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Podcast Episode Notes: Afford Anything - Episode #477
Overview In this episode of the *Afford Anything* podcast, host Paula Pant and co-host Joe Salcihai tackle three audience questions revolving around personal finance decisions. The key themes include managing debt, prioritizing retirement contributions, and merging finances in a marriage. The discussions emphasize the balance between mathematical reasoning and behavioral psychology in financial decision-making.
Key Concepts and Discussions
Episode Summary
- Guest Expertise: Former financial planner Joe Salcihai joins Paula to provide insights on listener questions.
- Main Questions Discussed:
- Kayla's Dilemma: Should she prioritize paying off a car loan or catch up on missed retirement contributions?
- Josh's Inquiry: Should he invest all retirement savings into a brokerage account since he qualifies for zero capital gains taxes?
- Anonymous Caller (Mary): How should she and her fiancé merge their finances, considering their international situation?
Key Takeaways
- Kayla's Question: Car Loan vs. Retirement Contributions
- Situation: Kayla and her husband are considering a new electric SUV at a 6% interest rate while wanting to catch up on retirement contributions.
- Advice:
- Prioritize Retirement Contributions:
- Historical data suggests that retirement accounts typically yield greater returns than 6%.
- Contributions to retirement accounts provide significant tax advantages.
- Behavioral Aspect:
- Kayla's financial maturity indicates that paying off the loan early is less critical.
- For those who might struggle with debt, focusing on debt payoff can be psychologically beneficial.
- Josh's Inquiry: Retirement Accounts vs. Brokerage Accounts
- Concern: Josh wants to understand the trade-offs between tax-advantaged retirement accounts and a more liquid brokerage account.
- Advice:
- Flexibility is Key:
- It's important to have multiple types of accounts to adapt to changing tax laws and personal financial situations.
- The *tax triangle* (Roth IRA, traditional IRA, and brokerage accounts) offers tax flexibility.
- Long-Term Perspective: Taxes and regulations may change, so wise planning is essential.
- Anonymous Caller (Mary): Merging Finances
- Situation: Mary is set to marry a non-U.S. citizen and wants advice on merging finances while living internationally.
- Advice:
- Keep Yours, Mine, and Ours:
- Maintain individual accounts alongside joint accounts to preserve autonomy.
- This approach allows for personal spending without conflict over partnership finances.
- Communication: Establish a regular, open dialogue about money to prevent future disputes.
- Consider a Prenup: A prenuptial agreement can clarify financial responsibilities and expectations.
Additional Insights
- Behavioral Components: The hosts discuss the importance of psychology in financial decisions. Emotional factors often influence choices more than pure math.
- Long-Term Financial Planning: The episode stresses the importance of planning not just for current needs but for future adaptability in various life scenarios.
Useful Resources
- Afford Anything Community: Engage with like-minded individuals to gain insights and feedback on personal finance issues at affordanything.com/community.
- Ask Paula: Listeners can submit their own questions for potential discussion in future episodes via affordanything.com/voicemail.
Conclusion The episode wraps up with a positive note on how thoughtful financial decisions can lead to a better quality of life. Paula and Joe encourage listeners to think critically about their individual financial situations and reach out for community support.
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For further details and resources, refer to the complete episode notes at [Afford Anything Episode 477 Show Notes](https://affordanything.com/episode477).
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Transcript
Automatic transcript. May contain errors.0:00Joe, have you ever had a car loan? I have had a car loan. I used to have car loans all the time. Ah, interesting. Was your car loan ever 6 %? I had a car loan once that was higher than 6 % because my credit was awful, and I didn't have any money, and the only way I could get a car was to have, I might have had a car loan at 8%. Ooh, well. Yeah. Winner.
0:25Loser. Well, this is a little bit of foreshadowing as to the first question that we're about to answer. Welcome to the Afford Anything podcast, the show that understands you can afford anything, but not everything. Every choice that you make carries a trade-off. So what matters most? And what matters most with regard to your money, with regard to your time, with regard to your energy, with regard to all of the limited resources you need to manage? That's the question this show is here to help puzzle out. My name is Paula Pant. I'm the host of the Afford Anything podcast. Every other week, we answer questions that come from you, the community, and we do so alongside my buddy, the former financial planner, Joe Salcihai.
1:07What's up, Joe? Well, just hanging out here, got my coffee, got Paula on the line, and I'm super excited to help you out. Awesome. Well, our first question today comes from Kayla. Hi, Paula and Joe. My name's Kayla, and my husband and I recently moved across the country in order for him to accept a new high-paying job following about half a year of job searching after a layoff. We're excited to be in this new city with lower rent. However, we have one big expense. That's because we don't currently have a car and we definitely need one in our new city. We gave it a lot of thought and decided that the best car that could meet both our needs so that we only need one shared vehicle would be a brand new electric SUV.
1:54be. This is a long-term, we think, good financial decision because we'll be eligible for a tax credit in the new year and we'll have lower long-term maintenance costs, let alone setting aside perhaps these lesser costs when we don't have to pay for gas and only pay instead for electric vehicle charging. We're excited about this decision, but even though our finances are on the up and up, we can't yet afford this car. We'll need to take out a 36-month simple interest loan at a 6 % interest rate and aim to pay it back early if possible by sometime next year. That said, we'd love to get your thoughts on how to go about balancing paying off this car loan with catching up on retirement contributions that we've had to pause or slow during this time of lesser income.
2:50My husband has available to him an HSA, which is new and exciting for us, as well as a 401k and a Roth 401k. His employer will match those contributions to the 401k at 50%, which is incredible. And he has the opportunity for a mega backdoor Roth with his employer. Meanwhile, I've only 50 % contributed to my 401k for the year, and my employer offers a less generous match. We'd love to get your perspective on whether to prioritize paying off that car loan at the expense of perhaps maxing out all these available retirement accounts, knowing that we'll invest those retirement savings in the stock market, which in the long run would make more than the 6 % interest on the car loan, But having this car loan, our first ever, is really feeling like it might loom over our heads.
3:49Thanks so much for your perspective as we think about all these big decisions following these life changes. Really appreciate you, Paula and Joe. Thanks. Super. Yeah. Well, Kayla, first, congratulations. That sounds like a really exciting transition. Congrats on the new city. Congrats on the new jobs. just the new life, right? You're building a brand new life and in a place of lower rents. Yeah. Yeah. Yeah. How about that too? Right? So Joe and I have not talked about this beforehand. So I'm wondering if we're going to agree on this or not. These conversations are always much more spicy when we disagree, but here's my position.
4:31Kayla, I would prioritize contributing to both of your retirement accounts. I would prioritize both of you doing that and make paying off the car loan a further down priority in that waterfall. And the reason for that is twofold. When it comes to debt payoff, there's the mathematical approach and then there's the behavioral approach. Mathematically, you are correct. The money that you contribute to a retirement account based on historic data is likely to grow at a far greater rate than 6 % over the long term. It will grow for, you know, likely to grow more than 6%, likely to compound more than 6%.
5:13And that's just the return inside of the account. In addition to that, you also get the tax advantages of making the contributions to the account. And I love, by the way, the fact that you, between you and your husband, you have a blend of both traditional and Roth accounts. I particularly love that he has a Roth 401k, which gives him the ability to put a lot of money into a Roth account. That tax treatment combination really does a good job of building out the tax triangle. So both the tax advantage as well as the growth inside of those retirement accounts, those are mathematically much stronger than paying off this car loan.
5:51That said, however, there's also the behavioral component. There are some people, not you, but there are some people who just live on credit and live on debt and borrow money to buy everything in their world. And when I encounter people who are like that, I often encourage them to prioritize debt payoff for behavioral or psychological reasons, for the life lesson of learning how to not live on debt. I can tell based on the way that you've asked your question, as well as by the fact that you don't have any other debt and you are thinking so thoughtfully, so cautiously about taking on this one very specific debt.
6:37I can tell by that that you are not in that camp. You are not somebody who turns to debt rather than cash as a means of paying for things. And so I'm not concerned for you about the behavioral component of it. I think we should still go through the behavioral component of it because, you know, here's the thing, Paula, there's a thing called a risk premium, which I think factors into this equation. 6 % to your point is a very beatable interest rate, right? It's a beatable interest rate, but how much higher return with the risk of the stock market do you have to get to make that arbitrage actually worth it?
7:19And in my head, that's eight, eight and a half percent, probably maybe, maybe even slightly more. And that's just, by the way, my gut feeling, that's not applying any of the widely accepted, you know, mathematical models that people do to these things. So six percent, to your point, is beatable. But realize that that's a guaranteed six percent that you're getting. So that's not something to to just go. I mean, a guaranteed locked in six percent is better than you're going to get on a CD. It's better than most bond rates. You're getting a decent rate of return. So I don't know mathematically that it's a horrible thing to pay off the car.
8:00However, I agree with you. We got to walk through that. This is the math going on in our head. I think that's why people hopefully are here is to think about how we think about this stuff. Yeah, exactly. The arbitrage spread, like let's assume that over the long term that money inside of a retirement account would grow. we'll say 8 % over the long-term, right? The arbitrage spread is 2%. And so that is something, it's not massive. We're not talking about the difference between a 3 % loan versus an 8 % return. But 2 % over a long-term compounding can really add up to some significant money, right?
8:38Well, the cool thing is we know she's going to beat 8 % though. I mean, the market does what markets do over long periods of time, she's going to get better than eight. I mean, I'd be a fool to say that she would get 12, but I might say some crazy people might say that, but I might say that she could get 10, right? Potentially. Even if we conservatively use eight. Historically. Right. Even if we conservatively use eight, there's still the mathematical case for making that arbitrage. But you're right. The premium, the arbitrage spread is not massive. They're two equally good decisions, right? She's not - Well, no, I do think the stock market decision is better because I do expect the markets to continue to perform the way they have in the past.
9:26And if that's the case, then I think that fence of eight, which is my fence, that she has to jump to make it worthwhile, then I think, yeah, go for it because I think she's going to easily jump that 8 % fence. Yeah, I say so as well. When I say they're both equally good decisions, I don't mean equally in the mathematical sense. Mathematically, the retirement decision is better. The decision to contribute to a retirement account is better to prioritize that one. What I mean is that if ultimately the decision that she's making is do thing A that improves my net worth or do thing B that also improves my net worth, right?
10:03Those are both directionally very good decisions. When we live in a society where so many people would say, you know what? Screw the retirement account. I'm going to go spend all of this on champagne and caviar. Sounds good. Where do we meet? Are we doing that? Let me tell you why. Let's go into that behavior part that I said that I was really interested in. Because I think the behavior aspect of this question is what turns the good decision to do what you suggest into a great decision. if Kayla and her spouse attack the loan and they pay it off behaviorally Paula people that have done that are more likely to be susceptible easy for me to say susceptible to yeah to the I think I need a new car again sooner so I have noticed just even in my own family back when we had car loans, the moment the car loan was paid off and you were used to the car loan, you would go, oh, wow, look at this car.
11:12It's older. Man, remember when that was new? Remember how great the car was? Remember how awesome? Well, you know what? Car payments are only a little bit higher now than they were then. So let's get another car payment. Let's do this again. And I live in a world without a car payment on my car. Now I will say this on Cheryl's car, We decided to arbitrage that. We do have a loan on my spouse's car. Paula, that's at a 2 % interest rate, right? We took the 2 % money from Volkswagen so that we could just leave our money invested. Now the game is different. In my head, behaviorally, Paula, my game is how long can I drive this car until I have to buy another one?
11:55But it's funny how it's exactly the opposite of when I had car payments. If she told me she was buying the car used, number one, just me personally, and this is my bias, I would have been more on board with the move if Kayla said she was buying a used car than buying a new car. There's so many reasons why. And I guess she's talking about long-term and smart for the environment and lower maintenance costs. there, there are tons and tons and tons of, of discussions there that I don't think we even need to get into. If she was telling me she was buying a car that already had 80 ,000 miles on it, then I would, I would say, Ooh, Kayla's the kind of person that's going to see how long she can drive this car.
12:39And proudly when it reaches 250 ,000 miles, you know, proudly donate it to some place because it just no longer runs anymore. But that's not the case. And you know what? There's a lot of reasons for that. Obviously, she said it's because they want to have one car for two people. It needs to be reliable. It's got to run every day. So not questioning that decision. But if she's going new car, I think there's a case to be made that she may end up wanting a new car sooner if she doesn't run out that loan for a longer period of time. You know, one thing that she could do or that anyone who's listening who has a car currently has a car loan could do, is when that car loan is finished, start making a car payment to yourself.
13:25Like if you're in the habit of making, yeah, thank you. If you're in the habit of making a particular monthly payment, right, whatever that monthly payment on your car currently is, once that car loan is finished, keep making that same monthly payment, but just make that monthly payment into an account, preferably a completely separate account at a different bank, different credit union, different institution that you never look at. I mean, go so far as to tear up the checks, don't have a debit card issued from it, intentionally forget your login password, right? Make it as difficult as possible for you to even see that bank account or see the balance inside of it.
14:08like you want to forget that that money is yours and you want to just have an automatic transfer set up from your bank account every month into this other out of sight, out of mind account so that you feel as though you don't have that money at all. You feel as though that is just missing money. And then once you do that for a number of years, you one day wake up, you know, be like, where does that, do I have another bank account? Where did that, and then you, you know, realize that you forgot the pass, five years ago, you forgot the password to this bank account, right? And you log in and you see the balance in it and you're like, holy smokes, I could buy my next car in cash with this.
14:53Well, or even if you check it every day, every week, every month, whatever amount of time, Paula, even if you check it behaviorally, I've always found with people that that changes the game now it becomes like my game with my car is how long can i drive this thing until it dies right how how long i i am at 235 000 miles right now how long can i drive it till it dies with that game because i play this game too it's i cannot buy a new car this is this is my challenge to myself i cannot buy a new car until there's enough money in that account for the for the car, which then changes my decision-making around this car nickel and diming me.
15:35I'm like, no, no, no, no, no. I'm going to get this thing fixed. And by the way, the cost of that fix is way less than a monthly car payment for the next 12 months so that I can keep playing this game. It changes behaviorally the nature of what you're playing. Now you're like, how long can I stick it out? The reason that I advocate for forgetting about the account is because oftentimes if you see a giant lump sum of cash sitting in an account, it's easy to find other reasons to spend it. Oh, totally. Hey, look at this. I've got 15 grand just sitting around in cash. And you'll see, especially in this community, you'll see a couple of things.
16:13Either you'll find a reason to spend it or particularly in this community, you'll say, oh my goodness, I'm uncomfortable with holding this much cash that's just sitting there not performing, losing value to inflation, shouldn't I put it all in Bitcoin? Right. So either of those things can happen. And that's not a diss on Bitcoin. It's simply to state that every bucket of money has a particular goal and a particular timeline. And so the investment treatment of it needs to be in accordance with its goal and timeline. And so if this bucket of money is set aside for your next car, then that's not money that you want to subject to a lot of investment risk or volatility.
16:59When we talk about her options at work, can we go into that part for a moment? Yeah. The options of how to invest. There is math here, Paula, versus behavior. I'd love to get your take on this. Mathematically, funding the hell out of that HSA is the number one place. because of the tip. Actually, it's the number two place. Triple tax benefits. Yeah. Yeah. Yeah. The number one place is whatever amount the match is going to have a maximum on the 401k. That's probably number one because you're going to take that free money that's available. That's number one. But once you get there, sounding like Kayla's going to have extra money, then that triple tax benefit on the HSA is the number two place.
17:44The problem with the HSA, though, Paula, again, is behavior. and you see behavior in two different divergent areas, kind of like what you were talking about, forgetting the account when it comes to your money. But this one has bigger consequences. On one hand, what people will do, some people, if you're a spender personality, you will see that money sitting there knowing that that's money for your deductible. You're flooding as much money as you can there. So you tend to keep less money in savings and cash. And so, yeah, it's triple tax-free, but you ruin all that because every year you go in and you grab as much of that HS money as possible.
18:22That's generally not this community, but that is the public at large. That is the issue. Behaviorally, I see a pot of money. I go spend it on my healthcare, right? Because I have a high deductible plan. In this community, we suffer from the opposite thing. I have this severe debilitating pain in my butt or wherever it is. And you know what? I know this money's triple tax-free, so I'm just going to deal with it. This is your health. This is your physical well-being, and your net worth means nothing if you're not physically able to spend it. But we won't spend it, right? We have totally the opposite.
19:02And that one drives me crazy too, as much as the spender. So the HSA presents these really horrible behavioral dilemmas that whatever your compunction is, it magnifies it. So I love the triple tax free. I hate the behavioral aspects of the HSA. Right, right. Yeah. If you are going to leave money sitting inside of an HSA, that means that you pay cash, pay from your checking account for your medical needs. It doesn't mean that you don't get treated. Right.
19:40But you've seen that before. I've seen that before. People going, no, I really don't want to spend that money. This is your help. No, I'm sure I can just, you know, I can power through it. I'm going to be fine. Joe, you're saying that's a pain in the ass? Oh, I need a, do I have one? Come on, do I, I might, there it is. By the way, for people who are wondering what the heck we're talking about when we say triple tax benefit, what we mean is that, yeah, right? We should explain that. when you put money into an HSA, the money is tax deductible when it goes in. It grows tax deferred as it's inside of it.
20:24And then when you spend that money, if you spend it on a qualified medical expense, it's tax exempt. Or if you reach retirement age and you don't spend that on qualified medical expenses, then here's what you can do. It's one of two choices. Either you You have paid cash for qualified medical expenses throughout your life, in which case, as long as that HSA was open at the time that you paid cash for those qualified medical expenses, you can then reimburse yourself with tax exempt money later in life. So for just to use an example, when you're 30, you pay$5 ,000 in cash for a qualified medical procedure.
21:07when you're 50, after letting that money grow and compound for 20 years, you decide that you want to reimburse yourself. At that time, at the age of 50, assuming that you've kept the receipts, you can reimburse yourself with tax-exempt money. And in the meantime, that money has grown inside of your account for the last 20 years, right? So that's one thing that you can do. Or once you reach retirement age, you can then just take that money out and spend it in retirement. And it's treated in the same way that a traditional 401k is or that any other tax deferred retirement account is. So that's what we mean when you see triple tax benefits.
21:46It's a beautiful thing. Yeah. Tax deferred going in, it's tax sheltered growth. And then the withdrawal is either tax exempt or tax deferred depending on the way in which the withdrawal works. It's heaven. So Kayla, that is our answer for you. Prioritize the retirement accounts and prioritize your HSA, which is technically not a retirement account, it's a health savings account, but prioritize the HSA, prioritize the 401ks, prioritize all of the tax advantaged accounts first and foremost, and then only pay off the car. And when you pay off the car, before you get the next one, challenge yourself to put money into an account for your next car so that you don't have the payment question again.
22:33Yes, exactly. With luck, this should be your only car loan. So thank you for asking that question, Kayla.
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26:40On the topic of taxes, since we've just been talking about tax strategy, our next question comes from Josh. Hi, Paula. I'm a long-term listener of the show and had a question I wanted to run by you. My wife and I are 28 with hopes of retiring early. I've been wondering recently about the trade-offs between a tax-advantaged retirement account and a traditional brokerage account. The long-term capital gains tax rate is currently 0 % up to$89 ,000 for married couples. This is well in excess of what my wife and I expect to spend in our golden years. I could easily structure my portfolio around long-term, low-cost, indexed ETFs and live a tax-free retirement.
27:18Why would anyone who shares my retirement outlook consider contributing to a retirement account over a more liquid brokerage account? Josh, thank you so much for that question. And thanks for hanging out with the Afford Anything community for so long. You know, Paula, you and I love where this question is going. so many people get wrapped up in tax optimization strategies. And Josh nailed it on the head. You should be looking for tax flexibility. And there's actually a reason for that, Josh. And part of it is embodied in your question. When you talked about your situation, you also talked about current tax rates and maybe knowingly, maybe unknowingly, but people do this all the time.
Read the full transcript
28:00So this isn't you. This is, I think, all of us. You projected those tax rates into the future. And if you look at the state of the debt in America, assuming that you live in the U.S., you look at the deficit situation, every tax expert thinks that we are going to have to change the game when it comes to taxes. So we don't know how that game is going to change. I would be remiss if I, if I, you know, decide to look into a crystal ball and talk about that. But I would not project those into the future. And you see, as an example, Paula, this is one of the few times the old guy story might be, might be good.
28:48There was no such thing as a Roth IRA when I was starting out, right? Now there's a Roth 401k. There's no HSA. Right. When I would have all these modern conveniences. But no, imagine if I projected out at that time what my tax strategy was going to do and I locked myself into it. Right. So fluidity as the situation changes and all we know is that the situation will change, period, full stop. It will change if it's going to change. We like what we call the tax triangle, which is three different types of taxability. I like leading off with, especially for people your age, lead off with that Roth IRA, that Roth position, because while you're going to pay tax now, you're going to put a lot of money in an account that hopefully, if the game doesn't change where they tax that stuff later, most people think that won't change, that can't change because people don't want to get unelected.
29:43That game should stay the same. and you never got to worry about tax again for that account. Second is, this is especially great if you're closer to retirement, that pre-tax position, putting money in where you're going to get tax benefits today because we don't know about the future, but later on you're going to have to pay the tax. But the third one that everybody forgets about is exactly, Josh, where you're going, is put some money in a place where the tax ramifications don't really matter. An exchange-traded fund, Paula, in an average year does not throw off very much money in taxes. While it is friction, it's not as much friction as especially people in our community make it out to be.
30:26While we think of it as this huge dragon, it is much more of an ankle biter. It is not nearly as absolutely horrible as we think it is. Now, I would still lead with the tax-advantaged positions. Why not? because the game does change. I know that I've locked in my tax treatment of those today, especially that Roth stuff, right? And I've gotten some benefit out of it during the time, and I have zero friction. So if it's available and I know that I'm going to backfill, and by the way, with retirement, I like to do that. I like to backfill. Imagine yourself living to 90, 95 years old and cover those years, then cover the earlier years, then the earlier years.
31:09So for backfilling, use the tax advantage stuff to backfill. Right. You know, and that's what struck me right away was he's 28 years old. He wants to retire early. He and his spouse want to retire early, but there are going to be, you know, he didn't specify the particular age, right? Maybe they want to retire at 35. Maybe they want to retire at 40, 45. I don't know. But even with an early retirement, two things are going to happen. One, they're going to need different buckets of money with different strategies and different tax treatments, one of which lasts up until the age of 59 and a half, and the other of which is a different bucket of money with a different strategy for once they are 59 and a half and over.
31:52That's one component of it. The other component of it is they're 28 years old. Let's say they do retire at the age of 35. That gives them a potentially 70 year retirement. There are going to be so many things that they do over that time that we don't know and they don't know. Nobody knows what income ramifications that may or may not have. Right. Yeah. No idea. None. Yeah. Sometimes you get lucky and you start a project that you think is not going to pay very well and it takes off and you end up making more money than you ever anticipated. Sometimes the opposite happens. Exactly. Well, yeah. But predicting the future is so, so difficult.
32:37I mean, I look at 20 years ago, would I be on a podcast talking to Josh right now with my buddy, Paula Pant? I didn't know Paula Pant. I had no idea who Paula was. By the way, podcast 20 years ago, are you kidding me? Like we're in this, even in this medium didn't exist at that point. If you told me I'd be a radio person, which would be, I guess, the equivalent 20 years ago, I'd be like, no, I'm not going to do that. So predicting the future is so, so difficult. Exactly. And particularly with early retirement, that future lasts for so many more decades. And those are decades where typically you're healthy, you're active, you're full of energy.
33:17So you're going to try lots of different things, including things that don't even exist today. Yeah. I do love the bias then toward flexibility specifically for that reason. Right. Exactly. So yeah, it comes back to the triangle. And we were talking about this with Kayla as well. It goes back to that tax triangle. So weird that we have these inadvertent themes almost every episode. Right. Exactly. Because with Kayla, we brought it up because she mentioned that her husband has a Roth 401k. And what's wonderful about that is, you know, if the only Roth account that you have access to is a Roth IRA, then that means that as a percentage of your overall contributions, you can only contribute a very small amount of money into a Roth account.
34:01But if you have a Roth 401k available, you can contribute significantly more money. And that's beautiful. Well, and I also think that HSA, it embodies different parts of the triangle depending on how you use it. So it gives you totally flexibility of all three corners, which is pretty cool. Yeah, exactly. Well, two out of three corners. It's never going to be taxable. Yeah, exactly. Yeah, yeah, yeah. Which is a good thing. But on the other side, the upside of that taxable place, to Josh's point, you can use it whatever you want for whatever the hell you want. And nobody's going to tell you no.
34:36Right. I've often told people, don't think of retirement accounts as accounts for retirement. Think of retirement accounts as a deal between you and the government in which the government agrees to give you some tax benefits in exchange for you agreeing to not touch this money until you reach a particular age. That's all a retirement account really is. Tying that agreement to this nebulous concept of retirement. The word retirement references a career status when, in fact, retirement accounts have nothing to do with a career status. Retirement accounts purely reflect two things, tax treatment and age.
35:20Exactly. But, Josh, don't ignore them because you've got to think about those years. I mean, knock on wood, all things go well for you. You make it to age 60. And if you do, using those tax treatments, there's no downside to protecting some money for when you reach that point. Yeah. By the way, for the sake of everyone who's listening, I would like to make a correction or an addendum to something that you said in your question. In the question, you said that the long-term capital gains tax rate for a married couple filing jointly is 0 % if that couple's income is$89 ,000. It is actually, in 2023, it's$89 ,250.
36:02In 2024, it's$94 ,050. Again, that's for married filing jointly. If you are a single filer, that is for 2024, it is$47 ,025. So thank you, Josh, for the question. Best of luck as you build towards early retirement. You know, we've all set health goals. Maybe we want to exercise more or eat better or lose weight, but without a plan, they often fade. That's where Prolon comes in. Its five-day fasting mimicking diet gives you a science-backed, structured approach to stay on track and see real results. So Prolon offers an injection-free way to get help to lose weight, get help to burn fat while protecting lean muscle.
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39:35Joe, our final question today comes from an anonymous caller. And you know what that means. It's time to give her a name. And it means I get to mess it up like I did in the past. Oh, did you? Well, so for people that are new to this, I generally, this is where I get to do a short what Joe's been watching review. And I was watching this Disney show called Ahsoka, but I called it a COSA. I didn't have it in front of me. And I heard about that. Apparently, we have some Star Wars geeks out there that don't think that Akosa and Ahsoka are the same thing. And I still have no idea what you're talking about because I don't know pop culture at all.
40:12So we will move on. Let's call her Mary after the actor who is on Battlestar Galactica, Fall of the House of Usher, and also Dances with Wolves. Okay. Well, I have no idea what any of that meant. That was all Charlie Brown's teacher. want, want, want, want. But what I, you never saw dances with wolves. No. Kevin Costner. Oh, no. Paula, you will love that movie. Okay. You will just love that movie. Great. So our next caller is named is an anonymous call. Mary. And we're going to name her Mary. Hey there. First, huge congratulations on completing your master's. What an accomplishment Next, thanks to you and Joe for this amazing, informative, entertaining, and truly life-altering show.
41:03So I'm calling with my own good news. I'm getting married in 2024. I'm a U.S. citizen, and my fiance is a non-U.S. citizen who I met while working in West Africa. We plan to legally marry in that country, his birth country, and we'll use that marriage license to start the U.S. also visa process. We hope to live outside of both of our home countries for a good portion of the next decade based on whatever surfaces within our international development careers. We see marriage as bringing our two lives together. So my question is, how do we thoughtfully merge our financial lives? As background, we are both working.
41:41We do not pool our income currently. We live separately. We have property in each of our respective countries. I have a house. He's building rental units on land he owns. Separately, we also have our checking and savings accounts. I have my retirement accounts as I'd like to retire in about 15 years. So I max out 403B, Roth, HSA, and contribute regularly to an investment account, Vanguard. He does not have retirement savings, but should have access to a pension in his home country. He has no debt. He does not currently have a credit card, though he's had one in the past. I have debt. I have a federal student loan, which will be eligible for forgiveness soon.
42:23And I have a mortgage, which I will pay off in about six years. I also have a travel-friendly credit card, and it doesn't have a balance. Once married, we think we'll need a joint checking savings account for communal expenses, a place to invest and save for his retirement. A joint credit card might be nice for the travel perks, but definitely a nice to have. Ideally, we would keep all expenses low, including taxes, and manageable, so not too many dashboards, and easy to manage while overseas. We'd also want to use savings vehicles like 529s or custodial Roth accounts once we expand our family.
43:04So this is a huge step for our future and for our family that we're building. What do we need to know? What do we need to do? What do we need to discuss to protect our individual and joint financial health as we set out together? And I especially want to know what aspects make sense to merge, what aspects should stay as is. I'm hoping that you, Joe, and even the broader Report Anything community can share sage advice, resources, or additional areas we should consider before marriage and life overseas. with great admiration and appreciation. This is Anonymous. Mary, that is so sweet. First of all, congratulations on your international development career, on your upcoming marriage.
43:51Also, just I love your energy. Yeah, thank you. She's in a great place. Yeah, you can hear it. You can really hear it in her voice. Wow. Wow. I think the first thing that I would start with is for you and your future spouse to sit down and talk about three concepts, yours, mine and ours. because I think the ideal scenario, and you sort of alluded to this within the question when you asked, what do we merge? What do we keep separate? The ideal scenario is that each of you retain yours and mine so that you have some accounts that have a sense of individuality, some accounts that are purely yours, right?
44:39Because both of you came into this with different debts, different assets, different net worths, different profiles. But more importantly, as you build through the next several decades, you want to retain a sense of autonomy. You want to retain a sense of individuality. And you want to be in a position in which you don't fight over, you know, one person wants to spend money in a way that the other person thinks is absolutely frivolous. You know, you want some buckets of money that are yours and mine so that maybe one of you one day, 20 years from now, one of you will have a sibling who needs a big financial help.
45:23Right. And one person wants to bail out their sibling. The other person says, no, I don't think that's a good use of money. when it comes to that something like that a loan to a family or or a gift a major gift to a family member that's the type of issue that can cause a lot of rift inside of a relationship if everything is commingled whereas if you have yours mine and ours then when there is a particular expense that you disagree about you know it's cool it doesn't have to come out of our account This particular thing can come out of my account. That particular thing can come out of your account.
46:02And then there's the shared life that we're building that comes out of our accounts. That can still create a rift though, Paula. Well, let's use the loan to a family member example, right? Imagine you have a sibling. Your sibling needs 50 grand. You want to give money out of your pooled – you and Cheryl, your spouse, have pooled money together, right? Cheryl does not want to float 50 grand to your sibling, right? But you do. How do you work that out if it's all commingled? I think even if it is not commingled and I decide to do it and she's advising me not to do it, I think there's still a rift there.
46:47I think we need to talk about how we communicate. What's the frequency of our money communication? How are we going to talk about money? How are we going to talk to each other? I was listening to an interview with Kirsten Bell and Dax Shepard, two people. Paula has no idea who they are, but they are celebrities. I've seen The Good Place. That's one of the few TV shows I have seen. There it is. But the two of them talked about how, and they've certainly been through a lot with Dax's addictions. And Dax tells this story about how Kirsten Bell just said, we're not going to talk to each other this way.
47:25We're a couple of adults. If we're going to have a talk, we're going to talk like we're a couple of adults. And these are the rules is that you can stop me when you go, no, you don't yell at me like I'm nine and I don't yell at you. We are people that are here together because we want to be and we're partners in this marriage. And so we talk that way. And it was funny because even right after that, Cheryl and I had that talk because we both are very spirited people. We have strong convictions and we would sometimes do that. And when we had that talk that we're not going to talk to each other that way, it was fantastic.
48:04And the amount of time since then, Paula, we've called each other out because we're still the same hotheads we used to be. That hasn't changed. It's this momentary, no, we're not going to do that. Remember? And we go, you're right. I'm not going to do that. We're not going to do that. So how we talk, which came up with, that's how Cheryl and I came up with our 20-minute weekly money meeting, which is far more important than we could talk about commingling accounts. But we then are able to have this discussion about should you loan money to your sibling? I'm married to this person because they're smart, because I value their counsel.
48:39And if I do decide to do it, I think the way to avoid the rift is not to say, well, it's my money, so I'm going to do it anyway, because that creates a bigger rift. Maybe not a bigger rift, but it still creates a rift is here's the reason why I want to do it. Here's what this means to me. Here's exactly the feelings that are involved. Here's what maybe you don't know that happened in our family earlier. Like we can have this discussion about how we communicate. I mean, you can have that discussion, but at the end of the day, that doesn't mean that you'll always necessarily agree. Sometimes two people can understand and communicate and validate one another's emotional experience, but still ultimately disagree on the outcome or the next step.
49:23Right. I'm glad you brought that up because as an example, you and I disagree fairly often and we don't have a rift. Right. But because we talk through our disagreement, you can go, yeah, you know, Apollo, you're probably wrong, but I love you anyway. Okay. And so disagreement doesn't mean rift. But if you counsel me very strongly not to do something and I just go, it's my money, I'm doing it. There's going to be a lot of times there's going to be a rift there. The attitude in the statement of it's my money, I'm doing it. I mean, the rift is not the action of doing it. The rift is that attitude.
50:01If two people were to get together, you know, if you have a very constructive conversation in which you say, you know what, this is why I want to give 50 grand to my sibling. These are all the reasons. These are the emotions. This is the family history, etc., etc. Right. Your spouse might still say, I get that, but I've worked and sacrificed really, really hard for that money. You know, this is my money, too. So I get where you're coming from. But no, I don't want to do it. And I'm putting my foot down and I disagree. And the two of you just may communicate well, but come to an absolute impasse.
50:40And when that happens, you know, you are essentially then you're in a situation where you're trapped, where you're like, okay, if I don't get, if my spouse doesn't give me permission, then my hands are tied. Then you start to feel trapped. You start to feel like you're living under a dictatorship. You know, that's where that absolute lack of autonomy becomes detrimental to the marriage. Whereas if you just had something that was yours, right, that you could decide what to do with, then that really sidesteps a lot of those problems. Which is why I think very strongly the first conversation you have is how are we going to communicate?
51:25How are we going to talk? And specifically about money. How are we going to talk about money? Cheryl and I have agreed on this 20 minute money meeting. We are our fights were not often, but were difficult. and those fights are gone when we have the money meeting. And it's funny because now we laugh. When we do disagree, we laugh because we're like, oh, we haven't had the money meeting in three weeks and look at us right now. Like we will pop the balloon that way. We'll go, oh, it's weird. This little 20 minute shock absorber does so much for us, but that's for us. And I know that when I was an advisor, I would counsel people on doing this type of thing and everybody had their own tweak, but a few things.
52:07It had to be frequent. I don't like the Camp David summit once every six months that some people do because one of you is a money geek and you come with a bunch of spreadsheets. The other person you're dragging to the table and they freaking hate it. Make it consistent. Make it often and make it keep it short. And I believe keeping it light and having saving those big those big conversations will happen organically. And I've never seen this not to be the case. If you have the little conversations on a very frequent schedule basis, the big conversations then occur like this one. What if I'm going to loan money to so-and-so?
52:44And it's going to be a lot less of a rift that you create. And I think that your partner, and I can't speak for everybody here, but I believe this idea of them feeling dictatorial or they veto stuff, much less likely to happen if you have this consistent communication where you feel like you're on the same page about most of the big things. Yeah, but it can still happen. That dictatorial, I'm living under a dictator. Well, anything can happen. Anything can happen. Sure. Yes, it can happen. Yeah. When your hands are completely tied and you, when you have complete powerlessness, right, that's, that, that's when you really start to resent your partner because you're like, man, I'm completely powerless because I can't make any decisions without my partner's thumbs up.
53:32You know, I don't know if you're hearing me right, Paula. I'm saying you're right. I'm saying you're right. But, but I think before you have that conversation, we have to have a conversation about mine, yours, whatever. We have to talk about how we communicate because my goal, Sun Tzu, the art of war, just this brilliant book. Sun Tzu says the best battle is the one that's never fought. That's never fought. If I think forward about all the things that can happen in a marriage, what are we going to fight about? Number two reason people get divorced is money. Number one is infidelity, right? Those two things, what happens is a lack of closeness.
54:10It's a lack of communication is often at the root of both of those. By the way, number three is we don't communicate enough. And I think number three is tied so much into one and two. So if we begin by realizing that a war can break out whenever we want to use Sun Tzu language, bad things can happen at any point. My only goal at the beginning of this relationship is to reduce the likelihood that those bad things occur. And I think the only way to solve that problem is to say, how do we communicate? I think two things are going to happen. Number one is you will have a rift several times. No matter how good you communicate, there is going to be a rift.
54:48There's going to be something where you disagree. And number two is both of you are going to evolve as people. Right. And it's funny. Our mutual friend, Roger Whitney, the retirement answer man says he's been married to five different women over his long life. He's been married to the same person, by the way, for a long period of time for people that don't know. But you know what? She's been married to five different men, right? Because Roger's changed over time. And if you communicate a lot consistently, you can change together. Doesn't guarantee that you'll change together, but it's more likely that you will change together.
55:24If you don't, then it gets more difficult because now you're dealing with somebody whose feelings have changed, whose life view has changed, and yours has changed too, but in a different way. So I'm not disagreeing at all. I do think yours, mine, ours is an important thing to do. I'm just talking about that rift. And I think if we have that discussion first, we can diminish the chance that that happens. Right. To the yours, mine, ours, one thing that will be important as you structure this is make sure that the naming on all of the accounts reflects reality. What I mean by that is the way that when you discuss what's yours, what's mine, what's ours, make sure that the accounts, the on paper documented holder of each account reflects what is what the two of you have agreed is in your hearts.
56:23Don't be in a situation where even if there's some tax benefit, blah, blah, blah, you know, even if there's some logistical administrative benefit, don't be in a situation in which the name on paper is not the same thing as the name that's within your hearts and minds. Those need to be the same. With regard to a prenup, you know, that prenups are for some reason controversial, which is funny to me because nobody would ever argue against two business partners forming a written agreement prior to going into business together. right? And if you expect that your business is going to last for the next 60 years, and this is going to be a business that you grow and thrives and you hire employees and it's a legacy.
57:10Yeah, of course, you never want that business to fall apart. But you, it's always prudent. There's never any controversy as to why you would form an agreement with your business partners at the onset, a prenup is very much the same. You know, a prenup is the agreement that reflects the two of you and the ways in which the two of you decide to have accounts that are yours, that are mine, and that are ours. And what I like to tell people is technically everybody has a prenup. Your prenup are the laws of the place that has the jurisdiction over your marriage, right? That's a great point. Yeah. You've already got one.
57:52You've already got one, right? The laws governing whatever place, whatever locality, whatever geography has jurisdiction over your marriage, that is your prenup. So your choice is you can either accept the default prenup that was handed to you by the government, or you can custom design your own, one that fits the two of you, right? And why would you take a government-assigned prenup when instead you could customize one? You're going to have one either way, right? It's either going to be your government-assigned one or it's going to be one that you create. Mary talked about having children. And I remember when I would give financial planning talks in Michigan, especially in the Detroit area for any of our Afford Anything community that's there, the roads around Detroit are just horrible all the time, Paula.
58:46They're just absolutely rotten. And I would tell these audiences that you want to get your estate plan done, because the state already has a plan for your kids, right? What's going to happen to your kids when you pass away? And you've seen that they can't even get our roads right. Imagine what they do with your kids. And why it's easier for us to do that when it comes to death scenario, that, hey, planning out my estate, you already have an estate plan. The state's got it. Probably aren't going to like it, but the state's got it. That's true. It's the same thing with a prenup. Yeah, that's true.
59:19Everyone's got an estate plan. It's whatever the government decides to do. You got one. It sucks, but you've got one. Exactly. The international component of their marriage, that's not an area that I'm super familiar with. I know once you apply for the Spousal visa, there will be a wait time of a few years before he can be granted U.S. citizenship. I think it's three years or something. But, you know, I'm sure you know that process far better than I do. In terms of the life that you're planning, moving, living in a variety of countries, I mean, you're going to need accounts that reflect wherever you're living.
59:58There's going to be currency conversion. I think the best thing to do is choose banks, and you know this area far better than I do, but choose banks that have presences and footprints in the places in which you will be. I have a lot of friends who use HSBC Bank, for example, if they spend a lot of time in Europe. I can't recommend any specific places because it's all going to be very location dependent. But don't shy away from bigger banks with international footprints, big international footprints. When I went to Amy Minkley's FI Freedom Retreat in Bali back in September, Paula, people were having problems, to your point, with their Schwab account.
1:00:44At some ATMs, they couldn't get their money out of it. And a Schwab account is fairly ubiquitous. It's worldwide. So they were surprised that on Bali, it was one of the few places on earth where it wouldn't. So do some of that work at a time. I think that also extends, by the way, speaking of Charles Schwab, brokerage firms get a little hairy if you're going to spend extreme amounts of time living in another country. And I know that this has a lot more to do with U.S. law and money laundering schemes. And so some companies are like, forget it. So I would be very clear with wherever your financial accounts are held that you're going to live in X country for a while and make sure that that happens.
1:01:30Because the horror story you will hear from some companies is absolutely horrible. All of a sudden, they just kick you out. They're like, yeah, you got 60 days to move your money out of here. I know that you're living in West Africa and we don't do business in West Africa. So you got to move your money in 60 days. And you're like, how do I move an IRA? When I'm living in West Africa, how do I move an IRA that's US-based to a different firm? How do I even do that? So before you do this, just call your broker. The big ones have heard this before. They have the right people. They will even know how to counsel you on what to do next.
1:02:07But just make that call ahead of time so you're not surprised later. Right, right. I think we covered it. I think we did. Yeah. That's a great question. Yeah, I love it. Right. So Mary, thank you for asking that question. And congratulations again on everything that's up ahead for you. All right, Joe, we did it again. I always leave here with my heart full because not only do I get to hang out with you, Paula, but I feel like both, I feel like Kayla, Mary, and Josh are hopefully in a better place, which makes me super excited. I think we thought about better tech strategies. I mean, so much about floating the loan, about great ways to hide money.
1:02:55So the money builds on its own about behavioral decisions, about communication. I mean, so many important topics that are just these life skills that people can, I don't know, use for a long, long time. Exactly. Exactly. Retirement, tax planning, but all kind of told through the lens of thinking more clearly and long-term. All right, Joe, where can people find you if they would like to hear more of you. Oh, you can hear me when I'm not here over at the Stacking Benjamin show. We, we like to end the year strong at Stacking Benjamin. So we're doing, uh, we're getting ready for our usual year end stuff, which is we have somebody who's a, who's a celebrity in the financial space every year, help us talk about what are some of the big events of that year and what should we have learned from those events?
1:03:49And then we do the same thing with our round table, which Paula includes you. So the next to last week of the year with this year, we've got Jean Shatzky from the Today Show and Hermione joining us. And then Paula, Len, and OG will also have there. So we love that tradition every year. It's great to look back on the year and go, wow, look at where we've been. Look at all the things that happened. And then to pause for a moment and go, what could we have learned from that? So that's coming up on Stack of Benjamins. Oh, fantastic. Fantastic. Well, thank you so much for tuning in. If you enjoyed today's episode, please subscribe to our show notes, affordanything.com slash show notes, where you can get a synopsis of the episode plus timestamps.
1:04:33Please chat with the community. Mary mentioned wanting feedback from the Afford Anything community. So affordanything.com slash community is the place where you can go to talk to other like-minded people and get advice, feedback, just to find connection. And finally, make sure that you share this with a friend or a family member and make sure that in whatever app you're listening, you have hit the follow button. And while you're there, please leave us a review. Thank you so much for tuning in. I'm Paula Pant. I'm Joe Salcija. And we will catch you in the next episode. Thank you.
From the publisher
#477: Kayla is torn between paying off a loan early or catching up on missed retirement contributions.
Josh wants to retire early and meets the threshold for zero capital gains taxes. Should he put all his retirement savings into a brokerage account?
An anonymous caller wants to know how to merge financial lives with her husband from another country.
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it at https://affordanything.com/voicemail
For more information, visit the show notes at https://affordanything.com/episode477
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