How Middle-Class Families Can Retire On Time Without Burning Out

21:47Mindy Jensen:It doesn't just sit in a bank account. You can invest this in the stock market and see your HSA grow. And then you pull out the money to reimburse yourself, again, tax-free, down the road after it has had time to grow. Maybe they have somebody gets their appendix out and they need to take money out of there. Fine, that's what it's there for. But if they all get to 65 with their appendixes, they can just have this giant pile of cash that they can start pulling out or reimbursing themselves later. So you definitely wanna keep track of your receipts from anything medical, not healthcare costs, not premiums.

22:25Mindy Jensen:Healthcare premiums are not HSA deductible, but your doctor's visits co-pays, your medicine, things like Band-Aids and contact solution. And there's a list of like 9 million things that you can charge on the HSA. So keep all your receipts and then down the road, start paying yourself back. I think this is a superpower account. And after we take our 401k match, I would be strongly encouraged folks to contribute heavily to the HSA, maybe max this out entirely before going to the next retirement accounts. It can essentially operate as a retirement account like a 401k, but it's much better than that because all of the medical expenses come out tax-free.

23:01But again, that power, the superpower of this account, it's arguably the best account even if you are disorganized. But if you are very organized and just file away every receipt you have for medical expenses, it's arguably way, way more powerful than the other retirement accounts because it goes in tax-free, it grows tax-free, and it can be distributed tax-free. But I would also encourage you to keep those receipts for your health insurance premiums, too, if you pay them, because I believe that that's legislative choice, that those can't be reimbursed by the HSA. And one day that may change and that may be another yet another way to get money out of these accounts at a really tax advantaged way.

23:40So that's not current policy today. There's no plans to change that. But who knows what's going to happen in 10, 20, 30 years?

23:45Mindy Jensen:That's a good point, Scott. I should go back and find all of my receipts for my premiums as well. Okay, next up, we're going to talk about college savings. One of the household specific goals here is to save for college. We believe that that should be a secondary goal for this household. A primary objective has got to be retirement savings and emergency reserve on track, right? There's no point in having a big college fund if we're going to have a crisis that's going to disrupt the family lifestyle on the way to children going into college. I would much rather see this household being on track to retire than having college fully funded, right?

24:16We can borrow for college. We can find other opportunities to fund college like attending state school or attending community college and amassing a lot of credits before transferring to a full four-year college in many cases. But we cannot catch up to retirement if we run out of time at that point. So I think it's really important to prioritize retirement first. However, this household has discussed their desire to fully fund retirement. Once they start hitting their 15 % household savings target for retirement, I'd be fine with this household then beginning to save a little bit per child for college.

24:50And a good starting point for that might be$100 to$300 per month per child going into an account like a 529 plan. If you're going to start doing that when your children are young, the advantage of the 529 plan is greatest because the gains can be distributed tax-free for qualified educational expenses like college education.

25:09Mindy Jensen:But not only college education, Scott, you can use this for primary and secondary education as well. Walk us through what else you can use this for. Well, you can use it for any expense that is an educational expense, like a computer or a dorm room. Or you decide that you want your child to go to a private grade school instead of the public grade school. You can use your 529 funds to pay for them to go to the private school. It looks like you can use 529 plan for up to$10 ,000 per year for private school tuition. That's another use case as well on that front. But if you're planning to send them to a very, very, very fancy private school, probably going to need something else on top of that.

25:46Probably not this household, though.

25:47Mindy Jensen:Our family is not sending them there. Yes, our family is using the 529 plan to save for money for college. That's what we're doing as well. OK, so we've got two kind of big decisions in this framework that this household needs to make, right? We've tried to give answers everywhere else. You know, we're going to invest in low cost index funds. We're going to save 15 percent for retirement. We're going to save for college after we save for retirement, for example. But this household does need to make two decisions here. And there's an argument that perpetually goes back and forth on these decisions.

26:18We're going to give our opinion on them, but we do need this household to actually make a thoughtful decision and align on it as a couple. The big decision this household has to make is around Roth versus traditional retirement contributions. So traditional retirement contributions typically defer taxes now. So you're going to not pay taxes today. they're going to grow pre-tax and you go to withdraw the funds you're going to pay tax at ordinary income rates when it comes out. The Roth is after tax contributions so we're going to pay taxes today federal income taxes any state applicable state taxes and then we're going to put that money into a Roth IRA and it's going to grow tax-free and any gains on that money will come out after we hit a traditional retirement age and we want to pay taxes on that growth and in this household, in this situation, I would heavily bias this household towards the Roth side of the spectrum here in their retirement contributions, because I believe that this household is going to be in the 12 % federal tax bracket here in 2026 with this income after we account for things like the$32 ,200 standard deduction, a 401k contribution and match if that's available to them, and any HSA contributions.

27:26They're almost certainly going to be saving the rest of that at a 12 % federal income tax bracket. And because this household is basically responsible and working hard, I think it's very likely that over the years, they will slowly increase their income to have a few years in the 22 or 24 % or maybe even a higher tax bracket over the course of the next 20 or 30 years of their career. And at that time, I think that's a great time to switch over to the traditional contributions like a traditional 401k.

27:53Mindy Jensen:I completely agree, Scott. And this is something that I wish I would have really considered back when I was contributing to a 401k. I was prioritizing reducing my taxable income in the moment without even considering what the tax brackets I was in. And some of this is unknowable. What are future rates going to be? What's the future income situation for this household gonna look like? So there's no right or wrong answer and you're doing just fine whichever way you pick. We're just gonna bias you towards that Roth instead of the traditional here today. All right, number two. College funding philosophy.

28:26We kind of have three options here for college funding. One is to attempt to fully fund estimated college costs. So that means that we're going to save as if our children are going to attend a target school. That may be a state school. That may be a private school. That may be a very expensive elite private school. But we're going to pick that target and we're going to fully fund it. The second option is to partially fund some percentage, like 50 or 75 percent of what we estimate those college costs are going to look like. And then option C is going to be to ignore college savings and fund retirement first.

28:57For this household, I think I'm going to recommend that they really put their foot on the gas for retirement savings first rather than college. Even though college funding is a stated goal, they can borrow or otherwise find ways to creatively fund college. College is not a known cost. College, again, you know, like we talked about, their children may attend community college for a few years. Their children may get a scholarship. Their children may not go to college. Things may look different in 15, 20 years as things come up, but they only have one crack at retirement. They know they're going to need funds for retirement in order to live a comfortable life at age 65.

29:35So I would really only begin funding college. I would heavily bias this household to make the conscious decision not to fund college right now and really focus on retirement until they hit or maybe even meaningfully exceed that 15 % target. And only then think about funding college once they're well on track or even ahead of their retirement goals. What do you think, Mindy?

29:58Mindy Jensen:I think that's a great point, Scott. You can't borrow for your retirement, but you can borrow for your education. So absolutely, retirement first, when you are consistently hitting 15 % to 20 % of your savings, when you are consistently hitting 15 % to 20 % of your income in your retirement savings, then you can start. And I I would start low. I would start with the$100 a month per child and then see how that affects your retirement savings, see how that affects your spending, and then maybe ramp it up a little bit. But you've got a lot of time for kids who, I mean, these kids are young. Who knows if they're even going to college?

30:33This is a decision that you have to make and it feels hard, right? Like, this is strategy, right? We are a household here. This is a very basic personal finance challenge faced by 50 million American households that are going through some version of this decision-making process here. And we have finite resources and conflicting goals. Core strategy challenge that goes on. We can't balance across all of these things and get to our goals. We have to choose. And that is a good strategy. There are winners and there are losers. There are things that get done and there are things that don't get done in the context of a good strategy.

31:12And we are taking this situation, the conflicting goals and saying, how are we gonna prioritize? The priority is going to be take the 401k match, max the HSA, contribute after that to the Roth after we have emergency fund and forego college savings until we're well on track to reach our retirement goals. And there's a cost there. We may pay more in taxes if we go to fund college here. But I think that what will happen for this household is they'll get that pattern of savings set and they'll get farther and farther ahead on their retirement savings. And they'll have options when it comes time to pay for college as they go down this path.

31:45And I think that is the more realistic outcome. And I think that the risk of funding college, but not having those options present for retirement is greater for this particular household. That's a judgment call. That's where personal finance gets personal. But no matter what, if you were in a household like this, you are going to have a hard strategic choice about how to allocate your dollars towards conflicting goals.

32:05Mindy Jensen:Scott, how are we going to advise this family to implement this strategy? Next up, we're going to talk about an implementation roadmap, the three phases that this household will likely go through as they implement this plan, right? Those are going to be stability, building the retirement engine, and layering in after they built the retirement engine, college savings, and building flexibility into their plan. Now, as the first step toward this plan, we're going to recommend that this household begin tracking their spending and net worth. This is a very basic first step. Let's go to build a retirement engine.

32:39You want to tell us what that is, Mindy? Yeah, this is phase two.

32:41Mindy Jensen:After we have completed phase one of stabilizing the household, we are working on your retirement plans. We are looking to build up to the 15 % of your income as retirement savings. We're prioritizing the Roth while we're still in the 10 to 12 % tax bracket. We are maximizing our HSA if we have a high deductible health care plan. And we are investing that balance for as many of those medical expenses as we can while we're saving those receipts so that we can pull it out at a later date. And we're going to automate all of our contributions as much as we possibly can. The company sponsors the HSA.

33:23Mindy Jensen:We're going to have that come out of the check before we even bring the rest of it home. We're going to try to remove every decision that we have to. So you're not making that. Should I contribute to my HSA account every month? You're making it once and then that decision's done. Then from there, we'll move on to phase three. Once we are consistently saving 15 % or ideally even a little bit more for retirement, we're going to make the decision about whether we're going to pivot to begin funding college, that$100 to$300 per month engine, and we're going to start layering in flexibility as the next phase.

33:57At this point, I believe this household may opt for a more aggressive financial plan once they get to this target, and we'll be ready here at BiggerPocketsMoney with that more aggressive plan that can make an early retirement or provide additional optionality there once they get to phase three and are sitting comfortably in it. Choices begin to pivot a little bit there. But that's when, at this point, we're beginning, again, contributing those 529 plan contributions We'll consider a taxable brokerage, and we're going to just guard against lifestyle creep. We're going to monitor our spending and make sure that the goalposts, the spending, at least adjusted for inflation, have not moved materially so that we can continue to accumulate responsibly for retirement.

34:35So I think you're going to spend a year or two in phase one. You're going to transition to phase two pretty quickly if it's a top priority, and you're going to sit there for a couple years. And then phase three is going to come after three to five years. And that's where you're going to sit for most of the rest of your career. If you're getting for a traditional retirement, if you follow a basic financial plan like this with discipline.

34:57Mindy Jensen:I think that's right, Scott. And I like that you shared how long they will be spending. We rattled these phases off because we already spent a lot of time discussing them. But this is not a, oh, you're there. Now you're under the next phase. Now you're under the next phase. it'll be a few years before you are able to get yourself into phase two most likely and that's okay you're moving forward so we've got our our plan at a high level let's talk about investing here we've already discussed this we believe that low-cost broad-based u.s index funds is going to be the core of a portfolio like this this is going to be widely agreed upon best practices among many of the people in the personal but not all of people in the personal finance community that You're going to hear the same thing from Dave Ramsey.

35:40You're going to hear the same thing from the Bogleheads community. You're going to hear the same thing from Amit Sethi. You're going to hear the same thing from ChooseFI. All these folks are going to agree with this. Those funds often are favored by a company like Vanguard. So you might have found like VTI or VTSAX as tickers for the Vanguard Total Stock Market Index or VOO, for example, for the S &P 500 Index. These are very similar decisions. And on our document here, we've got a list of these types of examples of index funds that have these low fees. Now, we also talk about funds that come through a Fidelity or a Schwab.

36:17So when you go to your employer in this household and you're looking for an opportunity to invest in a low-fee index fund, Vanguard may not be available because it's not available through your 401k plan. It may be an alternative like Fidelity's Total Stock Market Index Fund, which might have a ticker like FSKAX or FZROX. There might be a Schwab Total Market Index Fund. So just know that we're looking for a low-cost index fund that covers the total stock market or the U.S. market or the S &P 500. These are all going to be very similarly performing items here. And the thing that will drive your wealth is not which of these funds you invest in, but that you are investing in a low fee broad based index fund that generally has exposure to these areas.

37:00You may also want to add a little bit of total international stock market exposure. And there are other tickers there as well. Again, these can get very confusing. There's a lot of naming conventions here. But if you go looking for these items, maybe you're using an AI or maybe reviewing this lightly with an hourly or advice only financial planner, you should be able to identify relatively close alternatives to the funds that are the favorites, the darlings of the personal finance world in Vanguard, for example, inside of your 401k, your HSA or your other retirement account investment fund offerings.

37:34Mindy Jensen:Yep, I completely agree, Scott. And this is the financial stability framework, which is available at biggerpocketsmoney.com slash resources. You will download a copy so that you can review it, make any notes you'd like. If you participated in our 31 day challenge, you can keep it in your challenge folder. This is a great thing to come back to over and over again as you are continuing down the plan. This advice is free only for this household. It's for entertainment purposes only at Illustrated, of course. But there is no there's no email required. There is no sign up information or whatever. It's just download it.

38:09And we will get feedback from this. So we might get challenges. We would evolve our opinion over the years or change it based on changing tax codes. There will also be a financial model that goes along with this, an Excel spreadsheet that models out the taxes this house will pay based on their state and all that kind of stuff. That will also be available for free at biggerpocketsmoney.com slash resources. And we'll update and modify those as well over the years to make sure that they are all updated and in tune. And if anyone spots an error or anything like that, as comes up from time to time.

38:36So those are free only resources for education and entertainment purposes only, of course. But they also contain all of the things we talked about today and many examples of these funds if you get confused or can't see an option to invest there. Again, that is not investing advice. It's entertainment only, but we do have it in there as an illustration.

38:54Mindy Jensen:Let's talk about best practices, Scott. Okay, so coming, we're not gonna spend too much time on this, but a good financial plan has a strategy, like a diagnosis, what's going on here. We have a household. They're doing just fine. And then it has a guiding principle. They don't need to do anything crazy. They just need a basic structure following best practices to build wealth by retirement age. And then it has specific actions, right? What to save, what to invest, all that kind of stuff. Another component of a good financial plan is a series of best practices that are common to most planning situations, right?

39:27And so in this plan template, we've got a checklist here of 10 categories, maybe 25, 30 actions. And these are covering things you've got to do. They're a pain in the rear. You've got to do them anyways. It's health insurance. Am I enrolled in an employer plan? Do I have a plan that's HSA compatible? Am I making a smart choice on that? Do I have cash reserves that are enough to cover the annual out-of-pocket max and deductible if I need to get in that situation? Then we've got to make decisions around life insurance. We recommend term life insurance, not whole life insurance or permanent life insurance products.

40:01And what am I going to do about disability insurance, umbrella insurance? Do I have an estate plan in place? What are my cash and liquidity controls? How do we agree as a household if we're going to spend large amounts of money on necessities and or fun or entertainment or vacations, those kinds of things? What are we doing with our retirement accounts? Do we have that written down and the decision-making process automated? What are we doing with our HSA? What are our debt controls that we're putting in place here? What is the decision we've made with respect to education planning, tax and compliance hygiene?

40:35Do we have a process for filing our taxes every year? Probably this household is going to be fine with something like a turbo tax. There's not a lot of complexity here, but they want to make sure that they actually know what they're doing. And or if they have some more complexity that gets layered in the future years, that they've got a competent CPA in there. Do they understand marginal versus effective tax rates and why they're deciding on the Roth versus the traditional 401k and have that down? There's a career component to this. Do we have basic professional policies in place to make sure that we are on track for that next promotion or raise?

41:04Do we have a resume updated? We're ensuring that the household is going to earn market compensation for their skill set and knows what needs to be done to advance. And is there a basic cadence for reviewing our finances like net worth, savings rate, all those kinds of things? We recommend a monthly money date and then an annual review once per year in a more formal capacity. And then last, I think, is a really important one that's not covered in a lot of financial plans is this concept of alignment on lifestyle goals, right? A good financial plan is engineered to get you to something you want out of life.

41:34And we have a template at BiggerPocketsMoney, also at Resources, a goal-setting template that you can do with your spouse that will help you kind of decide, hey, if I was handed all the money I needed in the world right now, what would I actually live? Like, what did my ideal life look like? And that exercise is very freeing because in a lot of cases, it doesn't cost an insane amount, you know, hundreds of millions or tens of millions of dollars. You can live a wonderful life on 50, 70, 100,$150 ,000 a year. But if you design, you start out designing that right now, you may find ways to engineer getting to that point much, much faster.

42:06And your financial decision making will be reflective of those stated goals. So we've included that checklist here and what we think are a set of best practices and how they cascade from this specific households framework in the financial stability framework, this financial plan template for the middle class. Again, available at biggerpocketsmoney.com slash resources. So go download it. It's a Word document. You can use it for any purpose. That is personal. Please just email us if you're going to reuse it for some commercial purpose. We'd like to give our written approval for that. But these are part of our mission to provide high quality financial planning resources for those who otherwise wouldn't be able to afford them or seek them out.

42:43Mindy Jensen:Yep. You can find them at biggerpocketsmoney.com slash resources. And Scott said it's a Word document. It's also up there as a Google Doc in case you don't have Word. Yeah, you can make a copy of a Google Doc or you can download it as a Doc X, which typically opens in Word. But we're trying to make them as free as possible. And sometimes, you know, you do need a Google account. You want the Google Doc or you do need some kind of software to open up the Word Doc if you download it. All right, Scott, I think that we covered pretty much everything for our couple here. We didn't even name this time.

43:12Mindy Jensen:These are the Smiths. The Smiths are a stable household, two young kids. They're young. They don't have plans to retire early. And this is the plan that we think will get them to traditional retirement. We would love to hear from you. If we miss something, if we misspoke, please email Mindy at BiggerPocketsMoney.com or Scott at BiggerPocketsMoney.com. All right, Scott, should we get out of here? Let's do it. All right. That wraps up this episode of the Bigger Pockets Money podcast. he is Scott Trench I am Middy Jensen saying peace out, Sprout the further you get along financially the more you realize how rare it is to find people who are both at your level and asking the right questions.

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