Q&A: The Goalposts Moved — Is That Actually a Problem?

0:00Joe, when you were a financial planner, did you see people's charitable giving strategies change dramatically between when they were working and then when they were retired? No, I can't. I can't say that I did. Even though the income stream ceased.

0:15Paula Pant:Yeah, I still didn't see a real change. in fact, maybe it's interesting. The money flows seem to stay the same, but the time spent helping the charity went up. Okay. So donation stayed constant, but volunteer hours increased. Yeah. Yeah. Interesting. All right. Well, we're going to tackle a question about charitable giving in retirement. We're also going to answer - I wonder why you asked. Yeah. We're also going to answer a question about tax optimization and asset allocation inside of retirement accounts. And we're going to talk to a landlord in Central Florida who is wondering how to deal with all of the new construction in that market, because that has put downward pressure on rental prices.

1:03All that in one episode. 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 entrepreneurship, acronym double I FIRE. I'm your host, Paula Pant. I trained in economic reporting at Columbia. Every other episode-ish, we answer questions from you. And I do so with my buddy, the former financial planner, Joe Salcihai. What's up, Joe? Did you know, Paula, that I used to drive Uber?

1:34Paula Pant:I did not know that. I did. I got tired of it, though. All the people talking behind my back. Nah. Come on. Come on, people. And with that, we're going to go to our first question, which comes from Les.

2:13529 plans for family members. If I were to stop earning an income in the next five to ten years, then those charitable contributions would necessarily have to stop, as I do not think I would be able to support my current lifestyle and continue the same amount of charitable giving. This makes me think that I may want to continue some part-time work in order to fund those additional charitable expenses in the future, which are a personal goal of mine. How would you go about thinking about this and trying to balance this out with some financial freedom in the future? Thank you and appreciate your time to weigh in.

3:00Les, thank you for the question. And I love that you are making charitable giving and funding 529 plans for your family, both. I love that you're making that such a cornerstone of your priorities. So let's talk through a couple of different ways that you can continue making the charitable gifts that you are making even in retirement. There are two models that I've seen. One is a model that was practiced by a person in the FIRE movement named Leif Dahlin. He wrote a blog called Physician on FIRE. He's a former anesthesiologist. He also had big charitable giving goals. He worked until he hit his FI number or his FIRE number, and then he worked one additional year that was purely for the purpose of charitable giving.

3:48So his final year of work was purely a charitable giving year, and that allowed him to reach his giving goals. That's one possible model. The alternate model is what you said in your voicemail, where you could continue to work part-time in retirement purely for the sake of charitable giving. And if you think about it, Joe, you mentioned earlier that you often saw retirees, donations would stay consistent, but volunteer hours would rise. And there is certainly social and psychological benefit to contributing volunteer hours for the purposes of getting to know the people who are involved in a given organization.

4:33But from a purely economic perspective, particularly if you are a highly compensated worker, it often is more efficient, monetarily efficient to, rather than put in low wage volunteer hours, put in high wage worker hours and then dedicate that money towards giving. Like from a pure economic lens, that is the most economically efficient thing to do. I mean, that said, you do lose, there are social benefits, They're non-economic benefits to volunteering.

5:07Paula Pant:Yeah, you just have a bigger shovel this way, you're saying? Yeah, exactly. So those are the two models that I've seen. One is the one dedicated year approach, and the other is the part-time work approach. Well, I agree with Les. There is no clear-cut answer. I think another way to just think about this, Paula, is because he brought up how he thinks about this in terms of financial independence. And I think when you're making a decision like this, I was wondering why Les would call in with a question like this. And for me, and this might not be the case, but for me, the real reason I thought that I would call a podcast asking this question is because maybe I feel a little hemmed in by this goal.

5:52Paula Pant:I want more flexibility, but at the same time, I really want to support these very important things in my life. But I think that's the nature of financial independence. It's really cool that you have the independence to be able to do this. And so if you're thinking about it in terms of affecting your financial independence, I think you're already there, which I think then instead of feeling hemmed in, And this is really a freeing thing because now instead of focusing on just you and what supports you, you have the ability and the wherewithal to be able to focus on others, which is a pretty badass place to be.

6:39Yeah. Yeah. I will say, you know, financial independence is not synonymous with retirement. It's synonymous with work optionality in either model. If you're working one dedicated year for the purpose of giving, or if you're working part-time in retirement, either way, if the purpose of that is purely for charitable giving, then that is the very definition of work optionality. It is purely optional. Yeah.

7:07Paula Pant:So I find this to be exciting more than hemming him in. And the other way to think about this, and you touched on this, Paula, with your answer is, and I remember interviewing a very smart gentleman named Chris Field, who does a lot of work with nonprofit organizations and was saying that for many, when you talked about volunteering, for many people, if he has skills that are great for the organization, it might actually make sense to go the other way and use those skills to help the organization. instead of the donation. I remember Chris saying, and I don't remember the exact quote, but saying something to me like, yeah, you know, somebody wants to give a hundred bucks.

7:52Paula Pant:That's great. But if you're somebody who knows how to do social media, that is a skill that we, you know, every nonprofit in the world wants and needs the ability to get the word out. Or if you're somebody that knows AI or you're somebody who knows how to fix computers, even, you know what I mean? Like some of these tasks that are somewhat specialized can be worth much, much more than whatever equivalent amount of money that you give would be. Yeah, that's true. So I should amend my earlier statement. When I talk about volunteer work, it depends on the type of volunteer work that you're doing.

8:32Paula Pant:It 100 % depends. Because there is rote work that's very plug and play that can be low value in terms of what it would cost to hire somebody to do equivalent work. But then there's also the opposite. There are also board seats that need to be filled. Yeah, if you've got some skill, I mean, that is huge. In fact, it's funny. That is my role with our local nonprofit is because I know how to talk to media. I know how to write press releases. I know how to be on camera when we're getting ready for our big fundraiser, the half marathon. Guess who does the Facebook lives and the Instagram lives telling people about how the race is going to go?

9:14Paula Pant:Guess who made all the videos of the race course for everybody? Like that's, that's in my wheelhouse. It's super easy for me to do, but not easy for anybody else on our to do. The other piece of it, Les, when you're thinking about the money management angle, there are two ways in which you can build an endowment through which you can have an ongoing stream of income that you can use to distribute charitable funds every year. One is through a donor advised fund, as you know. The approach there would be to work until you hit some type of a funding goal inside of your donor advised fund. Just hypothetically, let's say that you want to put$200 ,000 into a donor advised fund and then at a 4 % drawdown rate, that means you can distribute$8 ,000 a year to charity in perpetuity.

10:07Right? That would be one approach. The other approach is that you can create a foundation. There are two types of foundations out there. There are foundations that are actively engaged in doing things, and there are foundations that exist primarily for the purpose of distribution of assets. And if you have a foundation that is formed for the purpose of distributing assets, then your role as the manager of this foundation will be exactly that, to nurture the endowment very much in the same way that all of us nurture our own portfolios, manage the investment, manage the endowment, and then make distributions every year.

10:54and the IRS requires actually 5%. And they have specific guidelines and timelines for when those need to be made. But that's another approach. And what's nice about the foundation model is that you can get other people involved as well. Whereas a donor advised fund, you would largely be managing on your own. But either way, regardless of whether you choose donor advised fund or foundation, the common thread is that you are creating a base endowment and then making annual distributions from that base endowment. And in that regard, it's pretty similar to building a retirement portfolio and then living off of that, right?

11:38What is a retirement portfolio? It's basically an endowment that you're building for yourself for the rest of your own life.

11:43Paula Pant:That's a great strategy when you have this ongoing commitment to something in your community. But with these 529 plans, Paula, he definitely has a set timeframe for those. Right. And that's a very good point. Everything that I've talked about so far is assuming donations in perpetuity. But with the 529 plans, those are time-bound. That's another part of the approach. Prioritize the 529 until that time-bound designation is over, until those kids go to college. And then do those in series rather than in parallel. Like an A-B, yeah. Yeah. But less to the philosophical part of your question when you asked how do we think about balancing financial independence with the desire to continue charitable giving.

12:31At a philosophical level, I would say financial independence is not the cessation of income-producing activity. Financial independence is optionality. It's work optionality. If you do decide to take on some part-time work for the sake of continuing to give, I see that as fully aligned with being work optional. So thank you, Les, for the question. Cheers to you for prioritizing this so highly.

13:05Paula Pant:Yeah, absolutely. We're going to take a moment to hear from the sponsors who make this show possible. When we return, we're going to hear from Jamie. Jamie is 58 years old, has a 401k worth about$1.5 million, but has some questions related to the way that his investments are split and tax treatment. And after that, at the end of the show, we're going to hear from a landlord in Central Florida who's wondering how to deal with the changing market there. Both of those are coming up. Heads up to anyone who's a small business owner, who's an entrepreneur. As you know, one of the big lessons that you learn early in that experience is that you don't have to do it all yourself.

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17:46Welcome back. Our next question comes from Jamie. Hi, Paula and Joe. I'm 58 years old with a Vanguard 401k worth almost a million and a half, the third of which is in a Roth bucket, as I flipped over to doing that several years ago. The other two-thirds is traditional tax-deferred, but split into what shows as different sources. An initial rollover from my previous employer, which is about 40%, my employer match, which is about 20%, and the other 5 % is under a company base. I'm not quite sure where that came from, but I'm not asking either. My question is essentially from a simplicity standpoint, if those three are all tax-deferred accounts anyway, can or should I somehow combine those and are there any advantages or disadvantages of doing so?

18:30Or does that even matter? And should I just think about having tax-deferred versus tax-free accounts? I currently split my contributions between Vanguard's total stock market index fund and the international version, 80-20, and I've been meaning to push it to the efficient frontier. But when I look at my account summary and already see four sources times two funds, I wonder if I'll just be multiplying and complicating things if I further diversify? And if I want to initiate Roth conversions in the future, how do I manage that across those different sources or should I even care about that? In general, I've been pretty confident in my DIY skills to date, but I wonder if it's finally time for me to engage a professional financial advisor I can discuss such questions and concerns with.

19:14So thanks for your no-nonsense wisdom and insights.

19:18Paula Pant:Jamie, what a great, interesting question this is. For people that are just starting out, what happens is, as you know, Paula, people change jobs. Not only do they change employers, but things happen at work and you've got different plans at work. You've got the Roth option, the traditional option, and depending on what stage of life you're at, you might choose one, you might choose the other. And so you accumulate this tax spaghetti of all these different sources. And then you start thinking when you're trying to wrap it all up and make a plan like Jamie is like, okay, how do I make this a cohesive thing?

20:01Paula Pant:The good news is we can get you close to the efficient frontier, Jamie, and without a lot of worry. There's only one thing I want you to look at before we start talking strategy at all, because your question is about combining these. And it appears that you probably can. However, if any of this, especially that rollover portion, if that was all pre-tax money before, and the match is obviously pre-tax money, I'm not sure what the company base is, but we'll assume that that wasn't yours, wasn't put by you, so it would qualify as pre-tax money. assuming those things, then you certainly can combine them.

20:46Paula Pant:You can think about them as one entity. And in the future, you could, after you leave employment, you could roll those over. Now, I would talk to a tax expert about that beforehand. I would have them go through your actual company documents to make sure. But it sure seems to me that if this was all pre-tax money, before, and that's the only thing that we're looking for, well, then certainly you can put them all together and make it an easier plan. But even if they're not, what I would often do, when I was a financial planner, was you'd have clients that would have five or six different accounts.

21:26Paula Pant:And for whatever reason, we couldn't combine them. So if anybody came along and they broke into my client's computer and they saw these different accounts, they would go, this is not diversified at all. Why is this one account all in small cap? And why is this account all in international? And this account is all large cap value because I'm not really worried about the individual account. Right. Yeah. It's overall asset location. You're going to over concentrate specific accounts so that the overall big 30 ,000 foot view asset location make sense. A hundred percent. And if I had a really bad 401k, my client had a horrible 401k, but let's say the international option was really good.

22:13Paula Pant:I would then underweight international and everything else and have them contribute just to the one fund that didn't suck in their 401k, or in some cases with the least sucky of all the funds. And this would happen sometimes, especially with small employers where they, you know, just to be able to have a retirement fund for people to save into is something employers want to do. But for many reasons, those can be very expensive to administer. They'll pass the cost on to the employee by having to use what's called an annuity-based plan. So the funds are all pretty high fee. So we would look at which fund can we use that does the least damage?

22:57Paula Pant:I think you can look at it that way, Jamie. I think you can take these different pieces and begin lining up what percentage is close to where I need to be with large cap in general or large cap value or whatever the asset allocation is that you're looking at and say, this fund is this piece, this fund is the other piece, this fund is the third thing. When you begin changing them over to Roth, that can create some changes only if it changes your distribution strategy. If your distribution strategy is to take money from this account first, this account second, this account third, based partially on the taxability of the account, then that might change your asset allocation some.

23:48Paula Pant:But if not, if it doesn't change your withdrawal strategy, I don't know how much that's truly going to change the investment type that you're in. I think the other piece that's going on here is the cognitive overload that comes from when he logs into his accounts and he sees these bucketed as different sources. Yeah. It can create this overwhelm. Yeah. It feels messy. Right. And so sometimes I wonder if just running all of this through a different dashboard, whether it's one of those plug and play dashboards like Bolden or Projection Lab, or even making your own spreadsheet, which you can do fairly easily with AI right now, making your own spreadsheet and just viewing it there, if that might make things feel cleaner, especially assuming that there's consistent tax treatment.

24:42Joe, what do you think about his question as to whether or not he needs a financial advisor? I'm always curious as to what you'll say, because as the former financial advisor, I realized there's a risk of asking a barber if you need a haircut.

24:55Paula Pant:Yeah. But last week, I mean, when we talked about this, I was like, no. Yeah. Last week you surprised me. Well, in this one, I think it could be an interesting discussion, but not because of the asset allocation piece. The asset allocation piece, I think, is fairly easy. and I think that being able to do that piece yourself makes sense. I think the fact that he's 58 and he might be beginning to look at how am I going to withdraw from these accounts and there are things coming up like Irma which might affect his tax on his Medicare. Well, a quote tax on his Medicare. Yeah, part B and part D. Yeah.

25:35Paula Pant:So he's got a few hurdles. And how much do I take and what's the timing on taking money out of these pre-tax accounts versus my Roth portion? How do I mix those up? That's where a professional, because now the asset allocation needs to dovetail with the tax strategy and your lifestyle decisions. and also, you know, the biggest threat in any retirement is long-term care. How does that strategy fold in? If you're going to, on one end, self-insure, then you're going to have a bucket of money that you're going to save for, you know, later in life, just in case you need help and you need a fund to pay for that help.