492 | The RRTTLLU Investing Framework | Jesse Cramer

24:51Even though I know there's probably a 90 % probability that the stock market is gonna be higher in four years than it is now, I wanna be a little bit conservative, at least at the first run of this analysis. And if I do this continually for this client from now until 30 years from now in this spreadsheet, I'm going to, from the bottom up, build them a portfolio that hopefully the listeners will take my word for it. It's probably gonna be something like 20 % bonds to cover the first five or six or eight years and 80 % stocks. Because for year 12, right, You're going to need$120 ,000 inflation adjusted 12 years from now, Brad.

25:27Well, I'm pretty confident that stocks are going to be better off in 12 years than they are today. And I feel pretty good about putting that money into the stock market. And this goes back to the earlier comment where I made where a client comes and they say, oh, my portfolio is down. This is really concerning. Are you guys sure you know what you're doing? I can look at you, Brad, and say, well, Brad, the next five years, look at the spreadsheet. All of that spending is in bonds and bonds aren't down this year and you're okay. So being able to do that, it is certainly more conservative than the typical, you know, pedal to the metal VTSAX position.

25:59But at least for me, it helps people sleep at night a little bit better. And there's a little bit of a mathematical underpinning of why that is. Yeah, interesting. And obviously we can. It's hard to go through the underlying math on a podcast. But I think even just the psychology of it makes sense for certainly a certain percentage of people out there or your clients specifically. And yeah, it's interesting how it all ties into, I know we've had Karsten from early retirement now on so many times, and he has the safe withdrawal rate series, at which last count it is 60 parts, which is crazy and just remarkable.

26:38And I mean, essentially like a PhD in safe withdrawal and early retirement. So I think for people who are really looking to dive into the nuance of this framework and also of basically what you just talked about in passing is really those first roughly five years are the biggest risk to your early retirement based on market conditions and truly withdrawing money at that point. And that's what Big Earn or Carson goes into in such great detail there. So I would highly advise people to check that out. I know it's a big undertaking to read 60 parts. You can get the gist of it, certainly from the first maybe 10 or 20 and go from there.

27:16But I think, yeah, it would be in my estimation, and again, it's every person. It's different because if this person had oversaved, let's say, quote unquote, oversaved, and their spending was$120 ,000, but they had$10 million, well, the likelihood of them ever running out of money is almost zero. And then we might go and say, you could even have two schools of thought at that point, which is at that point, you could just stay 100 % stocks because it almost doesn't matter. And then you're just wealth maximizing. Or you could equally intelligently say, you've won the game at that point. Let's put it in a high yield savings account getting 5 % now.

27:53And you ride off into the sunset. So again, this is not financial advice. Let's make that very, very clear. but it's so interesting how, I mean, I just set up kind of an off the wall example, but either of those extremes I think would be reasonable options to move forward with. But you in that situation would have to decide what works for you. And I think that again is what we're trying to get across here. I think of that example, Brad, from, from my point of view, if someone came to me and they said, I've got 10 million bucks, I spend a hundred thousand dollars a year. So essentially for listeners, right, they're living off a 1 % withdrawal rate.

28:27And they said, I'm a little worried about X, Y, and Z. So I'm just going to put it all in a savings account. Okay, that's fine. We'll use that as our baseline. But I would pose to that person, I would say, listen, you're going to die. Then let's say you're 60 years old when you're coming to me with this story, you're going to die with$8 million or$7 million or something like that. And then I would ask them, what's your plan with that eight or$7 million? Are you going to donate it to the local charity? Are you give it to your kids? Like, what's your plan? And hopefully they have an answer to that.

28:57And maybe the answer is, yep, going to give it to my kids. Great. Well, then I'm going to ask, well, what are your kids' timelines like? Because if you're 60 and you're telling me the story right now, maybe your kids are in their thirties and they're going to be inheriting$4 million each 20 years from now when they're 50. Well, what's it like for to be a 50 year old with$4 million? And you realize they're going to have a really long timeline of their own in front of them. And so I might encourage this person to say, okay, take 5 million of your dollars and put it in savings because that's yours to live on for the rest of your life.

29:27And you want to feel safe that way. I'm not sure it's good investment advice, but if it makes them feel good for this hypothetical, I'm willing to let that happen. But I would encourage them for the rest of it that they know is going to be handed down to their children and they know is going to have this multi-multi-decade timeline with it. You've got to think about that in a different way than the savings account. You've got to put some more risk on that and get some more return. Totally agree. And that's why, yeah, the timeline, which is item three here, is so critical and to understand your own timeline.

29:57And it actually, what you just said reminded me of something that Bill Perkins talked about in Die with Zero of, hey, maybe in that case, and again, we're using this one random hypothetical of this crazy situation, but maybe in that case, you give your kids some money in their 30s when they can actually use it, right? As opposed to their 50s, 60s, 70s when they've probably already won the game at that point. And what was funny was I was actually just having an email conversation with one of our community members, John, and we were talking about Dive with Zero. I've talked about Dive with Zero so many times.

30:28And to me, it's the psychological mindset shift that's in that book that is so critical. And it's funny that we brought up the Safe Withdrawal series because part 60 is basically Big Earn just ripping the financial assumptions in Dive with Zero. And again, when I was emailing with this guy, John, I actually said, I didn't even realize there was anything financial in Dive with Zero. I totally glossed over that. Whenever I bring up Dive with Zero, I am not condoning whatever Perkins was talking about financially. We're not talking about literally dying with zero dollars. We're talking about, hey, reorient your spending to different seasons of life.

31:06It's interesting how that all came together, Jesse, here with the Safe Withdrawal Series and with this off-the-wall example. It was the perfect time to put that little caveat in. No, all these topics are related though, which is why it is. It is great to have these kinds of conversations. And for what it's worth, I also think it's so important. One of the taglines, I mean, this is a shameless self-promotion here, but one of the taglines of my blog is invest in knowledge, right? It's Benjamin Franklin's quote, an investment in knowledge pays the best interest. That's how I got the name, the best interest.

31:34But this idea is right. Read Die With Zero, read Big Earn, listen to Choose FI, and you start to pick and pull different facts from different places and you start to hear different opinions. And over time, you start to build your own thoughts when it comes to this challenging, semi-mathematical, semi-economical, very personal and psychological topic of personal finance and investing. Agreed, agreed. Thanks for listening to Choose FI and for all your support of our mission here. The absolute best way to support Chooseify is when you sign up for your next rewards credit card to use our cards page at chooseify.com slash cards.

32:10I keep this page constantly updated, so it should always be the top resource for you. Thanks for being part of our community and for your support. Let's move on to tax, which is the next one in the Rudy Lou. And now tax can be a very charged subject for some interesting reason. And I feel like people get very irrational when it comes to taxes, just generally speaking. There's just something visceral about it. But I'd love to just kind of hand it off to you. And how does tax fit into this acronym? Yeah. And for what it's worth, probably the risk return and timeline probably are the three most important of the Rudy Liu acronym.

32:50But taxation, liquidity, legal concerns, unique scenarios are important, too. So taxation, a big one there. And it comes up maybe not as often, but the idea would be, well, what's your tax bracket? What's your marginal tax bracket? That might matter for certain types of investments. A much more common one, though, is let's talk about the balance between your traditional accounts, your Roth accounts, and your after-tax or taxable brokerage. And we need to think about it from that point of view and say, you know, when someone's writing into the Choose FI Facebook group, we need to ask ourselves, well, is this person better off pumping more and more money into their 401k?

33:25or should they actually think about taking some of their dollars and starting to build up their flexible taxable brokerage? There's a mathematical concern there. There's also just a de-risking concern there. And what I mean by that is the whole taxation investing conversation, the big elephant in the room is that none of us know what tax rates are going to be like in the future. We don't know what our personal tax rates are. Basically, how much are we going to be earning or how much are we going to be pulling on our portfolio? So that's the personal tax rate. And we also don't know what government will do, what tax rates they'll set.

33:58And so because of that, the way at least I approach it is I want to go into the future minimizing my tax risk as best I can. And for me, that means trying to strike a balance between traditional accounts, Roth accounts, and taxable accounts. So that in any given year, depending on where the government sets the tax rates, I have the option to say, oh man, tax rates are really high right now based on the current administration. I'm going to pull a little bit more on my Roth. I'm going to keep my income low and I'm going to realize some capital gains while that income is low. Other years, maybe the government sets tax rates really low.

34:31So, okay, I'll pull on my traditional account and I'll pay those lower tax rates. Maybe I'll realize some capital gains while the tax rates are low, et cetera, et cetera. I want to give myself that flexibility. And the whole taxation portion addresses those kinds of concerns. Yeah, it is interesting, Jesse. I had this all kind of, like you said a minute ago, it all builds on itself in so many respects. And I think even the taxes conversation and maybe some of our more advanced financial independence strategies like a Roth IRA conversion ladder, tax gain harvesting, then the interplay of the ACA subsidies as well.

35:08There are all of these interesting intricacies that all tie together. And so it's interesting, Jesse, I just had Sean Mulaney back on the show. So he was on an episode 475, basically talking about ways to access your money before 59 and a half, which is yet another layer to this. And then we actually just answered some questions from the community from that episode, which was really great. And it's fascinating how most of us think that, hey, we want to lower our tax liability in the future. That's just the blanket answer. I want to do everything I can to lower my tax liability. Okay. I mean, that sounds great on the face of it, But then, like I just said a second ago, there are these little extra things to consider of, oh, wow, if your taxable income and tax liability are too low, maybe that might adversely affect you for the ACA and health insurance.

36:03So I think some flexibility is what I would generally tell people is like you just said, having a little bit of maybe I've got some Roth, maybe I have some traditional or traditional 401ks IRAs. I obviously have my regular brokerage account, which we call taxable brokerage, which is just the worst phrase in the world, but we just cannot come up with anything better. And just being able to kind of pull on these levers and all of these strategies. I think what's cool about the financial independence community is we're just constantly evolving. And we also realize that the world is constantly evolving.

36:38Like you just said, you never know where future tax rates might go. You never know what's going to change. But as long as you stay on top of it and you have flexibility, there are always strategies. And I think there's a very reasonable case for many of us that, again, put aside what you think is right or not right as far as legislative priorities go. That's all beside the point. I think there's a reasonable chance that a lot of us, when we're not working, we don't have current income, that we can get most of our money out of traditional IRAs and 401ks for very little tax, almost zero. and we can also get essentially 100 % subsidized health insurance through the ACA.

37:20I think that's very viable for most of us in the financial independence community. Again, put aside what you think is right or not right for wealthy people to get that. I understand that's important, but we maximize the rules as we see fit. So again, having that flexibility, like you said, it's just, it's really important. And I know I've been going on for a while now, so I'll let you jump in, but, but it's amazing how like it all just builds on itself. It does. It does. And, and you brought up Sean Mullaney. And when you mentioned Sean's name, I think about myself, you know, I know so much more about the tech system this year than I knew last year, than I knew the year before the year before.

37:56And when I listened to Sean talk, I'm like, oh my gosh, there's so much more to know. I mean, the tech system is very much like a cave system, like one of those underground cave systems. Not that I've ever gone down there because I'm I would never go spelunking. Exactly. But when you read about them or, you know, when I've played some sort of fantasy game with an underground cave system, it's like the deeper you go, the more forks in the road you come to. And you eventually get to this point where you're like, oh my gosh, there were so many permutations and so many pathways and you don't even know where the bottom is.

38:27Like no one's ever even been to the bottom of it all. And all I'm saying is it's a very complex system. There's some nuance involved. There's certainly some better paths than others. Like, you know, Sean might come on here and I think he'd be the first to say, you know, for each individual person, it's kind of like you're mapping the territory all over again. But certainly some paths are better than others. And so I'll just end it with that because the taxation question, it's very important. It can be very complicated. It's definitely something you want to try your best to, you know, it might be hard to find the best path, but you definitely want to be able to find a better path than a bad one.

39:01Yep. Agreed. Agreed. It's funny. You were talking about about games there. I like that. But it made me think of the board game Clank, which we have, which is actually like a subterranean, like different tunnels and such. So my mind went immediately to the Clank board game. So I know people love getting board game recommendations. So that's actually one that I would suggest. I think there's a Clank legacy game that David Gardner from The Motley Fool really likes. So he's my go-to guy for board game recommendations. So anyway, that was a total random aside. Let's go back to the framework. We're getting down.

39:32We're actually getting near the end here. So we've got a couple more left. So liquidity, this is something that we've maybe touched on a little bit, but I'd love for you to really talk about that in depth. Totally. And I think there's a reason a lot of financial planners and tax people love games because really this whole system is like optimizing a game, but we'll save that for another day. Maybe that's a future ChooseFI episode for you there. But liquidity, right? We dipped our toe into liquidity in this conversation. Liquidity is similar, but different than the timeline question. There's some similarities as we'll go through this, Brad.

40:04The idea of liquidity is, do you need to readily access the money? Or is it okay with you if the money is in some way locked up? And a very good common example that many listeners are familiar with would be real estate investing. If you buy a house, you know, rental real estate house, you have to be willing to put up with the fact that you cannot readily access your equity at a moment's notice, right? You've got to list it and put it on the market and find a buyer, et cetera, et cetera. And it might take months. If emergency strikes, it might take months for you to get that money back. Well, with the stock market, we know that we can sell our investment on Fidelity, transfer it to our bank account.

40:40It might take 48, 72 hours, and it's right there. When we invest, and depending on when we evaluate investments, we need to understand what the liquidity of those investments are. When someone has excess money that they might not need for eight or 10 plus years, maybe they throw a little bit into a private investment. I don't know. And some of those, I don't have any money in private equity, But I do know that they often require you to lock up your money for five or seven or 10 years. That's part of the deal. They promise outsized returns, whether those come or not, it's an entirely different conversation.

41:12But you know, the idea there is, so you can kind of see it's kind of tied up with timeline a little bit, like when do you need the money? But there's also this question of, are you the kind of person who might need it tomorrow? And if that's the case, then liquidity is an important idea for you to consider when you're making an investment decision. Yep. Totally agreed. I think it's, like you said, it's a consideration and it's an important one. It's not at the top of the list, clearly, but it is essential. And yeah, there are a lot of us who invest in real estate and that's a perfect example. It seems like it would be fairly liquid in the grand scheme of things until there is a major downturn.

41:50And then, hey, you might not be able to sell this thing for a couple of years, potentially, or at a price approaching something plausible. And that might be fine. But you have to go into it with eyes wide open. You have to understand what is my timeline. This is the intersection of timeline and liquidity, right? So just a random example here. But yeah, I mean, I have real estate investments that I bought 15 years ago that are still underwater. I've talked about this so many times here on the podcast. This is like a complete disaster. But I'm now at a point where they're completely paid off and they cost me essentially nothing.

42:25so my timeline has changed and also my my risk tolerance on them when i was paying every month on a mortgage it was a disaster and now that they're paid off okay well the timeline and the risk and the liquidity it all it all shifts which is actually pretty fascinating right yeah your investment policy statement or just your financial plan in general should be thought of as a living document right it changes as your life changes i think that's one of the fundamental underpinnings of everything we're talking about today and of financial planning in general is that it's for your life and your life changes and life throws you curve balls.

42:59Hopefully things get better in time. Occasionally you'll have a bear market in your own life and your plan will likely change accordingly. And more on the liquidity topic, Brad, this is getting a little nuanced, but I still think it's important for people to understand. There are some investments out here and I feel pretty comfortable making a blanket statement that different investments than what we've been talking about today. These are more on the exotic side. where when bad things happen in the world or in the markets, there are some investments where the entire market dries up for them, where traders basically say, I'm not touching that until things settle out.

43:35There's no way I would buy that right now. It's too risky for me based on the current economic conditions or based on global political conditions, whatever it may be. And if you're the one holding that investment and you need to sell it and no one's buying, that is pure illiquidity. I mean, you are screwed at that point if you need to sell it and no one's buying. And so you will see there were times like during the great financial crisis, if you go back and read about what happened in the markets in 2007, 2008, in that period, there were certain types of investments where people said like, no way, there's no way I'm going to buy Greek debt right now.

44:10And listeners might be like, who cares about Greek debt? The global debt market is significantly bigger than the global equity market, right? We don't play in those pools, but they affect us. They affect the economy as a whole. And so again, this is maybe a little deeper than the typical listener is going to ever face themselves, but it's just worth knowing that certain types of investments, the liquidity can dry up when you most need them to stay liquid. And that's certainly not something that you want. Yeah. Yeah. That's interesting. You bring up the Greek debt, because I forget exactly when that was, but there was at least a year or two in the news where that was a major story that they thought there was going to be a worldwide contagion if Greece defaulted.

44:51And then it just kind of, I haven't heard anything about that in 10 plus years. So it's funny, total aside, but that kind of thing happens. And yeah, I guess that could actually be maybe one or both of these last two here of unique situations and legal, actually, frankly, I'm not 100 % sure how legal ties in to this framework, but how should we think about these last two? So legal and unique situations? Yeah, it is good to tie them together because they come up the least often, I would say. I mean, a legal situation might be something like, is there a divorce in place? And is there some sort of policy in place that says, even after the divorce has been finalized, there's still some sort of connection, maybe because there's a child.

45:32And therefore, an investment that you make, you need to consider the fact that, oh, like certain of the proceeds, alimony, like those kinds of things. There can be little things like that. Another common one might be depending on what your employment is, are you allowed to invest in your own company? Are you allowed to invest in your competitors? Little things like that, that it's just worth pausing and just double checking and making sure that what you're about to do is perfectly kosher for you. A unique scenario might be something like someone writes in and they say, oh, my company, they're offering us this great deal, which a lot of companies do.

46:03And they'll essentially allow you to buy shares of their own stock at a lower price, at a lower than market price. And then if you want to, you can just turn around and sell them the next day at market price and just collect the 15 % profits or whatever like that. But when it comes to someone investing in their own company, well, do you want or need more exposure to your own company? That would be a unique scenario worth considering. So like I said, I think it's almost by definition, these unique scenarios, they're hard to put your finger on. but one of the reasons why it's important to try as best you can to get to know the investor before you make any sort of investment advice or get to know yourself before you give yourself investment advice.

46:41Something I like to think about is that for a lot of DIYers, we are our own financial planners and we have to try to think of ourselves that way just to ask yourself, you know, what's unique about my life? And is there anything, I mean, here's another big one that we've run into at work before is we're working with a client who they are a commercial real estate investor. That's how they put food on their children's table. And what I mean by they don't invest in REITs. No, they buy buildings and develop them and rent them out. And so the question then is, well, does this person need any more real estate exposure in their portfolio?

47:15Do they need to own the stocks of home builders? Do they need REITs in their portfolio? And the answer is probably not. So again, it's just a unique scenario that comes up when you least expect it, but it's worth understanding on an individual by individual basis. Yeah, that makes sense. And so a couple other things jump to mind are maybe people who want to do like the ESG investing, right? Environmental sustainability governance, or like don't want to invest in certain companies that they might consider like negative or polluting or vices. Right. Like we just had an episode. It was 483, which is actually one of the best episodes we've had, I think in the whole run.

47:51It was on effective giving for the FI community. And this might be a unique situation in your own life in terms of, hey, I want to make considerable charitable donations. And how do I factor that in? Can I donate appreciated stock? What's the interplay with a donor advised fund? So like all of these potential things that, hey, that might not be relevant for many investors, but it might be really pertinent for you. And I think that's why, again, what we've talked about, Jesse, for this entire hour is this is about you, the investor. And like you said, most of the people listening to this are going to be DIY investors in some way, shape or form.

48:30But even if you're not, even if you have a financial advisor, like this might be something to come in and say, hey, I've got this kind of crazy Rudy Lou thing. But here's what the actual list. And I'd like to talk these things through because they're really important to me. Yeah. And something you hit on there in that summary, Brad, is the idea that I think for most people listening, start at the top and work your way down. You know, RRTT and the first L liquidity, definitely worth thinking about. The legal and unique scenarios, they might matter to you. They might not. For what it's worth, maybe an important legal one that I just kind of thought of, Brad, is just the fact that, right, we have legal mandates for when we can touch certain pools of our money.

49:08You know, 59 and a half. RMDs start at age 72, 73. So those are some little legal side effects that people should think of. There might be tax limitations that prevent certain assets from being gifted to others, little things like that. Trusts, right? There's a legal loophole. I'm not sure if trusts are spoken about much in the FI community, especially as people start to think about their estate planning. I mean, the whole intersection of estate planning and financial planning and investment management is another one too. But yeah, I mean, for the most part, I think if the average listener starts at the top and starts with risk, return, and timeline, that will do so much good for them and will really lead to better results, not only for yourself, but if you're ever on one of the online forums and offering advice to others, rather than just lobbing S &P 500 at them, hoping that it's right, because it might be right for them.

49:59But try to dig into the RRT upfront and understand that person a little bit better. And odds are it'll lead to better FI outcomes. Nice. Jesse, thank you so much for coming on. I think this is really, really helpful. I think people are gonna really enjoy this episode. So we mentioned the Best Interest podcast. You have a blog at bestinterest.blog. And there actually is an article we'll put in the show notes. It's slash RRTTLU. And there's a lot more detail on that, certainly. And yeah, where else would you like to send people? Brad, I think if someone really wants to connect with me, they can find me on LinkedIn or email me jesse at bestinterest.blog.

50:40But going to the blog homepage, bestinterest.blog, I send a really quick weekly newsletter similar to the ChooseFI newsletter that's just, here's my most recent articles, here are my recent podcast episodes, and here's a bunch of stuff from around the internet that I found that I've consumed this week. That's really good. Chooseify makes regular appearances there. When I really like one of your episodes, I send it on the newsletter. So I think that's the way that most people, they sign up for that and then they start following along. Wonderful. All right, Jesse, thanks again for coming on. I really appreciate it.

51:07Thank you, Brad. This was tons of fun. Thank you for listening to today's show and for being part of the Chooseify community. If you haven't already, the best ways to get involved are first subscribe to the podcast. So you're listening to this on a podcast player and just hit subscribe. And then subscribe to my weekly newsletter. I actually sit down every Monday and write this by hand. And I send it out Tuesday morning. So just head over to choosefi.com slash subscribe. And it's really, really easy to get on the newsletter list right there. And I would greatly appreciate it. It's the best way to get in touch with me.

51:41You can actually just hit reply to any of those emails. And it comes directly to my inbox. So that's the way that I keep a pulse of the community. and how we keep this the ultimate crowdsourced personal finance show. And finally, if you're looking to join an in real life community, we have Chooseify local groups in 300 plus cities all around the world. So head to chooseify.com slash local, and you'll find a list of all of those cities in 20 plus countries all across the world. And if you're just getting started with FI, or you have a family member or a friend who you think would be interested, two easy ways.

52:15Choose a Vi episode 100 is kind of our welcome to the Fi community. And even though it's a couple years old at this point, it still stands up. And it's a really great just starting point to get an understanding of what is financial independence? What are we doing here? Why are we looking to live a more intentional life where we save money and use it as a springboard to live a better life? And then Choose a Vi created a financial independence 101 course that's entirely free. just head to choosefi.com slash fi101. And again, thanks for listening.