Everyone Says Don’t Hold Bonds in Taxable Accounts. They’re Wrong

In short

Afford Anything Podcast Episode Notes

Episode Title

Everyone Says Don’t Hold Bonds in Taxable Accounts. They’re Wrong Episode Number: 651 Host: Paula Pant Co-Host: Joe Salcihai

Episode Overview In this episode, the hosts tackle the common financial advice surrounding asset allocation, particularly regarding the holding of bonds in taxable accounts. The discussion is framed through listener questions that explore real-life applications and implications of financial strategies as individuals approach financial independence, particularly those who have reached CoastFI (Coast Financial Independence).

Key Listener Questions and Discussions

Brandon's Question (1:28)

Topic: Should I hold bonds in a taxable account during CoastFI?

Background: Brandon plans to withdraw from his taxable account for the next 20 years and is currently 100% equities. He questions the common rule against holding bonds in taxable accounts.
Discussion Points:
The traditional advice against holding bonds in taxable accounts is generally based on scenarios where individuals wait until full retirement age to draw from all types of accounts.
In Brandon's case, since he will be relying on his taxable account exclusively for two decades, it should function as a complete portfolio, which may include bonds or cash for stability.
Importance of balancing risk, liquidity, and cash flow needs when planning withdrawals.

Andrew's Question (22:07)

Topic: Supporting a mother-in-law's retirement through shared home ownership.

Background: Andrew and his spouse co-own a home with his mother-in-law and seek ways to help her retire without causing familial tension.
Discussion Points:
Exploring fair and flexible options for financial support while maintaining healthy relationships.
The concept of seller financing as a potential mechanism for structuring financial support in a win-win manner.
Importance of open discussions about financial plans and the need to understand the mother-in-law’s concerns regarding her retirement.

Chandan's Question (49:16)

Topic: Using covered-call strategies to generate income from a stock-heavy portfolio.

Background: Chandan has a significant amount of wealth and is exploring passive income avenues without dealing with real estate.
Discussion Points:
Explanation of what covered calls are and their potential to generate income while holding stocks.
Analysis of the trade-offs involved, including the limitation on upside potential when stocks appreciate significantly.
Assessing if covered calls are a suitable strategy based on individual income needs and risk tolerance.

Key Takeaways

Bonds in Taxable Accounts: The common rule of not holding bonds in taxable accounts is context-dependent. When relying solely on a taxable account for income, it may be wise to include bonds for stability.
Asset Location by Purpose: Financial strategies should be designed based on individual circumstances rather than one-size-fits-all advice.
Planning for Family Support: Open communication and structured agreements can help create a fair approach to shared financial responsibilities within families.
Covered Calls as Income: This strategy can offer income potential, but participants must understand the associated risks and limitations, particularly regarding the cap on profit potential.

Analysis of Key Concepts

Mental Models and Strategies

Asset Allocation: Understanding when traditional advice applies and when it can be modified based on personal financial circumstances.
Behavioral Finance: Recognizing familial dynamics and the psychological factors that influence decision-making in shared financial situations.
Income Generation Strategies: Covered calls can be a method of income generation, but the trade-offs must be carefully considered.

Resources and Links

Asset Location Cheat Sheet: [Download here](http://affordanything.com/assetlocation)
Guide to Double-I FIRE: [Download here](http://affordanything.com/fiire)

Episode Structure

Introduction: Overview of the podcast and episode theme.
Listener Questions: Each question is explored with in-depth discussions and expert insights.
Conclusion: Summary of key insights and encouragement to share the episode.

Call to Action Listeners are encouraged to download free resources, share the podcast with friends and family, and connect with the community for further engagement on financial matters.

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Transcript

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0:00Joe, you know how sometimes we have episodes where we really keep to a particular theme. Sometimes. Today, we've got three incredibly different areas of personal finance that we're covering. So we're going to be talking to somebody who's reached CoastFi and has some questions about asset allocation and asset location. Okay. That's a fancy way of saying, where do you put various things in your portfolio and how much of it do you have? We are going to be answering a question from someone whose mother-in-law needs some money for retirement, and he has a very generous but somewhat creative idea as to how to help his mother-in-law.

0:40Sounds good. And we're going to talk about covered calls. I love covered calls. I know you do. I don't do them often, and I'll explain why, but I just love explaining how they work. Amazing. Well, all of that is coming up right now. Welcome to the Afford Anything podcast, the show that knows you can afford anything, not everything. This show covers five pillars, Financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double-I fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode-ish, I answer questions that come from you, and I do so with my buddy, the former financial planner, Joe Salcihai.

1:17What's up, Joe? Paula, what's going on? Oh, you know what? I am excited to dive into today, so let's get started. This first question comes from Brandon. Hi, Paula. Question about bonds and Coast FI. I've never owned any bonds. I'm 100 % equities. I've always been aggressive, but I do wish to become more conservative soon, as in today, in my brokerage account. My wife and I, ages 41 and 45, we plan to begin Coast FI within the next year. We will supplement a new part-time income by beginning drawdowns from only our brokerage account, which is currently 100 % equities. We will need a 4 % withdrawal rate for the next 20 years to achieve our goal.

2:03I've always heard the advice to never place bonds in a brokerage account. In our situation, should I not allocate bonds in the brokerage account while we begin drawdowns? I feel it's way too risky as it sits now. So in a hypothetical example, 70 % stocks, 20 % bonds, 10 % cash for the next 20 years while we draw down, something in those regards. Also, potential to explore risk parity method, but again, concerns that this would all be within our brokerage account. Of course, we don't want the tax tail to wag the dog, but I'm very curious to hear your thoughts. We believe our retirement accounts don't need touch.

2:44They have more than enough to grow without further contributions to reach our full retirement needs at ages 61 and 65. With that said, I want to keep those retirement accounts 100 % equities for at least another 10 to 15 years as I have no intention on using those accounts until full retirement age. And again, that's more like 20 years from now. Very curious and grateful to hear your thoughts on where to put bonds, if this makes sense, if our plan makes sense, and then how we reallocate the brokerage account, because it's certainly going to trigger taxes if we sell today to get that cash cushion.

3:23Love the show. Appreciate all you do. Keep up the great work. Brandon, thank you for the question. And first of all, congratulations on reaching Coast 5. That's incredible. I am so excited for the adventure that lays ahead as you and your wife embark on part-time income with a 4 % drawdown from the taxable brokerage portion of your portfolio. That sounds awesome. And I am very excited for all of the life and the adventures that you're going to have. So to address your question, first, for the sake of everybody listening, the reason that people often say don't put bonds in a taxable brokerage account is because people are assuming that the premise under that is that people are assuming a framework in which you have three different types of accounts, tax-deferred, tax-exempt, and taxable, under the traditional retirement framework that you are planning to use and to therefore later tap at an equal timeline.

4:24So under the traditional retirement model, if a person waits until full retirement age before they start making drawdowns, then yeah, you treat all three of those accounts as a collective and you locate your assets across those accounts in a collective manner. But Brandon, what you're doing is something totally different. What you're doing is you're saying, you know what, my tax advantaged accounts, I'm going to wait until I am at the appropriate retirement age before I start tapping them. Until then, I'm purely going to tap my taxable brokerage account. So you're in a totally different situation in which those three accounts don't get regarded as a collective.

5:05So for you, it totally makes sense to have bonds in the taxable brokerage account because that taxable brokerage account stands alone as the sole account that you are going to tap between now and when you reach for retirement age. Or Paula, they're not drawing down at all because for many people that are conservative enough that they want bonds in their portfolio, then you certainly don't want these bonds throwing off taxation for no reason if you're not going to use the income stream. I think that if you're looking at what the most important thing here is, it's stability of the income stream.

5:47And if that's the case, we really have three choices. something that throws off a high income stream, and we can get into that, a bond, which throws off a high dividend or income number, or something like a high yield savings account, which is going to be the most stable, but isn't going to give you much. Right. But regardless, so I think his root question was, in a world where everyone says, don't put bonds in your taxable brokerage account. How should he think about it? Yeah. I think that's one of those deals where we hear half of what quote they say. I mean, which happens a lot, right? We hear the sexy part.

6:29As an example, back in the early 2000s, a wonderful money manager, a lot of people still know this guy, I've heard of him, Peter Lynch. Peter Lynch said, buy what you know. And Peter Lynch also then said, that's the top of your filter. Don't just go buy the ketchup manufacturer because you use ketchup. Don't go buy Nike just because you wear Nike clothes. He's like, that's the top of your filter are things that you know, and then work down from there to see if it is a good buy or not. But the number of people who told me they got burned by Peter Lynch because they bought what they know, but didn't stay around long enough to hear the rest of it is a huge number of people.

7:12And I think this is that case where I have heard a lot of people say, don't have bonds in a brokerage account. But I feel like there almost always is among professionals unless you're building an income stream. Right. Exactly. Yeah. Don't buy bonds in a brokerage account if you have a total of three accounts, each of which have different tax treatments and you are managing all three as one singular unit, you know? Or you're managing all three and I don't need income today. Right. Exactly. Exactly. And that's the case for the vast majority of people. And I think what this really gets to the heart of his question is how do you discern when the advice that is appropriate for the vast majority of people in the vast majority of cases is not appropriate for you as an individual based on your own individual circumstances, right?

8:12Because necessarily what you get through mass media is meant for the mass public. And while that works in the aggregate, it doesn't necessarily work for the individual. And particularly when you get to coast-fi, which is something that is unusual in our society, right? There isn't going to be specific advice for that. You know, not a ton. This I found frustrating when I was a financial planner, because often a client who was the exception to the rule, like Brandon is in a lot of ways in this case, would come into my office and they would say, Hey, I know that you told me to do this thing, but I was just listening to Susie Orman, who on national TV said, don't do that thing.

9:03And I would have to then walk through why they're the exception. And by the way, I got good enough at this that I learned that the best battle is the one that's never fought, right? Sun Tzu, the art of war. And so I would bring to people, Paula, when they were the exception to the rule, I would groan. I go, oh, no, no. Oh, I have the exception to the rule. So I would walk into the room, let's say you're my client, and I would say, Paula, I want to show you something that Susie Orman says. And I would either show you the video, read you the piece, show you the piece. We'd walk through it together.

9:37And I'd say, and the reason I wanted to show you that is because we're about to do a strategy, which is specifically the opposite of this thing. And here's the reason why. Susie Orman, number one is talking to maybe 10 million people on TV and you are a single person. She needs to use the law of large numbers. What is it that is a universal truth? Dave Ramsey, we should get out of debt. So I'm talking to a huge number of people. What do I do? Focus like a laser, not like a flashlight where it's this big dim ball, but like a laser on that debt and get rid of it and then practice a no debt lifestyle.

10:18Debt is bad. Now, you and I, with our audiences, go, is debt bad all the time? No, it's not. But for Dave Ramsey to reach that huge audience, he's got to be adamant. Debt is bad, period. And if he's not that way, then he's not going to be able to talk to as many people as he talks to so succinctly. So I think if you start with Dave Ramsey as an example, and you begin with debt is bad later on, when you've swam into deeper waters and you understand more of the nuance, you know, oh, okay. I see why he said that. And I see why I would start there, but I also see why I'm in a different spot now and why leverage might actually work for me.

11:03Right. Exactly. I'm thinking of a specific client, by the way, this couple between the two of them. And by the way, this might've been in 2001 or two. So if inflation, if prices double every 18 years and just wages would then just keep up with inflation, hypothetically, right? If that's the case, at the time, these people were making about$700 ,000 a year. So today, today's dollars make it maybe$1.5 million a year, right? So they have a ton of income coming in. We have maxed out every single tax shelter that's available. They have plenty of money on hand to fund all their goals. They were naturally fairly frugal people.

11:45And so we were just looking for places to put their money and not get smoked on taxes. You know what's a great place? Oh, you're about to say the W word. A permanent life insurance policy. Oh, I thought you were going to say whole. That's where that's a W. Whole life. How do you explain to somebody that as much as I detest 99 % of the time people putting money into these policies and they got ripped off by somebody who was more interested in a commission than anything else? Right. Why this is specifically perfect for them. Well, and remember, we had somebody who called in and her father had purchased a whole life insurance policy for her many, many decades prior, right?

12:35And so that policy was paid up. It had like, it costs like 50 bucks a month to keep it active. And she said, well, you know, I hear that these are bad. Should I let it go? No, absolutely not. It's like 50 bucks a month to keep it. And she said, well, what if I don't have any beneficiaries? Give it to charity for 50 bucks a month. You have the opportunity to make a massive charitable donation. Huge impact. Yeah, exactly. And so it was one of those situations where what is good advice in the aggregate, because when you're speaking in the aggregate, you're talking to people who are thinking about buying a policy now.

13:17Now, you're not talking to people who had a policy purchased for them 25 years ago. And already have done all the painful hard lifting. Right. And did it correctly back then so that this policy actually has a very low cost of insurance and is doing what it's actually designed to do. Exactly. And so that's the problem that you run into when mass market advice doesn't fit with the nuances, the specifics of your individual case. So Brandon, where all of this is going is in your individual case, when you think about the bucket of money that you are going to be drawing down from, from the age of 45 until you reach full retirement age, you don't have three buckets.

14:03You have one bucket. And so because you have only one bucket during this window of time, of course you're going to keep bonds in that bucket. It's your one and only bucket. It certainly makes the strategy easier. You don't have to overcomplicate it. And this is the cool thing. I think the best piece of this is knowing, and we'll get into this when we talk about options. We'll get into this when we talk to Andrew about his mother-in-law's situation. You know, you have a good strategy when you know what the Achilles heel is because every strategy has an Achilles heel. And Brandon, your Achilles heel is you're going to pay a little bit more money in taxes, but it's okay.

14:48And once you know that that is the Achilles heel of this strategy, great. Assuming that Achilles heel is acceptable. Do you know what I mean? Like the pain of the taxes is worth what you're going for. Here's what Brandon's going for. Brandon is going for stability. Brandon is going for a paycheck that comes every month. Bonds are a phenomenal way to get that done. The downside is when you take money as income, you're going to pay a tax. Well, and Brandon's going for not tapping his tax advantaged accounts, letting those grow and letting those accumulate until he reaches full retirement age. So he continues to get the advantage of having an all equities position in his tax advantaged accounts.

15:36Brandon, there's a couple other ways that you can go. One, I moderately like, possibly. I don't know how much money you're talking about. I don't know the numbers that you're dealing with, but one I moderately like and one I don't like. To minimize the tax game, you could go with low volatility equities like utilities and then sell them off, hoping for small capital gains along the way, along with dividends. So you won't get taxed as heavily on the capital gain. And you'll also then have a smaller stream of income from the dividend payout, which will be also then that'll make a lower tax game.

16:15I think the volatility of doing that one, Paula, makes that unacceptable for me and not something I would do. You don't want to begin your coast-by journey and have something happen to the equities market and have that blow up. So I would not do that one, but it's one that I considered. The second one is you could have a piece of that income stream come from REITs because REITs have a little tax advantage in the income stream that bonds don't have because generally the way a REIT pays out income, Paula, part of that is a continual return of some of the principal that you put in initially. Sometimes only a piece of that income stream is going to be taxable while a piece of it is along the way, a return of the money that you initially invested.

17:06I would talk to a tax advisor about that before I did it. REITs also, while they move like equities and much of the same economic data impacts the real estate market that also affects equity markets, it tends to move slower, right? It's going to go down, but slower and up, but slower and down, but slower. And so having a portion of it in a REIT portfolio where you're holding on to the base and not selling it off, but taking some of that income stream out of a REIT versus a bond might also help defeat the tax devil a little bit. For anyone who's listening who wants a guide on asset location. We have a free guide called the Asset Location Cheat Sheet, and it gives you the fundamentals at a broad level, fundamentals of asset location.

18:00And remember, it's general advice for everyone. So it's not specific to any unique situations. But if you want to learn the backbone of that framework, you can download it for free at affordanything.com slash asset location. That's affordanything.com slash asset location. It's a free four-page cheat sheet of the fundamentals of which assets to put in which types of accounts. affordanything.com slash asset location. Totally free. Thank you so much, Brandon, for the question. And congratulations again on reaching Coast Fi. We're going to take a moment to hear from the sponsors who make the show possible.

18:39when we return, we're going to hear from someone whose mother-in-law does not have adequate money for retirement. And he has an idea that is very generous, but also unusual. It's unlike any question that we have ever answered on this show. The kids are back in school now, and I finally have some extra time to plan a weekend getaway for just us. We've been wanting to visit Lancaster County, Pennsylvania for a while now because I've heard so many people rave about it. We love exploring new places, finding the cutest shops, and eating at restaurants that the locals love. DiscoverLankaster.com is the best place to learn about the unique things to do and upcoming events.

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21:40welcome back our next question comes from andrew hello paula and joe this is andrew from oakland california got a fun one for you in 2018 following my in-laws amicable divorce my wife and i moved into her childhood home in oakland california to help her mother with the mortgage and upkeep. At the time, the home was valued at around a million dollars with a$460 ,000 mortgage. The arrangement was presented to us by divorce lawyers that it would be a way for us to, quote, buy our way into the home while providing financial stability for my mother-in-law. Now, over the past eight years, my wife and I have made a lot of contributions to the home's value and maintenance.

22:30We've paid at least two-thirds of the mortgage and utilities in the time since we've moved in, which is about$160 ,000. We've also invested about$100 ,000 in home improvements like foundation and earthquake retrofitting, new roof and solar panel, and also electrical work, removing old knob and tube. About a year after we moved in, we all decided to build a detached ADU in the backyard. This was seen as a solution for our need for more space, as we now have three children, my wife and I, and my mother-in-law's desire to age in place near her grandchildren. We used a cash-out refinance to fund the project, pulled about$220 ,000 in cash out to fund the ADU development, and that brought the mortgage to just under$700 ,000.

23:18The home at that time was appraised at$1.4 million. That was in 2020. That was before the ADU was completed, but it's settled back to about$1 million now. Again, not including the ADU. With my mother-in-law nearing retirement at age 71, there's concern about her financial readiness. The main home and the detached ADU seem to be her primary investment, and her retirement savings appear to be limited. I would like to have a conversation with her soon about her financial plans and explore ways to compensate her for a portion or all of the home's remaining value to help secure her retirement. In case this helps, my wife and I are both 40.

24:00We make about$150 ,000 pre-tax. We've saved about$550 ,000 to retirement, various IRAs and 401ks. We don't have much liquid cash, but we are determined to build that up in the coming years. We're on the deed for the home for 50 % while my mother-in-law has the other 50, but that's not the same as really being true owners. Any advice or creative or simple ways to increase our financial stake in the home and supplement my mother-in-law with some type of retirement funds during her penny retirement? I appreciate your thoughts as always. Take care. Paula, Andrew's question went a different route than I thought it was going to go when I first heard it.

24:42Where did you think he was going? I thought he and his spouse were helping out mom. And I thought that they had kind of done things on handshake deals. And now, even though he'd done all these improvements to the property, that he wasn't a true owner of the place. Like, you know what I mean? They had helped out, quote, helped out. Right. I've seen that happen a ton of times. So, Andrew. Far too many times. I was so happy to hear it didn't go that way. Yeah. I'm so happy. My favorite part of that question was when he said that he and his wife are on the deed for 50 % and his mom's on, the mother-in-law is on the deed for 50%.

25:20When I heard that. For both of us, that was our favorite part. And I want to explain why. And it's because often when family is involved or loved ones, I should say more broadly, when loved ones are involved, so much, especially in real estate is done on handshake deals because you love and trust the person. And that goes horrendously bad so fast. OMG. Making sure that the paperwork reflects reality, making sure that the paperwork reflects the handshake deal. I cannot overemphasize how critically important that is to anybody who's listening. And Andrew, I'm so glad that you have already taken care of this.

26:05But to anybody who's listening who currently has a handshake deal with a loved one around real estate, around small business, around any monetary, but particularly the two areas where we see this are real estate and business, right? If you have a handshake deal, run. Do not walk. Run to a lawyer, to heck, even if you have to print out some legal forms from the internet, even that is better than nothing. Although we'd prefer you didn't do that. We'd prefer you didn't do that, but that is way better than nothing. I mean, if you have to write something on a napkin, you know. Please do. That is better than nothing because the worst, worst, worst thing you can do is to have documentation that is different from the handshake agreement.

26:56Misunderstandings, hurt feelings. People forget. People often have selective memories. They can. Yeah. Yeah. And memories get revised in history. But even if there aren't, Paula, there is even then the accusation of selective memory. So if somebody does not have a selective memory, they just plain forgot. It's easy to see why somebody would go, oh, yeah. Yeah, right. You were just trying to get away with something. Right. So even if that's not the case, the accusations are justified. Yeah. Don't do that. And Andrew, we'll get to your question in just a moment. I realize we've gone a little bit on a tangent on this, but I'm doing this for the sake of the tens of thousands of people who are listening to this.

27:38The broader good. The broader good. For the sake of the greater good, and Andrew, we'll get to your question in just a second, but for the sake of the greater good, I really, really want to hammer this point home. Oftentimes, people are so reluctant to think the worst of a loved one. Oh, they would never do that. Oh, they're such a good person. Oh, I know that they'd be good. They'd be fine. They're never going to do anything bad. And so if that's you, and if you're getting caught up in that, then here's what I would say. Let's assume that you're right. They're a great person. They would never do anything terrible.

28:12But imagine that they get impacted by cognitive decline. Maybe they get impacted by early cognitive decline. For some people, cognitive decline shows up shockingly early in life, right? That's not their fault. It's not their fault at all. It's just their brain. Nature. Right? It's nature. That can really, really F up everything. Or imagine, let's say that everybody in question, maybe you're doing a business deal with a bunch of people who are all in their 20s. So you're sitting here thinking, well, the cognitive decline is not going to start in your 20s. Okay, let's imagine somebody's in a car accident and they have a traumatic brain injury.

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28:58Then what? Again, it's not their fault. It's the brain injury. What do you do if somebody has a traumatic brain injury? You want to protect yourself in the event of that happening. What do you do if somebody gets addicted to substances? Addiction is a disease. It's not your fault. Addiction is a disease. And if somebody has a disease, what do you do? So you want to protect yourself in the event of traumatic brain injuries, cognitive decline, addiction. You want to protect yourself because those things happen. Those things have happened to millions and millions and millions of great people. And there but for the grace of God, go I.

29:41So, all right. I'll get off my soapbox now, but I feel very strongly about this. I couldn't tell, number one. But number two is, I think it needed to be said. And frankly, Paula, that's why I brought it up at the beginning because I thought, oh, thank God. Because that is a rabbit hole. Can I just say two things to Andrew and then I'm going to get out of the way because this feels like you're definitely much more your area of expertise than mind. Andrew, I have one thing that I considered that maybe I would ask if we were in a room together and that actually comes back, Paula, to help because of this.

30:19The one thing that happens when a person passes away is that their assets get a step up in basis to the beneficiary. So that other half of the house that she owns, you would end up avoiding a lot of tax if she still owns it. So if in her family, Paula, they're going to live 25 years, the average person lives to 90, 95 years old. Fantastic. If mother-in-law is not in great health, it may make sense to explore other options as well. In fact, I always like exploring two or three different options and see which way to go. Almost like we did earlier with Brandon. I said, I thought about low risk equities and I thought about real estate.

31:01I'm always exploring a couple other things. So I don't think that's going to matter here. The thing I think that is going to matter though, the thing I'm much more excited about, I believe this involves a concept called seller financing, which the cool thing here, Andrew, is that you can devise a strategy that will work really well for your mother-in-law and for you. Because when the banks are out of the way, when the banks are off the table like they are here, you're going to be able to structure this thing in a way that really is great for everybody. You can get very imaginative. So the thing that I would say is often people go and they look in this situation, they get onto a banker and say, what could I do?

31:51I don't know that you need to do that here. I think there's a lot of creative things you could do that work with the amount of cashflow that you have available with the amount that your mother-in-law needs. So if we start off with what's the amount that she needs, how do we structure a deal then where she gets what she needs and you're able to afford it on a monthly basis, like this could be a really win-win situation. And frankly, it's going to take, Again, you want all this in writing, but it might cost a couple thousand bucks, Paula, to have some good lawyers draw it up. So I get really excited about where this could head.

32:34Well, let's back up a little bit because I have a couple of questions. I'm going to question the premise here a little bit. I hear an assumed problem followed by a proposed solution. So the first thing that I want to do is clarify what is the problem that we're trying to solve. Andrew, I noticed two things. There are two words that you said in your question that made my ears perk up. You said that it seems, you used the word seems when you talked about your mother-in-law's savings, and you also used the word appear. both of those words, it seems and it appears, her savings appear limited. Both of those indicate that you do not have a lot of clarity around what your mother-in-law's financial situation is.

33:25That's funny, Paula. And I'm glad you said that because I took that a whole different way. Oh. I took that as Andrew being kind and having a little velvet on his hammer of the fact that she doesn't have much. So I thought he was being polite. But I think that needs clarification. Yeah. I interpreted that as him not knowing. Interesting. This is why there's two of us. So that's the first thing I would want to clarify. The second thing I would want to know is how much help, if any, does she want? And what role does she see you playing in that, right? So what is her plan? And plan is maybe a fancy word, but what are her thoughts?

34:11What are her assumptions? From where she sits, how does she view her financial situation? And what role, if any, does she want you and your spouse to play in solving whatever problem she has? That's the second set of questions. And I start with that because that's kind of the premise that we're building from. The third question is, does she want to relinquish ownership in this home? Or if she did that, would that make her feel less secure about having a place to live? I mean, there is that psychological element of if this is not my home, do I know that I'm going to have a place to live when I turn 80?

35:01and again you can have a handshake deal that says yes of course you will right but there's there is a certain reassurance that you get when that home is 50 yours it's a human emotion that's a as they say tale as old as time i mean i think all the way back to shakespeare and king lear right no we'll take care of you dad and then king lear does not get taken care of spoiler alert sorry you.

35:30I just blew the whole thing. And then you find out the butler did it. I actually watched a video where somebody was like, do you have to spoiler alert Shakespeare? You had 400 years to read it. I don't think that's my problem anymore. But yes, I mean, from your mother-in-law's point of view, it might be the case that she doesn't want to relinquish her share of the home because there is a certain psychological comfort and there's a certain level of certainty, both at the emotional level, really at three levels, at the emotional level, at the psychological level, and at the legal level, the actual administrative legal level, there's a certain level of certainty and comfort that she gets from knowing that she has a stake in this property.

36:22and she may or may not want to lose that. And again, we just went on our tangent about handshake deals. There's a certain risk that she would be taking on if there's a handshake deal that she can continue to live in a place that isn't hers, which is to say there's a certain certainty that she has now because that place is partially hers. Well, this is another reason, Paula, that I brought up the step up in basis issue. Because if this is an asset that ultimately Andrew and his spouse are going to end up with in the far future, is there another way to help mom? Right, right. And that goes to my fourth question.

37:09So question number four is, what are your mom's actual cash needs? What are her cash outlays? And how is she paying for it? How is she paying for it now? and how much is she going to need to pay for various cash outlays in the future? I mean, you think about the expenses that a person in their 70s might have. There are your basic expenses, groceries, your share of utilities, some clothing, Medicare premiums, prescription co-pays, car insurance, gas. Wait, are we going to try to go through all the expenses? Right. What does that add up to? Nail polish. Floss. Steaks, but only on occasion. Eye drops.

37:52Garbage bags. You know, various things. Those things that you buy. So what does all of that add up to? I think we understood where you're going, Paula. Maybe she has a dog. What do those expenses add up to for her? And how much money does she need moving forward? When we answer question number four, Or the follow-up question is, if this 50 % of the house was bought out, would it be enough? And again, I just keep going back to what certainty would she have that she has a place to live? If you were to take over full ownership, could she sign a 30-year lease for$1 a year? And would it be valid? Would it uphold?

38:37Because if you were to take all of the expenses that she has, and then if you had to add a rent to it or something like that, That would certainly defeat the purpose. But if you could draw up an agreement for where she could lease the place from you for a dollar a year, guaranteed for the next 50 years, and if you knew that if you ran it by some lawyers and you knew that it would hold up, you had it notarized, I'd feel better about that. I'm also wondering Paula you know maybe the reason Andrew has this solution in mind because his spouse has siblings and maybe instead of asking the siblings to take care of mom maybe it's an exchange right equity of the house in exchange for money that mom can get that makes it a more I don't know fair is the right word but a more you know what I mean makes it so that there's an exchange there versus they're taking charge of mom and the other siblings are not helping mom at all.

39:41I don't know. Right. Like you, I was also wondering why this specific conclusion, besides the fact that they already lived there. I mean, that, that makes sense. Right. But that could complicate things as well. Right. Andrew, I'm very happy that you didn't fall in the, in the well of dealing with friends and family on a handshake basis. Yeah. And this is all drawn up. Yeah. Kudos to you for doing it right. Yeah. And I think these are all the areas really to examine. Number one, does this involve siblings? And if it does, how do you make that equitable? Number two, for mom, how is she going to feel about not owning a piece of her house?

40:26Number three is, is there then a different way to handle this? And if so, there's many different ways to support mom versus buying the house. If you do, and if this does end up being the best way, I think designing it based around mom's needs and your ability to pay, and you got to really remember mom's needs here, not just your ability to pay. This is, I think, an excellent opportunity to look at a non-conventional seller financing deal if it comes to that at the end that you are going to buy the house. Well, can I float one other possibility? And again, it depends on how much mom spends, but part of the reason that I brought up groceries and utilities is the first two points before we got to toothpicks.

41:18They live together. These are probably shared expenses. could an alternative be that mom retains her stake in the home, but they pay for a portion of mom's cost of living. Maybe they pay for all of mom's cost of living. Andrew, I know you mentioned you don't have a lot of cash, but it might be the case that your mom doesn't have a lot of spending. I don't know. I don't know what her spending is. But if her spending needs are predominantly importantly, groceries, utilities, Medicare, and clothes. I mean, that's other than health related expenses, that's probably not going to be a whole lot. And it might be the case that rather than buy out her portion of the property, you make an arrangement in which you cover some of her expenses and through inheritance or through, you mentioned you have three kids, through child care services that she provides, you know, that's where the reciprocity in value comes in.

42:23So that might be another way of making this deal fair. Maybe you cover, you and your wife cover the mother-in-law's expenses and via inheritance, your spouse and, but not the siblings receive this asset. And that agreement is just made in advance so that everybody knows it. That way your mother-in-law still retains her share of the home, but she has the assurance of knowing that her bills are covered and you have the assurance of knowing that the house will be totally yours when she passes. I like directionally where this heads though. What does mom need? Begin with what mom needs. And I think that'll light the way to a creative solution.

43:07Eye drops. She needs eye drops. And floss. And nail clippers. Nail polish. Garbage bags. Garbage bags. See, probably shared expenses. We could team up on those. I'll Venmo you for my half of the garbage bags. Everybody wins. All right. Well, thank you, Andrew, for the question. And best of luck. Please call us back after you've decided what to do and let us know how things pan out. We're going to take one more break. And when we come back, we're going to discuss covered calls. That's up next. So imagine it's midnight, you're on the couch, you're scrolling through this new website, hitting the add to cart button, and you decide to check out, but you remember that your wallet or your credit card is in the other room and you don't want to get off the couch.

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46:37Welcome back. Our final question today comes from Chandan. Hey, Pola. Greetings. Huge fan. Thank you for everything you do. You're awesome. I'm 42 years old and I have been living in the US now for close to 10 years. I work for an extremely large IT company, one of the FAANG companies. and over the past 10 years I have managed to build about 2 million dollars across my brokerage and retirement accounts not including my home. To be honest I never thought that this kind of wealth was ever possible. You might connect with this but I grew up pretty poor in India and no one in my family can guide me on what to do with this kind of wealth because it's literally unheard of.

47:25I feel both incredibly grateful and I'm also extremely scared that I might screw this up from here. I would love your help on two questions please if you don't mind. The first one is how do I make sure that I don't screw this up? Roughly 30 % of my portfolio is in my company stock mainly from RSUs and the rest of it is in market ETFs like VOO and UQQ. Broad market ETFs I like to keep it as simple as possible. The second question is how do I turn some of this portfolio into passive income? I can already imagine Paula thinking this has to be something around real estate for passive income but I don't like real estate.

48:09I don't think I will enjoy dealing with tenants, property issues on and so forth as much hands-off as possible as the approach I like to take. Recently I came across something called as covered call ETFs for passive income and I don't think I've ever heard you discuss that in your podcast before. QQQI for example seems like an extremely good covered call ETFs which give you a monthly income. I was wondering what's your guidance on this should I invest some part of my network into QQQI so that I can make passive income if I want to stay within equity if not what are the other alternatives I need to look at.

48:48Once again thank you for everything you do. I really appreciate it. Thank you. Chandan, first of all, congratulations to you on everything that you've built, on how hard you've worked and how far you've come, how much you've done. You've created incredible success. And so you deserve all the congratulations in the world for what you've been able to build. I like that you said that you're scared of screwing it up because it reminds me of something Morgan Housel wrote about, and I'm paraphrasing him. He wrote about how you have to be optimistic to make money and paranoid to keep it. And what he means by that is that, and I think your life is really an example of this, you have to be an optimist to be able to achieve what you've achieved, to start from a poor family in India and come to the United States and work at a fang company and build a portfolio of$2 million, not including your primary residence, that requires an enormous amount of optimism.

50:03Because if you were pessimistic about the future, then you would never even begin. Again, optimism is at the root, and you might not have even thought of it like that. You might not have even thought of it as optimism, but optimism has to be necessarily at the root of your set of assumptions in order to be able to do that. Fundamentally, investing, all investing, is an optimistic act because investing inherently is the act of assuming that the future is going to be better than the present. So you must be optimistic in order to make money. And you also have to be paranoid in order to keep it. Because once you have money, it is so easy to lose it.

50:47To scams, to thieves, to swindlers, to bad advice, to handshake deals. It is so easy to lose it. The way I've seen people screw it up fast is when they begin to think that beyond the wealth they've built so far, there is a different strategy that applies. And they think they have to get fancy, I guess, to put it the way my mom would put it. You don't need to get fancy, Joe. So people don't lose generational wealth by continuing to invest in exchange-traded funds, broadly based exchange-traded funds, like he is largely now. They mess it up by thinking, now I have to go into venture capital. Now I have to go into private equity.

51:34Now I have to go into startups. Now I loan it to my well-meaning friends who are, quote, really trustworthy, and they have a new restaurant idea, and I can help them out. I think that's how people mess it up. I would say just fundamentally from the beginning, continuing to do what you've done, A, you know it, and B, it's a diversified approach besides the RSUs, which we can get to in a second. That's not diversified. And I'm glad that you recognize that. But by staying with the diversified ETF-based approach, you're not going to mess it up because you are investing in the biggest companies in the world.

52:15You're investing in the bedrock that employs people, that builds things, that is the economic engine that fuels the world. So by investing in that, it will fluctuate, but you will still be there as long as we have a civilization because you're investing in the bedrock of that civilization. What I like about the exchange traded fund piece as well is that it's self-cleaning about the fact that you don't have to pick which, what's going to continue to lead civilization. I don't know. Polly, you don't know. China doesn't know. So what do you do? Well, you go with the proof and these exchange traded funds only put companies in the exchange traded fund if they meet the criteria.

53:04And when they no longer meet the criteria, they take them out. You don't have to do anything. So you don't have to bet which companies are going to win. And just to clarify for everyone, specifically, Joe, you're talking about broad market ETFs, not some of it, because there are some ETFs out there that are like very niche and too fancy. So you're talking about extremely broad market ETFs. And that's a great point, Paula, because even in the ETF market, marketers are starting to get into that market because they know it's an exchange trade of fun. That's a buzzword. It's a hot word. So I'm going to create these niche, weird, could lose money very quickly exchange trade.

53:44But there are now. They're inverse ETFs. Jason Zweig in the Wall Street Journal was talking about there are now ETFs that are doubling and tripling and 10xing single stocks. So you're buying an exchange traded fund, which we all think is, oh, diversified, broad based. No, it is 10xing the risk in a single stock. So it will go up faster and down faster. And Jason wrote in the Wall Street Journal just a couple of weeks ago that, you know, largely these were made for professionals, but even the professionals that made them know the vast majority of people buying these things are amateurs who are looking at it more like a roulette wheel than as an investment.

54:31Right. There's a meme stock ETF now. It's called meme ETF. It's expense ratio is 69 basis points. Of course. Is the ticker symbol M-E-M-E? Yes, it is. It's Emmy. That's so awesome. See, I love that. I hate everything about that except the ticker symbol. Right. Yeah. Such a good time. Yeah. So I just want to clarify for the whole audience, not all ETFs are good. In fact, I would say the vast majority of what's there on the ETF market right now is actually pretty terrible. But the vast majority of where the money is. So if you go by names, most of it's junk. If you go by the assets under management, the vast, vast majority is in what we're talking about, broad-based.

55:16Broad-based, yeah, exactly. So that would be the S &P 500. That would be the total stock market index. That would be S &P, large cap, mid cap, small cap. That would be the QQQ, which is the NASDAQ exchange that you're buying. So those broad-based exchanges. All right, we want to talk about RSUs first. Yeah, let's talk RSUs. Because, Chanda, you already recognize that having so much money in your company could be a problem. The answer is 100%. Now, it's a problem and it's also a solution. So the reason your wealth grew as quickly as it did, you recognize in your call that being concentrated in that stock got you where you want to go.

56:02So whenever a financial person tells you to diversify, it's not going to make you more wealthy. This goes back to Brandon, Paula. People always say, well, I heard I should diversify and I'm not getting rich. Diversification doesn't make you rich. Diversification makes sure you don't get poor. And those are two different things. If you want to get wealthy, reduce your diversification, get just a few positions, increase the standard deviation in your portfolio and don't be wrong. And if you do those things well, so what am I saying? Bet more on a few good bets and win. And there you go. So buying an individual company is going to get there.

56:44So I think the first thing is to recognize that right now you're feeling, I don't want to mess this up. And if that is a bigger goal than growing quickly, which it sounds like it 100 % is, then taking some of the money out of the RSUs and diversifying, it makes a ton of sense to me. Joe, to quickly summarize what you just said, concentration is playing offense. Diversification is playing defense. Absolutely. And that's why, by the way, certified financial planners will stress diversification. There's actually two reasons. What about you and what about them? The first one is, is for you, it makes a lot of sense.

57:29John Un said, I don't want to screw this up. You know, a great way to not screw it up? Broad-based ETFs versus single stock. You will not, you will not screw it up. And then the second thing that has to do with them, you're less likely to fire them if that stock goes down and they told you to keep it. Which if the broad-based economy goes down and the exchange-traded fund goes down, the advisor just points to the economy and goes, hey, everybody's doing it. It wasn't me. It's both. I do feel like there's a little bit of cover your butt there, though, Paula, where advisors are very reticent to tell you, no, go ahead and keep a concentrated position because you want to win.

58:07But here's what the downside is going to be. So with the RSUs, I think you set up a strategy that's dollar cost averaging, but you're dollar cost averaging out versus dollar cost averaging in. What do I mean by that? If you take a look at insider trading reports, you can find these at CNBC.com as an example. If you look at any stock, a lot of people out there going, Joe, you said insider trading. Isn't that illegal? No, it's not. Insider traders are allowed to sell their stock and buy their stock, but they have to flag it. They have to tell people. And there are times when they're not allowed to trade their stock.

58:45As an example, when there's material information coming out about the company, like a quarterly earnings report, there's a time frame before and after when they're not allowed to do anything. You will see, though, when you look at insider trades, when a good financial plan is in place, because Paula, you will see they sell 100 ,000 shares at the beginning of every quarter on the same day. And this is an executive, an insider, who is divesting themselves of a position. And you can usually tell there's a financial planner behind that because they're not betting. they're just saying this stock might go up this stock might go down i want to make sure i'm around if it goes up we have plenty of money that's already diversified but let's get safer but over time so i'm going to just sell a hundred thousand shares or you know whatever the number is over x amount of time and then you're not betting on a specific date and you're getting where you need to go and the other thing too is you're spreading that tax bill out a little bit we're near the end of the year.

59:50We're in the fourth quarter. You're going to take some tax hit today for selling some RSUs and you're going to take some of it next year. So I like that as a diversification strategy. We don't have to do it all right now, but set up a plan. The hardest part of that, by the way, sticking with that plan. So many times we would be in the middle of this. I would be with an executive where we set one of these plans up, Paula, and the executive would go, oh man, we got this new line coming out. I was in Detroit. We got this new car coming. It's going to be Well, we have to forego all that. We had a plan.

1:00:23We have it in place. Let's not overthink it. If the line goes great, you still have X amount of your car company stock. You're still in it to some degree. Most financial planners, John Don will say between five and 10 % of your overall portfolio can be in a single concentrated stock like your employer. I think you said you have a third right now. So you may want to get that down to five or 10 % along those guidelines. It's up to you, though. How concentrated do you want to be? What I have done with my own portfolio, because I have one individual stock that's done very well, and so it has turned into a significant portion of my investable assets.

1:01:07And the way that I have thought through what to do next is my mental framing is, what is the purpose of this money? Is this money earmarked for retirement or is this money essentially play money that I'm just investing for the sake of seeing how far it grows? The mental framework that I have come up with is a goals-based approach in which I know which buckets of money are for which goals. And then I also have a bucket that's sort of just for fun. and inside of this just for fun bucket, if something becomes a runaway winner and I believe in it and I believe in its future, I'll continue to let it ride.

1:01:50And so what that means is that that runaway winner becomes overall an overwhelming portion of my portfolio. But because the goal of that particular bucket is just for fun, that's okay. Well, that's why I like starting with the financial plan, right? If my goals don't include any of this money, then why not? Right. then why wouldn't I? Now, you could choose to change the goal now that has become a runaway winner, make the goals bigger. And the second you do that, then there's your diversification strategy for some of that money. Because if your goals depend on it, then certainly you're not going to let it run.

1:02:26Our mutual friend, Grant Sabatier, talks about how much he invested in Amazon in the early days. And if he would have taken CFP's advice to diversify, which is what everyone will tell you to do, he would never have built the wealth as quickly as he did by not having just Amazon in his portfolio. An interesting discussion, I think, there. Because as you get into a different place and the goals change, then certainly you relook at the portfolio and why am I doing what I'm doing? So coming up with the RSU divestiture, I think Shandad's going to be based on all that. Now, the second question you asked is about options.

1:03:03So we should start off with what is an option in the first place? And an option is either an option to buy or an option to sell. So Paula, let's say that you have this concentrated position of this stock. We'll say it's Amazon because I just said that about our friend Grant, who has talked about is Amazon openly. Grant wants to divest some of his Amazon, but instead of selling it, what if he sells it today, Paul, and it goes up tomorrow? He could instead place an option to sell, meaning he's going to buy the right to sell it at this price. And if it goes up, he will let the option expire. Now he has to pay for that option.

1:03:47He has to pay some money. So it's like an insurance policy. An option in a lot of ways is insurance policy if you use it conservatively. If it goes up, he's going to let it expire and he's just going to sell it for the higher price later on. If it goes down, guess what? He has this option to sell it at the price he was at when he bought the option. So now he can sell it there. So options, instead of buying the underlying security, an option is an option over a set specific contractual amount of time to control stock and decide, am I going to use this option later? I can sell it later if I do an option to sell, or if I do an option to buy, I can buy it later.

1:04:29Shonda, what you're talking about is buying something called covered calls. Holy cow. This is going to be a lot of one explanation after another, guys. So hang in there because you're going to get it. Because each of these words is easily explainable. Some of them are easy. Call is a tough word, but covered is easy. So we'll do that one. This is a strategy that can work for income. So he said, how do I increase income? I heard about this strategy, buying covered calls. And I think about QQQ. We're going to set QQQ to the side for a second. What he wants to buy covered calls in. Let's just talk about how covered calls work.

1:05:05This is an active strategy, meaning you're going to have to stay on top of it. So it can be a little bit more of a pain than most investors in the Ford Anything audience may want. Generally, we talk about passive investing and ride a broad-based index. I've done this myself before though. Like any strategy, it has a big Achilles heel. We talked about this earlier today. You know you got a good strategy when you know what the Achilles heel is and you still go, okay, this works for me and I understand the downside. So we'll also talk about the downside. Options, by the way, some people might go, oh, I heard about options.

1:05:42They're really risky. 100 % they can be risky. You can be a huge gambler using options. imagine Paula I can buy stock in let's just stick with Amazon I can buy stock in Amazon or I could just buy the option to buy it at a price in the future hoping it gets to that price let's say it's trading it I'm going to use just baloney numbers guys let's say a stock's trading at$100 now I think it's going to go to 110 instead of betting it will with all the money it takes to buy those shares. I just buy the option to buy it at 110. Fantastic. And I buy the option. I get it for pennies on the dollar because it's got to go up 10 % before this option is even viable.

1:06:29So fantastic. I get to control these shares and for a lot less money than I would have had to spend to buy the stock. I get to control the stock with less money. It can 100 % be gambling. In this option strategy, though, buying covered calls, this is not gambler at all. We are not gambling. In options, there are two roles. There's the gambler, the person going, you know what? I bet, Paula, I bet Amazon's going to go up, so I think I'm just going to buy an option. And then there's the person on the other side that I'll call the banker. And I like calling them the banker because bankers, as you know, are not risk takers, right?

1:07:09Right. And the cool thing about bankers is bankers don't make a ton of money on the deals they do. The risk taker makes a ton of money on the deal they do. The banker doesn't make a lot of money on the deal, but the banker makes money on every deal. The banker always makes sure they make some money on the deal. And in this case, buying covered calls, you are the banker. In this strategy, as the banker, we are selling covered calls. So we need to know what the hell these words mean. Covered means we own the underlying security that we're selling. So covered means I've got it covered. I'm sitting on these things.

1:07:51So Shonda talked about doing this with QQQ. So the first thing is I buy a bunch of QQQ. As opposed to a naked option. And naked option, naked option means I don't own any of it. Right. And I'm giving, now that is, imagine what a strategy. That is. Yeah, exactly. I am selling you the option to control shares that I don't own. How the heck does that work? I'm just going to go off on this tangent for just a second on naked. I borrow them from my broker. I then give you the right to control them. And then if it goes sideways, oh crap, I got to go buy those shares from my broker that you bought away from me.

1:08:30I could lose infinite amounts of money on naked calls. Right. Well, with naked shorts, you don't even borrow it. You enter into a contract, but without actually borrowing it first. So you don't even have it to give. You don't even have it to give. No. When that closes, you got to find the shares. Yeah. For the contract. So that's why it's infinite risk. Right. It's incredibly risky. This one, number one, I own the share. So in this case. So it's covered. Yeah. Yeah. Covered is the opposite of naked. Yes. So covered means I own it and I'm going to cover, I'm going to cover this. Think about the options like a blanket.

1:09:07I'm putting it on top of this big body of, of this position that I own. So it's covered. I'm fine. Again, a banker move, right? I own these shares. What I'm going to do is I'm going to give you the ability, the option to control them for a while. I'm going to sell the option that you get to control my shares. And guess what happens when I give away that to you? I don't give it. I sell it to you. I'm going to sell you the option to control the shares that I own for a few months. So a call is an option to buy. A put is an option to sell. In this case, I'm selling covered calls. So I am selling the option for you to control shares that I own, and you have the right to buy those.

1:09:56So the call is an option to buy. I'm selling the right for you to buy them. So I'm saying, Hey, Paula, you want to buy these shares for me in the future for X price? The risk taker says, yeah, sure. Depending on what the price is and how much that option costs. So if you're with me so far, that's what the strategy is. Now, how does this actually work? So let's put this in play. To put it in play, we have to know two more things. Oh God, there's more, but they're really easy. There are in the money calls and there are out of the money calls. In the money calls means let's say the stock is trading at a hundred bucks again, and you want the option to buy them for a hundred.

1:10:37So Paula, what you're saying to me is, Hey, I want to sit on this for another three months, but I'd love to control your shares instead of paying for them right now. If the price goes up further, heck, I'd love to buy them for a hundred. I mean, how great would that be? I know I could buy it for a hundred, but I, instead I'm going to pay you a little money to make sure the stock might go down. It might go up. So I'm going to pay a fraction of the money to control your shares for a few months. And maybe then I'll buy them for a hundred. Now, if it goes down, Paula, you only lost a little bit of money versus you would have lost a bunch more money.

1:11:10Had you purchased them in full, if it goes up, Well, you paid a little extra by the premium for the right to sit on that for maybe three or four months or maybe a year or whatever the amount of time is in the contract. So because you were able to do that, you paid a little more, but you still had the ability to make the decision later. So for the risk taker, there's a lot less money at stake. For me, for an option trader, I frankly, maybe I wanted to get rid of the shares. And for me to lock in the fact that I don't need the money now, but I'm going to get a little extra money on top of the$100 a share for the in the money call.

1:11:50I'm going to get a little extra money from you for controlling the shares. And I'm guaranteed that you're going to buy them for$100 a share. Fantastic. That's great. I might do that. What we really like for this strategy, though, is not that. we like what are called out of the money calls because out of the money calls means I'm going to sell them for a price that doesn't exist yet. It's trading at a hundred. I'm going to give you the right to buy them for 110, let's say January of next year. So if it goes at or above 110, now you're going to buy my shares for$110. Now, why would a risk taker do that?

1:12:31You know why? Because it costs them a fraction. And if they think it's going to shoot the moon, they think there's something that's going to happen. The stock's going to go up big time in the next few months. They can spend very little money for this huge move to control my shares versus imagine what they'd have to pay for an in the money call. Right. And in the money call, you got to pay a lot. Why the hell am I going to give you my shares for a price when I could just wait? Why would I do that? You got to give me a lot of money to do that. But to control my shares for a price that's better than what they're at now.

1:13:02You kidding me? You could do that for a fraction. So I'm going to sell out of the money calls to you. So I'm selling covered calls that are at a price that's not there. And a price tag that I've always liked in the past is 8 % to 10 % above what the price is now. So let's walk this through. I have a stock that's trading at$100. I sell a covered call to you. One call equals 100 shares, by the way. I sell a covered call to you for X amount of money for a little bit of money right now. By the way, I get to keep that money, whether it works out or not, I get to keep that money. So you pay for the right as the risk taker.

1:13:45Me as the banker, I get the cha-ching money in the bank. I also know that one of three things are going to happen. The price stays the same. This is a beautiful world for a covered call seller. because if the price stays the same, Paula, then you let the option expire because you don't have the right to buy. Why are you going to buy my shares for 110 when it's still trading at 100? Not going to do that. You'll just go buy them for 100. So you let the option expire. I get to keep that money. The stock goes down in value. I still own all my shares. And guess what? I still got to keep that money, which offsets the amount the stock went down.

1:14:25So now even though the stock went down, I made a little bit of money where if I would have just held them going down, I would have lost a little bit more money than that. So I lose less money when the stock goes down. When the stock goes up, and this is the Achilles heel, if the stock goes up 15%, 20%, it goes to 115, goes to 120, goes to whatever. I got to sell it for 110 and I didn't keep all that. But think about what happened. I got 10 % and I said January. Between now and January, I got to look at my crystal ball and go, you know what, Paula, I'll play this game. I'm going to make 10 % in the next three months and I get to keep 10%.

1:15:04You get the rest of it, but I still get to keep 10 % plus the premium that you paid me. So I'm not keeping it all. I got to split with you. And the other bad thing, by the way, I got to sell the shares. The shares go to you. You're going to exercise that contract in a second. If it goes up to 115, you can buy it for 110. You're going to do that. And by the way, what does Paula usually do in this case is the risk taker. She automatically then she buys them from me. She sells them right away. She captures the five bucks. Boom. Cost her a fraction of the money to capture the five bucks. Really the sweet spot on this is if it goes up 5 % or 6 % or 7%, right?

1:15:41Because now I actually made money and I also got your money as the risk taker. So covered calls, it's an active strategy. you have to look at the prices of calls and they're, they're published everywhere. It's easy to find out what the prices are. You will see the line by the way, between covered calls that just don't make sense because you're not going to make any money because the risk takers are going, yeah, I'm not taking that risk. Forget it. So it ends up being a waste of time for everybody versus where the risk takers are going 8 % and they've got an earnings report coming out in six weeks and they're thinking about this new drug.

1:16:25Okay. Maybe. All right. Maybe you can see that line where people are betting Paula, where the risk takers are betting. And if you're willing as a banker to go, yeah, okay, I will take that. And I'm happy with my shares being sold away. Then I'm good. So my first question then, Shondon, hopefully you understood that is, do you need the income? Because if you need the income, then maybe the juice is worth the squeeze. I do this only from time to time because 85 % of the time I look at the charts and the juice is not worth the squeeze. I'm like, why am I going to waste my time on this? It is so not worth it.

1:17:03But for people that want a consistent income stream and they're willing to sell some of these big positions away, then sure. Now, if there were a way to do this with your RSUs, where you turn them into just stock that you own and they're now unrestricted stock that you own and you're happy selling those away in the future. But until then, you're going to crank and make money on them, right? As a covered call strategy, maybe that's a strategy to sell away the RSUs. So for QQQ, you would have to sell me on that. For the NASDAQ, why am I going to buy the NASDAQ and earn income if I don't need income today?

1:17:41I don't understand why I would do that. And with the RSUs, when they become unrestricted, maybe that's a part of your strategy of divesting some of these. That makes sense since he wants to get rid of that stock anyway. He wants to start shedding that stock anyway. Sure. And then he could even price it where he's going to make more money over the short term, right? I used 8 to 10 because generally I want to keep the stock. Right. But if I'm okay getting rid of the stock, what if I placed it at five, where I eke out another 5 % on top of it, and I divest, which is what I wanted to do anyway, and I get to keep the premium that you paid to ride those shares.

1:18:16Right. So I get to keep the risk taker's money, I get a 5 % up, and I got rid of the stock. It's all a win. The Achilles heel becomes the win. While option strategies generally are considered risky, this is known, Shandan, far and wide, and for everybody else in our community, it's known far and wide as a very not risky strategy. When people say, well, I was going to do this covered call strategy, but then I heard options are risky. Yes, this is not risky. You are the banker here. This is the banker strategy. I'm not going to make a ton of money. I cap my earnings. I mean, the big problem with this strategy, Paula, is you cap your upside.

1:18:59You're going to lose out on some upside. At some point, if you keep doing this, you're going to lose some upside. That thing's going to go through the roof and you're going to go, I sold my shares. And then the question has to be, how do I feel about that? If I feel good about that because that was my strategy all along, then great. If I feel horrible about that, then why the hell was I doing it in the first place? Why am I doing this? I think that sounds like an incredible strategy for the RSUs, since he's over allocated to RSUs and needs to shed that anyway. He's got to look at his contract and find out how to make them unrestricted stock.

1:19:34But if he can convert them, and for some employers, there's ways to convert them. If he can convert those to unrestricted stock, then this might work. That was incredible, Joe. Thank you for that. That was absolutely incredible. I think this episode is going to go down in Afford Anything Hall of Fame as one of our best. I really do. All three questions. We saw the questions ahead of time. Yeah. And when we got on, we're like, oh my goodness. This is going to be one of the best episodes. It was certainly one of the best Q &As. I have really nothing to add to this other than the broader question, Chandan, of the premise of all of this was you asked how to create passive income.

1:20:15my question back to you is, do you need to create passive income? And I ask that because what you stated in your voicemail was a desire to protect the net worth that you have built. What you did not state was any desire to necessarily stop working. You have a successful career. You work for one of the FANG companies. You're young. It sounds as though, and you didn't directly state this, so maybe I'm misinterpreting it, but my impression is that you're eager to continue working and that you're eager to continue building your career. You just want to make sure that you preserve your net worth along the way.

1:20:55And assuming that you're eager to continue building your career, you don't necessarily need to build passive income. You could certainly focus on your career, keep your money in broad market ETFs or broad market index funds, and essentially have a set it and forget it plan with your investments while you keep your focus on your career. That's a incredibly viable, wonderfully viable path forward. So, you know, you mentioned that you're not interested in real estate because of the level of work that it would require, which is a great thing to know about yourself. So don't go into real estate, please.

1:21:37And I say this to everyone who's listening. if you do not want to go into real estate, then don't do it. Rule number one is you have to want to do it. If you don't want to do it, don't do it. Don't do it just because you think it seems like everybody else is. FOMO is a terrible reason to do it. Do it only if you want to. Do it only if you think that you'll enjoy it. Do it only if at a minimum you have a curiosity about it that you would like to explore or pursue. Those are great reasons to do it. But if you know that you're not going to enjoy it, if it's going to be like pulling teeth, don't do it.

1:22:10Stay out. The same is true when it comes to any other method of developing passive income. Unless you are retiring from a career or semi-retiring from a career, you don't necessarily need passive income. If you're focusing on your career, you can just let your assets grow, which is essentially another way of saying you don't have to take an income-oriented strategy with your investing. You can simply stash money away into broad market index funds or ETFs and let those ride while you focus on your core skillset, your core career. This goes back to Brandon's question too around asset placement. Not only do bonds throw off more taxes or income strategies, throw off more taxes, and if these are all in tax shelters like a 401k, Shandana or other places, but of course the RSUs aren't, those are going to be non-qualified.

1:23:10Those are going to be out and exposed to taxation. We don't want to create taxation that just ends up being friction. Capital gains gives you the ability for not just more upside, but also for less friction as well. But I think that was an Epic answer, Joe. Thank you for that walkthrough on covered calls. I love talking covered calls. As I mentioned, I've used them. I use them sometimes, not often. I generally play with covered calls and it's usually with a stock I was considering selling anyway. Instead of selling it at the current price, I'm like, you know what? Let's go out in the covered call market.

1:23:48But I've also used it when I was an advisor. We would use it as an income stream sometimes for retired individuals or people looking for income. I feel like I should get into it. I mean, I've just been sitting here selling my stocks like a chump. Yeah. Why just sell? Right. Why sell? But there is the downside. You know, I have had times when I decided to do a cover call instead of sell because I thought, hey, I'm going to squeeze out a little more money and the stock goes down. And if I would have just sold the damn thing. Right. So you have to look through the downside and go, am I okay with a, am I okay with selling it away if it gets called or if it goes down and it doesn't get sold away?

1:24:31And I really wanted to sell it. Am I okay with that? I got to make sure my downside that I'm fine with that before I enter into this agreement. Right. Well, thank you, Joe, again, for the explainer and thank you, Shantan, for the question. And congratulations again for everything that you've built. that is our show for today, Joe. We have done it again. Wow. That was epic. Joe, where can people find you if they'd like to learn even more about options? Well, how about the option of instead of fire, making work more fun and more enjoyable for you, for the people around you, for everybody, and whether you're somebody that works in an HR department, or even heck for people who aren't working, who just want to make things more joyful for the people around them.

1:25:19We have a great discussion with Richard Fain. And if you don't know that name, Richard was the longtime chairman and CEO of Royal Caribbean Cruise Lines and talks about wow and about bringing wow to everything that you do. And it's a fascinating conversation with a guy who thinks a lot about hospitality. So we're getting close to holiday soiree time, Paula, you know, inviting your friends over, maybe put a little wow on that or at work, wowing your customer. So Richard Fain and thinking about making life a little more fun. And that conversation is at the Stacking Benjamin show where finer podcasts like this one are found.

1:26:01Oh, that's excellent. Well, thank you, Joe. And thanks to all of you for being afforders. If you got value out of today's episode, please do four things. First, download one of our freebies So I mentioned earlier, we have this free asset location cheat sheet, affordanything.com slash asset location. We also, yesterday, we put out a FIRE guide. So affordanything.com slash FIRE. Go there and download a guide to FIRE. It's a walkthrough of the core concepts, the core fundamentals around IIIFIRE. So affordanything.com slash F-I-I-R-E. Totally free. Share it with your friends. If you want to get people on board with the notion of good financial health, the notion of FIRE, or the notion of generally like solid personal finance practices, it's a great resource.

1:27:02affordanything.com slash F-I-I-R-E. That's number one. Number two, share this with all your friends, family, neighbors, coworkers, fellow options traders. People you buy garbage bags from. The person who sells you eye drops. This will go all day, everybody. Share it with all of them and more because that is the most important way that you spread the message of FIRE. Number three, open up your favorite podcast playing app. Please leave us up to a five-star review and write some words about what you enjoy about the show. We really appreciate it. Thanks to the person who did that about the Karsten episode.

1:27:41Thank you to that person. Karsten is wonderful. We agree. So please, if you haven't done so yet, leave us a review, or if you have done so, update your review and tell us what you enjoy. Thank you again. Number four, hang out with our community, affordanything.com slash community. Thanks again for tuning in. I'm Paula Pant. I'm Joe Solzhi. And we'll meet you in the next episode.

From the publisher

#651: Many who reach CoastFI find themselves in a strange in-between: financially independent enough to stop saving, but not ready to fully retire. When you’re living off a taxable brokerage for decades, does the “never hold bonds in taxable” rule still apply?

This episode explores how traditional asset location advice meets real-life spending. We unpack how to balance growth, taxes, and stability when your taxable account becomes your paycheck. Then we shift to two more listener dilemmas: helping a parent retire through shared home ownership, and using covered-call strategies to earn income from a stock-heavy portfolio.

Listener Questions in This Episode

Brandon (1:28): “I’m CoastFI and will withdraw from my taxable account for the next 20 years. Should I hold bonds in taxable, or keep it all in stocks?”

Brandon’s retirement accounts can grow untouched, but his taxable brokerage will fund two decades of living expenses. The classic rule says avoid bonds in taxable, yet Paula explains why that advice isn’t universal. When your taxable account funds your life, it needs to act as a complete portfolio. We discuss how to balance risk, prioritize liquidity, and plan your glidepath into CoastFI life.

Andrew (22:07): “My spouse and I co-own a home with my mother-in-law. How can we help her retire without creating family tension?”

We explore fair, flexible ways to support an aging parent while keeping relationships healthy. Paula explains how to design a win-win deal and why seller financing can help balance cash flow and peace of mind.

Chandan (49:16): “Can covered-call ETFs help me generate income from my stock portfolio and RSUs?”

We explain how covered calls work, what “covered” really means, and the tradeoff between steady income and limited upside. For those with concentrated stock positions, Paula shares when covered calls make sense—and when simpler plans win.

Key Takeaways

The “no bonds in taxable” rule isn’t universal. When you’re drawing solely from taxable accounts for many years, that account needs to function as its own mini-portfolio, including bonds or cash for stability.

Asset location follows purpose, not dogma. Tax efficiency matters, but liquidity and risk management take priority when the account funds your life.

Think in terms of buckets. Your retirement accounts can stay growth-oriented while your taxable account carries the ballast for spending.

Plan ahead for rebalancing. When taxable balances decline, know how and when to refill your bond/cash sleeve from other sources to keep your glidepath intact.

The transition to CoastFI is a mental shift. You’re no longer optimizing for maximum returns, you’re designing for peace of mind and steady withdrawals.

Chapters

Note: Timestamps are approximate and may differ across listening platforms due to dynamically inserted ads.

(01:28) Brandon’s CoastFI question: bonds in taxable when withdrawals start now

(03:56) Why “no bonds in taxable” is a rule of thumb, not a law

(12:42) How to treat taxable as a stand-alone portfolio

(18:31) Balancing tax efficiency with cash-flow reality

(25:26) Helping a parent retire through shared property ownership

(01:05:40) Options: Buying or selling with Options

(01:07:07) Covered calls explained simply, income with a ceiling

Resources & Links

Asset Location Cheat Sheet (free): affordanything.com/assetlocation

Guide to Double-I FIRE (free): affordanything.com/fiire

Share this episode with a friend, colleagues, your the person you buy garbage bags from: https://affordanything.com/episode651
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