“The sooner we can understand the link between our money and how we spend our lives, the better.” Tanja Hester (called the Matriarch of the women’s FIRE movement by the New York Times) returns to YMYW to discuss the value of our time, how it’s connected to our finances, and the options financial independence provides for a life well-lived. Plus, Joe and Big Al answer questions about the balanced asset allocation strategy, taking a pension and another job AND Social Security, and what to do when your company changes 401(k) custodians.
- (00:49) Is Alex Shahidi’s Balanced Asset Allocation a Good Investing Strategy?
- (09:21) Cash Value MEC Life Insurance Strategy
- (20:23) Comment: Kid Playing Monopoly Crying About Taxes
- (21:37) My Company is Changing 401(k) Companies. Should I Set Up a Solo 401(k)?
- (27:02) Would I Be Penalized if I Take My Pension in 10 Years, Take Another Job and Apply for Social Security?
- (30:12) Should I Keep a Mortgage Like Ric Edelman Says, or Pay It Off Like Dave Ramsey Says?
- (31:39) Tanja Hester: The Flexibility of Financial Independence
Resources mentioned in this episode:
Tanja Hester, previously on YMYW: Retire Early Without Pinching Pennies
Joe & Big Al Break Down Indexed Universal Life Insurance on YMYW: Should I Invest in an Indexed Universal Life Insurance Policy? || What Do You Think of Indexed Universal Life Insurance? || Indexed Universal Life Insurance to Insure Future Income || Indexed Universal Life Insurance for College Savings || The Truth About Indexed Universal Life Insurance || Why This Life Insurance Is, for the Most Part, a Scam and read the blog: Incorporating Life Insurance Into Estate Planning
Welcome to Your Money, Your Wealth® podcast episode #250! I’m producer Andi Last, and for this landmark post-Thanksgiving episode, I’m thankful for the chance to follow up with one of our most popular guests, early retiree and author Tanja Hester, who the New York Times called the Matriarch of the women’s financial independence/retire early movement. But first, Joe and Big Al answer your questions about the Balanced Asset Allocation strategy, taking a pension and another job AND Social Security, and what to do when your company changes 401(k) custodians. And we’re thankful for a couple listeners that went out of their way to wind Joe up with their questions – thanks Mike and Ricardo, for bringing up IULs once again. Here they are now, Joe Anderson, CFP® Big Al Clopine, CPA.
00:49 – Is Alex Shahidi’s Balanced Asset Allocation a Good Investing Strategy?
Joe: All right Mikey. From Los Angeles. He writes in “Hey Big Al, Joe, Andi- OOooo…”
Andi: B-A-J-A, Big Al Joe Andi.
Al: B-A, Big Al- Joe, J-
Joe: Baja. Oh, now I get it. Now he’s like, he’s got the bolded Big Al Joe and Andi.
Andi: Actually I did that to try and make it so that you would understand it the first time around but I guess it didn’t work.
Joe: Who writes an email started ooooobaya?
Al: He thought it was baja.
Joe: I mean it’s like booyah. I’ve seen that but baja never-
Al: Clearly you weren’t born and raised in Southern California.
Al: It took you a while.
Joe: Yeah whatever. Pound sand.
Al: You’re from Minnesota. Baja. La Jolla. California.
Joe: “Have you ever been to the cajon?” I wasn’t expecting that. Anyway.Whatever. Mike. He writes in. “Someone was mentioning a book called Balanced Asset Allocation by Alex Shahidi and its revolutionary approach. Sounds like the summary is to have a rebalancing formula between equities 20%, commodities 20%, long term treasuries 30%, and long term TIPS, Treasury Inflated Protected Securities, another 30%. Have any of you, or Brian, hi Brian, read this?” Who the hell’s Brian?
Al: Brian Perry.
Al: Because he was on the show answering Mike’s first question.
Joe: You guys were just scraping at the bottom of the barrel there.
Al: Oh no, we had a great question.
Joe: No I’m talking about the host of the show.
Andi: He’s only our Director of Research.
Joe: Oh. “With returns expected to be a bit soft over the next few years, what do you think about this type of strategy? I’m always a little skeptical when people talk about someone who has been crushing it in the market given so much of the allocation to bond-like instruments. It seems strange that this would be beating the market over the long term. Figured this could lead into some interesting amusing discussion on my ride home.” There’s a lot of interesting strategies that are coming out.
Joe: And if you look at long term bonds in actually long term TIPS, they’ve performed quite well over the last several years just because of interest rates have gone down bond prices go up. And then you throw a little commodities in there and then equities. I’m curious on what type. I’ve never heard of the balanced asset allocation book.
Al: No I haven’t either.
Joe: And this doesn’t really seem like a balanced asset allocation.
Al: That’s not balanced at all.
Joe: We’re missing a few different asset classes there. This also sounds like there’s the permanent portfolio which is somewhat similar to this. Andi, look up the permanent portfolio and see what those allocations are. Because it’s almost, it seems like it’s very very close to this. But I would like to know what the rebalancing strategy is. Because wasn’t there another strategy that someone wrote in? And then there was triggers on when you bought and sold. So it was an asset picking strategy and also a timing strategy. So here’s the percentages that they want in each asset classes but it also triggered a rebalance, not necessarily a movement of the asset class itself but it was a movement on a 30 or 50-day moving average, or something?
Al: I do remember that. And I don’t remember exactly but I remember us talking about that. But here’s my thoughts I guess off the cuff. When I look at this long term treasuries, the expected return of long term treasuries is less than equities. The expected return of long term TIPS is less than equities. Commodities don’t necessarily even have an expected return. So I’d be hard-pressed to see how this would, this portfolio would beat other equity-type portfolios over the long term. Now in the short term? Certainly.
Joe: But I think the selling point on this is saying look at PE ratios of U.S. markets. And they could be a little high or the future expected return because valuations are a little bit higher than the norm, when you look at certain measurements-
Al: But that’s just one asset class. That’s large company growth stocks in the U.S.
Joe: Totally with you.
Al: There are lots of other asset classes that are not as highly-priced.
Joe: But then they’re saying we’ve had this bull run for several years. Does it make sense to take some chips off the table? And so this is a totally defense portfolio. It’s the doom and gloom. If you think the world’s coming to an end then you’re going into U.S. Treasuries. Because that’s the safest asset class. And then you put in TIPS which is just still a U.S. Treasury but it’s got a CPI little kicker on it given inflation.
Al: I’d say if you think the world’s coming to an end you buy a whole bunch of gold.
Joe: That’s where your commodities come in.
Al: Bunch of guns, bunch of bullets-
Al: have enough food to get ya through.
Joe: What’s the permanent portfolio?
Andi: So “the permanent portfolio was devised by free-market investment analyst Harry Browne in the 1980s. The permanent portfolio is composed of equal allocation of stocks, bonds, gold, and cash or treasury bills.”
Joe: Stocks, bonds, gold, and cash. So that’s long term Treasury, short term commodities and equities. So it’s very very close. So I don’t know Mike. What the hell? Go for it. Let me know how it goes.
Al: I would be cautious about this one Mike. That’s my advice.
Joe: I think it’s a very good defensive portfolio.
Al: It is a defensive portfolio.
Joe: It’s a phenomenal defensive portfolio. If you had this portfolio in 2008, you’d crush it.
Al: But then in 2009 and on, you would hate it. So it goes back to market timing. If you could time the market properly, this would be fantastic. But evidence and history have shown that that’s very very difficult to do.
Joe: This is a safe portfolio. The probably expected rate of return on this is anywhere from 4% to 5% long term, I’m guessing.
Al: Yeah because it’s 60% bonds. If you look at long term historical rate of return on bonds it’s about 5%.
Joe: And then so they’re using commodities a little 20% there, oh that’s your inflation hedge, which is BS.
Al: Yes we know that, but that’s how it’s sold.
Joe: It’s a volatile inflation hedge that’s not really an inflation hedge.
Al: And then equities. You look at equities over the long term they’re closer to 10%. Bonds 5%, equities 10%. So if you’re saying this is a great long term strategy, you’re nuts. But if you’re saying this is a defensive strategy, yes it is.
Joe: So I guess Mike it always boils down to your timeframes. What are you trying to accomplish with the money that you have? And then what’s the demand for the portfolio? And so on. Mike continues to write. “P.S. Thanks for the last response to my question on IRA rollover and mentioning the mega Backdoor Roth. I think there might be a little more to discuss there, based on what I read on the Mad Fientist blog, but appreciate the responses.” Aw, come on, Mad Fientist. “I will say I felt a little cheated that Joe was out when my message was read because there was a chance something I said could have set him off.”
Al: Well that’s likely.
Joe: “It effectively robbed me of the chance to bring joy to my fellow listeners by setting Joe off.”
Al: Well you’re already doing it now.
Joe: “I’m thinking of another question where I can cross that off my bucket list.”
Al: So that’s bucket list is to set-
Andi: Set Joe off.
Joe: I mean why, wonder why would you set me off Mike? Because BAJA, stupid ass BAJA stuff?
Al: Well that he came up with recently. That’s very clever.
Joe: Mad Fientist. What the- mega door- back door- Roth IRA, that would not set me off. I think that’s a very good strategy.
Al: It’s a great strategy.
Joe: If he was wanting to use like an index universal life insurance contract in some fashion-
Al: That would do it.
Joe: Keep writing in Mike. Try to see if you can set me off.
09:21 – Cash Value MEC Life Insurance Strategy
Joe: We got Ricardo. He wrote it from Houston Texas. H Town. That’s what Houston is.
Al: H Town.
Joe: “Joe, Al, and Andi. Thank you sooooooo much.”
Al: I like the way you read with emphasis. Very good.
Joe: Well there was a lot of ooooooo’s in this.
Al: Sooooooooo much. Yeah, you’re right.
Joe: “For your great podcasts and videos. You guys bring financial and tax planning to a whole new level.” Oh right. Thank you.
Joe: “Joe, please never ever ever ever ever ever ever ever ever ever ever tone it down.” That’s the second comment today.
Al: They like to, they like to set you off.
Joe: I don’t think I’m fired up all the time.
Andi: Oh you should listen to yourself, Joe.
Joe: I’ve never listened or seen myself ever and I don’t think-
Andi: You talk fast and you get really cranky.
Joe: I don’t think it’s cranky. It’s just passion.
Al: It’s passion. Yeah. They don’t want you to un-passion it.
Joe: Ricardo, you got it, brother.
Al: Keep it toned up.
Joe: Let’s do this. We’re gonna make it happen. Forever and ever and ever and ever.
Al: Dot dot dot.
Joe: Dot dot dot. “As these insurance series have become a personal favorite-“
Al: Oh boy, here we go.
Joe: “and as you throw out great information, I want to keep stirring the pot on the insurance topic a bit more. But I will start by saying I do agree with you guys especially Joe about the IUL that is indexed universal life as these are pretty bad mainly because of the terms. I would like to speak on a more strategic sense rather than the specifics of portfolios, 401(k), etc.” I know where this is going.
Andi: You haven’t even read the question yet.
Joe: I know, but I know where Ricardo is going.
Andi: Because I know you don’t read the questions in advance.
Joe: Ricardo’s got one. He’s gotta have one. And this is his chance to redeem himself for buying the product.
Al: And he probably wants more, I’m guessing.
Joe: Yes. Or he sells these products. It’s alright, Ricardo I’m never ever ever slow this thing down. I’ll tone it up right now..
Al: Tone it up.
Joe: “A little bit about myself. 47-year-old male, married with 2 kids, 18 and 7. I currently have a taxable account, Roth, two IRAs, one for making Roth conversions and the other is where I rollover my previous 401(k) which as I understand I cannot convert.'” Okay. Where the hell am I?
Al: It threw you off because-
Andi: You’re in the right place.
Al: It’s on another page.
Joe: “But which I understand I cannot convert.” Why can’t he convert?
Al: He can convert. That’s false.
Joe: Oh so- Okay so this- all right- Al’s already jumping the gun on answering some questions.
Al: Well you got confused. So I’m answering the question.
Joe: Sorry but I thought it was- The only thing that you can’t convert is an inherited IRA.
Al: That’s correct. So your previous 401(k), you can convert. If you want to, or a portion.
Joe: So he’s also got a 401(k) and a couple of rentals. “The amounts are irrelevant to state my point. But I would like to say-“
Al: Does that mean they’re small?
Joe: They’re outside of Odessa.
Joe: Odessa, Texas.
Al: Got it. Okay. Small town?
Joe: I think there’s a prison there.
Andi: Why are you looking at me for that? I have no idea.
Al: Because you can Google it while we’re talking.
Joe: It’s a very nice place. “Irrelevant to state my point but I would say that I only have dividend-paying stocks on all the accounts except the 401(k). The way I’m planning to use these is as supplemental income to Social Security in the future by stopping the drips from them as needed in getting these checks instead of relying on selling assets. Typically portfolio but I understand I have to sell some equities in the IRA rollover once I meet RMDs as a requirement, to supplement the gap from Social Security. In this way, I believe I won’t be dependent or subject to market conditions. As a bonus at least for the taxable and Roth accounts, these could work as some sort of endowment to pass to the kids.” Are you following this so far?
Al: Not really.
Joe: Me either.
Al: We’ll get there though I’m sure.
Joe: ”Joe, I agree with you on the IUL, Universal index life insurance. But my point on the insurance topic is as follows. I currently have a whole life-“ I told you. “Currently I have a whole life insurance with a mutual company that I think everyone has this point wrong as they keep measuring them to investment accounts and this couldn’t be further from the truth. In reality, these should be compared against savings accounts, money markets or CDs which if we are lucky will give us a mere 2% and with our friend inflation is a no-go. Basically I have a specially designed policy to act as a cash value life insurance with a current split of 14% base premium and 86% PUAs and I established a MEC of $50,000.” Oh boy.
Al: A lotta letters.
Andi: What’s PUAs?
Joe: “I have read the 200+ pages of the contract and the base premium is-” Jesus! “is my only cost.” Okay. “So it is also designed so the break-even point is at 6 years and I can stop paying into it at year 10. After that, it’s paying for itself as my PUA’s are buying additional term insurance within the policy to deal with the MECs. So in short instead of sending my cash into bank accounts, I fund my life insurance policy to use as an emergency opportunity fund which has a floor of 4%. Because it’s a mutual company there’s a dividend around 1.85% additionally to the 4% base. Now the beauty of this is that my family is covered in the event of my passing but I can use while alive the cash value accumulated that’s in it. But I want to make the point that this money is separate from my investment money which goes into another account. Please let me know your thoughts on the strategy here.” I’m exhausted. I am sweating. I need to go back to school. Because this was a very difficult email for me to read.
Al: Well let’s try to boil it down.
Joe: What he’s saying. He’s got a whole life policy. It’s with a mutual company. He’s got a good rate. And I agree- that you know so he’s using this, it sounds like he needs a cover his family. So he bought a whole life policy. And the whole life policy has a cash value component to it where he can draw cash out if he needs to and he’s not comparing the cash value of the life insurance policy to a investment account. It’s more like a CD. And I agree with that because in the stupid CFP® exam they have like- This is many, many years ago. When whole life policies were a lot more popular maybe than they are today. Or maybe the industry itself was still very heavily insurance kind of related in the financial planning world.
Al: So why don’t you just get term insurance to cover if you pass and then put the rest of your money in CDs, so you can have access to it at any time? If you’re comparing the rate of return, same same.
Joe: No it’s not. Because it’s tax-free with inside- Because he’s taking loans from the overall policy. And if he, and it’s a mutual company and if I’m an insurance holder of a mutual company the insurance policy owners are the owners of the company. And so he’s getting a little bit of extra juice. He’s getting a little bit higher rate of return than a CD. And so if he can take loans and take that money out and need to- and pay it back at a little bit higher rate. I don’t know. It’s OK. I would never do it.
Al: But why? Why wouldn’t you do it?
Joe: Because I don’t need insurance. I’m a single sexy man, I’m not married, I have no kids.
Andi: What’s the sexy part have to do with it?
Joe: I’m just seeing if any single ladies are out there.
Al: So here’s what I would do as a married man-
Andi: Sexy man.
Al: Man with kids. I didn’t say that, she did. You didn’t say it.
Al: That I was sexy.
Joe: I think you’re very sexy.
Andi: I think we had a listener that wrote in and said you were sexy.
Al: How would they know? I’m on the radio. Maybe they watched the YouTube. So here’s what I would do. And you can debate this all you want. I would do term insurance, which is what I have. And then I would have some money in CDs, and the rest in a balanced portfolio. I would beat the rate of return even net of the tax-free component and I’d have full access to my capital at any time I want it. That’s what I would do. That’s what I am doing. I think that’s a lot simpler approach than trying to work through this contract. However, I do agree with you. Structurally this can work from the tax-free component. But we have seen a number of these kinds of plans blow up-
Joe: most, almost all.
Al: because there’s not enough return to cover the policy payments and then the whole thing blows up.
Joe: But I think this is a fairly small policy and he’s already established a modified endowment contract and it’s paid up. So, I don’t know, this guy is definitely in the industry because he’s talking about stuff that no one really knows. But, Ricardo, love it.
Al: I do know what a MEC is. I don’t know what a PUA is. PUA?
Joe: Those are like I’m guessing they’re paid up-
Andi: Paid up additional insurance.
Joe: Yeah, paid up additionals.
Al: Paid up additional insurance. Okay. Okay cool.
Joe: Look at that.
Al: Well there you go. So I got educated.
Joe: I’m one smart insurance person that’s never sold a policy in my life.
Al: Ricardo educated me.
Joe: Paid up additions. Yeah. I was guessing that that’s what that was. But he’s saying PUAs.
Joe: You know Ricardo’s not, he’s out there.
Andi: Well he does say that he read the entire contract so he might have done the research necessary.
Al: Probably has different PUAs in there.
If you’re new to YMYW and considering various investing strategies, especially the “life insurance as an investment” strategy, or if you just love hearing Joe get set off and want to relive some of those exciting moments, I’ve posted links to all our previous indexed universal life insurance discussions in the show notes. Click the link in the description in your podcast app and have a ball – and download our white paper, 8 Timeless Principles of Investing, which will help you feel confident in your investment portfolio even when markets are volatile. If you have a money question, comment, compliment, complaint or story, or if you too want to try to set Joe off, click the Ask Joe and Big Al banner in the show notes and send it on in.
20:23 – Comment: Kid Playing Monopoly Crying About Taxes
Joe: Cynthia from Silver Springs, Maryland. She kind of sent us video Al.
Al: She did.
Joe: She goes “absolutely love your show. Learning so much from it. I found this when I was researching tax efficiency in retirement. My sentiments exactly. It’s a kid playing Monopoly and crying about taxes. So very funny.”
Andi: Did you watch it?
Joe: Of course. I watch everything that comes through my email box.
Andi: Yeah right.
Joe: Especially if it’s from Your Money, Your Wealth®. No I didn’t watch it. Did you watch it? Was it good?
Al: No, I haven’t seen it.
Andi: It’s literally a kid. He’s got the monopoly board and the money in front of him and he’s in tears and his mom says, ‘What’s the matter?’ He goes ‘taxes’. She goes ‘Yeah’. He goes this ‘I don’t like this game. I have to pay taxes’.
Joe: How old was the kid?
Andi: He’s like 7, 8.
Joe: Wow. Well, that’s awesome.
Andi: Yeah, learning early.
Joe: Yeah. Keep sending us some videos. Andi loves them. Al and I can learn about them when we do the show.
Al: That’s right. You can play it for us while we’re talking.
Joe: It’s probably a helluva lot better than this program.
Al: Oh that’s to be- She’s going to loop it into the program, so she can cut some of us out.
21:37 – My Company is Changing 401(k) Companies. Should I Set Up a Solo 401(k)?
Joe: Michael from Connecticut. He writes in Al. He goes “Good morning. I saw podcast #209 on Your Money, Your Wealth®.” All right. So 209.
Andi: That’s a ways back.
Joe: That was like 40 episodes ago.
Al: Yeah. Guess we talked about SEPs, solo 401(k)s, Roth conversions, etc.
Joe: We did that at 208, 207, 206, episode 204, 203-
Joe: Yeah, that’s fine. That’s totally fine. So Mike, Michael. “My job wants to change my 401(k) from Principal to a company called Orenda.” Is that right Al?
Al: Yeah. Orenda.
Joe: Orenda Retirement?
Al: Have you ever heard of them?
Al: Me neither.
Joe: “I never heard of them and I wanted to-“
Al: Neither has Michael.
Joe: Neither has Michael. “I’ve never heard of them and I wanted to ask if I should set up my own solo 401(k) through Principal and let the job I work at set up new 401(k) with that new company. Because right now they match 3% and I think I’m putting 15% so I’m at least 18% for my check. Would my 401(k) stay a 401(k)? Or what I have Principal set me up with an IRA? And let my job set up a new 401(k) with that new company? Will I lose any tax deduction? I saw that on the podcast it says set up a solo 401(K). Would that be IRA? Or still 401(k) with Principal? Or go with someone else? Then roll SEP-” and now a SEP. He’s got a SEP too, Al. “Then roll SEP into solo 401(k)? Is the simplified employee pension individual retirement agreement the new company my job is going to? I’m pretty sure I have over $25,000 in my Principal 401(k). Thank you for your help.”
Joe: Was that English? I don’t even know what that-
Al: That was, in Hawaiian they would call it Pig-
Joe: Pig Latin?
Al: Pig Latin Yeah. Anyway, let me, I’ll try this Joe.
Joe: Some of the fun of just trying to decipher what people are writing us here.
Al: The first thing I will say is if you just have a job then-
Al: Just a job as opposed to a job and a side company. So I’m gonna go there in a second. Just a job. You only have one source of employment and one source of income, that’s your job. You have to go with your employer’s 401(k). You can’t all of a sudden then set up your own.
Joe: He’s like you know what I got Principal 401(k). They want to go with Orenda. I was like, I ain’t going there. I’m gonna set up my own solo 401(k) with Principal.
Al: Can’t do that.
Joe: Can’t do that Michael.
Al: Now you could if you had a side hustle. Let’s say you were making some money on the side.
Joe: Oo, side hustle. Love it, Al.
Al: Modern now, right?
Joe: What are you, 23 years old?
Al: Teach an old dog new tricks. I could go boom. Look at that. I just brought that one in too. How about that?
Joe: Big Al’s goin’ boom and side hustling-
Al: And I wanna give a shout out to Michael. I could be super young y’all. Anyway so if you got that little side hustle where you’re making some money, you could set up a solo 401(k) for that, but not your current job. Okay, so let’s get that clear right off the bat. You with me?
Joe: Yep. You gotta go with the new 401(k), Mike.
Al: Yeah that’s your only choice. At your job, you can’t all of a sudden make a new one yourself.
Joe: But the only thing that’s kind of weird is that he’s got this SEP.
Andi: No I don’t think he does. I think he heard about that in the podcast and he’s thinking that that might be what he’s got.
Joe: “Or go somewhere else? Then roll SEP into solo 401(k) is the simplified employee pension individual retirement account the new company my job is going to-“
Andi: I think he’s really confused by what a SEP is.
Al: A SEP. I’ll explain that.
Joe: So he’s asking-
Andi: He’s asking are they putting it into a SEP?
Al: No. No. It’s just a different 401(k) provider is all it is. It’s the same 401(k) probably. Anyway so a SEP, simplified employee pension plan, is when you have your own business that’s profitable. If you’re a sole proprietor you could put up to 20% of your bottom line profits in a SEP. The reason why we like solo 401(k)s over a SEP if you don’t have any employees is you can put that 20% in for profit sharing but you can also put the employee portion in which is another $19,000 or $25,000 if you’re over 50. So at any rate. But everything you’re talking about here is only when you have your own company which it doesn’t sound like you have Michael because you keep talking about your job.
Andi: So Michael the only thing that you can do at this point is to go with Orenda.
Al: Andi can boil it down. Boom.
Andi: Unless you get a side hustle. And then shout out to Principal.
27:02 – Would I Be Penalized if I Take My Pension in 10 Years, Take Another Job and Apply for Social Security?
Joe: Scott from Lakeside, California. “Hi my name is Scott and I’m a widower”.
Al: That’s too bad.
Joe: “I’m looking forward to leaving my current employer and possibly start using my pension in 10 years at 64. Will I be penalized if I continue working another job or if I apply for SSI?” Will I be penalized if I continue working another job or if I apply for SSI? Okay. Well Scott, I guess I’m confused. Do you know what he’s-
Al: No, I’m trying to figure it out too.
Joe: So he’s leaving his current employer. He wants to start using his pension in 10 years at 64. So he’s 54 years old. And then is asking will he be penalized “if I continue working another job?” If you leave your job and have a pension with that employer you’re going to receive that pension at age 64 based on their formula on how you qualified for the pension. Usually, it’s years of service, your age on when you collect it, and maybe your high three years of income. So will you be penalized? Well if you worked for the current employer for another 10 years, potentially you could have a higher benefit because they’re going to take years of service into the equation to figure out what your pension benefit is going to be. But most of these companies are freezing and getting rid of the pensions altogether.
Al: I would agree. I think to me that’s the only penalty on it. On what appears to be maybe a private pension plan, is the more years of service you put in, generally, the higher your pension payouts are.
Andi: I think he’s asking about the windfall elimination provision. Because he then says, “If I apply for SSI.” He’s asking if he applies for Social Security, and he’s taking a pension, and he starts working at another job, is that going to affect his Social Security?
Al: Well that’s another question. We can answer that one in-
Joe: A couple minutes.
Al: One minute. One and a half minutes.
Joe: I don’t know- we got Andi from San Diego. What’s the question?
Andi: So he’s talking about applying for Social Security at age 64. He wants to take his pension in 10 years at 64 as well. Will he be penalized for Social Security? Will it affect his Social Security if he takes his pension and works another job?
Joe: at 64?
Joe: Yes at 64. You have to wait till full retirement age unless he makes under $18,000. So yeah. If he claims his pension and Social Security at age 64 and he’s going to continue to work at age 64 thereafter?
Andi: That’s what I think he’s asking.
Joe: Then yes he would. Social Security would be penalized because there’s an income threshold on Social Security until you reach your full retirement age.
Al: And if it’s a government pension, which we don’t know, then yeah there’s that Windfall Elimination provisions that would apply whenever you start claiming Social Security, regardless.
Joe: Right. But if you have a government pension you’re not putting it into Social Security. So they offset it.
Al: OK. So we answered three questions in that one.
Joe: That’s not bad.
Al: Yeah, pretty good.
30:12 – Should I Keep a Mortgage Like Ric Edelman Says, or Pay It Off Like Dave Ramsey Says?
Joe: All right. And then “Hey Joe and Al. Daniel from Michigan. 22 years old, but I was wondering what you guys thought about keeping a mortgage on a house. Ric Edelman says keeping a mortgage is good for tax benefits. Dave Ramsey says pay off your house as soon as possible”. I agree with both of them, Daniel. I think you’re 22, you probably can’t afford to pay an entire house, so I would hold that mortgage. See what interest rate you got, and then before you retire, it’d be good to be debt-free.
Keep sending in your money questions and the fellas will keep answering them. Just click the Ask Joe and Al banner in the podcast show notes – the link in your podcast app will get you there. And hey, do us a favor: share YMYW. Post YourMoneyYourWealth.com on your Facebook page, Tweet about the podcast and tag @ymywshow, share an update about us on LinkedIn or email your favorite YMYW episode to anyone who will find it entertaining or useful. Now, let’s switch gears and talk about the freedom of financial independence. At FinCon in September, I had a chance to follow up with Tanja Hester, the inspiring early retiree the New York Times calls the Matriarch of the women’s FIRE movement. Tanja and her husband Mark retired at the ages of 38 and 41. She writes the award-winning blog at OurNextLife.com. She co-hosts The Fairer Cents podcast about Women, Money and the Fight to Break Even, and this year she released the book Work Optional: Retire Early, The Non-Penny Pinching Way.
31:39 – Tanja Hester: The Flexibility of Financial Independence
Andi: Thank you very much for joining me today.
Tanja: I’m thrilled to talk to you.
Tanja: Oh gosh. It’s been almost overwhelming. I think that the feedback has been across a wide spectrum. You know some folks are brand new to the concept of saving and investing and thinking about the way they’re spending their money in a mindful way. So for folks who are new to those concepts they’re looking at that sort of like I think what a lot of us can relate to of kind of feeling like your mind has been blown by this concept. I think for others who’ve maybe heard about early retirement they’ve really loved the way that I approach the topic which is to not talk about money first and instead to talk about what you want out of life. What you want your legacy to be. How you want to spend your time. What feels meaningful to you. Thinking about those things and then thinking about what the money looks like that supports that. And then there have been those, which this is maybe perhaps the most surprising to me, is there have been folks who are looking at traditional retirement or who are already retired, who’ve said that they found a lot of value out of the third part of the book which is about making the transition into the next life chapter, whether that’s early retirement, traditional retirement or some kind of hybrid, like semi-retirement or what I call career intermission, taking like a gap year sabbatical, without setting yourself back financially. So I love it. You know it’s been folks of all ages I’ve heard from which is great. You know people I hear a lot of folks are gifting the books to friends, family, younger folks. I’ve heard someone gave a book I signed earlier today they’re going to give to a middle schooler. I thought that was pretty surprising. But you know like the sooner we can understand the link between our money and how we spend our lives, the better.
Andi: So okay now, hindsight being 20/20, would there be anything that you would change about the book?
Tanja: Oh little things. You know I think there are a few things here and there that I feel like I might explain a little bit differently now. The bummer about a book versus like a blog post or an article online even is you can update those. You can make changes. A book is done.
Andi: It’s out there.
Tanja: It’s out there. And so sometimes folks will say, “I didn’t really like how you said this,” and like, “cool, I can’t do anything about it.” But big picture, no, I’m really pleased with the book. I’m proud of it. I think it does represent kind of my worldview which is money is a tool, not the thing to start with. I think a lot of folks who go down the financial independence rabbit hole get really immersed in the numbers and the spreadsheets and optimizing every expense and pinching every penny. And it was important to me to put non-penny pinching right on the cover of the book. Because I think if you get true joy out of that, if that is a thrill for you, that is the way you like to geek out, great. But I think that’s not most people don’t want to be thinking about their money all the time. And so I do think it represents me to think about ok how do you sort of put this on autopilot, let it go and focus on what actually matters in life.
Andi: Now at FinCon, you gave an amazing big ideas speech talking about authenticity versus authority. On that same kind of line of thinking, looking at your path to financial independence, is there anything you would have changed about how you got to where you are today?
Tanja: Yes, for sure. The biggest thing that Mark and I would change is actually just slow down a little bit. We did not start from zero once we decided to set early retirement as a goal. That was about 6 years before we retired early and we’d certainly saved some, we’d made some smart financial decisions by that point. So again knowing that wasn’t the starting line, that was when we got really aggressive about saving. And you know in the end, if it had taken us 7 years, 8 years, 6 and a half, that wouldn’t make a huge difference in our lives and our health and our happiness. But for example, we just didn’t use all our vacation time in those last 6 years. We worked pretty much pedal to the metal to earn as much as we could to maximize what we could get. And I think looking back I wish we had taken a few more vacations, taken a little more time off, spent more time with family. There are some things we passed on that I really regret. You know in particular, 2 friends had amazing weddings in Europe. One was at a French chateau and one was in a medieval mountaintop village in Italy. And we passed on both of those because they were gonna be expensive. And looking back I’m like, “those are experiences we can’t ever replace.” And I think when you get those once in a lifetime experiences that were going to make great memories, you gotta do that stuff. And we were in the financial position to do them. But we made the decision not to, looking down the road at the big goal. Honestly, if we take in both of those trips that would’ve set us back like a couple of months, not something massive. So I think yeah, that is the thing we’d change. We’re thrilled to be early retired now, but we didn’t have to get there quite so fast.
Andi: Now, I want to talk about something that I’ve heard a lot from people who when they hear about the FIRE movement or financial independence they say, “you know what, that is for people who make a heck of a lot more money than I do. That’s for people are who are a heck of a lot younger than I am.” How do you respond to people who have that immediate, “nope, that’s not for me?”
Tanja: I mean I think there is no point in sugar coating the fact that it is much easier to save money when you have more money, when you earn more money. That is simply a mathematical fact. So I don’t think we should be trying to hide that. I think higher earners have an easier time doing this. Although we also know that higher earners are just as likely to spend their entire paycheck as lower earners. So just earning a lot doesn’t mean you’re a good saver or good investor. But of course the more you earn the faster you can save. I think I talk a lot in the book about how you can find different models. So this idea of it being all or nothing for example, that you either have to work full time or you have to be fully retired. That’s just not true. And I do think if you look at something like semi-retirement, like maybe you get yourself totally secure for your traditional retirement, and then you do just enough fun work, or part-time work now, to cover your day to day expenses, your annual expenses. That’s a lot more achievable for a lot more people. So I’d like to give other options or maybe you could take 5 years off and go do a lot of the things you dream of and then go back to work. There are different ways to structure our lives. On the age point, my theory actually we don’t have good data on who’s retiring early, but my theory is that the average early retirement pursuer or dreamer is actually going to retire in their 50s or maybe an early 60s. I know a ton of my readers are older than you might expect. You know given that you see media stories about people retiring in their 30s or 40s. But most people I think who you’re seeing in media stories are like the unicorn, but the total outliers. I think the average folks doing this are retiring more like late 40s, 50s. You know the average retirement age is 62 for men, 63 for women. Frankly to me, if you can beat that by a month, you have won the game. And I think even if you don’t beat it you did the average. Even if it’s 65 or 67 when you quit but you feel secure, you’ve won the game. Because most people in retirement are living off Social Security alone. And the average check is $1400 a month. Medicaid, Medicare expenses are still incredibly high. Even with that guaranteed insurance, so the guarantee is great but the cost is not zero. So if you have even a few hundred extra dollars a month that can make a life changing difference. And those are all things that you can put yourself in a position to do at almost any income level whether you retire early or not. I mean that doesn’t have to be the end goal. That’s why I called the book Work Optional because it’s really about can you put yourself in a position where you have some space in your life to think about your purpose and how you want to spend your time and that it’s not always about work and earning.
Andi: And that’s something I think you and I both understand, the concept of life is short. Tomorrow is never promised to us. And to know that it’s not just one way or another, you have to work 80 hours a week or be retired and on the beach, it’s a big deal. So thank you for helping people to be aware of that.
Tanja: Yeah, I mean obviously that’s hugely important to me with some of the genetic issues in my family. Also, this is a really sad story. But I heard just a couple of days ago while here at FinCon about a blog couple who has been not blogging very often lately, the PIE blog, Plan, Invest, Escape, Mr. and Mrs. PIE. She just shared on Twitter that a about a year after early retiring, they discovered that Mr. PIE has a terminal brain tumor and it’s very aggressive. It’s going to take his life. They’re trying to slow it down. Like, my heart is just breaking for them. But at the same time, I’m so glad that they did have that year. You know, that even if it was only a year, they’d planned on decades I’m sure. But having some time without having to go to work every day and have those special memories they made as a family during that. That’s so valuable, you can’t buy that. I mean you can, it turns out (laughs) but you can’t replace it. You know, if you miss that opportunity, it’s gone forever. And so I think whatever it looks like to you to find quality space in your life to spend with the ones you love, to do the things you’re passionate about. I mean, it’s just it’s the best gift there is.
Andi: And this kind of gets a little bit to the part that a lot of people don’t want to think about, but have you planned for worst case scenario? Have you talked about what happens if the thing that nobody wants to have happen, happens?
Tanja: Oh absolutely. I think it’s essential to think about that stuff and to build it into your financial plan. Because there is nothing cheap about aging, about getting sick, and that stuff is going to happen to all of us. You’re either going to die at a tragic young age or you’re going to get old and either way you need to be prepared. It’s very morbid to put it that way. I’m really fortunate that my genetic issues should not shorten my life and they should not rack up tremendous health care bills. But so many other things can still happen. People have heart attacks, people get cancer, people get in car accidents, I mean, like who knows. Any of those things could happen in addition to the genetic stuff. But in my case it’s a progressive disease that I have. It affects my connective tissue and joints in particular, but a lot of things in my body. So it’s more for me about maximizing my time while I’m as young as possible and not assuming that the things that a lot of other people do in their 60s and 70s – you know, my in-laws go on these fabulous cruises in Europe and they were just in Alaska. And it’s great. I’m thinking I’m so glad for them but I don’t know if I’ll be able to do that. And so I can’t put it off. And that’s always been my driving motivation: how do I get as much quality time while I’m still as able bodied as possible?
Andi: So to that end, what is next for you?
Tanja: So I’m actually really trying hard to be retired, (laughs) which it turns out I’m not naturally good at. I’m just to do things kind of person. I think we’re all wired differently but like for me I just I see something I find interesting and I do it. But I had the book come out, and we’re doing some travel. And I have events, I do some retreats for women who are interested in financial independence, since women often feel left out of a lot of those conversations. Those are called Cents Positive. But otherwise I’m blogging at a very slow pace at Our Next Life. I’m doing another podcast season in the winter. But that’s still a few months off. So trying to actually relax.
Andi: Is there any financial advice that is very common that we hear all the time, but is not right for women?
Tanja: I think there’s like this persistent divide where women are making the bulk of household purchasing decisions. Women are spending most of the money for families, for themselves. And yet if you are a woman and you for example try to open life insurance, most of the time they’ll say, “well great, I want to talk to your husband.” Or “why don’t you talk to your husband and then get back to me.” Or even in our case where I’m a blogger and author in personal finance, and the mortgage officer will say, “can I speak to your husband?” No, you’re going to talk to me. But I think there is this idea that men handle the high finance, the investments, the mortgages, and women handle the small finance and a lot of advice directed at women is focused on that, saving money on groceries. Getting shopping deals. Things like that. And it’s just that there isn’t a lot of the advice of, “here’s why you need to be investing and how you do it and why you shouldn’t be afraid of it.” Those are things that I think men are taught a lot earlier. So it’s not so much that there’s like some piece of advice that’s wrong, it’s that the advice is missing in the first place and we need to be treating everyone the same. Women need to be investing, in fact, more than men do probably, because we live longer on average. Women are more likely to be younger than their partners and outlive them. And then women are much more likely to be in poverty in retirement. When you need those savings and investments to last and the only way that happens is if you invest them so that they can grow faster than inflation. So yeah, invest women. You got this.
Tanja: Our Next Life is a great place to start. From there you can get to everything else. You can find me on social. I love doing Twitter and Instagram in particular. So I’d love to interact with folks, so I’d love to hear from you.
In the podcast show notes at YourMoneyYourWealth.com you’ll find the link to all of Tanja Hester’s projects, our discussion from earlier this year about the release of her book, Work Optional: Retire Early the Non-Penny Pinching Way, as well as all the free financial resources mentioned in this episode. While you’re there, hit the “Ask Joe and Al On Air” banner and send in your money questions or comments. Click the link in the description of today’s episode in your podcast app to go to the show notes.
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