Q&A: Retirement Investing for High Earners, the 1% Rule, & the Dow Jones Industrial Average

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0:30You're about to make a trade. Which you do you listen to? Is it get optioning those options? Or let's do a little research. Learn more at finra.org slash trade smart. Hey everyone and welcome back to the Rich Habits Podcast question and answer edition. This is the first Q &A episode after we've completely launched the Rich Habits Network, which means all the questions that we are answering in this episode came from the Rich Habits Network. Not only are we answering your questions in the network, but the ones we like most, we will then bring to the podcast and answer for everyone else to see. We could not be more excited.

1:15We have 196 members so far inside the Rich Habits Network. We're growing very, very quickly, and it's only been a week. Robert, can you believe it? I mean, I'm super excited. And what I like most already about the merger and the launch here for the Rich Habits Network is how much people are actually networking. You and I have both seen over the last couple of years in our private networks that a lot of people are just flies on the wall. And that's why I'm so excited calling it the network, the Rich Habits Network, because we want to instill that belief and that encouragement of people to work with each other, talk to each other, get to know each other, engage with us.

1:53because the more people engage with the information and the tools we provide and watch the modules, a lot of that is gonna help them on their wealth building journeys much faster. So I'm super excited. We're off to a great start and I can't wait to just keep building, building, building on this and really helping the masses in their journeys. And so I'm so excited. And what's really fun too, Robert, is like, for example, people will ask a question in the Rich Habits Network and then everyone else will kind of give their own two cents until we can jump in ourselves, call it 12 to 24 hours later.

2:22And so, for example, this question was asked 14 hours ago and three other people have already tried to answer his question before we could even get to it. So I think to your point of like building a network of other people who care about each other's financial well-beings, what they're doing with their money and how we can all win together is incredibly important. And that's what we've done with the Rich Habits Network. So do not forget, use the link in the show notes below. It's going to be right there. Join the Rich Habits Network. We're running a sale right now. It's$77 a month until September 1st.

2:50Prices go up September 1st. So if you want to join, you need to get in before September 1st. And I think one of the coolest takeaways in the chats and in the Q &As in the network is that we have lawyers and doctors and CPAs and real estate investors. So we have all of these like-minded people. So it really is a great network to bounce ideas off each other. And that's what I'm most excited about is getting so many people together across the United States and the world that all have a similar goal of building personal wealth. So I'm super excited about it. So before we jump into this episode, if you're looking for a simple yet sophisticated investing experience, you have to check out public.com.

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4:11So go try it out. It takes two minutes to sign up, and we both think you guys are going to love it. Public.com, all of your investing in one place. This is a paid endorsement for public investing, 5.1 % APY as of June 17, 2024, and is subject to change. Nerd Wallet, overall rating of 4.6 out of 5 stars as of May 2024. Full disclosure in the podcast description below. So Robert, our first question coming from inside of the Rich Habits Network is from Brian N. Brian says, I have a question. I recently realized that I have two separate Roth IRA accounts. I know I need to eliminate one of them, but I'm not sure.

4:44What is the best strategy to do so, making sure that I have one account going forward? So Robert, you want to kick this one off? Brian, great question. It's really this simple. Step one, figure out which platform you like better. You're going to have a favorite. You're going to have one you feel more comfortable with. go with that platform. Step number two is just sell the funds and get them ready to move into step three. And that is transfer them over to the other platform and get them invested. It really is pretty simple, but it is important because you want to get that narrowed down and get that money invested as soon as possible.

5:17And Robert, step two, I think is the most important one because weirdly enough, I know Vanguard does this. For example, if you have your money invested into a platform-specific mutual fund or a platform-specific investment of some sort, you can't just take that platform-specific investment and move it to another platform, right? Fidelity and Vanguard have completely different mutual funds and completely different names for those things. And sometimes a Fidelity fund or a Vanguard fund is not going to be kind of, you know, moved back and forth. And so to Robert's point, it's a good idea. It's not a taxable event to sell these things because it's inside of your Roth IRA to get rid of the investments, make sure it's all cash, and then quickly move the cash from one account to another.

5:58You might have to call somebody. You might have to just Google it too. It could be as simple as typing in the account number and where you're migrating it to. It depends on the platform you're moving out of or into, but it's pretty straightforward. So anyway, Brian, great question. Hope this helps. Definitely get it narrowed down to one. Our next question comes from Emanuel G. Emanuel says, Hey, fellas, I have a question regarding paying off a$300 ,000 HELOC. Do you have any tips or options for accelerating the repayment process? I really appreciate any suggestions you all have. Robert, do you want to kick this one off?

6:30Yes, Emmanuel. Love the question. And I think it's an important one to address, assuming that the interest rate on this HELOC is 7.5%, 8%, 8.5 % because they have climbed quite a bit in the last 18 months. So I would say you kind of have two immediate options. You may not like either of them, but I would look at refinancing because if you can refinance and you can save a couple of points there now that some of these rates have come down, I would do that. Or the other option would be I would get a second job or a side hustle and take all of that money to pay down what we would consider as this high interest debt known as the HELOC you have right now.

7:07So those would be the two easiest options, in my opinion, to help you rid yourself of some of that. I agree with the idea of side hustles, things of that nature. I think what can really begin to move the needle for you, Emanuel, is to reflect upon the idea of why you went$300 ,000 in debt in the first place. Maybe you have this HELOC because you do have existing high-interest credit card debt or high-interest medical bills or some sort of personal loans. But on the other side of the equation, maybe you went into this HELOC debt because you were trying to consolidate auto loans or a boat loan or some other recreational type of debt.

7:47I think there are two ways, and everyone knows them, to pay off debt. The avalanche method or the snowball method. And it doesn't really matter for you though, Emanuel, because you need to get rid of this debt regardless. If you've got the side hustles, rock and roll, take the money and deploy that toward this. Something else though that I want to make sure that you understand, Emanuel, and everyone else listening, is whenever you're making extra payments on debt, make sure that that extra payment goes toward the principal and it's not just like next month's payment. So what the difference of that is, and I'll try to explain it in such a way that's really illustrative here.

8:23Let's pretend that your debt's amortization schedule, which is the ratio between your principal and your interest every single month that you pay, is 50-50. And let's also pretend, Emanuel, that your monthly payment on your HELOC was$500. So if you were to go pay next month's payment,$250 of that$500 of an extra payment that you want to come up with here would go to interest and another$250 would go to the principal. We don't want that. If you're making an extra payment, no matter if it's a HELOC, a student loan, a mortgage payment, whatever else, make sure that all$500 or all whatever that total payment amount is, is going toward the principal amount of your debt.

9:02By having it go entirely toward the principal, you'll be able to knock down the debt much faster and save yourself from paying more and more interest. Wow. I think that was a great breakdown and really kind of rallies around what I said and your options, Emmanuel. So great question. I hope this helps and we appreciate you asking away in the Rich Habits Network. Our next question comes from Danish. Danish says, I've heard the word recession a lot in conversation lately, and I'm beginning to get scared. You all even talked about it in your last newsletter and you published an episode about how to prepare for a recession on Monday.

9:36My question is, how much red are we talking? When a recession comes, how much does the stock market normally pull back? And do I need to be making changes to my portfolio? Robert, I'll let you answer this one. Yes. I mean, I think we're going to see volatility and there is definitely some recessionary tales out there. There are some headwinds out there. We saw the SOM rule was triggered last week because employment data went up and went up to 4.3 % from 4.1%. But we've also seen a lot of good news as well. So I guess from my perspective, I see us in a soft landing situation where there will be some volatility, but I also think there will be a lot of positive points.

10:17And even with the recent news of the last few days, JP Morgan Chase released some new data where they stated that the chances of a recession have dropped pretty dramatically to 35 % based on this new data. So the answer is we don't know exactly what's going to happen. We're not in the crystal ball business, but I do think that we will see a soft landing and not as much red as others may consider. And Robert, to add just a little bit more color to what you were talking about as it relates to the red and what the stock market might do, of course, we've seen recessions that pulled the S &P 500 down 14 %?

10:56And we've seen them when they pull it down 60%, right? We all remember the great financial crisis. We all remember the crazy stuff that happened in the 70s and 80s. But here's the data. During the last four recessions since 1990, the S &P 500 declined an average of 9%. And that lasted over a 13-month period. Now, could we decline by 19 % like we did in 2022? Could we decline by 27%, 29 %? Of course we could, right? Robert and I do not predict the future. However, what we do get excited about is the opportunity to be greedy when others are fearful. And that's what we want to really instill in everyone listening right now.

11:34Are our portfolios going to look green and red and green and red? Probably a lot more than they have in the past over the coming months because of an election cycle, because of higher unemployment, because the Fed's cutting rates, because ABCXYZ. Absolutely. But the good news is we're investing for the long term, not for the next three or six months. And so Danish, if we see a recession, I would not encourage you to focus on your investment portfolio, but instead what that means for you as an employee. Are you going to be able to keep your job? Are you going to be able to keep earning your side hustle money?

12:07Are you going to be able to cut down on your budget with those unnecessary expenses if you lose your job, right? I want you to focus on you as a person and making sure that Danish is being taken care of versus trying to figure out how to time the market with recessions. I love that. I love that. Well, let's get on to our next question because this one is a really good one for you, Austin. So the next question is from Victoria from Inside the Rich Habits Network. And she asked this question just two days ago, and we're already including it in the podcast episode. Victoria says, has anyone had experience with investing within their high deductible health insurance plans.

12:41I need to work on my HDHP very soon. It's maxed out and it's sitting there doing nothing. I heard Robert and Austin mention it briefly in one of their episodes, but I've yet to see a webinar or anything in depth talking about this. All right, Robert, I'll kick this one off. So she's essentially alluding to an HSA. And if you're unaware, here are the tax rules around HSAs as just a quick refresh. The first one is contributions to your HSA are tax deductible, just like a traditional IRA, even if you don't itemize your taxes. Point number two is the money inside of your HSA grows tax-free, period.

13:20That's just how it works. And the third point is once you begin to take money out of your HSA, you can do it entirely tax-free, just like a Roth IRA sort of. You don't have to pay any taxes on those profits, assuming you spend the money on eligible medical expenses as defined by the IRS. Now what's really cool about HSAs, Victoria, is once you turn 65 years old, this account has sort of just turned into a traditional IRA. It has now this ability for you to use the money, the profits, on anything you want, not just eligible medical expenses. So if you want to upgrade the kitchen, you can use your HSA money to do that.

13:57If you want to go buy a new car, you can use your HSA money to do that, but it has to be after 65 years old. and you will have to pay ordinary income tax on those withdrawals, again, just like you would with a traditional IRA. Now, Robert, why don't you explain to Victoria the specific ETFs that we always encourage people to invest into whenever they're doing these long-term sort of investments like an HSA would be? Yeah, I just wanna cover two things and that is you're gonna wanna invest into those ETFs that we talk about all the time, the VOOs, the QQQs, the VGTs. Maybe you want to put in some Moat, M-O-A-T in there because these are good long-term strategies.

14:36And then also secondarily, one thing to remember with your HSA balances, they do carry over from year to year. So you're not obligated to use it or lose it with these flexible accounts. So keep that in mind as well because some people get that wrong. Now, Robert, Victoria actually had a second question she asked us, and I thought it was so good that we should actually include her second question in this podcast episode. And that is, Austin and Robert, I noticed that you guys don't talk about the Dow Jones Industrial Average. You always talk about the S &P and you always talk about the NASDAQ, but no one's talking about the Dow Jones.

15:10Why is that? And is it something that we should have in our portfolios? Robert, I'll let you explain what the Dow Jones is and why we don't really talk about it. Yeah, I would say just because the Dow Jones tracks the 30 largest companies in the United States. And because it's a smaller, larger by scale, but smaller index, we just always go for the S &P 500 more. And I think it's just because the Dow Jones, in my opinion, is less relevant for us as investors if we're buying these index funds. Now, if you want to track the Dow Jones because you want to buy some of these 30 largest companies, it's a good index to track.

15:46We just don't talk about it a lot because I feel there's just better ways for what we do in financial education to share with people when we talk about the NASDAQ or the S &P 500. That would be my takeaway. But Austin, I'd love to hear yours. Yeah, I'm right there with you. So in my perspective, it's like, okay, would I rather have all my money in a basket of 30 eggs or a basket of 500 eggs? Right. And so like that's kind of my perspective. It's like I would much rather be sort of betting on the American capitalism that is the S &P 500 versus just 30 large blue chip names. And more importantly, if you zoom out and you look at the total return of the Dow Jones Industrial Average over the last one, three, five, and 10 year periods compared to the S &P 500, it underperforms.

16:36It just does. I can't explain why. Probably because these are older companies. is. Maybe they're not as innovative. I don't know. But at the end of the day, I want to be investing into indices that are doing well. And don't get me wrong, the Dow Jones, it's up 200 % over the last 10 years, but the S &P is up 241%. And that 41 % difference can be night and day in some people's portfolios, including my own. So I will definitely be allocating toward the S &P versus the Dow Jones. But if you want to add it to your portfolio, be my guest. Yeah, I think that's a great takeaway and you nailed it. When you think Dow Jones, you think old and stodgy and blue chip and huge.

17:14When you think S &P is NASDAQ, you think of new tech and innovation. And you think of these fast growing companies, we're always looking for growth. And so we tend to look towards these companies that are moving faster, more profitable, higher margins because they're in growing sectors. So that's the difference. I don't think there's any right or wrong way here, but I just prefer the NASDAQ and the S &P 500 myself. Totally agree. So our next question comes from Priyanka. Priyanka says, how do I start diversifying in real estate? We are an immigrant couple in our 30s and we want to start investing in real estate as we have now taken all the necessary steps mentioned in the podcast about building our base, maxing our Roth IRAs every year, and opening a bridge account with public.

17:56Now we're ready to diversify. We are looking for a very tactical and guided approach. Robert, you're the real estate guy. Give Priyanka a play-by-play blueprint of exactly how her and her husband can begin to diversify into real estate as someone in their mid-30s that's already built their base and they're doing a great job with their money. Okay, I'm going to make some assumptions here because we know you're in your mid-30s, but we don't know if you currently own property or you're renting and just getting started. So regardless of that, let's look at it this way. Mid-30s, I'm so glad you're getting started.

18:28My number one step would be, are you ready to go? Do you have your credit in order? Do you have your money in order? Have you done the research? Because this is very important to know what your buy box is. What are you looking to purchase? So you can properly convey that message to brokers and real estate agents and people that may be out there looking to help you. Once all of that is figured out, then you have to select the area. So you want to select an area, hopefully concentric to where you currently live. You want to look at three things. You want to look at job growth. You want to look at industry growth and you want to look at wage growth.

19:04If you find all of that in an economic area that is growing, then that is a very good second step. Then you need to start researching. And before you hire a real estate agent, I would not do it cold. I would start researching, get the at-bats in, go to Zillow. get on the MLS list and really start learning the areas in the neighborhoods. And there's no better way to do that than driving for dollars. When you find a couple properties that look interesting that are in your buy box, go drive the area, look for development, look for cranes in the sky. Because if you see a lot of cranes and you see a lot of construction, you're probably in really good hands because everyone else is building there as well.

19:46That is where I would start when you're looking at the research to get yourself ready. Now, what to buy? To me, anyone that's buying their first or second real estate project, I would look to house hack. And it doesn't necessarily mean you have to give up your current house. Maybe that becomes a rental. And then you turn this into a house hacking situation where you get a duplex, a triplex, or a fourplex, because there's a lot of great programs out there right now, like the Fannie Mae program where you can do a 5 % down mortgage that helps you get up to a million three and up to four doors in purchase price to be able to get that property.

20:23So those are the things the play by play I would do. And if I were renting right now, I would buy a duplex, triplex or a quadplex, live in one unit for two years, and then do the same thing over again. And again, once you get to that third property under your belt, then you're ready to maybe start looking at that primary home because you will have all this revenue and you'll have six, nine, or 12 doors of cashflow to take care of any fees and payments you would have on the primary residence. That's the play-by-play if you wanna build wealth and you wanna be careful. I strongly suggest you don't just go out, save all your money and buy a primary home because that is gonna lock you in, not only your credit, but also a 20 % down payment.

21:07And that's gonna tie you up for a few years so you're not an investor, you're just owning a primary residence. I wouldn't do that. Now, Robert, let's assume that Priyanka and her husband already have a primary residence. They're in their mid-30s. They built their base. They're maxing their Roth IRA. They've got the bridge account. They're pretty good with their finances. So I'm just going to assume that they've already figured out how to buy a house by now. So does that change your advice at all? Do you then expect them or want to encourage them to invest in real estate in a different way, assuming they already have a primary residence?

21:36Well, I think the way to look at it is to get the numbers right. So many of the real estate gurus out there that have a high ticket course to sell people, they tell you to go buy single family homes as long-term rentals. The problem is if you're trying to build wealth, this can work, especially in areas with high capital appreciation year over year. But for most people in most areas of the country, you're going to make three or$400 a door. So if you think about it from that perspective, that's why I like multifamily. If I'm going to make three or$400 a door and it takes 10 doors to make me three or $4 ,000 a month, that is a lot of work and a lot of liability just to make a few thousand dollars a month.

22:18It's not game changing for a very, very long time. That's why I like multifamily better. So to answer your question, Austin, yes, it can change the strategy. And I'm not saying don't buy single family long-term rentals, but right now the numbers generally don't work with these high interest rates to be able to do that and cash flow and get decent capital appreciation. So people just need to be careful of that. That's why I like the multifamily better. It gives me more options. It gives me more cash flow each month, but just make sure before you do anything, you follow the steps that I stated and you do your homework on the numbers.

22:53So let's talk about those numbers. Let's pretend that Priyanka and her husband found a$200 ,000 house in the sticks of Tennessee that they could rent out for$1 ,200 a month. Those are the numbers. Does that check out? Does that work? What should the numbers be? Well, if you're in the nowhere part of Tennessee, you have to look at, if you remember the 1 % rule that everyone throws around. The 1 % rule is a general rule to figure out if the numbers work. If you're paying$200 ,000 for the house, you should be able to rent it for $2 ,000, 1 % of the purchase price. In this instance, that$200 ,000 home, if you can only rent it for 1200 does not meet that general rule.

23:32But that doesn't mean it's a bad deal because you have to look at maybe that area is gentrifying and the prices are going to go up a lot in the coming years. And we might see a six or 7 % year over year capital appreciation. In that instance, it might not be that bad. But the number one mistake I see younger, earlier investors make is they buy something that has negative cash flow every month. They're coming out of pocket because they didn't understand the numbers and the total ownership cost. And then they end up in a situation where they lose money every single month, they get frustrated and they end up selling it for a loss or breaking even.

24:08And that's just not a great strategy. And that is why being able to understand the numbers totally, total ownership cost versus what you can rent it for is very important if you're gonna get into the rental game. So what happens if the 1 % rule doesn't work though? Because I mean, the median house in America right now is 450 ,000. You're not going to get$4 ,500 a month in rent. So what do people do? Well, that's why so many retail investors that are into rentals are sitting on the sidelines because the numbers don't work out. If you take that payment on that$450 ,000 house at 3.5 % versus 7.5%, that just negates the ability because the payments themselves are so high now.