Q&A: We Just Had a Baby and Lost Half Our Income

28:09So if you really want a thorough one, ask that question. How many different randomized scenarios are you looking at to see whether my portfolio will weather that storm or not? All you do with the Monte Carlo simulation, you put in where all your money is. And then. Do you have to give them your social security number and your mom's maiden name? If you do that, it might be a scam. All right. Put in all your money. Yes. Put in all your money, the type of account that it's in, and then hit go. and it will then run through all these randomized scenarios. So it will try to predict the future for you.

28:48The output from this is a percentage chance that without changing anything, you're going to be okay. Just based on the past, right? The past doesn't equal the future, but based on all the things that could possibly change about the market, this is the percent chance you're going to be okay. Most people, when they look at a Monte Carlo simulation, if they're not used to doing this very often, are looking for 100 % certainty or at least 90, 95 % certainty. And I've seen people freak out at 95 % certainty. It could be in that 5%. What professional financial planners will tell you is you're looking for a number closer to between 80 and 85 % certainty.

29:32And the reason for that, Paula, is the fact that if you find out when you run the Monte Carlo simulation, that there's a 20 % certainty that you're not going to be okay. And an 80 % certainty that you will be most of that remaining 20 % where you're not okay. You're off by a little, you're not off by a ton. So you may be able to make some small changes to your lifestyle that have big impact over the fact that you're going to live this change for the next 20 years. So maybe instead of spending$3 ,000 on a vacation, you spend 2 ,500, you leave the other$500 in the market, something like that, which doesn't seem like a lot of money, but magnified over 20 years ends up being a nice chunk of money.

30:21So most financial planners will tell you that if they see 80%, they feel really good. Under normal circumstances, even if they they see 70, 75 % chance they feel pretty good that you're going to be okay. If you're younger and you have a lot of business experience and your expertise are in areas where you could jump back in and go back to work and you're happy with that, certainly a 70 % probability is fine because if you're okay with going back to work, well then great, fantastic. If you're not, I think looking at 80, 85 % is good. But Paul, to directly answer your question, If you see 90 to 100%, I think you're going to be A-OK when it comes to sequence of returns risk without changing a thing.

31:08So where can Paul find the software that is available to run a Monte Carlo simulation? The best software is available through financial planners. So you're going to find great stuff there. But if you want to just take a cursory look, we went to PortfolioVisualizer.com when we were talking about the Efficient Frontier over the past year. Guess what? If you go to Portfolio Visualizer, look off to the right and click down on tools under Portfolio Simulation, Monte Carlo Simulation, and they have some rudimentary tools. So if you want to get just a first look at that, I think you can just go to PortfolioVisualizer.com and it will be free.

31:48Right. And we're showing, for those of you listening via audio, if you want to check out our YouTube video, we're showing a demonstration of that on the screen right now. That's a great first place to look. And that's probably where I would send Paul. Well, I won't even say probably because I'm here and I have the microphone. Paul, that's where I'm sending you. I am sending you there. If it's borderline, I think that's when you bring in the pro. And certainly if Paul already works with a pro and Paul gets this as part of his annual fee, ask the pro to do that as part of your overall financial planning.

32:19But let me ask Paul's question in a different way. Paul retired in 2018. it's now, breaking news, 2025. Given that Paul is seven years out of the workforce, and given that his wife, though I don't know how recently she retired, but she's also retired from the workforce, given that length of time, are there any rules of thumb that say, hey, if you retired January 1st, 2000, well, okay, granted there was a market crash that happened in 2000, in 2001 as well. So that also would have subjected you to sequence of returns risk. But let's say you retired January 1st, 2002, and you've got another six years before 2008 happens.

33:06All markets started declining in 2007 though, right? But you've got five years before the market begins declining in what we now know is the Great Recession. For those people who retired January 1st, 2002, were they out of the sequence of returns risk window at the time that the Great Recession began in late 2007, early 2008? The answer to that is yes. These simulations show that the most damage to your portfolio happens in the early years. So what some professionals will do early on in a portfolio's life, meaning the time that you retire, if you're close to your goal, you barely have a safe withdrawal rate, they will lower the risk in your portfolio to compensate for the first few years.

33:52because of the fact that when you look at surviving a long period of time, damage up front is by far the biggest damage you can do. And if your portfolio isn't damaged during those early years, damage to it in subsequent years, because you survived those first few years are not going to be nearly as big. Now, if you've overspent and you're still at that maximum safe withdrawal rate, the sequence of return risk will persist. what the Monte Carlo simulation will show in those instances where you're not going to make it. Most of the time, the reason you didn't make it is because those first three or four years were awful, were absolutely awful.

34:32So in other words, during those years, if you survive those years and you actually had a good market and up market, now you have fewer years to live. Well, none of us gets out of here alive. Financial planning is the only field in which that's considered a good thing. Well, the good news is you've got fewer years to live. That's right. That's great news. Let's put that a better way. Your portfolio doesn't have to withstand as much. How about that? That's the kind of gentler way to say you're not going to live forever. You're going to die soon. Sooner. Hopefully not soon, but sooner. Sooner. So your portfolio doesn't have as long of a trek anymore.

35:15And it lasted those years, which means your safe withdrawal rate number is probably higher now, Paula, but you're happy living on the amount that you're living on currently. That being the case, you're going to be fine if you continue to maintain the same lifestyle that you had when you began retirement. With all of that said, I mean, this might be too simplistic, too reductive, but could we state that you mentioned three or four years? Could we state that three, four, five years is a rule of thumb barometer, assuming that you don't overspend? If you don't overspend, yes. Yes. So if Paul did these calculations that said, I'm going to be okay to retire and I'm under that safe withdrawal amount, and I haven't seen the sequence of return risk, I would bet if he ran it today, he's much more certain the Monte Carlo simulation will look way better today than it did then.

36:11Yeah. And given that he retired in 2018 and has seen, with the exception of short duration events in 2020 and 2022, Paul has, for the most part, between 2018 and 2025, seen predominantly an upmarket in his first seven years of retirement. Oh, yeah. Cumulatively, it's been up into the right, right? Yeah. In a big way. So based on the timing. He's probably looking good. Yeah. Yeah, Paul, run the Monte Carlo simulation. But if you were good enough to retire then and the math worked out at that time, I think the math is working out a lot better now. So thank you, Paul, for that question. And congrats on your retirement and on your wife's retirement.

36:55Next, we're going to answer a question from a caller who's wondering, should he pick the mathematically sound decision or should he pick the psychologically comforting decision? We're going to address that next.

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38:55Welcome back. Our final call today comes from Jonathan. Hey, Apollo and Joe. This is Jonathan out in sunny Spokane, Washington, and I have a financial psychology question for you. So here's the situation. I've invested enough into my Roth and pre-tax accounts such that I don't need to contribute to them anymore. They'll grow to the number that I need by age 59 and a half. I'm sure there's a term for this situation. Wink, wink. Anyhow, I've got$7 ,000 per year to invest for at least, say, the next 10 years. and I want that money to be accessible before age 59 and a half. So I could put it into a Roth.

39:34I could take those contributions out tax-free or I could put it into a taxable brokerage. I know if I put it in the brokerage, I'm going to pay more in taxes, but I know if I put it into the Roth, I'm going to struggle a lot psychologically pulling money out of that Roth. Do I bite the bullet, pay the taxes, not deal with the psychological stress? It won't be that significant, but still. Or do I just put it in the Roth and save myself a few bucks on the tax side of things? How should I think about this? Thanks in advance. I love this question, Jonathan, because I feel your pain. I alluded to this in my answer to Austin's question earlier in this episode, when I talked about how, in theory, putting money into a Roth account and then withdrawing the contributions is a possibility.

40:28But in practice, it's a possibility that I and pretty much everybody who's listening to this in the Afforder community all collectively feel queasy about. If I can be so bold as to make an assumption about the majority of people listening, I think we all really don't at a gut level like that idea because money in a Roth, we're so conditioned to keep it in the Roth since the Roth has such amazing tax treatment. So the idea of pulling contributions, we all know that we can do it penalty free, but we don't want to. That's frustrating. It's even more frustrating with annuities because annuities traditionally high fee instruments, they don't all have to be, but most are.

41:12And the annuity industry knows, Paula, that with annuities, it's first in, last out, meaning that annuities are tax deferred, not tax free like a Roth. And when you grow money, you've got to take out all the growth before you touch your principal. And the annuity industry knows that the science behind that is once you put money in an annuity, you don't take it out because you're going to pay a ton of tax on any dollar that it makes, which fortunately is a lot less than other places because the fees are so high you make less money. But I know, right? Oh, man. A little sarcasm there. Joe's idea of good news.

41:51I know, right? The great news is your product sucks so bad that there's not going to be much. But it is a problem. Is that the through line of these answers? Joe has a weird idea about what constitutes good news. Good news. You're going to die. Great news. Your product sucks. Yeah. No, not at all. I'm like the grim reaper today. But seriously, there is a mental issue with I've got this tax treatment. What if I need it more next year than I need it this year? So I'm going to go ahead and I'm going to leave that alone because of the tax treatment. And then you don't end up ever spending that money and whatever joy it might've brought you.

42:30How I think I would approach this is with a one-two punch. I'm in favor of doing the thing that is psychologically most comforting because at the end of the day, we as messy, imperfect humans are our own biggest obstacle. And the more that we can work with our nature rather than against it, the more we set ourselves up for success. That being said, the reason I say I take a one-two punch here is I also would interrogate the premise that you will always feel the way that you do right now. Remember how earlier in this episode, actually, in the answer to Austin's question, I talked about how when I was in my 20s, I took a lot of pride in maxing out every retirement account every year.

43:20Max out my 401k, max out my backdoor Roth IRA, max out my HSA. I took so much pride in that. It was beyond an activity. It was an identity. Partially it's because for a big chunk of my 20s, I couldn't. I just didn't make enough money to be able to do so. So once I finally could, that was, why wouldn't I, right? That was my status symbol. Look at me with all of my maxed out retirement accounts. And part of it was a deep, deep sense of identity as the type of person who does that. The notion of not maxing out, fully maxing out all available long-term tax-deferred or tax-advantaged accounts was at its core a threat to my own core sense of self.

44:06So of course I would never do that. Of course I would never suboptimally contribute to all my tax-advantaged accounts, right? That's not who I am. But over time, my sense of identity shifted. And with that shift in identity came a deep and true shift in my attitude, my feeling, my approach to how much money I need to put into tax advantaged accounts today. Backdoor Roth IRA, HSA, workplace tax deferred account, all of the above. It's funny because when you look at the CFP's list of different types of risk, that risk, Paula, which I think is a huge risk that often frightens me when I'm in online forums and I hear people talking about things in a very permanent way, really isn't addressed in their list of risks.

44:57The closest might be horizon risk, where the horizon of you needing this money changes. And it's because for some reason or another, you needed it differently. but what I love that you got to there was what's behind it, which is I've changed. My life has changed so much through the years and my feelings about security, my feelings about my risk tolerance, my feelings about what makes me happy have certainly changed. There's things that no longer bring me joy that used to bring me a lot of joy. And then there's other stuff that I absolutely love. who knew that I would get to 57 years old and realize how much I like olives.

45:38I didn't like olives at all. And now I just freaking love olives. I'm so excited to go to Greece and just have so many olives. I can't wait. But I think that's a real thing when people talk permanently about, I'm 27 years old and I think I would love for the rest of my life living in a tent in the woods. And so I'm going to drop out because I'm financially independent on that lifestyle. I'll tell you at 27, I felt that way at 57. I couldn't do that in a million years. So I think it's difficult for us to re-rail back onto where we're headed with Jonathan's question into, I think that if you're naturally a saver, if you're naturally careful with your money, there's never going to not be a little bit of pain.

46:27Like you don't overnight become a spender. don't overnight go YOLO. You're just, it's not going to happen. It's not going to happen. It's part of your gene pool. So for me, Paula, I don't know. I think that this all begins with how you look at spending. I think this is a deeper conversation on how you think about spending money much more than it is a tax question. Because frankly, if I make the thing that I'm spending money on valuable enough that it is a core to that personality that you're talking about, I don't care what account it comes out of. This is the thing I've wanted to do my entire life.

47:11And you know what? It is worth it no matter what pot it comes out of. And if we're spending money that way, then certainly I want to get the best tax treatment possible. But I think I have to work through that roadblock first. Right. Because if Jonathan does the most mathematically sound thing, he would put all of this money, as he stated in the question, into Roth accounts, enjoy the tax advantage that accrues, and he'd withdraw the contribution. And to the extent that he would have to withdraw the contribution for basic food, shelter, and clothing, anyone would do that just for the need to survive.

47:52I think where the challenge comes in is can he overcome the psychological barrier that would perhaps prevent him from going anything above subsistence? Because the risk is that he hamstrings himself and he hamstrings his life because he just can't bring himself to take out anything above subsistence. And that's not a life that we want for him. And that's not a life I assume that he wants for himself. Right? It's not an optimal life. And remember the distinction between being optimized and being optimal. I think in that scenario, by the way, that very much deserves professional help. From a financial planner or from a therapist?

48:38I think a financial therapist. I don't think a financial planner. Financial planners, since I've left the business, are finally getting what we needed all along, which was help on the behavioral side. And now the behavioral component is one module of the certified financial planning coursework. But ask any CFP. It still isn't anywhere near the amount of behavioral work they do. And so they're not adequately trained. I think most want to be. And over time, they get a lot of experience in that area. So you might find decent help. But I think in that case, Paula, we go with somebody who's been specifically trained to deal with this because this is not a financial issue.

49:19Right. Jonathan, one thing that I would probably do is, and this is my answer to a lot of questions, is spreadsheet it out or run it through a couple of calculators. Assuming certain set of assumptions around what your contributions are and what your return assumptions are, what would be in dollars and cents the actual difference between scenario A and scenario B? the difference between the Roth scenario and the taxable scenario. If you were to make those contributions and let them accrue in these two different types of accounts with different tax treatments, this is going to be an exercise of making assumptions.

49:56And maybe you run a couple of different scenarios so that you find a range of possible outcomes. So a best case, worst case, and mid case range. But I want to know what is the actual dollar amount that we're talking about? how much more would you make if these were Roth contributions? So I'd want to know what that number is. And then on the flip side, I would want to continue to interrogate the question of how certain are you that you will feel in the future the way you feel today with regard to that reluctance to take out Roth contributions? And to ask that same question in a slightly different way.

50:36What could you do to make yourself more comfortable with the idea of withdrawing Roth contributions? And if you think through that and you think, you know what, here are a list of things I could do, here are a list of tactics, but I'm not entirely sure that these tactics are going to be effective. You come up with that list of tactics and then assign a probability to it working out. Maybe you go through all the tactics and at the end of all of those tactics, you still feel the same. No amount of self-hypnosis or affirmations or any list XYZ tactic here, right? Maybe no amount of those tactics are actually going to work out.

51:18And you think that there's a significant probability that even with effort, with concerted effort, you might still feel that reluctance to ever pull that money out of Roth accounts. If that's the case, then I think you have a probabilistic answer. I am no expert in this area, but I have had a lot of experience, like a lot of people that have guided people through the saving and spending process. I think when the goal is bigger than the money, then that's your fulcrum. That's the leverage you need to apply to the situation. If it's not, then I think we go back to Vicki Robin. Why am I spending the money in the first place?

52:01If it doesn't matter which account you pull it out of, then I think the goal was bigger. If it does matter, then my question is, was it worth even pulling out your wallet if this account was better than that account? Like, really? I continue to return to spending based on your value system. You know, Vicki Robin is notoriously frugal, but our mutual friend, Paulette, convinced her to buy a hot tub. Yeah. Yeah. Yeah. Even Vicki Robin convinced her to buy a hot tub. That's what a great persuasive writer Paulette Perhatch is. That's why she gets the big gigs with the New York Times. Yeah. But it was exactly that question of your money or your life.

52:47Which is funny, just repeating Vicki's words back to her. Mm-hmm. That is funny. But it's not true. Right. If I think about the biggest things in my life that I truly want to do, I'm not going to obsess about Roth versus non-qualified. But if I'm buying something that I'm a little sketchy on, well, then I start parsing that more. But to your point, Joe, that is actually the thing that worries me because what if Jonathan gets to that point and he decides nothing is worth it? Nothing's worth it. And so then he lives this very pauper, ascetic, subsistence lifestyle. If that is you and it suits you and you get incredible joy from that, then great.

53:36Make sure that you've got a donor advised fund or some good charitable organizations or a nice estate plan and live that life. But if you recognize that that's a problem, then I think, Paula, then it's time to bring in the financial therapist. They're wonderful. You and I have talked to financial therapists before on our shows and in our careers. These people can really help and they have a lot of compassion. They've seen this situation a thousand times. So where it feels very unique to you and me, to them, they understand what you're dealing with. You can have the comfort of working with somebody who not only has the training to help you, but they've seen it before.

54:21And I'm glad, by the way, Jonathan asked this question because there are tons of people, especially in a community that loves to nerd out about the stuff you and I talk about, Paula. Yeah. These are the people that worry enough about the types of questions Jonathan asked that we think a lot more about our money and not enough about the value train. Yeah, not enough about what's it all for. Yeah, yeah, yeah. Sometimes it gets so fun keeping track of optimizing our money and doing the right thing that we forget there's a reason why I'm actually doing this thing. But I follow a lot of the fire-related subreddits.

55:00Oh, you know what? It was in a Henry subreddit, actually, the high income, not rich yet. Someone posed a question. He made, I think if my memory serves me correctly, somewhere, something along the lines of$500 ,000 a year and his expenses were under$3 ,000 a month. I mean, there's this massive, massive, massive delta between his income and his expenses. and he was asking if he should buy a fancy car, like a really fancy car. It was something that he was kind of dreaming of, which he could easily do in cash a bajillion times over. And people were recommending, like, maybe buy less of a car. Maybe buy, you know, we thought about getting a used one, right?

55:48Like, so many people in the comments were missing the notion that this was an indulgence that he could easily afford to buy three or four of them and were instead, in the comments, trying to find ways for him to frugal back or cheap out on this one splurge that he really wanted and that he easily could get. So I think that's a perfect illustration, Joe, of what you were talking about. People will often deny their own dreams because, well, I know it's my dream, but it costs a lot. Were people saying just buy the car, buy the car, buy the car, like 500 comments? A few people were, but a lot of people were saying maybe buy a lesser car.

56:30That doesn't do it for me. Yeah. It's either buy the car or don't buy the car at that point. Don't buy the car because the car doesn't mean anything. But having a lesser car that you don't care about as much to spend the money on something that you're always going to view as suboptimal. Yeah. It's like the worst of both worlds. I think it's a horrible answer. Yeah. either buy the thing that lights you up or don't buy anything. Right. If you're going to go, go all out. Yeah. Yeah. That's just buy the lesser car is the worst answer. It's so bad. So Jonathan, we don't have a clear answer for you, but we have a few different prisms through which you can look at this.

57:07Yeah. I think that gives them some direction on how to look at it and think about it. I don't know that he would have said, put the money in the Roth. Like he would have accepted that. Yeah. Yeah. Flip a coin. That's right. Next question. Yes. Heads Roth, tails taxable. And we're out of here. But that could be part of the answer to flip a coin, see how it lands, see how you feel about how it lands and use that as information. Well, you've heard me talk about how I use that in client meetings. Right. How do you want the coin to land? Yeah. I flip a coin. They can't decide. And then when I flip the coin and ask them, which one do you hope it is?

57:5199 % of the time had an answer. And then they get pissed at me because I take the coin and put it in my pocket and they go, whoa, what was it? And I go, it doesn't matter. We figured it out. Yeah. You wanted it to be heads. Yeah. But you don't know until the moment of the coin toss. I do a modified version of that. I see You're feeling about it. Yeah, because there's an immediate, instantaneous feeling about the outcome of how that coin flip landed. So what is the immediate visceral reaction? Are you disappointed that it landed heads? Are you disappointed that it landed tails? What's that instant gut feeling?

58:30I take stock of that because that feeling is information. That's a data point. So thank you, Jonathan, for the question. Thank you for inspiring this discussion. Joe, we've done it again. Such great questions. And I love the fact that we had a psychological question in there. We had with a sequence of returns, how to use the tools and a really good financial planning question around purchasing the car. And so much of what we talked about in the answer to Austin's question was foreshadowing around what we ended up discussing in the answer to Jonathan's question. One led to another led to the next one.

59:09Exactly. Just like we planned it. Just exactly like we planned it. Joe, where can people find you if they'd like to hear more of your planning wisdom? The Stacky Benjamin Show is a great place to find us three days a week, every Monday, Wednesday and Friday. And on Fridays, you will find the Paula Pant on most of those episodes rocking in these great discussions, these chatty discussions about financial planning topics, often the same topic we talked about all week long and just kind of bringing it to a nice warm community close on Fridays and also rocking the trivia in the worst way possible.

59:47Yeah. The thing I do want to draw attention to, though, is Austin gave a shout out to Stacking Benjamins. And I know why he did that, Paula. He did that because he's in Minneapolis, St. Paul, or at least he said he was. And that's where we have our only - Or at least he said he was. It's where everybody wants to be from. He claims to be from Minneapolis, St. Paul. Right. He probably is in Des Moines. We all know he's from Lexington. He's throwing us all off. But in Minneapolis, St. Paul, we have the Stacking Benjamins meetup group. And so they meet once a month. They have a Facebook group. If you just put in Stacking Benjamins Twin Cities, if you're in the Twin Cities.

1:00:24I talked last week about these great documentarians, Pete and Rebecca Davis, and their great movie, Join or Die. In August, they're going to do movie night. They're going to get all the stackers together, the afforders together in the Twin Cities. and have popcorn and have fun watching this great documentary that in the first half is about how we need to join things more for our community. But the whole second half is forget community. You are 50 % less likely to die this year if you belong to one of these clubs, a group, something that's bigger than you. A phenomenal movie about what it truly means to have a happy retirement.

1:01:02But Joe, that takes away your good news, you're going to die sooner. Right. So come watch this movie. Watch the movie because we want more longevity risk.

1:01:19Wow. Yes. Way to raise the stakes. You're welcome, America, especially Twin Cities. So if you're in the Twin Cities, join our media group, a great group of people that meet once a month. Awesome. Awesome. Well, thank you so much for being part of this community. Thank you for being an afforder. If you want to talk virtually online with other members of this community, go to affordanything.com slash community. That's affordanything.com slash community, completely free. You can organize into different spaces based on what you're interested in, maybe retirement planning, maybe debt payoff, maybe saving for college, maybe general pursuit of FI or FIRE.

1:02:00so you can organize based on interests. And it's a great place to meet like-minded people, share ideas, ask questions. Again, that's affordanything.com slash community. Thank you so much for being an Afforder. I'm Paula Pan. I'm Joe Salcihai. And we'll meet you in the next episode.