrepreneur. I was a broker for a number of years before I met and married my husband, and then I married into $40,000 of undeclared consumer debt. He looked good in the flight suit. I didn’t ask him for his credit report. (laughs) Big mistake. Big mistake. So now when our kids bring home a significant other, they bring that significant other’s credit report. So my husband, he was in aerospace at the time – he was a reservist, he wasn’t full-time active duty, and so he took a $50,000 a year pay cut to leave aerospace and go back into the military as a captain. I mean, he had two daughters and then he kept me pregnant for the next seven years. (laughs) So we had five babies in seven years. So we moved 11 times in 13 years. So there was no way for me to keep my previous career field, and so I became a master at saving money. We paid off all of that consumer debt on one military man’s income in two and a half years. So yeah, and out of that came the whole passion for becoming more financially literate, it led to my first book, and then 15 books later we’re still doing it.
Joe: You know firsthand, but help her listeners understand the difficulties that maybe someone in the military has versus not when it comes to finances. So it’s very difficult for maybe the spouse of someone that’s in the military to find full-time work if you’re moving every couple of years. So can you talk about the challenges and then some of the things that they can do to potentially put themselves in a great financial position such as you have?
Ellie: Certainly. I mean, one of the things Bethany and I see when we go from base to base is that military spouses and military spouse hiring is a significant issue. And if you’re moving as many times as I said we moved, then it takes you two to three months to find a job, and they may not want to hire you because they know you’re going to move again. So continuity in employment is a really big issue. And so those are some of the things that we have to help military spouses with. That’s why the “mil-spouse-preneurship” is very popular in the military community. They’re starting side hustles. They’re getting, like an AFC, accredited financial counselor certification designation, so that they can take that, that’s a mobile, portable type of career. So there are some career fields that are portable in terms of military spouses. But we try to help them bridge the gap when it comes to how to be able to succeed. And one of the things is simple and that is, live within your means so that when you are moving all of those times, then you can have less debt to worry about as you’re moving from place to place. Bethany, what would you say is the number one thing that happens in military families when it comes to wasting their money?
Bethany: (laughs) A lot of things! One of the biggest ones is buying a brand new car. So we see that frequently, is the car payment – especially for young military members who got their first paycheck, their very first job out of high school, and they think, “oh my goodness, I have money and this car payment is exactly what I’m making right now! It’s perfect! This is exactly what I should do!” So if you drive across the base, you’ll see that dorms parking lot, and you’ll see Camaros and Mustangs and the most beautiful cars. And if you drive just a little bit further you’ll go to the Commanders’ lot, where you’ll see the 1991 Toyota Camry, you will see those manual cars, they’re not super shiny, but they’re all paid off. So that’s one of the things, but going back to what my mom said, one of the things that she said often, that I love, is that what her part-time job was as a military spouse when she had all those kids, when she was staying home, her part-time job was learning how to save money. And so you don’t necessarily have to go out and make money. That’s a great thing, there are lots of ways to do that. But if you take a step back if you really put in the time in cutting back on all these little areas – when it comes to menu planning, when it comes to the grocery bill, when it comes to where you’re spending and where your impulse buying, all of those things – if you take the time and you put that time into it, that can be your part-time job is to learn where you can save so that you can make that income go a little bit further.
Andi: That’s creative. That’s a nice one.
Visit the show notes for today’s episode at YourMoneyYourWealth.com to watch the video of this conversation with Ellie Kay and Bethany Bayless and to read the transcript. And keep listening, because in this next segment Ellie and Bethany have a list of useful tips, resources, and benefits available exclusively to our military members – you’ll find all those links in the show notes as well. And hey, if you know folks like Joe’s friend Mikey Martin, members of our armed forces who should know about of the benefits available to them, email them a link to the show notes too.
10:11 – Ellie Kay and Bethany Bayless: Financial Challenges and Benefits for Military Families (part 2)
Andi: So let’s talk about what some of the other challenges that us civilians don’t think about when it comes to military finance – and what the solutions are for those challenges?
Ellie: Well one of the other challenges is when you move, yes, the military pays for you to move. But guess what? There are families moving from Hawaii to Alaska, because of their bases and where they work. and it’s significant. So think about it, you have got a young enlisted military member and their spouse. Some of those families already have a couple of children, and they’re only making, depending on their special duty pay and all of that, they’re making between $25,000 and $30,000 a year, and they don’t have to pay for their move, but they’ve gotta pay for snowsuits for everybody, they have to pay for coats. Every time we move, even if we live in base housing, we need new things for the house. We may need blinds. You know, you don’t want to hang up sheets and they won’t let you. So there are all of these additional expenses that come up. And then, one other quick thing I’d like to mention, is that when that military deploys, the military spouse has a lot of additional expenses. So if they have smaller children, if that spouse is deploying for a year, they ain’t gonna stay up there for a year in Alaska, is just too dad-gum cold. So they’ll take the babies and they’ll go and they’ll nest – it’s called nesting – they’ll nest in the lower 48. Well, if you think about it, you’ve got this young enlisted family, and they’re having to pay for tickets to fly down, maybe their own parents will help them out with that. They can only afford that ticket once to be able to go down. If things are extended or something like that, that can be an issue and so when they’re deployed there’s all these additional expenses that come up because you’re worried about your spouse’s safety. I mean, it really is hard. I like to say that it’s hard for a spouse to have their military member deploy, and now as a mom, it’s even harder to see my babies go off and deploy. But you’re worried about that, you’re concerned for their safety. And so you’re not really into, like, saving every nickel and penny and stuff like that. And sometimes you’re exhausted. And so you spend more money on eating out. You know, all those extra expenses. So things can really add up even during deployments, and those are things that civilians don’t always see. They just hear about the special duty pay and things like that, and they don’t always appreciate the fact that, OK, not only are they having to deal with finances, but they’re having to deal with life and death. They’re having to deal with those really big concerns that they have.
Joe: What benefits, or added benefits if there are any, that military individuals have that maybe don’t even know that exist? There are a lot of people that listen to our show – well, not a lot, there’s probably four or five that listen to our show. (laughs) But there could be something out there that maybe they should know about to help them become more maybe financially savvy or help them build that financial independence long term.
Bethany: Joe, I love this question, because it’s one of my favorites. There are so many incredible resources available to our military families on base that are not available for us as civilians. My biggest, number one tip that I can give is the Airmen and Family Readiness Center or the Military Family Readiness Center, the readiness center on base. For Navy families, it’s Fleet and Family. They can go to these centers on base for financial education and for so many different resources. The counseling that they’re able to get there is also incredibly crucial. It’s something that we as civilians would pay $300 an hour for if we were to get it somewhere for ourselves. But this is free for more military members and their families. And a lot of times it’s seen as a last resort. You go to these places if you’re in trouble or if you’re in crisis, and that’s not necessarily true. These resources are available on base for free to help you with things that you have questions about. So if you want to create a spending plan for your family, they’re able to walk you through that. When it comes to your credit cards, if you have credit card debt, student loan debt, they help you come up with a plan to pay down those cards for that debt. And they walk through your credit score, they can explain the difference between a credit report and a credit score, all of those things. And this is free to all military members – all they have to do as they walk in, they can sign up for an appointment. They have classes that are available there. It is my favorite resource that’s available to them for free.
Andi: That’s fantastic, very cool.
Ellie: Adding to that real quick: so we have a few things that, when we go and teach financial education on bases, that not all service members are taking advantage of. Right now there’s a BRS, which is the Blended Retirement System. If you’ve been in 12 years or longer, then you’re grandfathered into the old retirement system. If you come into the military this year, you automatically get the new one, and then those people in that no man’s land have to make the decision. So that’s a really big thing – they need to make that decision because they could be losing some money if they don’t opt into it or if they don’t make the best choice that’s available to them.
The second thing is making sure that they take advantage of the TSP. And if they were not one of those military members that automatically get a lifestyle fund that is available to them – sometimes they’re in the G Fund, so they need to make sure that they’re in the L Fund of some kind. So the G Fund is just a basic, like, 1 percent or less, whereas the L Fund is better investing based on your age. So they need to modify that. We’ve found some poor military members that have had 10 years in the G Fund thinking they’re making all kinds of money – so that’s important, for civilians too that have a thrift savings plan.
And then the last thing is the Savings Deposit Program. So this is the best kept secret and you would not believe how many people that are listening to your show today that may be military that have never participated. So when you deploy into the theater, into a combat zone, after 30 days you qualify for the SDP, and you can put in up to $10,000 and make a guaranteed 10 percent return for as long as you’re in the theater, and then it continues 60 days after you get back. So in the past when we’ve spoken to Navy SEALs, the savvy ones, they can keep those going all the time, because those special ops groups are in and out of the theater so frequently, they keep that 10 percent going on $10,000 on a regular basis. So those are my secrets, and those are things that military families should be taking advantage of.
Joe: A quick question, a follow-up question with that. Is there automatic enrollment for military individuals in the TSP or do they have to enroll themselves?
Ellie: Well, they need to do the enrollment themselves, in terms of signing up for the TSP, yeah they do. They’re going to be sent a PIN. They’re going to be sent all of this information, but they have to do that themselves. And like I said, now, new people that are enrolling in it, they automatically are signed up in an L Fund. There’s L 50, there’s L 40. It depends on your age and how close you are to retirement. So that part is good news, but they do need to opt into that and especially, like there is a matching element as well involved, and they have to sign up, and they have to opt in if they’re wanting to do the matching portion of BRS.
Joe: How much education is there when new recruits come in to talk about the TSP or to talk about the Roth component of it versus traditional, and compound interest? Is that what you guys do in some instances, to educate the younger individual? Because if you’re 20 years old going in there, just putting 25-50 bucks, to begin with, could make a very huge difference in their lives.
Bethany: Yeah there is a certain amount of classes they have to go through when they’re transitioning into the military. There’s a certain amount of required education. And with this new BRS system that’s coming out, they’re now requiring touch points throughout their career for them to get that financial education throughout their career. This is something that’s new they’re rolling out. And then what we would do is, we would come alongside those resources available on base, the Airmen and Family Readiness Center, all those readiness centers. We come alongside of them and we give that financial education, but pointing them right back to that sustainable resource available to them on base. So we do add some financial education that’s very needed right now in the military, because there is a good element to that, but when it comes to adding more throughout the career, it’s one of those things that we talked to Commander after Commander after Commander who say, “I wish I had this when I was their age. I wish I had this when I first got in the military. I wish I knew all of these things.” So we just kind of come alongside and help what they’re already doing.
Ellie: And we”re, essentially, a commercial for the Military Family Readiness Center. So the way I like to liken it is, I’m a mother of seven. And so when my children were teenagers, I could tell them things all day long and they wouldn’t listen. So, my daughter, I won’t mention her name, (laughs) but let’s say she’s she’s going out on a date and I say, “hey you know Bethy, it’s cold outside, you may want a jacket,” and she’s like, “yeah, yeah, yeah.” And then I say that a couple of times, then the boyfriend shows up and says, “hey, you may want to grab your hoodie it’s a little chilly outside.” “Oh, really? OK!” So that’s what it’s like on bases. So you’ve got your Commanders, you’ve got your Military Family Readiness Center, you’ve got the drill instructors, you have all these people telling these young military troops, “OK, here are some things you need to know about finances, you need to do this.” And they just don’t listen. But then we come in with a shiny show, and it’s fast-paced, and we do like Twitter chat, and we got this amazing MC that has just got so much energy to burn, and we give them free gifts, we give them gift cards and iPads and books and all kinds of stuff.
Andi: So, of course, they’re going to listen to you!
Ellie: Thank you. Yes. And so that’s what we do. But we like to augment what’s already being done and highlight it.
Joe: Hey, so what are you guys chatting about on The Money Millhouse?
Bethany: We are getting into a season where the holidays are coming up and the beginning of the new year. So we recently had an episode when it comes to spending family time that doesn’t have to spend a lot of money. So making those holiday traditions, making those things that can last for years and years and years but it doesn’t have to cost you a lot. We had a great episode with Tasha Corcoran from Our Big Happy Life, and then coming up we have some excellent episodes on retirement, which is so much fun. I’m serious. It is so much fun. Retirement’s the best. And I’m at that age right now where my husband and I are thinking about this. We’re thinking about practical ways that we can be putting money away for the future, but also thinking about retirement maybe in a different way, in a new way. And so those are some of the episodes we have coming out and we just have, again – I mean, you might take my word for it and listen to the podcast. I think we have a lot of fun, and we think we’re really funny. (Laughs)
Joe: Ellie Kay and Bethany Bayless, we really appreciate you hanging out. This has been fantastic.
Bethany: Thank you so much for having us.
Ellie: Thanks for having us. And you’re going to be on our podcast as well so that we can say we have had you guys on our podcast.
Check the show notes at YourMoneyYourWealth.com for links to both Heroes at Home and The Money Millhouse, as well as the Army, Navy, Air Force and Marines Family Readiness Centers and information on the Blended Retirement System, the Thrift Savings Plan and the Savings Deposit Plan. Coming up in the next few weeks on Your Money, Your Wealth, everything you ever wanted to know about your finances – and everyone else’s, with Lindsey Stanberry, editor of Refinery29 Money Diaries. And learn about the Leverage Equation with Financial Mentor Todd Tresidder – subscribe to the podcast at YourMoneyYourWealth.com to listen free on demand. Now, let’s get to your emails: if you have any financial questions, military or otherwise, or comments or suggestions, click the “Ask Joe and Big Al” button at YourMoneyYourWealth.com. Better do it soon because if we do get those million subscribers Joe was just talking about, we’ll never get through all the emails!
Financial Challenges, Tips, and Benefits for Military Families
Courtesy of Ellie Kay and Bethany Bayless:
Challenge 1: Continuity in military spouse employment
Challenge 2: Added costs and extra expenses with every move
- Tip 1: “mil-spouse-preneur-ship” (start a side hustle or portable career)
- Tip 2: Live within your means (don’t buy the shiny new Camaro)
- Tip 3: Make a part-time job out of learning where you can cut back and save
- Benefit 1: Military Family Readiness Centers
- Benefit 2: Blended Retirement System
- Benefit 3: Thrift Savings Plan (make sure you’re in the G Fund)
- Benefit 4: Savings Deposit Program
21:44 – When Should I Claim Social Security to Avoid Government Changes?
Joe: This is from R. Cooper. “Mr. Anderson.” Wow.
Andi: (laughs) That sounds like something from The Matrix. “Mr. Anderson…”
Joe: You know how many times I’ve heard that?
Al: A lot I’m sure.
Joe: “Mr. Anderson… I really appreciate the YouTube videos you produce.” R. Cooper I do not produce them. “I find them quite informative and valuable. I also enjoy the exchange you have with Big Al. I’m currently 56 years old, single. I am planning on retiring early next year. I was thinking about taking Social Security at 62. I’m using the government’s money and not tapping my 401(k) plan so early in my retirement. My question is twofold. The longer I wait to collect Social Security, the more likely the government is to make changes to the amount, date that I can collect etc. Do you really think I should wait 10 years until I hit full retirement, or should I be better served to only wait five years with less chances of major changes to Social Security, and once I begin collecting Social Security would I be grandfathered? I really appreciate your thoughts you might provide.” Well R. Cooper, that is a very political question you have there, sir. (laughs)
Al: (laughs) It is, the answer is It depends on your feeling about politics. So I’ll start, Joe. And I guess, R. Cooper, this is just my opinion. The Social Security Administration, so what they tell us, what the trustees tell us is that they’ll run out of money in 2034 – run out of money for the trust fund, which means if they haven’t done any fixes at that time, then they could only pay out about 77% of the promised benefits. So you’re right to be concerned. So then it’s a matter of, well, is this something they can fix, and the answer is yes they can fix it. They’ve actually had situations like this before and they’ve lengthened the retirement age. They’ve increased the amount, the percentage that they collect. They’ve increased the cap on Social Security. So if all of those happen, you’re likely, at your age, not going to have much or any of those. Probably the concern though is there has been talk over the last at least couple of decades about means testing, which means that if you make too much money maybe you’ll have some benefits taken away. That is a potential concern. But at the moment nobody, absolutely nobody, is talking about it. And in this political environment, it seems pretty unlikely that’s going to happen before you get to full retirement age – although, now, that’s an opinion, and you may disagree with me. And if so, then go ahead and take it at 62.
Joe: Yeah. So he’s 55, 56 years old. I definitely see his concern.
Al: I do, because that’s 10 years till full retirement.
Joe: Yeah, he’s like, “I don’t know. There’s a ton of things that can happen.”
Al: Yeah and I would say this too is, if there’s going to be a change, they will likely give you a period of time. Like, let’s say you’re 64 and they say, “you know what, in three months if you don’t claim it, then you go in the new system.” It’s that seems likely. I can’t guarantee that but it seems likely.
Joe: So I guess the answer to the question is he grandfathered, the answer is no. They can do anything they basically want.
Al: Although typically they do grandfather, but it’s not guaranteed.
Joe: So I guess it’s, what are your other assets, what does your overall retirement plan look like is, I think, a better question to see how much are you really – how much income are you counting on with Social Security? Is it’s 80%, 50% 30%, something like that? Do you have other assets if that benefit were to be reduced? And so on and so forth. But politically speaking, I would wait until your full retirement, or even later.
Al: And I think by the time you get there we’ll know a lot more.
Joe: Because we’ve got 16 years until this happens. There’s been a lot of talk of trying to fix the system and things like that by other groups, not necessarily politicians. But when politicians talk about it, no one really likes to hear about it. Because they don’t want anything to happen to their entitlements. Which is understandable.
Al: Well sure. So think about this, if you’re a politician and say, “you know what, I’m going to reduce Social Security benefits,” do you think you’ll get elected? Of course not. (laughs)
Joe: No! You’re done! (laughs)
Al: (laughs) So they will have to deal with it, and they will deal with it, but probably not in the near term.
Joe: So my advice, I guess, for R. Cooper is that I think that they will have some fixes. Me personally, I’m going to wait to my full retirement age, and I am a lot younger than you are, Cooper.
Al: Not that much.
Joe: I know.
Al: About a decade plus. (laughs)
Joe: Come on.
Al: (laughs) I’m aging you on the show. (laughs)
Joe: I know, I feel like 60 right now.
26:40 – Roth 401(k) vs. Traditional 401(k): Which is Better for Taxes and Inflation?
Joe: Okay let’s go down to Alabama. Marcus. “Greetings Big Al and Joe (Joel). Yeah, Marcus!
Andi: Somebody listens to the show!
Joe: That’s what most people call me.
Al: Yeah they do like to call you that.
Joe: “Hey Joel.”
Al: Does your mom call you that? Just curious. (laughs)
Joe: Okay. She calls me sweetheart. Dear. “Oh dear…”
Al: Oh yes? (laughs) Okay.
Joe: “First off, I thoroughly enjoy the podcast.” Well, thank you, Marcus.
Al: That’s very nice.
Joe: “Earlier this year I caught up on YMYW seasons 1 through 4 via YouTube and just recently found the podcast.” Marcus has been binge watching YMYW. For those of you that don’t know what YMYW stands for, it’s Your Money, Your Wealth®. “I’m still enjoying it all. Now to the question. When it comes to 401(k) versus Roth 401(k) and the whole tax issue, I know it’s been back and forth about which is better and why. But how does inflation factor into this equation? My thoughts are Roth 401(k) is better because taxes are already paid and it grows tax-free so the money is my money and none is the government’s.” Damn right, Marcus. “Argument one is that you typically… is that you typically will be in a lower tax bracket, blah blah blah in retirement…” oh, I see. He’s talking to me. “Is that you’re typically going to be in a lower tax bracket, blah blah in retirement so defer your tax payment BUT how does this hold up when inflation is factored into the picture?? Given inflation will happen, isn’t it wise to “pre-pay” taxes now? Hypothetical if I am in the 22% tax bracket now and I think I will be in the 12% tax bracket in the future so I defer taxes until then. Given there is a 20+ year retirement time horizon when inflation is factored in how does this 12% tax rate hurt my pockets? Is there a chance I won’t be in the 12% bracket because I need to take out more money due to inflation? Am I missing something around inflation and taxes? Help me understand this scenario.” So what say you, Al?
Al: So what he’s saying is Roth versus regular 401(k), is it better to do the Roth because of inflation? Because what he’s thinking is he’s going to be maybe in a higher tax bracket in the future just because inflation, he’s going to have higher dollars pulled out. And I would say that there’s one thing, Marcus, maybe that you’re forgetting, and that is the IRS tax rates are indexed for inflation also. So the 12% tax bracket, for a married couple right now, goes to about $77,000, single, half of that. So next year it’ll be $78,000, year after, $79,000.
Joe: Yeah, but the inflation they use to increase brackets is a little bit different than what the increase is for me to buy a loaf of bread.
Al: Correct. Yeah. And so that’s the other part of it, right? But I think let’s get out of the way right off the bat is that the brackets are increased for inflation – if they use the right inflation amount. Let’s start there. (laughs) If they use the right inflation amount, it’s same-same. In other words, by the time you get to retirement, yes, you’re going to be pulling more money out of your retirement accounts. But the tax brackets will be much higher. Then we go to part 2, which you’re getting at Joe, which is, are they using the correct inflation amount? And they tend to use a relatively conservative amount. Why? (laughs) Because that’s the way they are. And so you may have to pull out more, and you’re going to get into these higher brackets sooner. So from that standpoint, it’s possible that your analysis could have some merit, especially when you consider medical, which inflation on medical has been a lot higher than regular inflation.
Joe: But still, as inflation goes up, that means his cost of living is still going to increase. And if all of his money is in a standard 401(k) plan, he has to pull more money out of that account, and every dollar out of that account is going to be subject to tax. I don’t care if it’s 12%, 21%, or 22% or whatever it is, every dollar that comes out of that account is taxed. So does he do the Roth versus the traditional? Well if he’s in the 12% tax bracket now, I would go Roth all day long.
Al: Right, agreed.
Joe: Because what Marcus is not talking about here is that the tax rates are due to change. They’re going back to where they were. Well, that’s what it states in the law unless they change the law.
Al: Actually he does say, “hypothetically if I’m in the 22% bracket now and I think I’ll be in the 12% in the future.” The 22% bracket now will be 25% in about seven years based upon how it’s scheduled to go.
Joe: And the 12% will be 15.
Al: Correct. Yeah, so, me personally, I mean just mathematically, if you’re going to be in the 12% bracket versus the 22 I wouldn’t be doing a lot of Roth. But there’s a lot more to this, and one of the biggest things, and Joe you always say this, which is when people put money into a Roth and they end up paying the tax and they forget about it, and they’re glad they’ve done that in the future. On the other hand, if you got the 401(k), the regular 401(k), you got a tax deduction, you had an extra paycheck, but you spent it, you’re not in a better situation. And that’s the emotional part of this.
Joe: I mean, with that small of a delta, Marcus I don’t know. I’d buy the tax. I would buy the tax today. Because you’re saving a couple of dollars if you go pre-tax, or you’re spending a couple of extra dollars if you go Roth. You’re not going to remember you spending the extra dollars in tax in 2019 when you need the dollars 20 years from now. You know what I’m saying here? So let’s say he puts in $18,500 into the Roth at 22%… (reaching for calculator)
Al: (laughs) Your dead calculator?
Joe: Yeah. $18,500 at 22% is $4,000. OK. So that’s what he would save in taxes if he did that. But now that $18,500 is now in a tax-deferred account and its growing, and now that $18,500 is $200,000 twenty years from now. Everything is going to come out at ordinary income tax.
Al: Right. And then you can take the Roth 401(k), you can put your higher expected return assets, like smaller companies, value companies, emerging markets, you’ll probably over the long term have more assets that way, more tax-free. Something else that’s true in the lowest bracket, or the lowest couple brackets, 10 and 12 percent, that’s where your Social Security may become taxable – or it may not be taxable. The lower the income that you show on your form 1040, the less of your Social Security that will be taxable. And because of that, that 12% bracket really isn’t 12% because every time you add a dollar of income, you’re adding another, in some cases, 85 cents of income on Social Security. So it actually works out to about an 18, 19% tax rate.
Joe: You just lost everyone. Provisional income and blah, blah… (laughs) Marcus, I don’t know. I like where your head’s at. I like – tax diversification, I think, is the key. We don’t know anything about your overall situation, like how much money does he have? How old is he? When does he want to retire? Does his wife have – how much money does he have in deferred income and everything else. But I like the analysis. He’s paying attention to his cash and that’s good.
34:20 – YMYW Love
Joe: We’ve got Justin from San Diego.
Al: That’s a testimonial. (laughs)
Joe: “Dear Pure Financial. I want to send you a quick message to let you know how much I enjoy your Sunday morning show. We’ve learned a lot and wanted to take a moment to say thank you and hope the show continues for a good long while.”
Al: Actually, I wouldn’t call it a testimonial. That’s just a compliment.
Joe: Thank you, Justin.
Andi: I just listed those as testimonials because they’re people that don’t actually have questions for you. They just wanted to compliment you guys.
Joe: I feel my self-esteem has risen. (laughs)
Al: Me too! For the rest of the week and I’m gonna be on cloud nine because of Justin.
Andi: There are two more.
Joe: Scott, this is from Scott. He says, “Joe and Big Al, love the podcast. You guys are awesome and the information on the show is invaluable. Keep up the good work.” Thank you, Scott. Kinda tearing up here. (laughs)
Al: Have we got about 20 of these?
Joe: I wish. (laughs) We got two.
To send your love and adoration to the fellas, just click the “Ask Joe and Big Al” button at YourMoneyYourWealth.com or email firstname.lastname@example.org. But really, the best way to *show* your love for YMYW is to *spread* the love! You could watch the latest episode of our TV show – that’s the Sunday morning show Justin mentioned – on Creating a Steady Stream of Retirement Income on YourMoneyYourWealth.com and subscribe to us on YouTube. Then, email your friends the TV show and the podcast and tell ‘em to subscribe to both! Then, share your favorite episode on Facebook, or Twitter or LinkedIn and be sure to tag us – of course, you’ll find our social links at YourMoneyYourWealth.com too.
35:58 – Market Tidbits and Cyber Monday Stories
Joe: Cyber Monday was a big hit. Did you shop?
Al: It seems like I did buy something. You know what, I bought some new – a three wood and a five wood.
Joe: Oh you did on Cyber Monday?
Al: Yeah. Cyber Monday.
Joe: Oh really? Look at you.
Al: It came on Thursday. I used it a couple days ago.
Joe: Yeah I saw you. What percentage did you get off? Did you get it like at Golf Mart or something dot com or?
Al: I have no idea. It was a good deal and I just got it and it showed up.
Joe: 30 percent off or 20 percent? Don’t even know.
Andi: And that is not an endorsement for Golf Mart. (laughs)
Al: It definitely wasn’t Golf Mart, it was on Amazon. I don’t know who sent it.
Joe Huh, interesting. You know what’s really rampant right now because of the holidays is these infomercials for working out. You guys see this stuff?
Andi: Isn’t that like always though?
Joe: Now we got apps, you can have a trainer on your app, right on your phone and then you’ve got these beautiful people doing push ups, doing burpees, and they’re smiling and laughing and they got great bodies, and it’s like, this is such B.S. You know what I mean? Have you ever done a burpee? I’m not smiling when I’m doing a burpee! (laughs)
Al: That’s a terrible thing. (laughs) It’s something you stop doing when you’re not a teenager anymore.
Joe: Anyway. But the the the fitness industry is just about as big as anything out there.
Al: Yeah. I would agree with that.
Joe: And you know so you get these specials. It’s Cyber Monday, you can get this trainer for half off. Of course, I just had a big fat Thanksgiving dinner, of course I got to buy it. And then what we.. not I found, but what I’ve researched – I think Andi found this.
Andi: OIh, blame it on me! (laughs)
Al: Let’s hear this.
Joe: More people spend more money on these great deals than they anticipated.
Al: Right. So they end up spending more.
Joe: They’re spend more. It’s like these companies know what the hell they’re doing.
Andi: You know what, I actually did personal research on this, because on Cyber Monday I got an ad in my email for a drum practice pad, I play drums at home, and I knew that the drum practice pad was normally $59. The e-mail I got said it was 30% off, I go and it’s $54 – because they’re marking it down from $79.
Al: Right, it’s a fake price.
Andi: Yeah. So I didn’t buy it! So they actually kept me from buying anything on Cyber Monday.
Al: Right. I do know they’re sophisticated. I got a quick story on a book that I just read, and this was Target, but it could be anybody. They’re talking about data scientists and how they can buy algorithms, they can anticipate what you’re going to need, and they send you those coupons. And they’ve actually figured out – I guess the the golden goose is figuring out a pregnant woman, because then they’re going to need to buy all kinds of stuff for years and years.
Joe: Right, diapers and…
Andi: Wow, that’s creepy.
Al: Right. And the thing is, a new mother is so preoccupied with the little kid, she wants to go to one store. So they want to make sure that everything’s at that store that she’s going to need. So they figured out with algorithms that when someone’s pregnant, or they’re pretty close, and so they started sending coupons and then people got all freaked out. “How do you know this?” And then they learned – this is tricky – what they learned is they would send totally random coupons, like for a lawn mower, and then diapers. So it looked like it was a random thing. (laughs) And it’s been working.
Andi: Wow. And I wonder how many of the algorithms figured out somebody was pregnant before they even knew.
Al: Well I don’t know, wow, that’s different. (laughs)
Joe: I love the algorithm. I don’t care. It’s like “I need this.” (laughs)
Al: Do you know what an algorithm is?
Joe: No. (laughs) But I love them. Do you have an iPhone? You better buy one now because they might go up with these tariffs. 10 percent.
Al: Okay. They already cost a thousand bucks.
Joe: Here’s a stupid story. I guess this is the story hour. I was on an airplane.
Al: (laughs) Is this a financial show or no?
Joe: Yes it is. I was on an airplane flying back home from Minneapolis to San Diego. And so, I hate – I don’t really care for flying all that much.
Al: You don’t. That’s why you don’t go on trips.
Joe: Right. And I was like, “you know what? I’m gonna buy an iPad. And I was shopping with my mother. I had to get some speakers and some other stuff, we’re running errands, and then I go, “Ruthie, I’m gonna buy an iPad.” She’s like, “all right, sounds good.”
Andi: Was this on Black Friday?
Joe: No, it wasn’t. It was like Wednesday. What is that…
Andi: Green Wednesday!
Joe: Green Wednesday and we bought some pot. (laughs)
Al: You bought the pot on Friday and the iPad on Wednesday. Got ’em mixed up.
Joe: Yes I did. So I bought it and it’s like, okay whatever. I was like, wrap it up, I don’t like being in stores all that long. It’s like here, is this a good iPad? I don’t really care. I’m gonna watch a movie on it and that’s all I want. Just give me the iPad. So I buy the iPad, get home, and then I’m trying to set that thing up, and it only has Bluetooth for the speakers. So I can’t plug my normal… and I don’t have Bluetooth speakers, so I bought this thing to watch a movie on the plane home and I can’t
Andi: I think that’s the new deal with the iPhones and iPads is the fact that they don’t have a physical connection for speakers.
Joe: I think that’s B.S.
Andi: I agree.
Joe: And so I pulled the thing on at the airplane and I was gonna maybe just surf the web or something like that. And then I was like, “You know what, whatever,” and I put it in the pouch in front of me?
Al: And you forgot it?
Joe: Forgot it. (laughs)
Andi: You left it on the plane.
Joe: Yeah I used it for 30 seconds. Great purchase.
Andi: They got you.
Joe: I know. So I call the airlines, “no, never heard of it. Brand new one? Yeah, you were sitting in seat 1A? Nope, didn’t find it.”
Al: Seat 1A? First class?
Joe: No it’s a charter flight. There is no first class. It’s just a straight shot. It’s called Sun Country. Pretty nice airline , it has a brand new iPad. (laughs) I’ve got some fun facts here to close this out. Did you know five percent of people who bought lottery tickets account for 51 percent of all tickets sold?
Al: No I didn’t know.
Joe: Talk about the 1 percenters on the one side of the spectrum. But 5 percent account for 51 percent!
Al: Half of all the tickets. Have you ever bought one?
Joe: I’ve never bought a lottery ticket.
Al: Yeah me neither.
Joe: I’ve received scratch offs like in a stocking or something.
Al; Yeah you get ’em as a gift. Do you scratch ’em off just to see what you won?
Joe: Yeah. And then I won like ten dollars once and I just threw it away. (laughs) I don’t know where to go! I don’t know what to do with it! What the hell do I do? “This was fun. This was a fun game.”
Al: Take it to Target and they say, “No I don’t think so.” (laughs)
Joe: Speaking of gambling, Alan and Andi. Gambling generates more revenue each year than movies, spectator sports, theme parks, cruise ships, and recorded music combined.
Al: Really. I would have not guessed that. So apparently that’s why the casinos are pretty nice.
Joe: $34.6 billion industry that runs the table there. That’s a lot of money.
Andi: Is that taking into account Vegas and everything across the country?
Al: Got to be everything.
Joe: Now there’s legalized sports betting. I don’t sportsbet either.
Al: Yeah. Me neither. And you don’t go to Vegas very often.
Joe: No I don’t really care for Vegas.
Andi: You don’t like flying, you don’t like Vegas, you don’t like stores… (laughs)
Joe: Yeah I’m a barrel of laughs.
Al: I remember decades ago when you turned 35. (laughs) I remember being there with you. That was almost 10 years ago.
Joe: Was that my 35th or 30?
Al: It was 35th. Michael Jackson passed away that same weekend.
Joe: Oh yeah that’s right, we listened to Michael Jackson – that was awesome. I mean not that he died. I love Michael Jackson. I loved the fact that all I could listen to for 24 hours was Michael Jackson.
Al: I was in Vegas with my buddy Eric. And I remember you came down to our room and you did, like, 10 Michael Jackson songs with dancing.
Joe: Yes. And I killed it.
Al: You did kill it. After you left, Eric goes, “who was that guy?” (laughs) I said, “paid entertainment. It’s on me.”
Joe: Oh my God. You know Pablo Escobar? Rats ate $2.1 billion of his loose change. $2.1 billion, because Pablo Escobar can’t go to a bank. So he was stashing all this cash in, like, barns. So yeah, rats ate $2.1 billion of it.
Andi: Imagine having so much money that rats can eat $2 billion of it. Oh my Gosh.
Al: That’s interesting.
Joe: So here’s one. This is one for the cocktail party later on tonight, folks. If you have ten dollars in your pocket and no debt, you are wealthier than 20% of all Americans. Alan’s already…
Al: I’m trying to do my calculations of which group am I in?
Joe: “Hey, how you doing? You got $10? What’s your balance sheet?” (laughs)
Al: How much debt do you got? Oh, you don’t have any? All right!”
Joe: 96% of employed people will not be able to retire at age 65.
Andi: Who is that according to who?
Joe: Oh, look at you, you want the source. According to the Employee Benefits Research Institute, 96% of employed Americans will not be able to collect their full retirement Social Security benefits to compensate for lengthening lifespans. The Social Security Administration has extended the age that you receive benefits, so yada yada yada. You know what the largest domination of US ucrrency was?
Joe: Denomination, what did I say?
Andi/Al: Domination! I’m trying to think, “where is he going with this??”
Joe: WHAT’S THE LARGEST BILL, DAMMIT!?! (laughs)
Al: Twenty dollar bill. (laughs) That’s the highest I’ve seen. (laughs) I thought you were saying number of bills. You’re taking the bill itself. $100,000.
Andi: There’s a $100,000 bill??
Joe: There was a $100,000 gold certificate. That’s what Al has in his wallet right now! (laughs)
Al: So I’m in the top 1%.
Joe; Yeah. That’s all he’s got, the largest bill.
Andi: No, you’re the top, Al.
Al: I am the top!
Joe: The largest bill ever printed was the $100,000 gold certificate, it was printed back in 1934 and 35. So if I do that math, that was, what’s that in today’s dollars? You got a calculator?
Al: No, you’ve gotta do it while you’re talking. (laughs)
Andi: So this was $100,000 in 1934, you said?
Joe: My battery died.
Al: Yeah. It’s a big number.
Joe: And then last one, if you’re in the drive thru, Americans spend $117 billion each year on fast food.
Al: Okay. That doesn’t surprise me.
Joe: They spend $117 billion in fast food, but if you’ve got $10 and no debts you’re richer than 20% of most people.
Al: That’s because most people spend 10 bucks on McDonald’s.
Joe: You got 10 bucks in your pocket, “I’m gettin’ a Big Mac!”
Al: That’s right.
Joe: All right, that’s it for us. For Big Al Clopine, Andi Last, I’m Joe Anderson, the show is called Your Money, Your Wealth®.
Is that on par with winning $10 on a scratcher and throwing it away? Special thanks to today’s guests, Ellie Kay, and Bethany Bayless. Check out the Heroes at Home financial education event for our military members and the Money Millhouse podcast for more information – links in the show notes at YourMoneyYourWealth.com, where you’ll also find links to subscribe to the Your Money, Your Wealth podcast and the podcast newsletter!
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Pure Financial Advisors is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.