Q&A: Taking Social Security Early, Building Two ADUs, & Whole Life Insurance For Children?

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0:57hey everyone and welcome back to the rich habits podcast question and answer edition brought to you by public.com before we jump into the episode we want to take a moment to recognize the 2 ,976 lives that were lost in 9-11 back in 2001 from the horrific terrorist attack that took place. I know so many people that were impacted by this tragedy, and it is so important that we never forget what happened and that all 2 ,976 people who lost their lives on September 11, 2001 are remembered and are always recognized. Yeah, what an emotional, emotional memory. And I just want to add to that, that to give a shout out to all the first responders and all the people, the firefighters, the police, and all the people that took part in this horrible tragedy, and did all the right things for the United States and all the people affected.

1:53So we thank each and every one of you and everyone affected. And we just wanted to take a moment to kind of honor and remember all of this because it's just such a tragedy. With that being said, let's now jump into the episode. This is our Thursday episode, which means we are answering your questions. You can ask us questions via Instagram DMs at richhabitspodcast. You can email us questions at richhabitspodcast at gmail.com Or you can maybe comment a question on Spotify. If you're not yet using Spotify to watch and tune into these episodes, you are missing out because we published the video over there.

2:28We got the polls, the comments, the everything. Spotify is the best. So if you are a listener of the podcast, we highly recommend watching and listening on Spotify. Definitely. And we enjoy all the questions as random as they may be and as difficult as they may be because personal finance is personal. And we just love all of the engagement with each and every one of you. So stop by, leave us that question, and see if it gets answered on an episode. So Robert, before we get started, it is always a good idea to remind everyone that the only way you will ever be able to retire, straight up retire, is to stop trading time for money and investing toward a nest egg.

3:08And the easiest way anyone can begin investing towards their future is on public.com. They make it incredibly simple to build a multi-asset portfolio, including ETFs, stocks, bonds, crypto options, and more. They also offer industry-leading yields of up to 4.1 % APY for your emergency fund. And for a limited time, you can earn a 1 % match on all of your IRA deposits, IRA transfers, and 401k rollovers. Which means it's a free$1 ,000 for every$100 ,000 that you rollover into their platform. So that old 401k that you haven't touched or maybe your IRA is sitting on some boring broker, roll those funds over and get your 1 % match.

3:49Fund your account in five minutes or less. Head to public.com forward slash rich habits to claim your 1 % match today. Paid for by public investing. Full disclosures are in the podcast description. And I will say one of my favorite things about using public for myself is you're able to like bucket your stocks and ETFs together. So like if you're on Robinhood or if you're on like M1 Finance or any of these other places, like it's a very hard process of keeping all of your investments in order. Where on public, you can like kind of categorize them. So if you have investments that are more specific to a theme like AI infrastructure and you've got like four or five names and a couple ETFs, you can like bucket them automatically into this like category and then click the category and easily see how that specific category in your overarching portfolio is performing.

4:38So like I'm super organized with my money and public makes that very simple and awesome. So major shout out public. If you've not get open to public account, what are you waiting on? It's the easiest way to start investing. You definitely nerd out more than me. But my favorite part of public, I think, is when I have cash sitting and I have that high yield cash account right there to earn me money while I sleep, while I'm figuring out where that money is going. I would say that's my favorite other than all of the options we have. So let's now jump into our first question coming from Natasha B.

5:36Natasha says, to bi-weekly,$210 ,000 in a traditional IRA,$28 ,000 in a Roth,$25 ,000 in a savings account earning 4%,$7 ,000 in a new public investing account, shout out public, and I typically keep $3 ,000 to$5 ,000 in my checking. My adjusted gross income last year was$56 ,400. The kicker, however, is I have$71 ,000 of student loan debt currently in forbearance. About$45 ,000 of that is at a 6 % to 7 % interest rate. My non-discretionary expenses are about$1 ,500 a month and my discretionary expenses are$900 a month. My question is, is it even feasible for me to retire at 62? And if I do, should I start taking Social Security at 62 or wait until the full retirement age of 65 or maybe even 67?

6:22And how do I even think about tackling the student loan debt while still saving for retirement? This is a wonderful question by Natasha B. You've got a lot to get excited about, right? You have about$330 ,000 invested right now at 52, which I think is a really good place to be. You are contributing to your 401k biweekly. I'm sure you're investing towards your Roth IRA. You've got a great savings account. You are trending in the right direction. There's absolute hope for you as it relates to wanting to retire at 62. Whenever someone says, I want to retire, I think you did a really, really good job of defining what that retirement looks like for you, which is working part-time.

6:59I have the flexibility to go from 40 hours a week to maybe, you know, 18, 20, 25 hours a week, being able to say, here is what my goal is. It's not to sit on a beach and drink Mai Tais all day. It's, I still want to work. I still want to do some stuff. I still have to earn some money, but this is what I want to work toward. And to be honest with you, I would imagine that is very feasible. Between your 330 ,000 invested right now, that will as you continue to invest toward these different accounts and money doubles every seven years in the stock market, you will, I'm sure, have$650 ,000,$750 ,000,$850 ,000, depending on contributions and returns by the time you're 62.

7:37So that's really exciting. You could retire on that considering you still want to work part-time, probably earning maybe$1 ,500,$2 ,000 a month, something like that, as you work part-time, maybe more. And then also you have these expenses that are only running you, let's call it 2 ,500 bucks a month, and you're going to have social security at 62. Like there's a world where you could retire early. I will, I will definitely cement that into this episode. A couple caveats though. The first thing is if you want to retire early, it's just a math equation. It is how much passive income can I earn? And does that offset my living expenses on a monthly basis?

8:11And so in your situation, you will be able to earn X amount of passive income from your portfolio, which, you know, 4 % rule is a great way to think about that. You will also earn some passive income from the social security that you'll start getting at 62, which I think is a great idea because my money works harder for me than the government can make it work for. Right. So I want that money at 62. And then you'll also be earning some money part time. I would imagine there's absolutely a world where all of that can come together and offset twenty five hundred bucks a month. Now, the kicker here, and I'll let Robert maybe take a stab at this one first, is the student loan debt.

8:41Seventy one thousand dollars of student loan debt is really frustrating, especially at the six or seven percent interest rate. That's tough. That one, if I were you, you have to somehow pay this off or get rid of this. The last thing I want you to do is to stop investing. So don't stop investing to get rid of it. But maybe you have to slow down your contributions. Maybe you have to take a step back. Maybe there's a world where you can side hustle this away. Maybe you can earn 500 bucks a month or about$7 ,000 a year, right? A little bit over 550. For the next 10 years, that's$70 ,000 and use that money to then pay off the student loans.

9:17Like there's a lot of ways you can think about this where it's not going to directly impact your ability to retire early. And that's the way I would try and navigate it. It's a tough situation, Austin, and I really love the breakdown. So I'm going to piggyback a few things you said. The goal for me with the side hustle would be to get$1 ,000 a month to go after these student loans. And here's why. Because at 53 years old, trying to retire at 62, that 10-year window is tough. thinking about only paying off$7 ,000 of the student loan debt a year because that is 10 years. So I would try to find a side hustle to get$1 ,000 a month that goes strictly to the student loan debt because here's why.

9:57You're still going to have interest on top of that and it's going to grow and grow and grow the longer it drags out. So I would be very careful there. And then also to be realistic because of the student loan debt, I think that puts us in a situation for Natalie where it's a little tougher to get to a number where she can retire because the$2 ,500 a month in expenses now, let's presume that in 10 years, it's gonna be 3 ,500 a month. So if it's 3 ,500 a month, if we implement the 4 % rule, she needs a minimum of$1 million to be able to draw 4 % over the course of the year to be able to get to that 3 ,500 a month.

10:38So that's another cautionary tale we need to understand in the math here. So I think first and foremost, I would do exactly what you said, Austin. Get the side hustle. Try to make$1 ,000 a month. Chunk this away as soon as possible so you can continue to invest, but find a way to get rid of the student loan debt so you can get on that track to a million dollars sooner than later. Otherwise, she's going to be working until she's 70. I think having this grow for her over the next 10 years, absolutely, there's a world where this is in the$700 ,000,$800 ,000 range, right? And the 4 % on the$800 ,000 is$32 ,000 a year.

11:19I should have known that. You divide that by 12 months a year, that's about$2 ,666. And then you add on, let's call it$1 ,200 a month for Social Security and another$1 ,500 a month for a part-time job. Now you're making$5 ,300 a month. And so there's a world where that definitely shakes out, but that's now completely separate from these student loans. So like you're gonna have to balance that carefully. And I think the answer on that is the side hustle. Maybe it's another part time job. Maybe it's an Uber. Maybe it's a delivery, like whatever you're doing here to make another 500 to a thousand dollars a month and just crank that out.

11:53Really just trying. Maybe there's things you could sell around the house too. Robert and I talk about this all the time. If it's a, you know, some old furniture, some clothes you don't use, some appliance, the blender you haven't used in three years. because you thought you liked the smoothies, you hate how they taste, so you don't use it, right? There's a lot of little things there that can get you across that$500 ,000 a month range from a side hustle perspective. And we're rooting for you here. So you're gonna be just fine. Yes, you can retire at 62, but you've gotta be very intentional. So our next question comes from Angel.

12:19Angel says, hello, Robert Nostin, huge fan of the podcast for educational purposes. What would you recommend me doing with some rental property equity? Current rental loan is$257 ,000 with a current estimated value of$700 ,000. The interest rate is 3.375 % and I currently make$1 ,000 a month in cash flow. I'm 42. I have$39 ,000 in a high yield savings. My 401k is at$260 ,000. I stopped maxing out my 401k this year to focus on cash savings and my Roth IRA. I just opened up a Roth IRA this year thanks to you all and I'll max it out from here on out. My spouse and I make$180 ,000 a year. I've got one child in college and I'm helping them pay some tuition and the only other debt is a primary home property that is $510 ,000 at a 2.5 % interest rate.

13:04I've always dreamed of building one to two ADUs on my current rental property. It has a very large lot, but I've been advised by a financial advisor not to take on the risk. What are your thoughts on how to best utilize the rental equity and would you consider it a good risk of building one to two ADUs? Can't wait to hear what you have to say. Robert, I'll let you kick this one off. Yeah, I love this question. You know, I deal with it all the time. Should I build out more ADUs on property? Should I add more rental units to my portfolio? But one thing I want to say to everyone that's either building a company that has properties that have a lot of equity in them, always understand and ask yourself this question.

13:42If I can get my hands on$400 ,000,$500 ,000, a million dollars right now and invest it properly, what does that do for the rest of my life? What does that do for my retirement? And in this situation for Angel, I would sell the property in a heartbeat. I would put that money in all the right accounts and do all the investments we talk about every single week and every day on this podcast. And I would ride off into the sunset because then you're guaranteeing yourself to be a millionaire or a multimillionaire by the time you're 60 years old. That's what I would do because here is the opposite opportunity.

14:18Let's say you build the ADUs. It goes okay. They don't cash flow very well. They don't have capital appreciation like the normal house did over the years you've owned it. And then all of a sudden you have all of this extra debt, presumably through a HELOC, which is going to cost you 8%, to be able to build these and then absorb a lot of the equity you already have built. Because remember, you take out this big loan. Let's say each ADU is$80 ,000,$90 ,000,$100 ,000. Well, that loan's coming out of your equity. So then all of a sudden, if it doesn't cash flow like you'd hoped and it doesn't have the capital appreciation, you're going backwards rather than forwards because they're never going to cash flow that much.

14:59Maybe you get two, three hundred dollars per unit per month, but that's not enough to make up the difference of what four hundred thousand dollars invested in the markets making eight, nine, ten percent a year is going to do for your net worth over time. That's my take. Yeah. So let's extrapolate upon that. So$700 ,000 you sell this rental for, you pay off your current loan of$257 ,000, you pay some closing costs, like whatever. You're all in around$400 ,000. Let's just say$400 ,000. On that$400 ,000, getting an 8.5 % return on your money on an annualized basis, that's$34 ,000 a year. You divide that by 12 months, that's almost$3 ,000 a month.

15:40That is much more than the current$1 ,000 a month that you're cash flowing, right? And depending on how you invest this, I would imagine that it would even be more tax efficient. If you are investing in NEOS funds and you're looking at that monthly distributions, those are all considered a return of capital. So that's all tax free. Your cash flow, I think right now, is taxed as ordinary income, if I'm not mistaken. And if you do this, you have the long term capital gains. There's a lot of different levers to pull here when you have the money invested in the markets. I think if I were in your shoes, I mean, the S &P is up 11.2 % so far this year, and the NASDAQ is up like 12 or 13.

16:15If I were in your shoes, I would take this$400 ,000, I'd park it in the markets, I would forget about it, and I'd let it double every seven years. Fast forward, you're 42 right now, that's$3 million,$3.5 million by the time you're ready to retire, all because you sold this rental property and focused on capital appreciation versus cash flow. Now, sure, the$700 ,000 may be worth$1.5 million in that period of time, but would you rather have$1.5 million with some mediocre cash flow or$3,$3.5 million of actual funds invested? And I'll take the$3.5 any day of the week. 100%, and it always brings me back to a story after Silly Bans when I was sitting on millions of dollars, and my cousin Tim said, give me$5 million right now.

16:59So if we put it in context of this question, it's really hard to get your hands on$400 ,000,$500 ,000,$1 million,$5 million. And once you do, if you invest it correctly, especially at a younger age, you're set for life. And so many people get it backwards and they just over invest and they take more and more shots and they end up going back financially. And I don't want to see them do that. So our next question comes from Taylor K. Taylor says, Hi Robert and Austin. Thanks for the practical financial insights you all share. Quick background. I'm 36 and I have no debt outside of my$330 ,000 mortgage at 3%.

17:37I have$400 ,000 of equity in my primary residence. I have$220 ,000 between my 401k and a brokerage account. I have two quick questions I'd love your thoughts on. Question number one is my wife and I currently pay$2 ,000 per year per child into a whole life insurance policy. We have three children. I'm wondering if a custodial investment account would offer better flexibility long term. What would you consider when choosing between the two? And my second question is, I have an opportunity to invest $50 ,000 from my 401k into a private real estate deal that projects an 8 % preferred return with 22 % average annual gain in a 2.2x equity multiple over 10 to 15 years.

18:16With a refinance plan in year three to get back my$50 ,000 investment, would you consider that a smart diversification move, or would you rather keep that capital in my 401k assuming a 10 % average return? Thank you for your insights. Robert, I'll take one and you'll take two. How's that sound? Sounds perfect. So no, you don't need to be putting$2 ,000 per year per child into a whole life insurance policy. What do your kids need life insurance for? They're seven, five, and two. Here's what you do instead. You open up a custodial brokerage account on a Vanguard, a Fidelity. I heard Fidelity is great for this.

18:49Actually, a lot of people have this question. Fidelity is the way to go here. There's a lot of people in the Rich Habits Network that do this through Fidelity. You open up the account on Fidelity. You say, hey, I'm the adult here and I'm investing on behalf of my two-year-old. I'm going to put that same$2 ,000, put all of that in there, put it in the S &P 500, maybe some NASDAQ or whatever else tickles your fancy. And it's going to grow much more, much better than the fees and the everything else, the lack of flexibility, the lack of growth, everything that sucks about a whole life insurance policy.

19:22So go to Fidelity, have one of these custodial brokerage accounts, open it up, invest, and your children are going to be thanking you when they're 17, 15, 12, 27, 25, and 22, right, 10, 20 years from now. The money's going to grow dramatically. So that's take number one. Robert, what's take number two? Yeah, I love where your head's at on take two, question two. I'm just not sure if it's the right time, in my opinion, given what you have already set aside in your 401k. And the number one reason is I hate to see people build up Roth IRAs and 401ks and then continually take from them because then you're not leaving that nest egg to grow for retirement.

19:59In this instance, I feel that's what you're doing. You're taking 25 % of what you've built up to risk on one real estate deal that you don't own. You're investing with someone else, if I understand this correctly, which that all sounds good on paper. you know, all of these 2.2x multiples, 8 % prep return, 22 % average annual gain. All of that sounds wonderful. I love real estate. However, I would want you to be very careful because there's a world where you give them this money. Maybe they're underfunded and they file bankruptcy. Then you have to get liens against the property or the project or the company.

20:36So there's a lot that can go wrong. And if it was capital you just recently made and you weren't pulling from retirement funds, I would be all about you starting to diversify into real estate. But I think that is a little bit more than I'd like to see you invest in your first project, given what you currently have saved and invested in your 401k. That's my take. Also, think about it like this, Taylor. You have$220 ,000 in your 401k and your brokerage account. And you're asking, do I take out 50 ,000 from my 401k to go invest it and, you know, have it grow for me or whatever in this deal. Is it a good diversification way?

21:15Yeah, like, yeah, like real estate's great. Yes, diversification. We're all for that. But the strategy of obtaining the funds is terrible. And here's why. Your 401k money, first and foremost, you pay a 10 % penalty. 5 ,000 of this 50 go straight to the government as a penalty for taking the money out. So that's a 10 % penalty on the$50 ,000. And then the average effective tax rate in the United States is about 15.5%. So now you got to pay all the taxes on this$50 ,000. So of this, you're essentially paying a 25 % fee on this$50 ,000 to obtain it, which means on the$50 ,000,$12 ,500 of it's already gone, right?

21:56So now you got to take out even more. Like it is, this is not a good plan. You're essentially borrowing at 25 % to invest. Like that's never, you know, credit card debt to invest. Like, no, this is the same interest rate as credit card debt. This is terrible. So whenever people are asking like, oh, do I take it out of my 401k and like all this stuff? It's like one, if you have a high effective tax rate, which, you know, averages like 15, 18, sometimes up to 20%. So now you're borrowing it up to 20 % and then another 10 % on top of that for the penalty. Some people are borrowing up to 30 % to go do something.

22:26It's like, no, I wouldn't advise anyone to go to 30 % interest rate debt to go whatever, right? So like, no, don't do this. I think you are maybe starting to earn a little bit more money. You got some kids, you'd want to get fancy. No reason to get fancy here. Stick to the plan. You've got 220 grand invested. How about you grow that to 500 by the end of the decade, maybe 550. And then once you have half a million invested, then I want you to start maybe setting aside a couple thousand a month for a year. Now you have 30 or 40 ,000 you could use to start diversifying, but I would not use 401k money here.

22:58It's not the answer, Taylor. Yeah, 100%. I see it every single day in the Rich Habits Network, people asking me in the DMs, hey, I want to go do this. And they're not understanding the total cost of use of funds and the opportunity cost. It's really, really important whether you're buying something or getting ready to invest in something and you need the capital, understand what that capital is costing you to be able to do the project, not what the returns say they're going to be these proposed returns because at the end of the day, I want to see everyone grow and have incredible retirements. And it's just, I want to make sure everyone understands the totality of the information is what is ultimately important when you're investing.

23:40So you understand what you're doing with your money. That's why I enjoy doing the rich habits podcast with you, Austin. Every single day is breaking these things down. So our next question comes from Liam. You Liam says, my name's Liam, 19 years old. And I just started listening to the podcast. I'm currently attending college and have a job in school to help pay for college. Would you recommend saving all of the money I make to contribute to my college bills and have lessened student loans at graduation or take out a percentage of every paycheck, maybe 10 to 20 % and use it to start investing in my Roth IRA?

24:12Thanks in advance. Liam, I highly recommend you tuning in to episode 131. It was published on August 18, very popular episode. It's titled How to 70X Your Money. And in this episode, we're essentially talking to people just like you, right, in their 20s. Every dollar that you invest in your 20s, if it's via the Roth IRA or any other way it gets invested in the S &P 500, assuming it grows by 8.5 % per year on average over a long period of time, will turn into$70 in retirement. So let's say that you are, I don't know, earning$1 ,000 a month. So you're saying you want to invest$150 of this on a monthly basis.

24:49every single month that you invest that$150, you are adding$10 ,500 to your nest egg in retirement. That is the power of compound interest, right? $150 turns into$10 ,500. And that's adjusted for inflation, right? It's adjusted for inflation. So Liam, the answer is take that 10 to 20 % that you have, go contribute and invest it and try and max out that Roth IRA if you can afford it. And then because the student loans like, I'm going to be there anyway, you're going to pay them off when you graduate. Like you're going to be just fine. Assuming you're studying something awesome and you are going to get a great job after college paying 50, 60, 70, 80 ,000 a year.

25:26Like you'll be just fine with the student loan situation. But when you're 28 years old and you can now start to afford to invest, you're going to be thinking, dang, 10 years ago, I should have started this stuff. I would have been way better off, right? Take the money, invest it, let it grow. I love that take in the$70 in retirement for every dollar wasted or not invested in your early 20s just is mind-blowing. And it's real. The math, maths, it's all there. So I love this take, Austin. And Liam, yes, get that money invested because this is compounding over time. And the earlier any of you can start investing, the better off you're going to be later on in life because you can't just keep waiting and waiting and waiting and living beyond your means early on.