I’m Retiring at Age 34 and a Half!

0:00Hey, Joe, do you know anybody who retired at the age of 34? I, no. You're about to. One of our callers is 31, has a goal of retiring in three and a half years. So by the time he is 34 and a half. And a half. I like the half. And a half. You know, because in the world of financial planning, 59 and a half is a significant age. 70 and a half for RMDs is the significant age. And 34 and a half happens to be a significant age. Welcome to the Afford Anything podcast, the show that understands you can afford anything, including retiring at 34 and a half, but you can't afford everything. Every choice that you make is a trade-off.

0:40That applies not just to your money, but to your time, your focus, your energy, your attention. So what matters most and how do you make decisions accordingly? Answering these two questions is what this podcast is all about. My name is Paula Pant. I trained in economic reporting at Columbia University. I am the host of this show, and my buddy, former financial planner, Joe Saul Seahide, joins me every other episode to answer questions that come from you, the community. How's it going, Joe? It is going great, as people can hear. My voice is a little bit rusty. I'm a little bit sick, but I'm ready to go.

1:18We got some great questions. We have incredible questions. And Joe, our first question comes from an anonymous caller who has doubled her income and is now trying to grapple with how to deal with a much higher tax bracket. Then we're going to talk to a renter who is wondering how to make the most of the fact that she's paying so much in rent. And finally, we're going to close out with a 31-year-old caller who is trying to retire in three and a half years. We're going to start by giving our anonymous caller a nickname. Joe, what would you like to name her? You know, back on a topic that I like a lot, which is recent television.

1:57I know, Paula, you and I are the same there. You're all about pop culture and about watching the latest thing. For those of you new to the podcast, I am absolutely not. She's not. She's not at all. And I'm going to say a few words that Paula won't know anything about. So there was this show, Paula, called Downton Abbey, which was pretty - What's a show? That's right. What's a television? I've seen Downton Abbey, actually. Yeah, Downton Abbey was great. And there's a newish version that's on Max called The Gilded Age. And The Gilded Age is about the robber barons and about the people and the making of New York City.

2:33So from Jay Gould to Mrs. Astor, the Society of New York City. And one of my favorite characters on this show is the spouse of a man who runs a big steel company. So he's kind of the Andrew Carnegie of the time. And her name is Bertha Russell, who is the spouse of kind of an Andrew Carnegie character. And she is a socialite making her way in the world. And what I like about this for this person is that this anonymous caller is doing the same thing. She's making her way in the world, Paula. She's doing some great things, much like Bertha Russell on The Gilded Age. Highly recommend the show, by the way.

3:20All right. Then our first caller, who is anonymous, will be named Bertha. Hello, Paula and Joe. I am an anonymous caller who called in a couple years ago when I was experiencing cash flow issues, having recently split with my partner. Your responses were very helpful to me and I am happy to report that I'll be starting a new job in the coming weeks and my income will go from 140 ,000 a year to over 290 ,000 a year, including RSUs and bonus payments. That's incredible. Congratulations. I'm trying to decide how to structure my investments going forward considering this significant pay increase. I am 47 years old, filing single.

4:01I have the loose goal of retiring by age 55, desiring approximately$80 ,000 in annual retirement income and a paid off primary residence. Here's the structure of my current investments. I've got $220 ,000 in a Roth IRA,$20 ,000 in a traditional IRA from a 401k rollover years ago, over$520 ,000 in a traditional 401k from my current soon to be previous employer, approximately$140 ,000 in a brokerage account where I have about 75 % of those funds in laddered T-bills and approximately$500 ,000 in combined equity between my existing home and one rental property. And last but not least, I've got$90 ,000 in cash savings and high yield accounts and CDs.

4:48I'm considering making these adjustments in 2024 given my job change and tax implications of this higher salary. I'd love your thoughts on these changes. First, I will roll my previous 401k into my new employer's 401k. I am wondering if despite being in a high tax bracket now and in the immediate future, should I make partial or all Roth 401k contributions into this new account? I will also have an employer match. Second, to maintain the option to contribute to a Roth IRA, I am thinking to convert the$20 ,000 traditional IRA in 2024 to a Roth IRA, my taxable income should be less this year considering the partial year in the lower income position.

5:33So my thoughts are to convert this before I have a full year at my new income with bonus payouts, et cetera. I'm also reading about the pro rata rule. And if I convert the full amount of this existing IRA, it will clear the way for me to make backdoor Roth contributions in the future. I'd love to get your thoughts on these adjustments and for you to weigh in on some of my questions. I prefer to be a DIY investor, but also wondering if I should involve a financial investor in some of these decisions. You two are the best and I never miss an episode. Bertha, first. Wow. Congratulations. I couldn't even get through your question without having to play a round of applause.

6:14That is incredible. I am so happy for you. I am so proud of you. What a huge success. That's incredibly exciting news. Wow. This makes my day. Joe, this is why we do what we do, right? Absolutely. To hear success stories like this. Yes. That's great. So to your questions, first of all, what are the offerings in your new employer's 401k? are they good offerings? Do you have a variety of choices? Are the expense ratios reasonable? I don't even think any of that matters, Paula. Yeah. Well, the reason is, is your 401k provider can change that at any time. So even if it's good right now, if they decide to go cheap for some reason, or somebody decides they got a buddy who sells 401k plans, they make some decision that you don't like, you're stuck with it.

7:08So I would never roll it. Even if all of the answers to your questions are great, which is the criteria most people use, I still wouldn't roll it to the current 401k. You'd roll it to a separate account. In a place like Schwab or Fidelity or Vanguard, you have every choice imaginable. And so your 401k is going to have some stuff it's really good at and some stuff it's not good at. And those are going to change based on whatever the committee that runs the 401k decides to do with it over time. And as that changes, you can then change your IRA allocation to match that. So if your 401k doesn't have a great international fund, your IRA allocation could be overexposed to international because you'll have none inside of your 401k.

7:54Well, okay. Hold on. I feel like we're talking about two different things right now. Number one, there's the question of where should she roll over her 401k? But number two, there's also the question of if you have a condition in which one particular type of account doesn't give you a good selection of assets, how do you then play the asset location game across a variety of different accounts? In your example, if you have a 401k that doesn't have access to good funds within a particular asset class, you can offset that by locating that asset class inside of your other different type of account.

8:32Right. But that is distinct from the primary question, which is, should she roll over her 401k to her new employers? But it's not. The reason it's not is because if the 401k is where you're restricted, Paula, if you're restricted based on whatever the 401k committee decides to do, then you need an unrestricted account where you can kind of pour over these asset classes to mitigate the risk that you might not be able to get that asset class inside the 401k the way that you would want it to be. I suppose all of this does become moot if she simply rolls over the 401k to a location that is not controlled by her employer, because then she would have control over that location.

9:18So for example, if she rolled it over to a rollover 401k account in one of the big three discount brokerages, Vanguard, Schwab, Fidelity, then it all becomes moot. Well, not a hundred percent because remember when she's still adding money in the future, if she doesn't have a great asset class, if there's an asset class that she needs, if there's something she needs that she can't get in her 401k, it still is going to be material how she then allocates that IRA and sets that up to offset the fact that she can't get exposure to this asset class that she really wants. Right. But those are with new contributions inside of her new employer's 401k, and she'd be offsetting that with assets in her rollover 401k as well as in her IRA.

10:05Yes. I suspect that the reason that she's thinking about rolling over the 401k to exist inside of the new employer's plan is so that she can manage one dashboard. Absolutely. That's typically the motivation. A hundred percent. And so there's a distinction between the mathematical answer and the behavioral answer, because behaviorally, it is more convenient to manage out of one dashboard. But the drawback to that, of course, is that fund selection can be curtailed. And when she leaves this position at some point, she already has this master IRA. The average person now changes jobs more than seven times during their career, which is why I like having this master IRA where I can have complete flexibility at any time.

10:49And then I'll always contribute to my current employer. And then when I leave that employer, it goes over to the master IRA, which is kind of my home base account. Okay. So I think you and I then are converging on a similar answer, which is roll over the 401k to an independent location. not to the new employer's plan. Yeah, absolutely. All right, solved. To your next question, which is, given that you are in a high income bracket, should you make Roth contributions? That's a fascinating question. And my question back to you is, how long do you plan on being in a high income bracket? If you reasonably think that you want to remain, ideally, under ideal circumstances, in a high income tax bracket or you want to remain as a high income earner for the next 20 years, make a Roth contribution.

11:52Absolutely. Because then you get the capital gains, you get the dividends, all of that is tax exempt. But if you think that this is something that's temporary, if you plan on being a high income earner for, let's say, the next four or five years and five years from now, you want to take an early retirement, under that set of circumstances, the Roth would not be a good plan. So largely it depends on how long do you plan on continuing to earn a high income and how long do you plan on continuing to be in a high income bracket? But I think what I'm hearing, Paula, is that your bias is like mine. We have a bias toward making Roth contributions, not away from it, bias toward.

12:34But if you're going to be only in a high income spot for a few years, then flip that. Yeah, that's a good point. My default is Roth is better unless there is some type of extenuating circumstance that would compel you to not make a Roth contribution. And so the last caller, the final caller that we're going to talk to in today's episode, Rob. Rob wants to retire in three and a half years. That is an example of an extenuating circumstance, right? A goal of no longer earning an active income in three and a half years from now. That's an example of an extenuating circumstance that would lead me to say, all right, don't bother making Roth contributions because three and a half years from now, when you do quit that job, you're going to be in a dramatically lower tax bracket.

13:25But again, if you're planning on staying in that job for 20 years, 15 years, heck, I'd say even 10 years, even if it's a 10-year plan of staying at a high income threshold, I'd make Roth contributions. And the reason for that is because the benefit of tax exempt growth, compounded tax exempt growth is not something that you want to pass up unless there is a compelling reason to do so. Yeah, totally agree. Which also I think then Paula feeds our answer on the converting the small traditional IRA to a Roth IRA? Absolutely. Because if she thinks that her income now is going to be a little lower than it's going to be for the next several years, do it now.

14:11Yeah, exactly. Sooner the better. Bertha, you mentioned that you're 47 and you have a flexible goal of retiring by age 55, which means given that it's a flexible goal, you plan on working for at least another eight years, but it might be 10, it might be 12. And that is a long enough time period to spend in a high tax bracket that making Roth contributions right now for the first few years, I think would be a good plan. As you get closer to your ideal retirement age, when you think that you're five years away from it, I would reevaluate. And by the time you get to that point, you'll also have a better sense of whether or not you still plan on retiring at 55 versus whether you want to push that to 58 or 60.

15:06But at this point, given that you are at least eight years away and possibly more, I'd make Roth contributions for the first couple of years. And the last part of Bertha's question involved whether she should hire a financial advisor. She said she prefers to be a DIY investor, but she's wondering if a financial advisor can help. As you know, Paula, I am very pro-advisor, but my definition of advisor is different than I think a lot of people when they think about financial advisors. So as I answer this question, I just want to be clear about what we're talking about. You should hire financial advisors who make you smarter, who will argue with you, who will push you, who will make you better.

15:50You need to be the CEO, which means no matter whether somebody else presses the button or not, I believe that you still are in control of your own destiny. So you need to be the one who's responsible for your goal. And I think a lot of people think that when they hire a financial advisor, they're going to delegate all this financial stuff. You take General Motors and Mary Barra, the CEO of General Motors. Mary doesn't come into GM twice a year and go, so how's this car thing going? right we doing okay no but people think that when i hire advisors that that's what i should do with my money but you are mary barra you are the ceo and so because of that you have quote vice presidents or advisors who know more about powertrain than you do who know more about how the uh steering works about the different pieces of the car than you do but you still need to know everything yourself.

16:47So I like financial advisors, but I don't like ones that just take it away and do the magic thing. I want somebody who's going to help you continue to become even better at this. Now, is it hard? No. And can you do it yourself? Absolutely. But every smart person I know surrounds themselves with smart people. They have smart people around them who make them even smarter. Heck, I mean, imagine Paula, you've had Morgan Housel on the show. Imagine if Morgan Housel were in your corner and he knew you personally. That'd be incredible. Yeah. How much better would you be with your money if you had Morgan Housel who knew everything about your goals and was helping you?

17:33That's what we're looking for when it comes to financial advisor. So broadly speaking, then it's have what I think of as a board of advisors. Absolutely. Yes. And you can also delegate some of the stuff that you could do, but you know that they'll get it right and they can do it quicker. Like as an example, if you're building out like a retirement game plan, right? And how you're going to spend money over your retirement years and how you want to access your accounts, there's plenty of calculators online that can do that. And advisors done this hundreds of times every year. They'll do it much faster than you do.

18:08So you may pay for expedience. You know what I mean? Like how much is your time worth? So you may pay for some of that stuff too, where you're like, yeah, I could do that, but I'd much rather have it done for me by somebody who's done it a thousand times. I know it's going to be right. It's going to be done much quicker. And now I can save my brain power for the stuff that actually matters versus inputting stuff into a spreadsheet. So I like both of those functions. I like number one, person that pushes me. Number two, if I'm building models, somebody who has a shop where they do that all the time.

18:41I'm a smart guy. I could build a car. And by the way, I'm not being funny. I think I could build a car. It would take me about eight years and it would probably run like crap, but I could build a car. I prefer to buy one because these companies do it every single day and I know that it's going to run reliably. The real skill set to develop is the skill of selecting people, recognizing talent. The skill is the skill of recognizing skill. Oh, totally agree. Yeah. When people tell me that they don't like financial advisors because they had a bad one, I don't think that's indictment on all financial advisors.

19:16I think that's an indictment on your interviewing skills. Right. There are A players, B players, and C players in every field, from financial advisors to veterinarians. To car manufacturers. Yeah.

19:32Hey, just because you're hating on my Ford Pinto.

19:39All right. Well, Bertha, I think that answers your questions. Thank you for asking those questions. Thank you for being such a longtime member of this community. And huge congratulations to you on this incredible new step on doubling your income. That's amazing. Next, we're going to answer a question from Humera, who is tired of paying rent with nothing to show for it. She's wondering what she can do. But first, I'd like to thank the sponsors who make it possible for us to bring you no-cost information about financial literacy. It's time for Cyber Monday, Dell Technologies' biggest sale of the year.

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21:01You know, when I was a kid, I remember on Christmas morning, I got lots of toys, lots of books, lots of clothes, gifts. The books were always my favorite. I'd spend all of Christmas Day just reading and reading and reading. But, you know, none of those are things that I have anymore. They were wonderful in the moment. But decades later, I have no idea where any of those things went. But by contrast, when you give a gift that brings somebody financial security, that's something that lasts a lifetime. Now, when it comes to financial security, nearly half of American adults say that if they lost their primary income earner, they would suffer financial hardship within six months.

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22:15Don't wait until next year. Give your family the gift of security today with PolicyGenius. Head to PolicyGenius.com to compare life insurance quotes from top companies and see how much you could save. That's PolicyGenius.com. If you're someone who's been meaning to get a real handle on your retirement plan, I want to point you to something that I think is genuinely worth your time. Bolden. It's a modern retirement planning tool that takes all the confusion out of figuring out your financial future. So most calculators give you a quick estimate and call it a day. Bolden goes way deeper. You can model different scenarios, test real choices, and see exactly how things like saving more, retiring earlier, or adjusting social security timing impact your plan.

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24:12Our next question comes from Humaira. Hi, Paula. This is Humaira. I just wanted to ask you, we've been paying rent for the past couple of years, and I'm wondering if it would be better if we just pay the rental with a credit cart where we can earn either miles for traveling or cash back. I'm not sure if that's an idea that people have ever done, but I know it's a very simple question. If any of your staff or somebody could just quickly email me the answer or something, I'd be so appreciative of that. And by the way, I love, love your podcast show and I've been listening for the last few days and I'm just really grateful for it.

25:00Thank you so much. Humaira, thank you for being a new member of this community. I'm so excited that you found the show and that you are loving it. I want to ask you to go listen to episode 504, 504 with Brian Kelly, the points guy. Now I know you left your question before that episode aired. In fact, we are actually recording this episode before that episode aired. So I know you haven't heard it because we haven't actually aired as of the time that we're recording this. We haven't aired that episode yet, but by the time you hear this, we will have aired that episode. And Brian Kelly, the points guy, had a role in developing something called the BILT card, BILT, B-I-L-T.

25:46If you are going to pay your rent with a credit card, use BILT because it was designed specifically for this purpose. Now, here's the thing. A lot of landlords do not accept credit cards, or if they do, they charge some type of a fee. What Bilt does, and by the way, this is not an ad. I have no financial relationship with them. I make$0.00 and 0.00 from anything related to Bilt. So I have absolutely no financial interest or relationship with this. What they do, and I think this is very cool, is if your landlord does not accept credit cards, or if your landlord charges a fee for a credit card payment, which is typically the case for most landlords, Bilt will process it as a credit card transaction, but then Bilt will actually mail a check to your landlord.

26:36So your landlord receives a check as though it's any ordinary checking account generated rent payment. But meanwhile, you get the credit card reward. You get hotel rewards, travel rewards, dining rewards, shopping rewards, whatever you want. Typically, travel rewards tend to, broadly speaking, have the best redemption value. Now, I'm going to put a giant asterisk here and say the thing that I hope is so obvious that it should go without saying, which is if there is any risk, any risk at all that this might turn into a source of revolving debt, meaning you might end up racking up debt by virtue of doing this, then obviously don't do it.

27:26And that goes not just for paying your rent with a credit card, but for paying for any consumer discretionary purchase with a credit card. This is a very financially savvy audience. So I hope that you're all listening to that disclaimer and going, well, duh. But for the sake of anybody who might be new here or listening to a personal finance podcast for the first time, that, of course, is foundational to any discussion about the use of credit cards for generating rewards. You know, Paul, this might be a good time for a primer for people to know more about what revolving debt is, like how that works and how it's different than other debt.