Q&A: Who Actually Makes Money From Gold and Silver These Days?

28:04But if you're not preparing for college, get ready to lose all your hair and look like me. Aw. Well, you know, Scott Yamamura, who was a guest on a previous episode, he talked about the rule of 72. And rule of 72 states that the amount of time that it takes for money to double, this is kind of a rough back of the napkin calculation, but the amount of time that it takes for money to double is 72 divided by the interest rate at which that money will grow. So for example, if you expect that money will grow at a long-term annualized rate of 8 % per year compounded, that means that 72 divided by 8 equals 9, which means that money will double in nine years.

28:51So let's take that and apply it to college savings. Let's say that the amount of money that you save, if you make a return assumption of 8%, and you might argue that's too high of a return assumption, we should dial the return assumption down lower. We can have that argument in a moment, but let's just hang with me for the math for a moment. If you make a return assumption of 8%, then whatever you have saved in the child's portfolio by the age of nine would double in nine more years when that child turns 18. So the balance of the portfolio at the age of nine, if you're making an 8 % return assumption, should be roughly half of the total amount that you want to save by the time that child is 18.

29:35So let's say that the goal, and this is the part, Diana, that I didn't hear in your question is, what is the goal amount at the time that the child turns 18? Let's say that that goal amount is$100 ,000. That means that by the time the child is nine, assuming an 8 % return assumption, you would want to have$50 ,000 saved. And so then pull the first nine years of compounding returns out of it and just run an extremely simple calculation,$50 ,000 over nine years, assuming zero returns, right? Assuming just pulling all of the returns out of it, looking only at the cash that you need to save. To save$50 ,000 over nine years means that you would need to save$462 per month.

30:23But obviously, that money is going to be growing over the span of the nine years. So you wouldn't even have to save$462 per month. It would be less than that. And so I'm with you, Joe. I think that she saved too much. But again, I'm assuming that$100 ,000 is the balance that she's aiming for. Sure. Yeah, we don't know what that finish line is. And I love begin with the end of mine. Right. So if that balance, the finish line is$150 ,000 rather than$100 ,000, that changes the equation. And the issue with a 529 plan in general is that the uses are so limited. It has to be money that's for the cost of college or qualifying expenses around the college.

31:05So either going directly to the school or there's a laundry list of pretty obvious expenses that are college related, right? The good news is the SECURE Act changed this a little bit, which is that if you don't use that money for college. Now there's opportunities to change that into Roth IRA money. But I'll tell you, Paula, I really like if Diana feels like she's been saving too much. I almost said we've been saving too much as if I had something to do with it. We've been saving too much. Diana, you and I have been saving too much money, mostly you, but I love just the brokerage account. I like still saving the money.

31:42Here's what happens when people dial it back. When you dial it back, that money just goes into your budget, goes into your checkbook, does nothing. I like the fact that you've been directing it. So let's continue to direct it, but direct it into a place that is much more flexible. And this is, by the way, something for any goal. I mean, it doesn't have to be for college. If you're going into a specific place, like let's say a Roth IRA or a 401k, if it's for your financial independence goals, how many times as we said, supplement that by having money go into a brokerage account. So we've got the gift of flexibility.

32:18We don't have the tax shelter, but we've got flexibility, which is really cool on its own. So I would still keep saving the$600 a month if she's built that muscle. I wouldn't let it go. I would just have that money go into a brokerage account instead after she does the homework that you're talking about. How much is too much? But even Paula, with that homework, I'm going to talk about another side of this. I'm thinking about my awesome niece who is a senior in high school this year. She applied, Paula, to five different small liberal arts colleges, private liberal arts colleges. They are not cheap.

32:53And she got nearly full rides to all five of those because she's amazing, mostly because she's related to me, right? Of course. She now has all this money in a 529 plan and Paula, she's going to use almost none of it. Almost none. Now, the cool thing is, is that her parents are already talking about, hey, what a great Roth IRA to start with, right? They're going to change the ownership name to her and then she will have this beautiful Roth IRA that's going to give her this leg up that she might not have had, had she not had her parents save this money. so it's still going to go toward her but not toward the college education it's going to go further out but man if that were in a flexible place it'd be a lot easier well you know the advantage that diana has is with three kids you know so for i'm thinking the 13 year old child right if diana's been saving 600 a month from the time the child was born that means that her save her contributions to the account are$93 ,600.

33:57And that's just the contribution of$93 ,600. That doesn't count all of the gains that that money has made over the span of the last nine years. And the last nine years has been primarily bull market. So that money has grown pretty substantially. If she is overfunded for the 13-year-old, then she can always change the beneficiary on the 529 to be the 11-year-old or the 7-year-old. But if she's saving$600 for them too, she's in the same situation with them. Right. But for the youngest who's 7, she can probably stop saving for that child. And there's a good chance that that child, the 7-year-old - She could do that.

34:40Can get the hand-me-downs from their older siblings. Yeah. Yeah. That definitely is a good idea. I love the fact that a lot of people don't know that you can change the beneficiary on your 529 plan. Right. So you can make it so that it's not this child, it is another child. In fact, if you go through children, you can make it you. If you want continuing education, if you've got some cool thing you want to do at the local university, if it's an accredited institution, accredited it, if it's an accredited higher education institution, it could be cooking classes, it could be golf lessons, it could be flight school.

35:19It could be all kinds of things. Or it could go to grandkids. It could do that too. It has to go to an actual living person. It can't go to a hypothetical person. So it needs to go to somebody who has a US social security number and is living, but it's not time restricted. So you can always wait until the first grandchild is born and then put it in the grandchild's name. And then it becomes like the Diana Education Trust. Right. For all purposes, it's like an education trust. Pretty cool. But a great problem to have, this is a wonderful problem to have, was that you took it seriously early on, possibly overfunded it.

36:01Yeah. Not a bad issue. Yeah. But Diana, to your direct question of how do you know if you've overfunded it or not, I mean, my first question back is what goal amount are you setting? Because again, if the goal amount is$100 ,000, then you've overfunded it. If the goal amount is$200 ,000, all right, now we're having a different conversation. There is a reason, by the way, Paula, that a lot of parents that are doing the right thing overfund college. And I saw this firsthand as a parent, which is that some of the college cost is not new expense. And I see people fall into this. So I'll give you my personal example.

36:42My son, Nick. I know what you're about to say. Your grocery bill. Oh, my grocery bill was so high. It was so high. When I saw the amount the University of Texas was going to charge him for on-campus food, I was like, my kid and I are going to win this together because the University of Texas is losing. And Paula, you've seen Nick and he's not a big dude, but that guy can eat. It is amazing how many calories he burns with his workout routine and whatever. But Cheryl and I found that when Nick went to college, this money I was spending in groceries now was just a cost transfer. I was still spending it, but now I was spending it toward part of the room and board bill to the University of Texas instead of here at home.

37:31And actually, frankly, it ended up being less money I paid for food than I paid when he was home. So some of those room and board costs, not as egregious as you think they're going to be. I think sometimes we get really afraid when we look at, you know, you go to savingforcollege.com, which is a fantastic place to look at the cost of college, responsible 529s, what the fees are going to be on 529s, all the different plan options you have from different states. Really, really like this website. When you go to a place like that and you see all these costs, and then you put those into your calculator and you include the room and board, you come up with this huge number.

38:09Well, if you think about it, you don't often see your grocery bill expressed as, whether if it's semester, four and a half months, or if it's a year, nine months, 10 months, you don't see your grocery bill expressed in those types of increments. No. And so you tend to think of your grocery bill as weekly or biweekly or at most monthly, at most monthly. But you never think of your grocery bill in increments of semesters. And so when you see that number, it looks like a huge number. Monster number. Yeah. And then you go, wait a minute. Oh my goodness. I'm already spending that. Yeah. I love the idea though of cutting the seven-year-olds 529 first and then having the water spill downhill.

39:00Yeah. The overflow spill downhill. I like that idea. Oh, well, thank you. Yeah, that's good. Thank you. I'll be here all week. One thing I like too, for diversification purposes, because of the fact that you can use, you can change the beneficiary, Paula. One thing we did with our twins that I still advocate for people, maybe not for Diana, maybe four, I don't know. I like using different custodians for different kids just because of the fact that different fun companies have different strengths and weaknesses and knowing that I can mix and match at the time. So I used the Vanguard Utah plan for my daughter and I used the New Hampshire Fidelity plan for my son.

39:46And we ended up using the 529s for both of them, which was pretty cool because then I got Vanguard and Fidelity. I wasn't trusting one fun company to take care of all of my college money. And this may seem like a little thing, but there was a time when Worth Magazine, I don't even know if Worth is still a magazine. Worth used to be a huge magazine in personal finance. Worth Magazine had a cover story that said, is Fidelity dead? Because the Fidelity management team, Paula, went through this rut back when everything was managed, right? There was very little indexing going on. The Fidelity team was all doing research through the same place and Fidelity just stepped in it research-wise as a group.

40:33What was also interesting was that Fidelity at the time was one of the biggest advertisers inside of Worth Magazine. And it showed great editorial balls, I guess, to be able to say, who cares who our advertisers are? We're going to still ask this question, which was a huge question. Made me really appreciate the editors at Worth Magazine at the time that they published that. Now, that's not going to be the case as much anymore with indexing, but still, if something bad happens and I have this opportunity, why wouldn't I? 529s are not the type of thing where I'm going to go touch them or move money around all the time.

41:14So having one at Fidelity and one at Vanguard, okay, maybe bad things won't happen. But if it does, I've got this extra layer. The last thing I'll say, Diana, is that if you waterfall the 529 balances down and you still end up overfunded for the seven-year-old, then there's always the option of using some of that money. if any of the kids want to go to graduate school. This doesn't necessarily have to be undergrad money. So there's always the option of using it for grad school. There's always the option, as we talked about before, using it for grandkids after they're born, after they have a social security number that you can associate with the account, or using it for yourself.

42:01So there is actually a lot of flexibility in the 529, which is one of the great things about the account. You get tax-deferred growth, but you do also get quite a bit of flexibility. Or there's always a popular option, Paula, that we haven't explored yet, which is just send it to your favorite podcasters. Why would she send it to Alex Cooper? Oh, hey. America's second favorite behind us, right? All right. Well, thank you, Diana, for the question. Our final question today comes from a caller whose pension and Social Security will cover all of her basic expenses during retirement. So she's wondering, does the 4 % rule still apply to her discretionary money?

42:45We'll answer that next. This Friday, the NBA on Prime tips off with their debut doubleheader. First up, Boston brings the action to the Garden as the Celtics face the New York Knicks. Then out west, it's a battle of the superpowers. as the Lakers try to poster the relentless pace of the Minnesota Timberwolves. The Celtics and Knicks, who has the most hustle in defense? This game will come down to who wants it more. And the Timberwolves and the Lakers, it's two Western Conference heavyweights going toe-to-toe. Buckle up, folks. This one's going to be electric. Celtics-Knicks, T-Wolves and Lakers.

43:30Coverage starts Friday, 7 o 'clock Eastern, only on Prime. This episode is brought to you by Marshalls, where you never have to compromise between quality and price. The buyers of Marshalls hustle hard, working to bring you great deals on brand name and designer pieces, because Marshalls believes everyone deserves access to the good stuff. Visit a Marshalls store near you or shop online at marshalls.com.

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44:33Our final question today comes from Wendy.

44:56percent. Whether you use the four percent rule or various other methods of drawdown with guardrails, the assumption is if you are relying on your lump sum to last the rest of your life, that your nest egg is usually invested in a portion of equities and some safer investments like bonds or cash equivalents, usually with equities making up 50 to 75 percent. I understand for the equities portion you can use a low-cost index fund or diversify a little with efficient frontiers approaches. But what if this lump sum is not needed to produce a guaranteed minimum amount of each year that you must withdraw to live?

45:31Our details. My husband and I will retire at age 59 and a half with a pot of conservatively invested dedicated money to take us to age 65 to 66. At that time, we will then have income from pensions that are not cost of living adjusted, but that generate$100 ,000 a year for life for both of us. plus Social Security for conservatively another$70K if it is still paying out the estimates that SSA website states we will have earned. Our base budget to cover all of our needs, what some call the minimum dignity floor, will be fully funded. This includes all our health care, housing, food, transportation, energy, and a bare minimum of travel, gifts, and entertainment.

46:13We do have another budget of$100 ,000 to$125 ,000 a year of fund money that we plan to use for extensive travel, gifting to our kids, and bringing our standard of living up to about$300 ,000 a year, which matches our current level of spending. But this fund money can absolutely be calibrated or even not taken at all in a given year if the market is down. My question is, if you have a pot of money and you want the most growth over decades without excessive risk, is a four-fund efficient frontier approach the best way? Do we need to have any of this money and bonds at all? A last point. In addition to these two buckets of guaranteed income and nest egg income, we also have$2 to$2.5 million in real estate equity that we are not including in our calculations.

46:59So in the unlikely event of the world is ending, worst case scenario like no social security or the pension goes bankrupt, we could downsize our real estate assets and simplify our lives dramatically and still not have to eat dog food to survive. Thank you.

47:42to touch your portfolio. Just delay. Yeah. Therefore, sequence of returns risk is not a risk. And with that risk eliminated, you can take on a heck of a lot more risk in your portfolio. I was about to say aggression. I was like, that's not the word. Yeah. But you can be much more aggressive in your portfolio. So no, you don't need a bond allocation. You can maintain an equities position because you don't have sequence of returns risk looming. You've eliminated that. So go ahead, be aggressive in your portfolio, grow it as much as you can. That's the opportunity that's available to you by virtue of the fact that you have flexibility and can adjust downwards when the market is down, especially if the market is down in the first five years of retirement.

48:34Those are the critical sequence of returns years. and by being ultra flexible during those years, you've eliminated the bulk of retirement withdrawal risk. I will only hedge what you're saying, Paula, in two ways. The first one is, I think if it were me, I would just keep a little larger cash cushion because if you do go through an extended downturn and you don't want to take it, I think you can afford to do that if you are staying completely in stocks and you're very flexible. So a little bit, Paula, of an approach like you, UUs or my co-host on Stacky Benjamins OG, a little bit of a barbell where you've got a little bigger cash reserve than a lot of people have.

49:14The second thing that I would look at, since you're comfortable with the efficient frontier, is that I would just look at what's called the standard deviation on that portfolio just ahead of time to know what the bouncing around is going to be. Because what you're talking about is really making a portfolio that's going to have significantly higher highs and significantly lower lows than you may have had in the past, depending on where you're starting. And I just want to know that ahead of time, what that flight plan kind of looks like. Because during those lows, if you're 100 % equities, it's going to suck.

49:52And the only thing that I worry about, I don't worry about the plan at all. I'm 100 % with you, Paula. Don't worry about that plan. It's a beautiful thing. If you can stay in equities, and when you're modeling the efficient frontier, just cut all the bonds out and say, put me along the efficient frontier, all equities, baby. Go, go, go, up and to the right. I'm great with all that. What I'm not great with is you because I don't know you and I don't know if you're gonna blow that plan up when the market seems like it's in this unrecoverable position, which is what happens at the bottom. It's 100 % what Bethany's partner is worried about, right?

50:32Is that you're going to get to this black area where it looks like there's no upside, which you and I know sitting here today is the time of greatest opportunity. But at the time, it feels like the time of greatest risk. So Joe, you're not worried about the math of it. You're worried about the behavioral psychology of it. A hundred percent. Right. Right. And that's going to be very highly individualized because only you know yourself well enough to know how you're going to handle that. And I think the best way to get a sense of that is to look at your own past performance, your own behavior during the Great Recession of 2008, during the pandemic.

51:12You know, the pandemic recession, it was a short one, but it was a sharp one, right? When you think about recessions, there are really three characteristics that define any recession. There's severity, there's duration, and then when it comes to multiple recessions, there's frequency, right? And so the recession of 2020, the pandemic recession, was one of short duration, but massive severity. How did you react? Because the way you reacted then is going to be a powerful insight into how you are likely to react in the next one. And then you go back to 2008, that was severe severity, but it was also long duration.

51:53Yeah. And so it gives you a window when you look at your behavior across both of those, it gives you a window into how you will react to severe recessions and how those reactions might change depending on the duration of the recession. And something else is going to change too, Paula. And I think there's a couple of reasons for this. I have some hypotheses, which I'm happy to dive into. But I also think that our risk tolerance goes down as we age, even if we don't need the money. I think so. I think my hypothesis is on two fronts. Number one is I think that the popular media, and we're always inundated with when you're older, you need to be more careful.

52:39And even if you think that doesn't affect you, you hear it so many, so many, so many times that I think that it does. I think the second thing, though, is that even without that, I think that you realize that your opportunity to wait becomes less as you age. And I think that one is a very real thing. So I think number one is learn behavior from everybody around us telling us over and over and over. But I think number two is you're like, oh, do I wait two years on this trip? Go ahead and take it when I'm down 35%. Right. which is another reason why I think I keep that extra large cash cushion. Right.

53:19Two years feels a lot different at 30 than it does at 72. Right. And one of my favorite components of your question was when you talked about that fun bucket, that flexible bucket of money that you would use for extensive travel, for all the fun stuff. I would encourage as you're thinking through your spending in retirement, to pull out a couple of buckets like that. This is actually a tip that comes from Christine Benz, who's also a former guest on this podcast. We'll link to her interview in the show notes so you can hear it in its entirety. But I flew out to the Bogleheads conference in Minneapolis last year and sat down with her and talked to her about retirement withdrawal strategies.

54:02And one of my favorite tips that she offered was to have a dedicated bucket of money for some specific retirement goal and have a goal of spending down that entire bucket. Treat it almost like it's a flexible spending account. Use it or lose it in that your goal for this bucket of money is that you want that bucket to be empty within X number of years. So maybe that's five years. Maybe that's 10 years. But the value in having a particular bucket of money that you are committed to whittling down to zero is that, number one, mentally, it puts you in a very different state. Now you're no longer thinking about growth.

54:46You're thinking about, I have to blow through this. My goal is to blow through this particular bucket of money. And what that does is it encourages you, especially at the beginning of your retirement, when you are likely going to be in the best health and have the highest levels of energy that you have, it encourages you to do that spending up front. So let's say that from the age of 59 and a half to the age of 64 and a half, during that five-year window, you have some bucket, some portion of money that you're like, I must spend this by the time I'm 64 and a half. If I turn 65 and there is even a dollar left, I will have failed in that goal, right?

55:30By virtue of doing that, you end up living more life in those first five years of retirement. And when you're in your mid to late 80s and you can't travel in the way that you could when you were 61, 62, 63, you're likely going to be pretty happy that you did it. I love that approach. I also remember, and I think, Paula, you and I may have discussed this before. So for people that are new to the show, I'm sure you haven't heard this, though. And if you have heard it, I think it's a good reminder. I love Paul Merriman's approach, too. When the market goes up, he and his partners, they travel the world.

56:11And when the market goes down, they appreciate all the wonderful local things that are happening in their backyard, which is just a pretty fun way to gamify it as well. Right. And that's not too dissimilar to what working people do with their income. You know, if you're a working person with some type of volatility in your income, maybe there are certain years that you get big bonuses and certain years you don't, certain years you get fat commission checks, certain years you don't. People often do this in an unplanned ad hoc sort of way. People often just kind of spend more in the years that they make more and spend less in the years that they make less.

56:47That's sort of a natural response to shifting income. And so I think Paul Merriman's approach is just taking that natural response and then applying it to market withdrawals. The other thing I like about that too, it just creates this well-rounded adventure. There's so many things. Paul talks about travel. There's so many opportunities that are low cost and there's so many opportunities that cost a lot. I feel like you get this fun buffet of high ticket items mixed with just zero cost fun, like going on a hike or you know what I mean? And they're all fantastic. And to have the serendipity to have it just happen as the market forces have it happen is pretty cool.

57:34Yeah. I mean, you think about enjoying New York City, you could go to a Broadway show, which is hundreds and hundreds of dollars. You could take a long walk through Central Park. I frankly derive an equal amount of enjoyment from each. And I'm glad that my life is able to do both, but certainly you can do one when the market's good and the other when the market's bad. Yeah, this is so fun. What's the one beautiful green space above the city, the High Line? Oh yeah, the High Line, the Chelsea High Line. Yeah, I mean, stuff like that. That was designed by the same architect who made the Atlanta Beltline, so shout out to all my Atlanta people.

58:11Cool. Yeah, really some fun stuff that you can do, to your point, for nothing next to nothing and other things that, I mean, all the five-star restaurants where you can, or Michelin star restaurants where you could spend an arm and a life. Yeah. There's Michelin star restaurants. And then there are also these like little hole in the wall places, right? Yesterday I had a slice of pizza, like the kind that you have to eat standing up because there's nowhere to sit at the little counter. And I mean, I would recommend that anybody, Prince Street Pizza, anyone who comes to New York. Heaven. Yeah, grab a slice.

58:47It's great. There's nowhere to sit, but it's amazing. I'm talking about New York City because I think it's a microcosm of life in that way. There are so many things that you can enjoy that truly enjoy at every budget level, whether it's free, cheap on one end or massively expensive on the other. And having the ability like they will to go back and forth, you know, to dabble, totally fits the Joe's All-See High approach to life. completely fits my ADD. Nice. Well, Joe, I think we've done it. No way. Already? Yeah, we have. That was super fun. So speaking of you and your ADD, where can people find you if they would like to know more?

59:34And by the way, we are not cracking jokes. Both of us, both Joe and I have ADHD diagnoses. What? So just to put that out there for anybody who thinks that we're cracking jokes about neurodivergence, we are not. Not at all. Yeah. Not in the least. Come out to dinner with the two of us. Yeah. It is a wide-ranging squirrel conversation. Yeah, exactly. You know what I'd like to talk about? If you want to read my work, I have this book that CNN, the year that it came out, 2023, called the number one book on personal finance that you should read. It's called Stack, Your Super Serious Guide to Modern Money Management.

1:00:13The reason I'm bringing this up today, Paula, is because of the fact I just found out that our local university here, Texas A &M, Texarkana, is going to use it in their curriculum in the fall. Amazing. Which I have been hoping, because as you've seen in the book, it's totally made for that. It's an end-to-end personal finance journey with lots of relaxed metaphors in it. So by the way, if you are working with a university or a college and you want to talk to me about how to get that done or you want to have me come talk like I just did at UC Santa Barbara, just write me Joe at stackingbenjamins.com.

1:00:51So how about that? If you read the book Stacked, pay particular attention to page 13. Lucky page 13. The best page in the book, I must say. Yes. You might notice somebody quoted. And even after that quote, we do interviews with experts from across the field of personal finance. And the very first interview that we do from the show is actually, it's funny, it's an Afford Anything segment with you and I talking to one of the Afford Anything listeners. So good stuff. Anyway, stacked and I'm super excited that this is going to appear in a university near me. That's amazing. Congratulations, Joe. Well, thank you to everyone in the Afforder community for being a part of this community.

1:01:38If you want to talk to your fellow peers, head to affordanything.com slash community. It is absolutely zero cost, and it's a way for you to connect with other people in the space. You can talk about retirement. You can talk about debt. You can talk about student loans or saving for college or anything that's on your mind, efficient frontier, asset allocation, you name it. It's all in the Afford Anything community absolutely free, affordanything.com slash community. Sign up for our newsletter, affordanything.com slash newsletter, where we send out special updates of things that we don't write anywhere else.

1:02:13So you only find it there, affordanything.com slash newsletter, also completely free. If you enjoyed today's episode, please share this with the people in your life, your dog walker, your barista, your boss. Your podcast co-host. Yeah. Share it with your own podcast co-host. Share this with your financial advisor. Share it with your accountant. Share it with - Your accountant's mom. Yo, I've never met my accountant's mom. Well, there's an opportunity. Oh, now I've got an icebreaker. So yes, share this with all the people in your life. That's the single most important thing you can do to spread the message of great financial health.

1:02:54Make sure you're following us in your favorite podcast playing app. And while you're there, please leave us up to a five-star review. Thank you again for being an Afforder. I'm Paula Pant. I'm Joe Salcihai. And we'll meet you in the next episode.