Q&A: What Nepal Reveals About Wealth and Safety

29:09Given our early retirement goal, though, I see why funneling money toward a brokerage account could make sense, even if it's technically less tax optimized up front. I'd love to get your thoughts. Given that the standard advice is always to max out tax advantage accounts first, is there a point in an early retirement timeline where it actually makes sense to intentionally scale back 401k contributions towards more easily accessible accounts? Thanks for all your advice. I love the show and hearing how you each think through people's unique situations in a way that is accessible for everyone. Thank you.

29:39Anonymous. Thank you for the question. I am personally a fan, and Joe and I have not discussed our answers beforehand. I am personally a fan of taking the taxable brokerage account strategy for the sake of simplicity. Yes, SEPP72T is an option. We can talk about that. But the simplicity of just being able to tap a taxable brokerage account, the flexibility that you have by virtue of splitting money into different angles of that tax triangle, I am a fan of that.

30:17Paula Pant:You're getting so far ahead of this game. I know. We haven't given her a name. I know. Right? No. What are you doing answering the question? I see Joe shaking his head and I'm like, oh. She had a name, but I don't remember what her name was. And we forgot to look it up ahead of time. She gets to have two names. Wouldn't it be funny if we accidentally gave her the same name twice? Well, I don't think we will if you go with mine because I have a possibility right here in my hands. Oh, what is it? The real question here is when do I really start to get creative with my financial plan? because like she said, most of the time you will fill up your retirement accounts first.

31:01Paula Pant:And when we talk about the tax triangle, the three types of taxation, you can really balance two of them for ages after 59 and a half, which is if you just balance the Roth and the pre-tax, you're good, right? But before that is really when you need that flexibility of that. So I think there's some creativity involved. I have been reading and you'll see that I've got this all dog-eared, but I've been reading a classic book by a woman who works with a lot of creative people, Twyla Tharp, and it's The Creative Habit. Twyla is one of the world's greatest choreographers. She has done so many different dances that she's created.

31:42Paula Pant:It is amazing, all the cool creative stuff that's in this book. So if you're worried at all about creativity, not something we talk about a lot on afford anything, but Twyla Tharp's book is really good. Early in the book, Paula, one of my favorite pieces of advice, she said, you need a routine, right? You and I both talked to James Clear about atomic habits, but she's like, you need a routine. And to get a routine, you need to get your butt out of bed in the morning. And you got to convince yourself to get out of bed in the morning. So she goes, I have a workout scheduled at 6 AM because she lives in Manhattan.

32:19Paula Pant:She goes, I have a cab scheduled every day for 530. Do you want to know what my morning routine is? And then you turn the page and she goes, my morning routine is to have the cab scheduled for 530. Because if I have the cab scheduled for 530, I will not miss it. If the cab picks me up, the cab driver already knows where we're going. If he drops me in front of the gym, I will go to the gym. If I'm at the gym and I'm in this group of people, I will work out and my workout is done before I even have time to think. The whole thing is just schedule the cab. And I think about that with the morning, just schedule that thing that you can't miss first thing.

32:57Paula Pant:So anyway, I thought maybe we call her Twyla. So the lesson there is essentially create Create a forcing function. Yeah. Yeah. Really good advice. Create a forcing function. I used to have, not anymore, she moved out, but there was a friend, this girl named Madeline, who lived on my floor. Every morning at 6 a.m., she would knock on my apartment door. Oh, that's great. Because my apartment is literally in between where she lives and the elevator bank. So she's going to be walking by my apartment no matter what anyway. So she just stopped and knocked on the door. And I was in the best shape of my life because I knew Madeline was going to be showing up at my door at 6 a.m.

33:40Paula Pant:Wonderful. Yeah. So I do think, though, Paula, you are right on. I think she's clearly at the point where the brokerage account makes a ton of sense. I think her advisor makes a lot of sense here. Wow. You, me, and her advisor are all in agreement. That makes for some boring radio. So, well, I think we can still, the real question was, when do you know, when do you know that this is the point? And I can tell you what I think about that. I like backfilling. So when I take the plan, I take my later years and I make sure that I'm, I'm filled up for my later years and I work back to front. And once I get to 59 and a half, then I know, and I know those years are going to be okay.

34:30Paula Pant:Then I know it's brokerage time. And maybe even before that, if I see that I'm on pace where that's going to happen, right, where I'm going to get to that point, just based on some fairly conservative numbers that I'm going to be filled up, I'm still going to want to develop that brokerage account for to add in flexibility, which is the secret sauce. And you won't get locked into a lifestyle that you don't like. You won't get locked into having to take money out that you're not going to spend. You can take out extra money in a year that you want to. There's so many advantages to having that brokerage account available.

35:07Paula Pant:So I like working back to front. The other reason I like working back to front is also the things that you develop on the backend, the Roth, the traditional, whether it's IRA or 401k, those take a little bit of discipline and a little bit of delayed gratification. And if you develop those first, you get used to having money on a statement that isn't yours. What I found is people often do it the opposite way. They're like, well, here's what I'm going to do. I'm going to put money in my emergency fund first. And then once that gets filled, then I'll start saving into a brokerage account. And then I'll start saving into my 401k.

35:44Paula Pant:That never works because you're making money too accessible and you haven't developed that muscle of saving money and delayed gratification. If you work from the back end and put away money that you don't have access to and you get used to that, then you can trust yourself with that brokerage account that's going to give you flexibility later on. That's my thought. Mm-hmm. Twyla, you mentioned that, you know, the thing that you often hear is like, oh, max out all your tax-advantaged accounts. Sure, that's standard boilerplate, you know, when you're talking to a mass audience and you have to give broad, generalized advice.

36:27Sure, it's a standard boilerplate. It works until it doesn't. when you dig a level underneath and you ask the question why the why behind that is all right all else being equal tax advantages are better than not tax advantages again that's all else being equal but what is that tax advantage where does it come from because it's not something for nothing it is a deal that you make with the government in which the government gives you a tax benefit in exchange for you promising not to touch that money until a certain age. And yes, there are methods. There's SEPP 72T.

37:12Paula Pant:Yeah, the one she talked about, right? Yeah. There are certain methods to get at that money at a younger age. But fundamentally, when you put money into a tax-advantaged account, at your core, at your essence, you are saying, I accept the terms of this deal. This is a mutual exchange between myself and the government in which they are giving me a tax benefit in exchange for me making this promise, this age-restricted promise. If there's a bucket of money that you don't want to be subject to that promise, then simply don't make it subject to that promise. That's the way that I view a taxable brokerage account.

37:54And again, absolutely you could 72T it, but the issue with 72Ting is suddenly things get more complicated and your relationship with that money gets more restricted. Whereas with a taxable brokerage account, you have flexibility. That delta in taxes, what that buys you is added flexibility. Yeah.

38:17Paula Pant:I really love her advisor's direction on this one. That is a great person to have in your corner. I love that idea. When you can find a good person and the key here is on good person. And I think for some of us, we don't do enough research before we bring people into our corner. But when we find that good person that can give advice like this, Paula, it takes some great planning that she and her husband have already done. Look at the nice savings they've done. They've done some really good saving. And when you can take that and you can now add to it this thing that isn't about what a lot of people complain about.

38:59Paula Pant:My advisor doesn't beat the S &P 500. This advisor gave advice that had nothing to do with beating the S &P 500. What's the other one? I can save money on my own. This isn't about saving money. This is about directing it in a way that's going to help you meet your goals better. That might've been a blind spot before. Love that. Love making sure that all of your accounts dovetail with what your goal actually is. Beautiful. Excellent. Thank you, Twyla, for the question. See, it could have been boring radio, but we made it fun. And by the way, congrats to your mom. Glad she's doing very well. And it was probably, Paula, based on the advice that I gave.

39:40Paula Pant:I would guess. Yes, the beach house. The beach house. I would have to guess it was probably based on something I said. Congrats to you, Joe, for taking credit for her mom's beach house. You're welcome. I have no idea. All right. Well, we're going to take one final break to hear from the sponsors who make the show possible. And when we return, speaking of mom, we're going to hear from a caller who's calling on behalf of her mom with a question for her mom. She's thinking about potentially an annuity. So we'll talk through whether or not you should buy a product that would create an income stream as part of your retirement plan.

40:19That's up next.

40:41There's no place like Chrome. Check responses set up required compatibility and availability varies 18 plus.

40:55Welcome back. Our final question today comes from Marie. Hi, my name is Marie. And first, I want to thank you, Paula. I've been a fan for about a decade and you are by far my favorite podcaster. So thank you for being such a wonderful part of the financial community. My question is actually for my mom. She retired last year and lives mostly off her Social Security income of about$1 ,800 per month. When she retired, I helped her roll her 401k over to a Rollover Fidelity IRA with a value of around$54 ,000 that so far she hasn't touched. When needed, she takes money out of her separate high-yield savings account to supplement her income, usually in increments of about$1 ,000.

41:39The high yield savings has a current value around$14 ,000. My mom is in the process of selling her mobile home and should net around$80 ,000 after fees. Her plan is to move into a house that my sister is building on her own land with a capped rent at$1 ,000 per month. As my mom turns 73 in January, I will help her set up her RMDs starting next year. My thought was to set up a monthly distribution so she can increase her currently monthly income stream. Are there any downsides to set this up monthly other than having to adjust it annually? My second and more important question is what we should be doing with the proceeds from the sale of her home.

42:18Historically, she hasn't been the greatest at managing money. So one thought was to take a portion of the 80 ,000 and set up a SPIA. Initially, I was thinking of 25 ,000 with a 10-year certain payout option as this would give her a small guaranteed income stream for life. I don't think an annuity is a great fit for many people, but my fear is that she will see this large sum of money in her account from the sale of her home and feel like she can really loosen her purse strings. By putting some of the money in an annuity, at least a small portion will continue to provide income for the rest of her life.

42:50Do you think this is a bad idea or should we be looking at another payout option like LifeCertain? What other investment vehicles might be a good option for somebody who isn't the greatest at managing money? And what do we do with the balance of the$80 ,000? Should we invest it for future growth or look at something safe like CDs. I want to make sure she has enough money to feel comfortable, but also make sure she isn't blindly spending money and make sure she has some guard rails in place. Any thoughts and ideas are greatly appreciated. Thank you again for all that you do.

43:20Paula Pant:Rhea, thanks so much for the call. This call, Paula, completely took me by surprise. You and I, before we hit record, we listened to this for the first time and I was running along as Paula saw, taking notes. And then she said, Spia. And Paula, I think laughed out loud as she saw my head go, well, what? Wait, what? I did. Yes. She was not expecting that. Plot twist. Yes. I did a complete double take. So if you did too, if you were listening, and maybe some of you didn't do a double take because you don't know what a Spia is. So maybe Paula, we should start there. Yeah, let's do it. So a SPIA is a single premium immediate annuity.

44:00Paula Pant:And what that means is you take some money and you turn it into a pension that you can't outlive. So what happens is Maria and her mom will solve for X amount of money they want to get per month. That's their goal is to get so much money per month. they put that into a calculator with an insurance company and the insurance company then says this is how much money it will take for us to give you that payout forever what the insurance company is doing is really the same thing actuaries do for life insurance they are calculating that so let's say paul we're doing it on you they are calculating how long they think you're going to live and then And they're going to, in a broad number of cases, have their mathematics work out that they're able to guarantee that everybody gets money for the rest of their life.

44:55Paula Pant:They don't go bankrupt. And even better, they make a profit. Right? So it ends up being good for the person. They get a pension they cannot live. good for the insurance company because they're able to do what they do really well, which is guarantee this income stream. So there's a lot of winners. So who loses in this deal? Well, there's a lot of afforders right now screaming at their device going, annuities suck. I've always heard that annuities suck. Annuities are horrible. And the answer is yes, and they can be horrible, but all annuities are not created equal. So let's just dive into who loses in this deal.

45:38Paula Pant:And the person who loses, the people who lose, and Maria mentioned a sister. And if it's just Maria and her sister, Maria and her sister are the ones that lose. Mom cannot lose in this deal. Mom will win in this deal because mom's going to have income for the rest of her life. However, when mom dies, if they don't pick a period certain payout period, which we'll get back into that, if they don't pick a period certain payout period, no money goes to any survivors. That income stream dies when she dies. So let's say they set this up and they set it for lifetime only, Paula, which is going to give the highest payout of any of the choices.

46:21Paula Pant:Mom has a heart attack two months from now and dies. let's say they put the whole 80 ,000 in the insurance company keeps the$80 ,000. They keep all of it. That's the deal when it comes to setting up this pension program. So, uh, that is the risk. And that's why she mentioned going with a 10 year period certain. And that means with mom's age now at a 74, this will be guaranteed to last until mom is, excuse me, mom's 73. So 83. So this will last at least until 83. Now, if mom lives past 83, the way a 10-year period certain works is that the payments will continue as long as mom lives. Mom lives to be 120.

47:10Paula Pant:Mom will continue to get payments from the annuity company. Well, I got to take that back. Maybe, maybe not. Because in many cases, the annuity company has kind of a cap out like you win where they just give you a bunch of money at the end. They might give you money when you reach 100, but regardless, if that's not the case, in most cases, she lives to 140. She lives to be 210 years old. She will still get paid. But if mom dies three months from now, the sisters will continue to get that payout for the next nine years and nine months. So they will get the full 10-year period certain. So at the very least, you'll ensure that some of the money will be returned to the family, even if mom passes away before the 10 years.

47:59Paula Pant:I like the 10-year period certain option on that. The alternate to this whole thing, by the way, is can you take this money that you were going to give to an insurance company and invest it instead and then create an income stream off of that? And the answer is you certainly can. And there are many times when, and you take the last 10 years as an example, many self-invested people, if they just picked the total stock market index or the S &P 500, they would have probably done much better than what the insurance company had projected because we had this upcycle. We had this great upcycle. The bad news is, number one, if you don't have a pro helping you do this, I think it's a mistake.

48:57Paula Pant:There's a propensity for people to bet or to not set up a really good asset allocation. The second thing that happens is what you are worried about, which is mom might have trouble with, it sounds like, maybe wanting to access money too quickly. And so she might run out of money if she has too much money available. I don't know if you and an advisor and your mom can create a kind of a wall. Because I had this happen before where I would have clients where they're like, listen, I'm not really good with money. So I want you to invest it under your guide. And by the way, I might call you for money and I really want you to talk me off the ledge.

49:47Paula Pant:And so it was great because people would not want to call me and they would leave their money invested for that reason. This is why when I hear people talk about how horrible assets under management advisors are, there is a certain type of person and your mom might be the person that is perfect for the assets under management advisor. And again, it's got to be the right one. It's got to be somebody who's going to be a good wall between mom and her money. That said, would I do that? I think there are a bunch of people, Paula, that the personal finance industry, not industry, the personal finance community of people that are really good at this forget exist, which is there are people who came into my office that no matter how much I tried to teach them how this worked and how much they needed to keep their hand out of the cookie jar, they weren't going to do it and they were never going to learn.

50:52Paula Pant:It just wasn't going to work any other way for those people. And Maria, you can kind of tell the questions I would ask you. If your mom is one of those people, this is who that annuity is built for. It's a hundred percent who it was built for because then she can't outlive the money. The whole family gets freedom from worry, you know ahead of time that this isn't going to be part of any inheritance. It is a decision that the family makes together to give mom peace of mind. I think it's a difficult decision, but for a lot of people, it's the right decision. Let me tell you how I'm not the only one that feels this way.

51:37There's a gentleman, an economist who is also a little bit of a movie star, Ben Stein.

51:42Paula Pant:Ben Stein was a character in Ferris Bueller's Day Off for people that saw it. He was the teacher who would say, anybody, anybody, anybody, Bueller. He also had a game show for a while called Win Ben Stein's Money, where people would compete and he would ask a bunch of questions because he's a super smart guy. Ben Stein's parents, Paula, he recommended a single premium immediate annuity for them. He said, I know money so, so, so well. my parents are never going to get it. My parents will never get it. A guy as smart as Ben Stein putting his own parents' money into a single premium immediate annuity, I think shows that this product is not always the ogre that we make it out to be.

52:29Marie, the most important word in your question was the word guardrails. I know a few people who it doesn't matter how much you try to teach them a concept, their psychology gets the best of them. I'm thinking of two people in my life in particular. One is someone who I sat down with him and tried to explain the concept of risk and reward and risk-adjusted return. But he cannot stop himself from making incredibly impulsive investing choices, the type of investing that is borderline gambling, betting his entire retirement balance, which is not much, especially relative to his age, on a single stock.

53:21And no matter how much education I try to give him, it just, it doesn't solve that gambler impulse that he really has. And I know somebody else, she's the opposite. I just had dinner with her a couple of nights ago where it doesn't matter how much I try to explain certain financial concepts to her. It's not going to happen. There are some people for whom, I think financial therapy would be a very good idea, but in lieu of that, guardrails need to be put in place.

53:54Paula Pant:It just shows you, Paula, that these product types, I'm not going to talk about the individual products like Lincoln Nationals versus Northwest Mutual's insurance policies, but these different types of products were made for a specific person and a specific reason. When they came out, there is somebody that it fits. I don't think when I look over the vast array of these products, that there is no use case for them until we get into some of the hedge fund kind of weird stuff. But some of these basic lines of insurance that people call the devil, there's use cases. I'll tell you who's the devil.

54:34Paula Pant:It's the salespeople who fit square pegs into round holes, try to shove people into these products that don't fit. But the product itself is not the devil. I think this guardrail could be a blessing for everybody. Right. So the issue is not the product itself. It's that people who are poor fits, it's the fit. There has to be compatibility between person and product. And when there's incompatibility, then that's the thing that's bad. So the compensation incentives in the insurance industry is where I point the finger to all of the people yelling about annuities that stink. I will say, Joe, to what you said about the assets under management model, I guess it depends on, Marie, how much of guardrails.

55:27Because if we talk about an annuity versus, let's say, the assets under management model, those are both iterations of guardrails. they're just different on the spectrum of like how guardraily is the guardrail, right? They kind of exist along a guardrail spectrum. And so the question for you is how strong of a guardrail does your mom need? Because if she only needs a little bit of a guardrail, the assets under management model might do that. If you find a person, the right advisor who, you know, the understanding with that advisor is, listen, here's why we're working with you. Here's the objective.

56:08This is the reason that we're coming to you. And this is the reason that we're putting assets under management. And this is what I want from this relationship. Like I want babysitting, essentially. Like I want you to be the adult in the room who says no. And if you go to an advisor and establish that as the relationship, then I think that could be a great fit. And it might be that you don't need a guardrail that's stronger than that. it might be that that is a sufficient enough guardrail that you could achieve the guardrail that you're looking for and get better returns with lower fees by virtue of going the assets under management model.

56:56That, I think, could be a very viable option. And then to what Joe was talking about, the annuity is there if you need a stronger guardrail. So then the question goes back to just how strong of a guardrail do you need?

57:09Paula Pant:It's a great question though. And it is the first time in the history of answering these questions that we've found the person that the annuity was specifically built for. I cannot remember an episode where an annuity might be the right answer, Paula. I don't recall somebody bringing this particular thing to the table. So what a great question. Yeah. We're going to link in the show notes to two previous episodes that we've done. One is Morgan Housel. He's been on the show several times, but we'll link to the episode in which he talks about the avalanche. But also, I want to link to an episode with Dr.

57:50Wade Pfau. He is a retirement researcher. He's a professor who covers retirement planning. He has come on the show and talked about annuities. I actually was anti-annuity until I heard Dr. Wade Pfau speak. And he laid out a case for when it can be a good idea, under what circumstances, what types of annuities. Whenever I think annuities, I think Dr. Wade Pfau. And so we will link in the show notes to our interview with him as well. If you do go the annuity route, please, please listen to Dr. Wade Pfau before you make any purchases. When it comes to the topic of annuities, Dr. Wade Pfau is the voice that I trust the most.

58:35Pfau is P-F-A-U. So we'll link to that in the show notes as well. Joe, I think we did it. How about that?

58:43Paula Pant:And my voice made it the whole way. Although I see a nap in my near future as I look in the crystal ball. Do you know what I was supposed to be doing tonight? Like, true story, okay? Today is Sunday. We're recording this Sunday, August 30. 30 hours from now, I was supposed to be standing on a stage at the comic strip. Oh, no. Yeah, the comic strip. It is a comedy venue in New York City on Second Avenue. And I was supposed to be delivering what's called a type five, which is a five minute set. So I've been taking stand up comedy classes since January. This particular bit, I have been practicing literally for months.

59:26I had a type five written scripted. It was doing so well. I was going to comedy classes weekly and workshopping it and it was doing really well. Do you know what my freaking type five, do you know what the subject matter is?

59:39Paula Pant:Oh no. Nepal. Oh no. Yeah. I have a five minute comedy set about being from Nepal. The whole thing, it starts with my name's Paula and I'm from Nepal. So you can call me Nepala. And then we go from there. I think now you could just open it up with, hey, so the last six months I've been working on this set about being from Nepal, which really was like, wow, neat until like a week ago. Right. Yeah. And now this is like I emailed my comedy teacher a couple of days ago and I was like, this is probably a really bad time to stand on stage and crack a bunch of Nepal jokes. All of my classmates are going to be there.

1:00:21I'll be in the audience, but I had to pull out of the comedy show.

1:00:25Paula Pant:A few weeks from now. Now people have to wait till October, November. Yeah, no, I'm going to. Just retool. Yeah, I'm going to put it on ice for a while because the premise of the whole bit is coming from a country that no one has ever heard of. And how funny, you know, how strange that is. There aren't a whole lot of stereotypes about Nepalese people. And if there aren't stereotypes, then you're the prototype. And so every time that I talk to somebody, I recognize that I am the one and only, probably the one and only Nepalese person they've ever met. Right. All my Nepalese stereotypes are based on Paula Pant.

1:01:01Exactly. Exactly. Yeah. When there's no stereotype, you're the prototype. With great obscurity comes great responsibility.

1:01:09Paula Pant:You're a bunch of Momo Eaton. Yeah. Yeah. So I talk about that, about the pressure of being the prototype. I talk about the fact that in 2017, President, and this is true, President Trump in 2017 referred to Nepal as nipple. Anyway, so that's what I'm not doing this afternoon. You can't really play a tiny violin for me. No, I will be dreaming about you not being on stage as I'm crashed out again. Yeah, as you're napping off your flu. Yes, yuck. Joe, where can people find you if they'd like to know more? You can find me Monday, Wednesday, Friday this week at Stacking Benjamins. And when you go there, on Monday this week, we have all of August we've called Financial Action Month, Paula, because April is Financial Literacy Month, but who cares about literacy if you don't do anything with it?

1:02:08Paula Pant:So we created this old bingo card. Well, it's graduation day. So we're going over greatest hits. What are the greatest, like some of the greatest, coolest things that you should be putting in action in your financial life to automate, to make things easier, to make them run. On Wednesday, it is going to be the one and only Wes Moss joining us. Oh, very cool. Who talks about, you know, my favorite topic, Paula, is what builds happiness in retirement. And Wes has a new project around that. And I can't wait to chat with Wes. And then on Friday, a special episode, we have Angelo Poli from MetPro on, who's kind of our health and wellness expert, health and fitness.

1:02:49Paula Pant:And he comes by a couple of times a year because what good is your money if you don't have any health? He always answers some of the best questions the community has about health and wellness. But in this one, we already recorded it. He made me tell my own story. We literally got together to record. We get together to record, and I told him what had happened with me and my ankle. I'm having ankle surgery at the end of September. And I told him what happened, which is a long story. But at a point when I thought I had no hope of walking correctly, I gained almost 20 pounds overnight, like almost immediately.

1:03:28He talks about the relationship between hope, wellness, our mental ability to stay in the game

1:03:37Paula Pant:and what the lack of hope does. And when hope was renewed and now I feel like there's a light at the tunnel, how I've been losing weight rapidly again and getting back in shape, which is very cool. That's amazing. He's like, we can answer your listener questions later. I think everybody wants to hear this story. So we're actually going to play that story, which is a little tough for me to tell. But that's this week on Stacking Benjamins. Wow, that sounds incredible. I can't wait to hear it. All right. Well, thank you, Joe, for joining us, for answering these questions. Thank you to all of you for being part of this community.

1:04:11If you enjoyed today's episode, please share it with the people that you know.

1:04:16Paula Pant:Share it with your mom who has beachfront property. Yeah. Beachfront property mom. Share it with Dr. Wade Pfau. And please, I got to hit the cough button again. Joe, it wasn't that funny. it just caught me share it with stand-up comedians yeah share it with the annuity expert share it with your cool fee-only financial planner oh yeah share it with all those people and more because that is a single most important way that you spread the message of financial psychology increasing your income investing real estate and entrepreneurship double i fire all right i'm Paula Pant. I'm Joe Solcii. And we will meet you in the next episode.