The Middle Class Trap: Why $750,000 Doesn't Feel Like Enough (Financial Plan)

17:00Scott Trench:And you can do both. I think a lot of people say you got to grind it out. And there's still some grind there, of course, but it's not to the point of where Fork 3 might be. And again, kudos to those people who can do Fork 3, but it's not so disruptive to your life that it's causing extra stressors and forcing a major decision or defining moment in your life. So again, I think, yeah, really focusing on how do we start to make that turn and discuss how we can diversify not just our investments, but our income strategies and early retirement too.

17:34David Jackson:Awesome. And so the core strategic insight for Fork2 is you have this liquidity in your life. It's just all going to your 401k. So what we're going to do is we're going to switch for a period of time, one to three years perhaps, stopping all excess contributions to the 401k in this particular example. This captures the employer match. You're going to take your employer match, but it's not blindly maxing out the 401k to its limit every year, literally the amount of discretionary spending that you can put in there. Everything else, because you're not maxing out the 401k, is going to go to your taxable brokerage account.

18:07David Jackson:We're specifically not prioritizing the Roth here either because this is a liquidity challenge. The diagnosis is you're going to get rich either way. Stop blindly adhering to the most tax-efficient strategy and take some suboptimal approach for a couple of years to bring optionality into your life during the prime of your life while your kids are still young, while your family is still young, while you can still enjoy some of that liquidity. So you're not going to end up with a huge pile of money you can never spend at retirement, right? And again, this diagnosis is only for the pretty strongly positioned student of personal finance who is in this problem, who is already coast-fi, who is already likely to build a huge retirement account balance at traditional retirement age and can afford to take some sub-optimization to get that balance of trade-off here.

18:51David Jackson:This amount that we're going to max into our taxable brokerage, we're going to call this the optionality fund, which is going to give us, again, that optionality, that feeling of peace or freedom or flexibility in our life that we're lacking with the current approach. The cost of this transition is real. There is a real tax drag that we're going to assume at retirement. And David, I think this is actually where you, analyzing the situation, might push back a little bit. But I calculated this as you're going to pay taxes now instead of investing in your 401k. And at the end of your journey, that's going to result in a lower terminal net worth if you just didn't take those funds and invest them in your brokerage account, for example, in the same types of low-fee index funds at the end of that journey.

19:33David Jackson:But David, I think you have a different opinion on this. You think that the opportunity cost is not the$50 ,000 to$90 ,000 that I'm estimating this to be for each year that you deprioritize the 401k and instead invest in your after-tax brokerage account.

19:47Scott Trench:I can appreciate the model and the thought behind it. I think where the opportunity lies is for most people, it may not be as tax efficient now, but in working with a financial planner, yes, we do care about your tax efficiency today, but we also care about your tax efficiency tomorrow. And so what is the best way to give you the highest level of tax optimization over your entire livelihood is more so what we're talking about here. So yeah, Scott, just as you pointed out, you're going to give up a little bit on the tax efficiency in the current year. But as we're going to discuss, and what I discuss a lot with my clients is, hey, would you be willing to give up a certain level of tax efficiency while still taking your current marginal income tax bracket into effect.

20:36Scott Trench:That's important. But are you willing to do that now so that when you get to retirement, you are not in the same position as, unfortunately, a lot of retirees who all they've been told is just save, save, put it away, and it's in pre-tax money. And now they're paying way more in taxes than they ever thought they should be in retirement. When if we would have just had a more diverse approach, like we're talking about here, we could spread out that tax liability over time instead of taking it all at the end. So I think in a way, is it less tax optimal in the current moment? Yes. But it could create a more tax optimal position over the course of your entire life.

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25:05David Jackson:I think this is an important point that I didn't actually model through correctly when I did this the first time until I submitted it to you for feedback. But I basically said, hey, you're gonna go in at a pretty high marginal tax bracket today and you're gonna come out at a lower tax bracket at traditional retirement under this approach. And you're saying that that may not be true, that your marginal income tax bracket may be much higher in this situation than what I originally called for. Can you explain that dynamic one more time without getting so far in the weeds that it's hard to follow for a listener?

25:35Scott Trench:I certainly can. So in our example, we have a household making about$175 ,000 and taking out, going away with all the extra math of standard deductions and things, That puts them right in the middle of the 22 % tax bracket. So it doesn't really matter if they're putting into their 401ks or not. They're going to be in the 22 % marginal bracket. Of course, their effective rate would drop or be raised if they did or didn't contribute to their pre-tax 401ks. But the whole point is if we say, okay, let's back off on 401ks a little bit for now. Let's instead put that into your taxable brokerage accounts.

26:11Scott Trench:Well, when you get into early retirement and you are pre-age 55, pre-age 50 even, and you're retiring, well, yes, we can do 72T. We can do substantially equal periodic payments or SEPP. We can do that with our retirement assets. And we probably will to a point. But our goal is during that time, a lot of our cash flow should come from these taxable brokerage accounts because the IRS does not see those taxable brokerage accounts, those long-term capital gains, they don't see that as ordinary income. So when you're looking at tax brackets, it's very likely that if you do this the right way, you could be in the 12 % marginal income tax bracket, which means any long-term capital gains taxes are 0%.

26:58Scott Trench:And that's a massive after-tax win based on current tax law. That's a huge part of the strategy.

27:05Mindy Jensen:Yeah, I think what a lot of people forget is that when you sell that$100 stock,$100 isn't your capital gain. It's the difference between what you paid for the stock and what you're selling it at now. Even if you paid$1 for it and it grew$99, you're still not paying taxes on that$100. Although most people aren't having such luck, they're buying it at$75 and selling it at$100. So you're paying taxes on$25, but you're getting all$100. So when you're thinking about selling stocks to pay for your lifestyle, your after-tax brokerage, you're looking at a tax bill that's far less than you might be thinking about.

27:45David Jackson:100%. So, David, this actually changes some things in the head because I like being intentionally right, not accidentally right on the middle class track there. It's good to be right. What I'm hearing is I took it for granted when I've been articulating this mechanism that by foregoing the 401k or the pre-tax deferral, I'm going to be sacrificing some tax efficiency. But again, you're saying that in this situation, again, a person who is very heavily concentrated in the pre-tax 401k already, that in their early retirement or certainly traditional retirement, they may actually be better off or the opportunity cost may be very small or negligible for going into a taxable brokerage account because of the different tax treatment of capital gains and qualified dividends versus ordinary income that will come out eventually of the pension.

28:38David Jackson:pre-tax accounts. Is that the right way to kind of put a pin in it for why the opportunity cost is not nearly as much as it might be at first glance in modeling it out?

28:47Scott Trench:It is. Yeah. And Scott, to that point, I think the biggest thing that some people miss is, well, I'm going to have to pay taxes anyway. And honestly, that's just really not true necessarily. It really depends on your tax situation, both now, but also in early retirement.

29:02David Jackson:The next question I have is for the Roth piece. I'm certainly, because I'm intentionally not giving up the current tax break in the 401k, the current tax deferral in the 401k, I am also in this situation not getting the Roth benefit. That is a real opportunity cost, right, that we should acknowledge as part of this plan if I choose to put it in the after-tax account instead of the Roth. Is that right? That's right.

29:28Scott Trench:Yeah. And I think that there is an opportunity if you're working one-on-one, And with clients who I work one-on-one with, that's something I can certainly model out for them. I mean, from a general standpoint, it's hard to say because obviously the tax-free growth against potential tax-efficient growth in a brokerage account, whether it's 0 % cap gains or 15%, that is something that you really need to get into the weeds to model out for sure.

29:54David Jackson:I really think this is a breakthrough. It's very technical, and I'm probably losing some folks. I've got to state it one last time before I move on here. is if you follow the financial order of operations logic too far and too blindly and too well across a personal finance journey, you may actually be under-optimizing relative to, for some years, a small percentage of those years contributing to an after-tax brokerage account instead. Is that actually a true statement for a good portion of the personal finance community here, including those pursuing financial independence retire early, David?

30:30Scott Trench:I would, yeah, especially in your client base and those BiggerPocketsMoney listeners that are in that allocation. I would say to kind of close the loop on it, in my experience over the past decade, roughly half of retirees that I helped coach and helped provide plans for were paying required minimum distributions in excess of what they actually needed. And so it actually can be less beneficial to do it the traditional way. So I'm excited to talk about a more modern structured approach.

30:58David Jackson:Awesome. And by the way, a bunch of the stuff we talked about is even prior to factoring in RMDs, which are often discussed as, hey, that's an overblown risk or whatever. I think they're pretty real for someone who's optimized on the pre-tax side for a lifetime and shouldn't be dismissed. But even discounting those, your logic holds for a portion of the FIRE community who wants to heavily rely on the pre-tax accounts in early retirement.

31:21Scott Trench:Yeah, those pre-tax accounts are key to the bridge years, right? Bridging the gap between the rule of 55, if you're going to retire at 55, or just 59 and a half without taking into account 72T and SCPP distributions, for sure.

31:34David Jackson:Great. And then one last qualification here I'd like to make, because I think we're going to get some really good feedback on this, or I hope we get some really good feedback on this, is the logic that we're talking about here applies to somebody more in the two and a half million and perhaps more FIRE target number. For a lean FIRE portfolio, someone who is looking to spend less than$40 ,000 a year and build a million dollar portfolio, I don't think our argument holds. And I think that you should contribute the max to the pre-tax retirement accounts in your high income earning years because your plan implicitly assumes a super low spending target and therefore super low withdrawals from these accounts.

32:13David Jackson:Would you agree with that?

32:14Scott Trench:I would actually disagree, Scott, respectfully. I would say that I would argue that it can be still beneficial for someone who is only in that lean million dollar portfolio.

32:25David Jackson:It can be beneficial to not contribute to the 401k, not max out the 401k for a small number of years. Is that what you're saying?

32:33Scott Trench:Yes. I'm sorry. Yes, that's correct. Yeah. So if you don't max out, it really depends on the age at which you're retiring. And of course, when those retirement assets can be in full force.

32:44David Jackson:Got it. Okay. And again, I want to keep hammering this thing here. We're not saying that it's bad to max out the 401k much or even most of the time, right? We're saying that if you have only done that across your entire career and you're blind to these other dynamics, you may, or you have a very good chance of being under optimized despite thinking that you're pursuing an optimal approach. That's what we're saying here, right, David? That's correct.

33:11Mindy Jensen:I'm feeling real seen here, Scott.

33:14David Jackson:I feel seen as well here. And again, I feel like this is something that I could intuit in a lot of situations. I don't think I could have modeled out, hey, that there's optimal. I think until today, I've been approaching this as, yeah, sometimes being suboptimal on the terminal net worth number is actually a boost to your freedom, life optionality, all the things that we want here in the FIRE community. To learn that it actually may be a boost to your terminal net worth or FIRE number or help you accelerate financial independence is actually pretty awesome here and pretty validating. Again, it depends on circumstances here, but I think that makes sense in the way that David's explained it here, that there just needs to be other sources of wealth that can't all be in one place or we're going to be suboptimal.

34:01David Jackson:And I also think that depending on what you believe about future tax regimes and benefits like ACA subsidy evolutions and those types of things, the flexibility is going to be absolutely critical to a financial independence journey. And having money in various buckets, including the Roth, the pre-tax, and the post-tax account is going to be the name of the game in that, which no one can model out or assign probabilistically at this point in time. Okay. So let's talk about what enough means in terms of feeling a lived experience in someone's behavioral change. So David, you work with clients all the time.

34:35David Jackson:I've hypothesized that this couple would feel better with$100 ,000 in after-tax assets that are reasonably liquid. They'd begin to not fear a job loss at$250 ,000. And if they got to the$400 ,000 mark, then the entrepreneurial half of the couple is going to have a very credible and serious case to the non-entrepreneurial spouse. Hey, I should probably go out and start this business. I could lose, but I could also win. And it's not gonna disrupt their lifestyle if we treat this as a fallback fund for us. Is that the right way to think about it? How would you benchmark these stepping stones in terms of the amount of liquidity needed to feel or see a lived change in your clients' experiences?

35:18Scott Trench:Yeah, Scott, I see this all the time where folks, even in our example plan here, clients a lot of times are grinding it out. They're doing what they feel like they should be doing, building up this net worth. Liquidity is key. Liquidity is key, and I can't say that enough because I have clients right now who have great real estate portfolios, and they should. There's nothing wrong with real estate. But at the same time, they have a liquidity crisis. And I'll say, well, you can't really take a brick out of your home and go sell it to pay a medical payment, right? So having that diversification across liquid assets and non-liquid assets, those non-liquid assets are good, but more liquidity definitely speaks for sure.

36:00David Jackson:What would you kind of advise someone in terms of how much is enough? This couple has been very clear for us, this fictional couple. They said, we want to feel like we have options in our life. And we don't right now, even though we have a$750 ,000 net worth and a pretty good household income here. How would you quantify that feeling for them to some degree?

36:24Scott Trench:The quantifying piece is really unique to the individual and the advisor relationship. You've probably heard the difference between risk tolerance and risk capacity when it comes to investments, but it's the same thing here with liquidity risk. I could throw out a number and one couple will say, that feels comfortable to me. Another couple says, that doesn't. So I think listening to, you know, what are your priorities? Is it just an emergency fund and you just want to make sure that you don't go into debt again? Okay, well, that number is probably going to be lower versus someone who is more entrepreneurial, right?

36:58Scott Trench:Or maybe wants to expand their real estate portfolio or other goals, non-retirement goals. That number is going to be higher based on that because, again, the liquidity risk is greater depending on that situation. but also how they feel about the flexibility and the diversification across those accounts to make it liquid, it is also going to be important there. So to quantify it is to also speak to the qualitative aspects of that plan.

37:24David Jackson:We have a different range in terms of lived experiences here. I've tried to quantify it as if I were this couple, I would feel pretty good about that entrepreneurial bet. If I had$400K in after-tax liquidity, I'd feel okay about a job loss. I wouldn't fear that to the same extent at$250 ,000. And I would still feel personally fairly anxious at$100 ,000 if one spouse lost a job, but I wouldn't feel like that was quite enough. And so to me, this implies a two to five year intentional flow of liquidity to building after tax liquidity at the opportunity cost of maxing out the 401k. And they're at an annual opportunity cost that I had calculated at$50 ,000 to$90 ,000.

38:03David Jackson:You say it might be much lower. where that may change depending on the timeline and how long they decide to deprioritize the 401k. But the model actually will be closer in many cases than what I estimated here over their retirement. Let's kind of zoom out here for a second and say, what are the aspects of a good financial plan here? And how do you describe what are the ingredients to a good plan?

38:26Scott Trench:I really appreciate the question because it's so core to my values and a lot of advisors' values that are trying to help people. So I think, honestly, the core values of a good financial plan is truly the plan being holistic and not just focus on investments. Investments are important, but they are a piece of the puzzle, right? What we're talking about here is how these clients are feeling about their freedom, their liquidity, how the money is actually going to be impactful to still do things with their family, still make experiences for their kids and with their kids, but still be able to retire at the age in which they want to, right?

39:03Scott Trench:That is a much more impactful plan and a sustainable plan than simply talking about, well, here's the numbers around investments. And again, I don't want to diminish that. It's important, but it's not holistic. So really coming at it from all angles and saying, how is this part of the plan impacting another and what are your priorities? Getting that and laying that out in a holistic plan is of the highest importance.

39:26David Jackson:And I think about strategy at BiggerPockets, right, as a CEO, a good strategy basically contains kind of three ingredients plus a bonus one, right, which is a clear diagnosis of the problem, right? We understand the factual current situation in crystal clear detail, including strengths, weaknesses, opportunities, threats, and, you know, income, in this case, balance sheet. The second is a set of guiding principles, right? Implicit in that diagnosis is where do we want to get to? So we know where we're at and we know exactly where we want to get to, right? A clear set of goals is imperative. Otherwise, if you don't know where you want to get to, there's a million paths you can take.

40:00David Jackson:And from there, there's a set of guiding principles, right? Is my plan going to be maximizing my retirement account assets at age 65? Is it going to be flexibility in my 30s, 40s, and 50s? Is it going to be, I'm going to make dang sure I have enough at 65. And once I'm dang sure, then I'm going to maximize freedom in my 30s, 40s, and 50s. Those have to be clearly outlined. And once those guiding principles are set, now we can move into specific action, which diagnoses exactly how and models out what these decisions are going to look like in terms of taxes paid today, taxes paid tomorrow, investment return assumptions under these guidelines.

40:37David Jackson:The last component of a strategy in this context, a financial plan in this context, is a checklist, right? There's a bunch of things that are common to every financial plan, like insurance, like estate planning, those types of things that we put in there. And you and I and Mindy have worked on a very detailed checklist for this persona of things here. Walk us through what you think are those checklist items now that we've kind of articulated the starting point, the goal, and the core diagnosis here, which is just stop putting all your money in the 401k for some time and you'll have more freedom in your life here.

41:13David Jackson:Very simple. That is good strategy at the end of the day, right, is a clear diagnosis and a very simple or almost obvious output from that strategy. But deriving from that now are a number of decisions we need to make in a checklist form to really complete our financial plan. So can you walk us through what you think are the most important checklist items that this couple should now put in place to implement this plan?

41:34Scott Trench:Yeah, Scott. So for this client in particular, and of course a lot of our clients fall into this category, number one is insurance. I'm looking at their life insurance, right? Are their kids protected if, heaven forbid, something should happen to them? So I'm going to recommend like a term ladder, a 10-year term and 20-year term policies that reduce over time. For health insurance, if they're healthy, we're going to go with a high deductible plan with an HSA, right? We're going to max that out because, again, you can use that even in early retirement years for qualified medical expenses and get the triple tax break there.

42:07Scott Trench:We've already talked about retirement assets, but I'm going to double down and say, hey, let's get the match. Let's get that free money. But then let's also put in any excess cash flow into these tax efficient direct indexing types of accounts. Or even if you don't like the direct indexing approach, something that has tax loss harvesting available to maximize after tax returns. That's where I'm starting with with these clients. What about estate planning?

42:29David Jackson:What are some things that you're looking for at a very baseline level for this type of person?

42:33Scott Trench:I think for estate planning, I honestly personally really dig into estate planning. I think it's hyper important, especially if you're a homeowner, have kids. It's something that you're going to want to put together. Definitely at least a will. Advanced directives. I know advanced directives are not something or a living will. Some people call it are not attractive, but your loved ones are going to want a piece of paper in their hand. They do not want to guess when they're going through situations in which you can't tell them what your wishes are. Powers of attorney, things like that are very important.

43:03Scott Trench:And of course, if you have assets like a home and your net worth is in this case, you're approaching a million, you may want to discuss with an estate attorney a trust or, of course, with your financial planner a trust to discuss those non-retirement, those non-investment assets and how to accurately leave them according to your wishes to your heirs.

43:22David Jackson:What do you recommend in terms of the cadence for this couple in terms of approaching their finances?

43:27Scott Trench:Yeah, Scott. So it really depends on are they doing it themselves or do they have somebody doing it for them? And of course, I think we're in the same boat. We like the do-it-yourselfers. I know I give specific guidance. Let's do low-cost index funds. Let's make sure we're rebalancing as appropriate to keep the portfolio the way it should be. Even if you're a do-it-yourselfer, I would say at a minimum, you're probably going to want to meet with your financial planner and rebalance at least four times a year is key. If you can't do four times a year, at least two times a year. But I think every quarter is important just to make sure that the portfolio is set up the way it needs to go.

44:07David Jackson:What are the other categories of kind of this checklist? What are some other things you're looking for or how do I know that I'm set if I'm a DIY personal finance student that's applying a plan along these lines?

44:17Scott Trench:The biggest things, again, are if you have kids, what does that look like for you, right? So I would challenge you, and if you have anybody else in your life, a partner or spouse who's helping with the kids, I would say talk, have a discussion about how you want that experience to be for your kids. Do you want to fund fully public or private? Do you want them to take on some of that? So that's part of that checklist. And then, of course, meeting with a financial planner to determine the best vehicles, like 529s versus ESAs versus taxable accounts. Typically, I'm recommending 529s. There's also the tax picture, right?

44:48Scott Trench:Taxes change all the time. We've seen that even with this year. We've already talked about a few things that have changed with ACA credits and things in the cliff there. So it's really important to stay up to date with somebody who's in this all the time. And I'm talking with clients all the time about those tax implications, both now and in the future. We're playing chess, not checkers, right? So how can we be tax optimal across their entire life versus just in the current year? Awesome.

45:18Mindy Jensen:I want to talk about education planning, because this is something where I fell very short because of a misunderstanding about how the 529 plan worked. And I don't know if it just was different 20 years ago and has changed. I mean, I'm sure that's the case. But I was under the impression that if you put money into a 529 plan, let's say I put a total of$10 ,000 in and it grew to$100 ,000 and then my kids didn't go to college or I didn't have kids or whatever. I was under the assumption that I lost that$90 ,000 and all I could get was that$10 ,000 back. So my thought was, why would I chance that?

45:55Mindy Jensen:I'll just continue to invest in after-tax brokerage and then I'll deal with it when I get there. And now I've got a kid in college. She's in her freshman year of college and I've saved$0 for her college fund. And I feel like this is something that maybe everybody else understands it and I just made the mistake reading it. But I feel like people aren't contributing enough or they're over contributing to the 529 plan in a way that is detrimental to their retirement and their liquidity plans.

46:24David Jackson:I'll actually chime in here and I'll say Virginia and I had this discussion with David last Friday, right? Like four or five days ago from when we recorded this. Our decision is to max out those contributions, like an absurd five times the annual contribution limit that you can put in, which we're not going to do. But we're going to take the maximum contribution, which is somewhere in the ballpark of$38 ,000 and put that in for both girls this year into our 529 and then call it a day. Because with that contribution, plus the ones we made in previous years, by the time our three-year-old and infant turning one this year go to college, that should be more than enough to cover many of the base expenses there.

47:05David Jackson:And I can call it a day. And that does two things for me. One, it gives me the Colorado tax break. And two, it allows that growth to grow and if used for college, be used tax-free on that. But we just had that debate yesterday. Give me your assessment of where we ended up. Did I articulate it reasonably well, why we like that approach?

47:24Scott Trench:Yeah, I'm impressed, Scott. You remember it a lot, which is good. I'm glad that something stuck with you. No, it was good. I could literally talk for an entire podcast episode about 529 plans and education savings. So to really slim it down, right? I think, especially in today, there are a lot more exit strategies, if you will, for 529 funds that don't get used than there have been in the past. And so, number one, it's important to have that conversation, just like Scott and Virginia did with me. It's really important to have that conversation with your financial planner to determine really what's the goal, right?

48:03Scott Trench:Are we talking public or private and full or partial funding? But to your point, Mindy, it's really, okay, let's say we get into a situation, the 529s are funded and we're funding them. And, oh, shoot, well, my daughter, my son just got a scholarship, which is great. But now I have all of this excess in my 529 plan. What do I do? Number one, the 529 plan under current tax law, you can roll$35 ,000 of unused 529 funds into a Roth IRA for that beneficiary. So if your daughter or your son is out of college and they've got$35 ,000 left in their 529, that's just a jumpstart on their retirement, right?

48:43Scott Trench:So that's an excellent way to use that. The other thing to keep in mind is there's something called intrafamily portability. And there are IRS guidelines around this. But essentially what it means is that any immediate family member, including any future descendants that that beneficiary may have. So if they have kids, you can actually save those 529 funds in that 529 plan and give them to a sibling, back to a parent if the parents are going to grad school late in life and they're switching careers, or even to their children one day if and when they should have children. So there is some flexibility versus taking it out and incurring the tax and penalty there to you.

49:21Mindy Jensen:Is it a taxable event to roll it from the 529 to the Roth IRA?

49:26Scott Trench:It's not. No, it is not a taxable event. up to that$35 ,000 threshold. And that's once in a lifetime. So just to be clear, it's not an annual limit. It is a lifetime limit, but it's still a pretty significant event.

49:38David Jackson:David, at the strategy level, though, it comes back to these funds are no longer yours, right? They're not part of your FIRE portfolio once you have used them, once you have contributed to your kids' 529 plan. They're now your beneficiary's funds, right? I include them in a tracking of my net worth. That's one of the reasons why I created the personal financial statement at biggerpocketsmoney.com slash resources. How about that plug? That's free, by the way, no email required. That separates out those kinds of things, right? Your 529 plans are not part of your FIRE portfolio. They're going to go to your beneficiary at some point in life.

50:11David Jackson:And there's a strategic trade-off there about your FIRE destination and your children's education fund, which I think today, the question is like what Mindy asked, right? Around, is there going to be a scholarship or something that offsets those funds? And do you see some people that take this too far way overfunding those accounts at a significant opportunity cost? Is that fairly common in your experience?

50:37Scott Trench:I would say it can be common. A lot of the folks that I work with right now, at least, are, again, in their 30s and 40s. They still have kids that are in elementary high school. But in the instances where I've worked with retirees who are in retirement, yes, I mean, their kids still would have these 529 funds and they're typically now using that for their children. So it works out. I think the biggest thing, Scott, that we need to talk about, and it's something that I do a lot with clients. I actually just had a client who had 529 accounts for their kids upwards of a million dollars. And they said, yeah, we could pay for 10 years of private school.

51:14Scott Trench:And we kind of laughed about it. Right. So, yes, it does happen. But I think that's then generational wealth that you can pass down to your kids if and when you get there. Do we want to avoid that? Absolutely, for sure. But that really comes down to what is more important to you as a client. Is it I really want to make sure that college is funded and I would rather overfund a little bit than underfund? Or is it, no, I want to really focus on my retirement. I'm going to do the best I can for my kids. But if they've got to take on a little bit of this, hopefully I can help them with cash flow during college.

51:47Scott Trench:But if not, we can help them in different ways, pay that off over the years afterwards. So it's really a matter of perspective at that point.

51:55David Jackson:That's kind of my plan here is what you just stated, right? Which is I'm going to, I'm going to, yeah, I think I funded it based on reasonable assumption returns. And if it, hopefully it's just a hair short. That means I've nailed it. And I pay just a little bit with non-529 plans for college. And hopefully it's short enough where I can transfer that$35 ,000 rollover to their Roths or something like that. Well, let's go back to this couple, right? So because this is a real kind of additional fork here is do I max out my 401k? Do I amass after-tax liquidity or do I begin funding kids' education?

52:30David Jackson:I can't do all of them, right? I do not have the liquidity to max out the 401k, max out the Roth, max out the HSA, max out the 529 plans. I have to choose here in my early 30s. What is kind of the bias you would bring to the situation, given what we know about our fake couple in this situation? And knowing the cost that Mindy is now paying because she's paid tax. This is all after-tax dollars that are going to her children's education costs here.

52:58Scott Trench:I think fork two still fits really well for a multitude of reasons, right? Number one, if we go fork one, maxing out 401ks, yes, there's a tax optimization for current year. But then we have to get into 72T distributions, SEPP, all that stuff. And what a lot of people don't realize is you don't get to determine the amount of your 72T distributions. There are tests that the IRS allows you to do, and you can only do. There are three different ways you can take them, and so there are limits. So to say that you could fully pay for your early retirement using those is a lot of times inaccurate. So it gives you a lot more space.

53:34Scott Trench:It gives you a lot more freedom. Again, diversification is a hot word, right? Not just investments, but in income. But also to your point, Scott, let's say we get to the point where Mindy is, right? 10 years down the road, this couple that we're talking about, they may have had better jobs or in a much better cash flow position. And all of a sudden they say, oh, well, shoot, we forgot about the kids or we didn't know about this for our kids. Well, they have built up a massive liquid account to where now they can front load five years if they want to. Right. So priorities change. Things change.

54:07Scott Trench:Tax law changes. The importance of fork two is that it gives you the diversification and the ability to mitigate risks when it comes to the future, because you have different buckets you can take from. So I guess I'll end it by saying this. My worst cliche or best cliche, depending on if you like cliches, is if clients will say, well, what's tax law going to be like in five years? I say, oh, shoot, I forgot my crystal ball in the trunk. You know, my fault. We don't know, but at least this empowers us and gives us the flexibility we need for the future going down that fork to path.

54:40David Jackson:I think that that's an interesting take. And I want to address the seriousness of that decision, because I think this is a hard choice for this person. And this is a lived experience for many people who listen to personal financial podcasts on their way to work or at the gym instead of the chain smokers here is you are reasonably optimized. and there's a decision, right? It's the 401k, it's the after-tax brokerage account, it's the Roth or it's the 529. And I think that the recommendation that we're coming with for this particular financial plan for the reasons we stated is after-tax brokerage, build the flexibility and come back to the maxing out of the 529 or the 401k at a future point after we've amassed some liquidity to give ourselves a really nice buffer against the world over the next five to 10 years.

55:25David Jackson:That's the hard trade-off of strategy that is the result of good strategy. Bad strategy is doing a balance across all of those things every year. Good strategy is the decision based on your goals and the objectives and the forced rank ordering of that. And I think that's where we should leave it here, right? That's where it comes down to. And there's many right answers to the question here, but that is the strategy that we've put together in this document. Again, this will be available at biggerpocketsmoney.com slash Duke, D-E-W-K, Dually Employed With Kids, D-E-W-K. You can also find all this at the broader resource library at biggerpocketsmoney.com slash resources.

56:04David Jackson:And if you'd like to chat with David, who works not just with Dukes, of course, but with a variety of situations, including very complex real estate positions and those types of things, you can go to biggerpocketsmoney.com slash CFP. And yes, we are partnered with Domain Money. And yes, Bigger Pockets Money will profit financially, including me and Mindy, if you do choose to work with David. But we really appreciate the partnership. endorse David and look forward to continuing to work with him.

56:26Scott Trench:Yeah. Thanks, Scott. Mindy, this was fun.

56:28Mindy Jensen:Thank you, David. This was a lot of fun. I learned a lot and I really love learning more about finances. And I have already shot off an email to my husband saying, we need to talk about 529 plans for both girls. So thank you.

56:43Scott Trench:That's great. Yeah.

56:45Mindy Jensen:All right, Scott, that was a fantastic episode with David Jackson. I learned a lot. I'm sure you learned something too. What did you think of his advice?

56:53David Jackson:I love being accidentally right, Mindy. I like being right on purpose more than being right by accident. But I have not thought through the entire implications of what is likely to be, again, likely to be true for somebody who has amassed essentially all of their wealth, all of their financial portfolio, at least, inside of a retirement account, and how having a balance can actually dramatically change the tax profile that you can experience in a lived fire or traditional retirement. So I think that was a really interesting piece there. And I think that the modeling there is going to be very complex.

57:27David Jackson:That's going to be something I need to add to my vibe coding toolkit and modeling approach here. But I think that's a really interesting point. And I had not considered that. Our approach does come with a clear opportunity cost in terms of the tax advantages of the Roth IRA, however.

57:39Mindy Jensen:I had also not considered the tax implications at the end where I'm starting to withdraw from my 401k accounts and I will be facing RMDs. And I know, boohoo, what a horrible problem to have, but I didn't optimize for my entire life's tax burden. I optimized in the beginning of our savings and investing for reducing my taxable income now versus reducing my taxable income later. I think I'm going to ultimately be paying a lot more taxes over my lifetime because I optimized incorrectly. Thanks a lot, David.

58:16David Jackson:Wish I would have talked to you 20 years ago. I want to call out where and why you are in this position and why it applies, because your strategy never fully really actually considered the fact that you did and were going to win. And I think this is a huge problem in the fire community. People start out, they're making 50 grand a year and they can't see, they don't understand that if they apply themselves, if they listen to financial podcasts instead of the chain smokers for a thousand or 5 ,000 hours over the course of the next 20 years. And that's what they like doing. And they apply themselves at work and they take advantage of the tax efficient ways to invest.

58:54David Jackson:And they invest in low cost mutual funds that reasonably reflect long-term average returns that they're going to do much better than the baseline plan suggests because they're going to get a raise at some point. They're going to be, they're going to find some opportunity that comes their way over time. And that is not modeled into most people's plans. And because of that, many people are going to end up with way more wealth than they initially bargained for. The 4 % rule is already implicitly extremely conservative. This is why I can be so optimistic on average across many conversations. Not everyone will win, but the more likely situation is that people will win far greater and far, far faster than their baseline conservative assumptions put in there.

59:29David Jackson:And for this reason, this is why I never prioritized the 401k until I was in a very high income tax bracket, very high income tax bracket. it's because I'm arrogant enough. And also, you know, I think reasonably educated enough as a personal finance to say, I probably am going to win. I'm probably going to win in the sense that my long-term wealth is going to be very high. And that's going to produce a very high tax burden. If it's all, especially if it's all inside of a pre-tax retirement account. And further on top of that comes my bias towards David doesn't have his crystal ball, but I'm going to pull out my crystal the ball here and say that you got to be really bold to think that this is going to be the highest tax bracket environment of your lifetime.

1:00:11David Jackson:Donald Trump's administration right here in 2026, I believe is going to be one of the more favorable tax environments. Someone like me in the fire community or building a substantial net worth and earning a good income is going to experience. I think that that is a very reasonable bet to make. And I am willing to play that out from a logic perspective. And I would rather pay taxes now on average than in whatever the future tax brackets come my way. So that is a controversial stance. People can disagree. I would love to discuss that with you, but that is certainly informing parts of my strategy here.

1:00:43David Jackson:So those are the reasons why you're now in this situation, Mindy. And I think a lot of people who are listening to this could find themselves at risk of that as well, as they're over-optimized for that. And they're not really understanding or internalizing the fact that they could win in a really real way. That will be suboptimal from a tax perspective. Sorry for my rant.

1:01:01Mindy Jensen:No, I always thought that RMDs were just something you paid. But if you set up your accounts correctly, you don't have to pay any RMDs and still win.

1:01:12David Jackson:RMDs are the end result of a lifetime of enormous winning of money not spent. Right. So that's that's the other one there. So maybe you should start spending now. Yeah. Money not spent. I'll say this. Actually, let's put this one out there for feedback. Mindy, your net worth, you're not shy about this, is going to approach the eight-figure mark within the next few years. Within the next year. And the bulk of that's in your pre-tax retirement accounts, right?

1:01:36Mindy Jensen:I would have to look up exactly where it all is. But yeah, I've got a lot in pre-tax retirement accounts.

1:01:42David Jackson:I think that if you pay taxes now, you're going to really thank yourself later, even if you're paying them at the top possible marginal tax bracket for federal and state right now, because I do not believe that whoever the pendulum swings in politics and one day somebody is going to get in power, who's going to change those rules at some point. I'll put that out there. That's a serious assertion. And I would love feedback on that from the comments here. But I would be really interested to see how you and Carl, if you sit down and say, that is the bet you are making right now. You're saying, if I believe historical returns are going to take place in 20 years, I'm going to, this number is going to double three times.

1:02:20David Jackson:And then I'm going to be, you know, or, you know, maybe, maybe two or two, two and a half times in real terms, inflation adjusted terms. And I'm going to be withdrawing those when RMD perspective, that's your bet you're making by keeping that in there. Is that the right way to frame it?

1:02:31Mindy Jensen:Yeah, we're looking into 72 Ts, but I'm also having like record income years. It's I know poor Mindy boo hoo, but it's like, which one of these levers do I pull? Oh my goodness, Scott, it's almost like I need somebody with professional experience to help me out.

1:02:46David Jackson:By the way, you've won. But it's perfect to talk to you here about this because if you were in this situation, the answer would have been, don't max out the 401k 20 years ago. It would have been put them in the after-tax bucket here and we wouldn't have this item here. You've won and I think that's a good illustration of this. I don't think this is widely understood by the personal finance community.

1:03:09Mindy Jensen:You know, Scott, I think you are correct. I didn't have a 401k match at any company except one that I worked at like 30 years ago. And the match, well, this was back when I think the contribution limits were super low, but like the match was like$6 ,000. And I think I was the only person in my department that was getting the match. I mean, I don't think anybody was even contributing to their 401k at the time. But even if I just did that, that would have been great. But then we went above. I mean, we maxed out Carl's, we maxed out mine for years. And because that's what you do. But if we had not, if we had paid the taxes on it back then, and who knows what the tax bracket was 20 years ago.

1:03:51Mindy Jensen:I mean, the internet does, but I'm not going to look it up. Our RMD situation would be much different because we still would have invested. We just would have invested in the things that we were already investing in in after-tax accounts. So, yeah, it's interesting.

1:04:05David Jackson:All right.

1:04:06Mindy Jensen:Well, if you listen to all of this, we really appreciate you. You're our favorite. Thank you so much for listening to us. He is Scott Trench. I am Mindy Jensen saying bye-bye, apple pie.

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