Mailbag | Backdoor Roth IRA, 4% Rule & 401k Strategies for Retirement Planning | With Rachael Camp | 521

25:20So we do need to pay closer attention there. And within 10 years of retirement, we do need to start adding bonds, how much bonds completely depends on the person, their time horizon, other income sources, how big their portfolio is. But we do need to start creating safe buckets or just safe assets within your portfolio. Because what happens is when you're preparing and you're leading up to retirement, that 10 years, if we enter a down market, 10 years leading up to retirement, it depends on when that happens. But that could have a negative impact on retirement. But then And we know, because we've talked about this so much, that when you start retirement, what really matters is that first five to 10 years with sequence of returns risk.

26:05And what we mean by that is if you have a bad order of returns, if you enter retirement and we experience a depression or just a few years of a down market, it can have a really negative impact on your portfolio. So the way that we solve this is by having different assets that are stable. So equities, as we know, volatile. We have up years, we have big down years. So Shane here talks about, can I stay in VTSAX? The risk of staying in 100 % equities and drawing on your portfolio is that you're drawing on your portfolio in a potential down market. We all know how great dollar cost averaging is into a down market.

26:45We love getting those cheaper prices in the stock market. Works really, really well when you're in the accumulation phase. But when you're in the retirement phase, it's potentially dangerous, really dangerous to your portfolio. So imagine how powerful dollar cost averaging is when you're buying into the market. It's really, really dangerous when you start taking money out of the market. So the way that we protect is by using bonds and cash as a sort of insurance for your equities. So we have a really rough first five years. And what I see a lot of retirees do, and what I think makes sense, is build up a few years of a cash bucket.

27:22So they go into retirement, first few years are rough. They can pull from that cash bucket. And then we have maybe another five-ish years of bonds, five to seven years, depends on the person where if we continue to have a rough time in the market, we can pull from bonds and we can leave our equities alone. That's a really high level discussion on asset allocation. But to Shane's point here, yeah, I think it's easy for me to say leaving it in 100 % equities is dangerous. And I would not recommend that as you approach retirement. Yeah, well, that is certainly a succinct way of putting it. Like I said, I didn't know where you're going to go with that, but that effect covers it.

27:59And yeah, I think when it comes to this type of financial discussion. And I hate to call it advice because this is not advice. But Rachel, I mean, I've been doing this for a long time. And the fear for me is when we make things too complex that people throw their hands up and they say, I can't do it. And I think that's part of the allure of index funds. And let's be clear, Shane talked about VTSAX. We are not dogmatic about VTSX. In fact, I'm trying to scream from every hill that I can. VTI, Vanguard's ETF, is to me a slightly better option than VTSX because they think people do silly things and they think of this dogma of VTSX.

28:42So they try to buy it at like Fidelity or Schwab and they get hit by these crazy fees. Like, please, if for some reason you've heard VTSX on this show or some other show or anywhere, essentially, like you could just buy VTI at this point and it's as good or better and you're not going to get hit with fees. So please just remember that if nothing else. But I think my fear is that when we try to make this too complicated, again, that people just give up. And I think for most of us, one of the beautiful things is that the path to fight is this simple path to wealth, where it's just, if I can save a significant amount of my income and I can invest it in low cost index funds, I can essentially set it and forget it.

29:22And I think there's a huge olor to that. But like this question gets to and like Rachel's answer. So Ella currently says, like, you can't just blindly do that forever. And I think that's where there is a little more complexity, but I don't think it needs to be overwhelming. because honestly, my skin crawls when I think about how many funds do I need to have? Do I need to start having buckets and all this? Frankly, I don't really want to deal with that all that badly. So I'm fine keeping the vast majority of my personal net worth in VTI. I think a good friend of mine like Frank Vasquez, who has the incredible podcast, Risk Parity Radio, P-A-R-I-T-Y, Risk Parity Radio.

30:04I mean, if you are looking to dive into like real complexity, go there, go to somebody like Karsten at early retirement. Now, like if you want that, the information is out there, but like Rachel was saying, like, there are things to think about for me when you're, let's say five years before five, I think that is where in my own mind, if I had$0 of income coming in, and this is another thing, page also is for people who have, let's say, pensions or people who have real estate income or people who have businesses in some way, it does change the calculus entirely because you're not relying on 100 % of your FI income, if you will, on just your network.

30:50So I think that's yet another layer of this is if you have other income sources, well, it mitigates the need for your sequence of return risk and your safe withdrawal rate to be exactly picture perfect, you have a lot more potential aggressiveness. Because as I see it, it doesn't necessarily change your timeline, but in my mind, it's changing my timeline in the sense of when I truly need to rely on my net worth to cover all of my expenses. And frankly, a lot of us are going to be in a situation like that, where we have some extra income coming in. So how would you think about that? As the strategy changes when you have other income, albeit it could be a small portion, but a non insignificant portion.

31:34Yeah. You know, it's difficult because I do run simulations, but also there are a lot of simulations out there that people can access for free too. And I know Carson has some too, that you can look into, but I think that point is so important because when we blindly follow rule of thumbs, it can really, you know, delay retirement or push us to be too afraid to do something because we don't have it perfectly set out. I have clients where we start off with a higher withdrawal rate, might be like a 5 % withdrawal rate, but then they have rental income really kicking in because their mortgages are going to be paid off on their rental properties in five years.

32:13And then once that rental income really kicks in, almost 100 % of their expenses are covered. So we can afford to start off with that higher withdrawal rate. But for that client, we might need to also start off pretty heavy in cash and bonds to make sure we can make it to that point. What we want to be able to do is to participate in a recovery. If we enter a down market in retirement, we need to have cash. We need to have money and equities in order to participate in the eventual recovery. So the way that I think about it, I actually do like to back into asset allocation. And I think a lot of times people confuse this with the bucket strategy, but I think it's a helpful exercise to say, all right, I have income kicking in at year eight of retirement.

32:57I need eight years of living expenses that I can really rely on. And then we can break that up three years cash, five years of bonds, something like that. And I do find from a psychological perspective, I get clients who love that. They love talking about it. And I've got eight years where I don't have to worry about it. And then I've got my pension kicking in, or I'm age 59 and a half at that point, and I can start accessing retirement accounts. I know next question, we're going to get into taxable versus retirement accounts in the context of this question. But I think it's a helpful strategy to just start with your situation.

33:34How many years of living expenses do I want to make sure that I have? And we can't make it like 15 years because we might start getting too conservative at that point. But first five to 10 years, if we can make sure that we've got that covered between cash and bonds, that helps with a lot of the risk here. So when we talk about, and Carson mentioned this, Kitchis has great research on it, but it's this rising equity glide path. So something I think people get confused quite a bit is if you look at a target date fund, like if you look up Vanguard or Fidelity target date funds, and you can do this, you can see how the target date funds shift and they get more conservative as you enter retirement.

34:16And even through retirement, they continue to get more conservative. But if the first 10 to 15 years of retirement are the riskiest, we actually should start most conservative for those first 10 to 15 years. And then we can start adding equities and get more aggressive later in retirement. That's kind of a difficult idea to bring up because it goes against so much knowledge that's out there goes against what target date funds do. But Kitchis has research on this for the 30-year time horizon, the traditional retirement, and Carson expanded on that research and he looked at it for the early retiree.

34:52They both kind of came to the conclusion that, yeah, it makes sense to start off conservative and start off with more cash and bonds and then increase equity throughout retirement as we get out of those risky 10 to 15 years of initial retirement. You can look at how they do it. But if you say, I want to eventually get to a 70-30 portfolio, start out at 50-50, calculate, I want to get to 70-30 in 15 years. And when you do your rebalancing every year, you start to add equities every year. So this works really well because in a down market, you are dollar cost averaging into equities. You're buying more equities if your retirement starts off a little rocky.

35:35Now on the upside, say you enter retirement and market does really well, well, you don't get to participate in the upside as much. But then we're just we're gambling with our gains there where it's a difference of am I going to end with 5 million or 7 million at that point. So it's really a risk mitigation strategy. But I find it really interesting. And the research is out there. And I don't see many people follow that. Yeah, that is really appealing to me. That's super interesting. All right, we're going to have to follow up on that. Maybe we could do a roundtable with them about it, because that would be really, really cool.

36:07So, okay, Rachel, I think we, it's funny, we actually loosely answered a little portion of each of the next three questions, but let's go through them nevertheless. So you alluded to Jennifer's question, which was, I have a question about funding early retirement with a brokerage account. I'm hoping to retire early in about 10 years at age 52. I'm planning to fund my early retirement from a brokerage account. I have a Roth IRA and a traditional retirement account that I can access at 59 and a half. Plus, I will have a pension at age 60 since I'm a government employee. So my question is, if I experience a down market in my early retirement, where should I poke funds from if I don't want to sell when stocks are down?

36:45Should I create a large cash account? I like the simplicity of JL Collins' plan, holding just one stock fund and one bond fund in your portfolio. But how does that work when your funding early retirement from a brokerage account, since we know it's not wise from a tax perspective to hold bonds in that account? I was really excited to tackle this one because asset location, I was curious to get kind of your opinion on this because we talk all the time about, put your bonds in traditional IRAs, shelter the interest. It's a tax efficiency strategy when we're using that. Now, I find a lot of people ignore municipal bonds, which the interest is exempt from federal tax and state tax if the bond is issued in the state that you live in.

37:28So looking at municipal bonds and placing them in a brokerage account could be a strategy. But to take a step back here to really answer her question, and again, we're kind of piggybacking off of the last one, but she says, if I experience a down market in early retirement, where do I pull funds from? So we just talked about this, but that's what your cash and your bonds are for. You can think about them in terms of buckets. You can think about them like I have 30 % of my portfolio in cash and bonds. It doesn't really matter. But I like to look at them as insurance for your equities. If equities are down or stocks, another word for equities, if those are down, we don't want to touch them.

38:07We want to let them recover because we don't want to do reverse dollar cost averaging. So a lot of people, a strategy I like and I see in practice that makes people feel really comfortable is in the final years leading up to retirement, they start to really build up their cash. And they like to go into retirement with two to three years of cash. I like that strategy. I don't think throughout retirement, you need to keep two to three years of cash. I think one year of cash is fine as you go and rebalance every year. But I know that makes a lot of people feel comfortable, especially if they don't want to go back to work.

38:42If we're really trying to eliminate that scenario of you have to return to work and we want to make sure that you can stay retired, then we have to be a bit more conservative, build up the cash, introduce the bonds. And so just to answer that question very simply for Jennifer, you'd pull from bonds or cash in that situation if equities are down. And then if equities are up, you kind of have the option to take some gains off the table if you want, or still spend on that cash bucket. It depends on the person. Yeah, there's so much here. So first off, when you say one to three years of cash, so just for anybody who's new to the podcast, that means essentially you look at your life expenses.

39:21So that's what one year of cash is. Okay, this is what my life costs an entire year. How much is the cash I would need to cover that for one year or in this case, two or three years? So just very simply, Rich, I do want to ask you about reverse dollar cost averaging. You snuck that in there real quick. I'm sure that piqued some interest because I'm sure a lot of people don't know what that means. But yeah, this is what's so interesting about a question like this is there's so many layers. And that's what makes this fun doing episodes like this, but it makes it really frustrating and complex because you want to give the perfect answer, but you really, you just can't.

39:56Like Jennifer, in this instance, just snuck in there. Plus, I will have a pension at age 60 since I'm a government employee. And I assume as well would have social security, which would either kick in sometime in her 60s as well. So just doing the math here, she's 42. She has a pension and Social Security coming in under 20 years. I mean, if you were sitting down with her as a client, that changes the entire complexion of how someone would look at their 4%, their stable withdrawal rate, because I suspect, and we'll never know, I suspect Jennifer has enough net worth to cover her FI number just in net worth, not to mention this pension in Social Security, right?

40:39And in which case, she doesn't have to worry about a 3.5 % stable draw rate on that money. Like, she could do dramatically higher. So I suspect strongly, and this is just a guess, that she could reach FI well in advance of 10 years from now, just based on back of the envelope, knowing how conservative people are. I think that's actually one of my concerns. And again, this is where it's so tough because I know most people in the world are not saving anything, right? So the funny thing about the FI community is we're the exact opposite. We oversave. We work too many years. We're worried about getting the chance of success as close to 100 % as possible when realistically you run 10 ,000 simulations in Monte Carlo and you get a 91 % success rate.

41:26Like that's essentially a hundred, right? Like, because you're going to make tiny little changes. Like you're not going to lemming style run off a cliff to$0. There's no chance of that. So I fear in the back of my mind that people are one more year syndroming. They're staying too long at their job. They're being too conservative in every way possible. So like, that's actually a bigger fear of mine than us just running off a cliff and running out of money and being destitute and eating cat food. Like I find that so hard to believe. And yeah, that's why what I'm taking this couple minutes here, Rachel, to talk about is like, I want us to think about our holistic financial situation.

42:05And I think a lot of us just assume, oh,$0 of Social Security. Likelihood of$0 of Social Security is almost zero, right? So like, it might be cut from the current benefits, but it's not going to be cut that much. To account for it as zero is really silly in my opinion. a lot of us don't consider any of this other income that's coming in like you have to consider it the whole point here is to like you've said repeatedly those first five years is where the issue is once you retire and you're making no income and that's when sequence or return risk but if you can mitigate that by having 10 20 50 percent of your expenses covered it changes the entire game of this because as sheen said and we didn't really go over this but sheen said this in the prior question, like kind of the whole back of the envelope math of this, of compounding and our fine numbers is that we're expecting a rough 8 % annualized return every year.

43:01Now, of course, we can't guarantee, like he said, there could be some years where it's fantastic, plus 20, there's some years where it's minus 20, right? But we're expecting that rough 8 % and you're pulling out three, four, maybe 5 % at most. So you're accounting a little bit for inflation in there. There's some wiggle room, right? Like that's kind of, again, very back of the envelope. I'm not giving like, this is not a math seminar here. This is just trying to conceptually understand. There's some wiggle room for, hey, maybe those first couple of years were not that great. But if you can mitigate that by not needing to cover 100 % of your expenses from your net worth, it just makes it dramatically easier.

43:38So conceptual framework over, I'd love to hear your thoughts. Yeah. I mean, I think the worst thing we could do here is scare anyone away from retirement because of sequence of returns risk. Because to your point, in practice, I almost like laugh sometimes when we obsess so much about withdrawal rates because when I see what people are actually spending in retirement, when social security kicks in and sometimes pensions or any other types of income that come in, their withdrawal rate is so, so low. I never think about it in terms of we're taking out 3 % of your portfolio every year because they have other sources coming in that cover that.

44:14Now, that being said, I do think we start to pay attention to withdrawal rate a little bit more because not many of us have pensions anymore. Many of us don't have guaranteed income. Yes, we have Social Security, and I know there's concerns about that, but I agree with you, Rob. The likelihood that we've been paying into Social Security our entire careers and that we're not going to ever see a dollar from that, I think is a little silly. So I do think we can rely on Social Security to some extent, but we are getting more concerned because we are having to create income ourselves now from our portfolio.

44:45So I get the concern and I get the stress. Pensions were great because they were able to take some of the mental load off of all of this. We're all thinking about it a lot more because we are the ones that have to create our pensions now. So I think it's important, but we also cannot ignore income that's going to come in. And we always ignore that. We say, I need 25 years of expenses saved. And that assumes that you will be living 100 % off your portfolio all throughout retirement. What I see happen in practice a lot is when Social Security starts and when pensions kick in, it covers such a large percentage of their living expenses that the likelihood of failure is extremely low.

45:27So just again, to point out and kind of try to answer Jennifer's question here, what we are doing in that first five to 10 years, because no matter if you have pensions coming in or Social Security, many people have a good 10 years where they need to bridge to something, bridge to Social Security or bridge to age 59 and a half when they can start taking from retirement accounts. That's where we want to make sure, and you asked about reverse dollar cost averaging. All that means is we retire, we enter a down market, say we're 100 % in equities, and now I need my income. So my million dollar portfolio is worth$700 ,000.

46:06Now I need to take out 40K from that, for example. We are really exacerbating the problem there because portfolio is dropping and we are selling shares and we're taking it back out. So that's what I mean by reverse dollar cost averaging. If you're saving for retirement, you're buying those low prices. If you're in retirement, you're selling at those low prices. That's the situation that we want to avoid. That's what's really dangerous to your portfolio. But like I said, I don't want to scare anyone here because it's a fairly simple thing to solve for. There's a solution there. And that's why we have bonds and cash in our portfolio.

46:47It's to protect against the sequence of returns risk. It's not to optimize returns. Equities are always going to be bonds and cash, but I just encourage everybody to think about bonds and cash as insurance for your equities. Awesome. Thank you for the clarification. I think that's going to be very helpful for a lot of people. Let's move on. I think we could do kind of a quick hit answer on the next two. We'll see how succinct we can be here. So Bob's question came in and Bob said, okay, I'd love your opinion and to shoot holes in my plan. My wife and I are 46. She has a million dollars in retirement, mostly 403B, 457.

47:22I also have a million dollars in retirement. We own five rental properties that will be paid off in a couple of years. They'll generate about$5 ,000 per month in net income after expenses. We currently spend about$15 ,000 a month in a high cost of living state where we will stay. My thought is that if I save up a million dollars in my brokerage account and have the five paid off rentals, that we can both retire roughly at 48 years old. We'll have the 5K in rental income and I'd have to pull out about$10 ,000 a month from that million dollars in brokerage. According to online calculators, that means our brokerage will be depleted in about 13 years.

48:00But by that point, we'll be over 59 and a half and can access our retirement accounts, which hopefully at that point should compound to over$4 million combined, which would at a 3 % withdrawal rate, get us the other$10 ,000 a month we need. Because they have the$5 ,000 in rental income, they need to cover another$10 ,000 a month. I like this plan, but my wife is concerned about drawing down the brokerage account so much during that time. What am I getting right? And what am I missing? I'm usually missing something, Bob says. So yeah, what are they getting right? What are they missing? Yeah, this is, it's funny.

48:32And I was telling you, Brad, beforehand, I actually had a client where almost not the exact same, but very, very similar situation where they had rental properties. I mentioned this earlier that were going to be fully paid off in a couple of years. So that income was going to kick in and really help them. And then they had a decent amount of retirement accounts and then decent amount of brokerage. But in order to get them to 59 and a half, we basically had to deplete the brokerage account. And at that point, the retirement accounts were going to be worth, and to his point, it looks like they're going to to be worth double when he gets there, which makes sense.

49:05And then you can start taking from there. This is a really hard thing to do. And in my simulations, I like to show the clients like your brokerage account probably going to be depleted unless we have like a great sequence of returns market really does well. We're probably going to have a$0 balance by the time we get to age 59 and a half. But the important thing is to always look at your portfolio as a whole. So we're considering the fact they've got these retirement accounts there that we probably should leave 100 % in equities, what we have at least 10 years or at least close to it. I can't say for sure.

49:40That way they can really, really grow. The hole I would poke here is this might not work well if your retirement accounts lean conservative. We need them to grow for the next 10 years so that they can take over an income. Other thing here we could poke a hole in is, I want to get this exact amount. He said 13 years? Yeah, 13 years. So high chance those retirement accounts are going to grow. Low chance that we hit a bad sequence of returns risk and they won't grow very much. That being said, we have had flat decades before. We've had decades where the return has been really minimal. You can look at 2000 to 2010 when we had the dot-com bubble and the Great Recession.

50:22Really bad decade. So that's kind of like a whole or just something to look at. If we hit a decade like that could be difficult, but that's the case for everybody's retirement plan, right? Like if anybody enters into a decade like that, we might be in a little bit of trouble. We might have to decrease withdrawals or, you know, look at some other type of income. But just back of the envelope math here, I don't see a problem with this. And in fact, like I said, I had a client that almost is doing this exact scenario, but that would be the one thing where I say, okay, brokerage account, got to lean a little bit more conservative so we can get through those 13 years.

51:00Retirement accounts, yeah, they should hypothetically double in 13 years, but we have to make sure that they're invested correctly, invested aggressively to do that. Yeah, agreed. And so, right, I am with you that on the surface, this plan seems sound to me. You can never tell, of course, where life in the markets are going to take us. But on the surface, Bob's plan sounds good. It makes sense. And I think also, it's not even factoring in two things that we've alluded to both in this episode in the past, which are, A, you can access retirement accounts before 59 and a half. So we have talked about that in depth with Sean Mulaney on episode 475.

51:42So it's not like you literally can't touch that money until you're exactly$59 ,500. There clearly are ways to access that money. So let's not be worried about that. There are ways. Also, not everybody's doing the math along with us here, Rachel, but they're assuming so once they've reached that$59 ,500, they need another$10 ,000 a month. So that's$120 ,000 a year. And interestingly, the 4 million that they're expecting is the 3 % withdrawal rate from that 4 million gets you to the 120 ,000. So frankly, 3 % withdrawal rate is very, very low. I mean, even Karsten has said 3.25 is basically like an absolute certainty.

52:25I mean, basically I'm putting words in his mouth, but every scenario he's ran, again, my editorial is barring a zombie apocalypse is you're going to be fine with that. so realistically it can be higher they're not counting social security at all so that almost undoubtedly is a couple extra thousand dollars a month so that changes the calculus here entirely too and not for nothing but again with my kind of like you're not going to be lemmings just running off a hill when you spend fifteen thousand dollars a month one hundred thousand dollars a year in an odd bizarro way you have more flexibility right because whereas somebody who's saying like I'm only spending$30 ,000 a year, they really can't cut that much.

53:08There's not that much to cut if something goes terribly awry. Whereas somebody spending$180 ,000 a year, almost undoubtedly, if the option was going back to work or running out of money to unpalatable options, maybe spending$10 ,000 less that year or$20 ,000 less that year is a much better option than either of those two. So they have in this bizarre way, a little more flexibility there. So I think again, back of the envelope, Dom's plan seems to work for me. Yeah. Yeah. I was going to say the, it kind of comes back to asset allocation. That's the other thing they need to make sure they get right to the point of the client that I've been talking about.

53:50One thing that I asked them that I ask a lot of clients when it comes to early retirement is, all right, let's say you retire terrible market, that brokerage account really drops. And again, that depends on the asset allocation by how much it's going to drop. Would you go back to work or could there be a way you earn other income? Because that will influence the asset allocation that I recommend here. In their case, they said, yeah, I would definitely go back to work. So we were able to be a bit more aggressive and early retirement is difficult because we have to be conservative to protect for that first 10 years for the sequence of returns risk.

54:26But if you have a long time horizon, you can't be too conservative. It starts to get really risky if throughout that time horizon, you are really low on equities. So that's where I would encourage everyone to go read Carson's research on this because he talks about the rising equity glide path. And he runs simulations here, assuming you start out at 80, 20, and then you get it up to 100. The other one he mentions has a high success rate is 60-40, you eventually get it up to 100 % equities. Those two had the highest success rates with the rising equity glide path. So those would be some other questions I would ask myself in this situation, because that will inform asset allocation.

55:08It will inform how conservative do we have to be? Because if their answer is, if we retire, I don't want to assume that we ever have to make income again. I don't ever want to have to go back to work. That will make a difference on their asset allocation. And I would direct them to Carson's research if they want to start finalizing their asset allocation to see what's a good plan for them. Wonderful. Totally agree. All right, let's move on to our second to last question here. So Ruthman sent this in and said, I have a burning FI question that I can't find an answer to. Traditional FI thinking is predicated on the 4 % rule, assuming a portfolio of index funds, et cetera.

55:44What if I amass a real estate portfolio that generates a 6 % net yield, post-management fees, insurance, et cetera. In theory, this reduces, and this part of which I'm a little unclear, in theory, this reduces the need to save 25x of annual spend to around 16x, 6%, and therefore the number of years working drastically reduces. Is this feasible and is there something I'm missing? I'm curious to know why everyone isn't following this expedited strategy instead. 6 % net yield isn't too hard to come by, especially in places like Dubai where they are. Would love your thoughts. And if I'm missing something that could radically alter my working life.

56:20So my first thought, and this actually goes back to what we said in our most recent mailbag episode, which was episode 513. We call that make your own dividend. We got we, and by we, I mean, me mostly got a little bit spicy on this is when you think you found some grand answer, and this is not a bad movement. I'm not, I'm not saying this specifically, but I would counsel when you believe that you found some genius way that circumvents all the other rules. I would just assume that there are millions of other people who are really, really smart too. And the likelihood of you having come up with this grand answer that you're outsmarting dividend stocks or Bitcoin or real estate investing.

57:03I've looked at these numbers so many times. There's no just silver bullet answer of like, oh, if you put all your money in Bitcoin, and it's guaranteed to double every couple of years. Like there's no guarantees in life, guys. There's really, I promise you there's not. So, okay, I don't want to get another soap bacteria, but let's just talk high level. What is Uthman missing it? So there's really two different questions here because they talk about real estate and then they talk about like just trying to get a 6 % net yield. Now it's impossible for us to comment on their real estate portfolio here.

57:41Sounds great. I have to rely on numbers here. You get a 6 % net yield. Great. But when we talk about 4 % rule, we have to remember we are talking about stock market there. We're not talking about real estate. We're not talking about a business. 4 % rule relates to bonds and stocks. So that's what we have to distinguish here first. When I have clients that come in with a real estate portfolio, I really have to rely on them to give me the numbers. this is what the cash flow is. This is what it is after expenses. And so with real estate, I just rely on that cash flow that they tell me. I don't look at it and say, okay, you own 2 million in real estate.

58:17Let's assume 4 % off of that you can take because it depends on the market, depends where you're located. They're in Dubai here. So I have no idea what the real estate market is like there. I don't know if this is typical or if this seems higher than normal, but for real estate, yeah, I do rely on that, the cash flow. Now the question of why doesn't everybody just go after 6 % net yield is something we did talk a lot about in the dividend episode, because that's what a lot of dividend investors say. Like, well, you're doing a 4 % withdrawal rate, I'm building up a 6 % dividend yield. So my portfolio has to be much lower than yours has to be.

58:52And I get to retire much quicker. We poked a lot of holes into that. And that's not necessarily really a great idea. And I'll just reiterate the point, but returns, safe withdrawal rates, they're two different things. I think I've said sequence of returns risk in this episode a hundred times already, but that's why they're different is because it's not the average return that matters. It's the order of returns that matters. So there's a low correlation between a safe withdrawal rate and an average rate of return. So that's why we can't just say, I'm just going to chase a 6 % dividend yield. And that is what I will live off of.

59:29That's fine if you can get a 6 % dividend yield, but there's other big piece of puzzle here, which is appreciation or depreciation that we simply cannot ignore. And so, yeah, I mean, like I said, Brad, these are two different things. Real estate is one thing. If you're getting good cashflow on that, that's great. But to recommend that everybody go chase an easy 6 % net yield is just not realistic. Yep, totally agreed. So let's talk about this in terms of that 6 % net yield first, and then in terms of what we talked about before. So I'm going to start there actually, which is, let's assume that your annual expenses are$60 ,000 and you have$20 ,000 of real estate, rental income, net rental income, so after all expenses.

1:00:14Yes, the FI calculation is very different then, and that's fine. And this gets to the heart of the question, I think, which is you don't have to do any multiplication of state withdrawal rates. It's a totally different thing, as Rachel just said. You would take, all right, my life costs$60 ,000. I have$20 ,000 coming in. So I actually now only need to cover another$40 ,000. And that would be true if that$20 ,000 was, we're not talking about dividends because you and I think those are separate. We're talking about if it was a pension, if it was a side hustle, if it was social security, if it was, in this case, rental income, that just gets subtracted.

1:00:51And then what's left over is what you need to then cover by the assets you have in stocks and bonds, et cetera. So that's really important. And yeah, to the question, if your life costs$60 ,000 and you had$60 ,000 of rental income, you're at fine. As far as I can tell, I mean, barring something else that we just simply don't know. And you're not talking about like, okay, this is in the absolute best year and I'm not accounting for vacancies and I'm not accounting for any expenses and I'm not accounting for this and that. If you're being smart with the actual business income statement for your rental business, which is what it is, let's be clear, that's a real estate rental business.

1:01:31If you are accounting for all those things and what we like to say, and I'm very liberally borrowing from bigger pockets here, is in a perfect world, I think for a lot of real estate investors here in the US, you're looking for that 1 % rule, which is I'm getting 1 % of the purchase price in gross rent per month. Let's say I'm buying a$100 ,000 house and I'm getting$1 ,000 in rent every month. Rachel, that 1 % per month is a 12 % gross return per year. Now, most people anywhere in the US find it very difficult to find a 1 % rural house. There obviously are places in the South and et cetera, where you can find those.

1:02:15But if you just look at your neighborhood, you're not even close. So let's be clear. These are not just falling off trees. They exist, but they're not falling off trees. So this gets to the question as well. We can't just like pin the next house next door and say, I'm going to get 1%. It doesn't work. So you have to find it, but you can find it. So that gets you to 12 % gross return. And then bigger pocket says you should generally say 50 % of that is going to be expenses. All the expenses that are incurred, property management, taxes, like I said, these vacancies, the air conditioner breaks, you have insurance, everything that goes along.

1:02:48So if you're just saying like pie in the sky, I have no expenses, or it's just the couple bucks that I spent this year, you know, those expenses are coming. You have to account for that. So that gets you down 50%. That gets you down to a 6 % net income. Now Now, that still can be wonderful if you can find that 1 % rule. And that does change the game. Because instead then on, let's say you have$2 million and you just happen to find a bunch of properties that meet that rule, you could get 6 % on that, which would be$120 ,000 of net income every year. Whereas if you put$2 million on the market and you relied on a 4 % rule, that's$80 ,000.

1:03:28So at the heart of the question, I do understand, like, would this conceivably, and this is not even talking leverage, which almost every real estate person would instantly be yelling at me, but taking like the FI accountants version of this, right? And saying like, all right, look, yeah, I get it. I mean, like, there is a case to be made for that. It's not even counting any of the equity, obviously, because that's a separate thing or appreciation. Like, yeah, your net worth might be going up, but we're just talking about that income, the income stream from these properties. So that's how I approach it.

1:03:58Yeah, it could potentially expedite, but I think it's in a very different way than the question it's ultimately getting at. Yeah. Like I said, it's kind of two different questions here, which is why I think we had to answer both of them. In my mind, real estate should give you the better deal because it's more work and there's more risk and there's so much more due diligence you have to do. So if I'm going into real estate, it better be the stock market as far as what I can rely on for returns. But that's why I emphasize that these are two different things. We've got your index fund investors going in the stock market.

1:04:28They don't want to touch it. They don't want to do any work. And then you've got real estate investors who do want to try to get a better return. They feel comfortable going into real estate, both sound methods. But in my mind, yeah, we can expedite FI by going into real estate, but it's also just going to be more work. So there's a lot of people that don't want to go down that road because real estate makes them nervous or they don't want to be the landlords or there's a lot of different issues with it. But the overarching point here is that these are separate things that we're talking about.

1:04:57So yeah, we could chase a 6 % net yield. I mean, I could chase a great yield on my business. There's multiple different types of investments that we could go after that could beat the stock market. But we have to look at them separately. And we can't conflate a 6 % net yield with a 6 % dividend yield. That's the real important point here. Nice. All right. I think we covered that nicely. So the last question, and you said this is going to be a land speed record for the brevity of the answer. So Robert's question, it might take longer to ask the question. I was listening to your deep dive on Roth conversion withdrawals.

1:05:32I currently work for a local municipality and they offer multiple retirement plans, 401k, Roth 401k, 457, and Roth 457. I also contribute to a Roth IRA, which has been open for 12 years. If I contribute to a Roth 401k and or a Roth 457 and roll those funds into my Roth IRA after leaving my employer, do those funds and any earnings immediately count as a quote contribution and can be pulled out at any time from my Roth IRA since my Roth IRA has been open for more than five years? So they don't count as a contribution. It's just a rollover, but the funds adopt the age of the account. So to answer this really quickly, your Roth IRA has been open for 12 years.

1:06:14Those funds are going to be seen as having been in there for 12 years. So you're good to go. That five-year requirement has been met. Nice. Okay. I can say more, but that's as simple as it gets. Absolutely love it. All right, Rachel, this is fun. We answered a whole lot of questions. And And as always, I appreciate you being here. It's been a great time. I hope nothing was too complex. Some of these questions are so hard to answer because it really depends on the person. But if you are willing to do some research, especially on asset allocation, I think everybody can get there and decide on a framework that works for them.

1:06:49Totally agree. So as always, and as you can tell, we are fielding these questions. I quite literally got that other question essentially while we were recording this and was able to read it. So currently, feedback at choose-to-buy.com is the best way to send them in or really to reply to my newsletter. That comes straight to me. We are going to, and maybe by the time this goes live, we might have a new feedback form on our website, which is going to be really robust and enable you to categorize where the feedback goes to and this specific type of question. So I'm hoping to make it easier to streamline everything.

1:07:23So keep an eye on that. Chooseify.com should be a much better viewing experience in the coming days, weeks, and months. So stay tuned on that. Rachel, where can people find you? Yeah, website is rachelcampwealth.com. It's camp underscore wealth on X or Twitter and camp wealth basically on every other social media platform. Beautiful. All right. Until next time, thanks for being here. Thanks. 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.

1:08:01I 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. You 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 choose a local groups in 300 plus cities all around the world.

1:08:37So head to choose a by.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. Choose a FI 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?

1:09:13And 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.