0:00

Joe you've heard of know matting but have you ever

0:02

heard of it? Slow matting. Slow

0:04

Madigan. Know. It's the

0:06

flow travel have no matting

0:08

and we have a caller

0:10

who has half a million

0:12

dollars from the sale. Of.

0:15

A home. Part of it has to be

0:17

dedicated to slow matting, but part of it

0:19

needs to. Remain intact for

0:21

retirement. So we're gonna talk about how

0:23

to manage the proceeds from the sale

0:25

of a home. In. The

0:27

context of both slow matting and

0:29

long term. Plan Cool or I

0:31

welcome to the Afford Anything podcast.

0:33

This is the show that understands

0:35

you can afford anything, but not

0:37

everything. Every choice carries a trade

0:39

off, and that applies to any

0:41

limited resource that you're trying to

0:43

manage. Whether it's your money, your

0:46

time here energy, your focus. and

0:48

so this is a show about

0:50

how to optimize those limited resources.

0:52

I'm your host Paula Pant I

0:54

trained and economic reporting at Columbia.

0:56

And I help you focus on what

0:58

matters every other episode answer questions that

1:01

come from you and I do so

1:03

alongside the former financial planner Joe Saucy

1:05

hi, what's up Joe I. Am.

1:08

Present and accounted for of got coffee.

1:11

We're. Gonna do this. Absolutely.

1:14

So I'm excited to answer the slow

1:16

Matt in question. But first, we're going

1:18

to talk to Sarah, who is sixty

1:20

and about to retire in five years.

1:23

But. She's got some questions let's hear from

1:25

her eg, Hi

1:28

Paula! I'm six see and

1:30

aiming to retire in four

1:32

to five years. Currently I

1:34

aaron about thirty five thousand

1:37

annually. My. House is

1:39

fully paid off and I

1:41

have approximately two hundred fifty

1:44

thousand in brokerage account in

1:46

Roth Ira and Traditional. As.

1:49

Well as two hundred fifty K

1:51

E none retirements C D account.

1:54

Which sharing their boss five percent

1:56

interest. My. tax bracket

1:58

these twelve percent My

2:01

Social Security Benefit after retirement

2:03

is about $1000 monthly. I

2:07

have three grown-up children. They

2:09

do not live with me. Two of them are

2:11

already married. I plan

2:13

to leave the house for their future

2:16

retirement. I'm worried

2:18

about my financial

2:20

future. If

2:22

I retire at the age of 65, my

2:25

money will be exhausted before I reach

2:27

80. Can

2:30

you advise if I am on the track to

2:32

retirement at the age of 65? I

2:35

love to travel. Additionally,

2:38

should I adjust my retirement

2:40

investment to 70 stocks, 20%

2:42

bonds, now or wait

2:47

until closer to retirement? By

2:50

the way, I need to remodel

2:52

my house and for the updates,

2:54

I estimated I will

2:56

need at least $65,000. Lastly,

3:00

would it be beneficial to

3:02

pursue a part-time work from

3:05

home job to maximize my

3:07

income? Any

3:09

suggestion would be appreciated. Thank

3:12

you Paula. I'm a big fan of

3:14

your podcast. Sarah,

3:16

thank you so much for calling in. Congratulations

3:19

on having raised three

3:22

children who are now adults and

3:24

on having saved half a million dollars

3:26

plus having a fully paid off home.

3:30

Let's talk about how to get you ready

3:32

for a secure retirement. Now first, you're

3:35

60 years old. That means you were born

3:37

around 1964, depending on

3:39

where your birthday falls. That

3:42

means that per

3:45

social security, your

3:47

full retirement age is

3:49

67. The reason that I point out

3:51

the fact that you were born around 1964 is because the year of

3:55

your birth determines what social

3:57

security considers your... full

4:00

retirement age to be. So for example, if you

4:02

were born in 1958, your

4:05

full normal retirement age per

4:07

social security would be 66 and

4:09

eight months. If you were born in 1959, it would be

4:11

66 and 10 months. But

4:14

for anybody who was born in 1960 or later, full

4:18

retirement age per social security

4:20

is 67. You

4:23

mentioned that your social security benefit will be

4:26

about $1,000. That

4:28

is, I'm assuming the

4:30

calculation if you were to withdraw

4:32

in four to five years, meaning if you were

4:34

to withdraw at the age of 64 or 65. What

4:37

I'd like to encourage you to do is

4:40

wait until you reach full retirement

4:42

age, wait until you reach the age of

4:44

67, because that

4:47

is a path towards collecting

4:49

a higher payout for

4:52

the remainder of your life.

4:55

Said another way, there will be a

4:57

benefit reduction if you were

4:59

to claim that money prior to the age of

5:01

67. And of

5:04

course, you don't wanna see your benefits reduced. So

5:06

wait until the age of 67, if you can. Now,

5:10

let's talk about the other component, the

5:13

half million that you've saved in

5:15

investment accounts. We can

5:17

have a separate discussion about whether or not we ought

5:19

to use the 4% rule, but just

5:21

for the sake of discussion. Using

5:24

the 4% rule, that could

5:26

generate an income of around

5:28

$20,000 per year. So

5:32

a fully paid off home plus an

5:34

additional $20,000 per year is

5:37

what you're looking at

5:39

as a basis, which

5:42

means, and I don't know what your

5:44

normal monthly costs of

5:46

living are, but it means likely you're

5:48

going to need something to supplement that in

5:51

order to bridge that gap between the $20,000

5:53

income that

5:56

you can derive from your investments. The

6:00

in that vs whatever your normal monthly

6:02

costs are and of the one piece

6:04

of information that were missing is what

6:06

do you spend months? So let's say

6:08

hypothetically you spend on average three thousand

6:10

dollars per month, including property taxes and

6:12

insurance and everything else. If you spend

6:14

three thousand a month which is thirty

6:17

six thousand a year, that gap that

6:19

you're trying to plug is sixteen thousand.

6:21

So that's the way that I would

6:23

approach it. That. Amount of

6:25

money that does she gives up

6:28

by taking so security earlier is

6:30

not insignificant. Number Paula, Friends: That

6:32

is a very significant number. It's

6:35

around eight percent per year that

6:37

you gain. Of you look

6:39

at any financial planner that the target

6:41

rate of return no use so you

6:43

don't want to give that away. Especially

6:46

since Sarah wouldn't have called then

6:48

if she didn't think it work

6:50

clothes and it's gonna be really.

6:53

Really? Close a do Some good news

6:55

for Sarah though. Paula that's just during

6:57

my time is a financial planner, but

6:59

talking with lots and lots of see

7:01

of peace over the years, you know

7:03

what doesn't. Ever happen

7:06

Eumetsat. Sarah's. Biggest fear:

7:08

You never run out of money.

7:10

I've never seen a person run

7:12

out of money. Doubts That doesn't

7:14

mean that it's all rainbows and

7:16

unicorns, but the average person gets

7:18

to a certain point they realize

7:20

that it's close paulo and so

7:22

they they change their lifestyle. To

7:25

make sure that they don't run out that

7:27

there's still enough acorns lowest in the nest

7:29

to make it a debtor seen a person

7:31

pull up to us. You know, a Coke

7:33

Machines A Just before they clutch their chests

7:36

and put the last quarter in the coke

7:38

machine and then die Never seen it happen.

7:40

So Bill Perkins whole thing about die broke

7:42

a great book. I was the As and.

7:45

The. A diverse year old I broke same

7:47

thing yeah it doesn't come true which

7:49

which by the way his. His.

7:52

his greatness but that said it is going

7:54

to be close so when she mentioned getting

7:56

a job i like the job for a

7:58

few different results I like

8:00

it not just because of the income

8:03

it'll bring in, it'll also

8:05

make it easier for her to delay social

8:07

security. Another book

8:09

I like is Wes Moss's book, What the

8:11

Happiest Retirees Know, and

8:14

they stay active. They've got

8:16

stuff going on. They've got purpose. They

8:18

got mission. They got these things. So, Sarah,

8:20

if you can align yourself with some organization

8:22

where you get paid and you're bringing

8:25

in income and you're

8:27

driving into retirement with this organization that

8:29

needs you to show up a few

8:31

days a week on this

8:33

part-time basis, good for everybody, good

8:35

for you, good for them. So,

8:37

I would highly recommend that you

8:40

consider employment during your retirement years.

8:42

Absolutely. It can be something flexible,

8:44

something part-time, and again, I don't

8:46

know how much money you spend per month.

8:49

That is the key piece. That is the missing

8:51

piece of information. If you assume

8:53

that you retain this paid off home and

8:57

that you derive $20,000 from your investments

9:00

and you assume that you don't take

9:02

any social security, then it's simply what

9:04

is the gap that you need to plug

9:06

between the $20,000 per

9:09

year that you're collecting and the

9:11

amount x that you spend

9:13

annually. And then once

9:15

you know what that gap is, that's the number

9:17

that you're aiming for when it comes to some

9:20

type of part-time work. I

9:23

worry when she asks about

9:25

investment allocation, I worry, Sarah,

9:27

about you getting too conservative,

9:29

too early. And

9:31

the reason I worry about that is because it's

9:34

going to be so close and you already have

9:36

in my estimation for

9:38

somebody that's going to be as close as you're

9:40

going to be, too much money sitting in cash.

9:43

Now, here's what we have right now. We

9:46

still have a lot of inflation. We have a lot

9:48

of inflation in the area of construction. Paula,

9:51

I would tell her to do that

9:53

renovation now. Do

9:55

it as soon as you possibly can because prices are

9:58

just going to keep going up in that area. There's

10:00

no way construction prices don't continue

10:03

to at least keep

10:05

up with general inflation but may

10:07

even continue to outpace it. So

10:10

just the risk of that makes me

10:12

go, you know what, if this is $65,000 today, you're not

10:15

gaining anything leaving that money in a

10:17

savings account and waiting until next

10:20

year, the year after, five years from now. Do

10:22

that now so that you know what you have

10:25

and then keep a reasonable amount

10:28

in your emergency fund and move

10:30

the rest into investments because it's

10:32

going to be about keeping up

10:34

with and beating inflation and

10:36

we need as much of your money to beat

10:38

inflation as possible. So I wouldn't be looking at

10:41

moving more money toward bonds. I

10:45

would be looking at how much money do I

10:47

need in cash as a buffer so that

10:50

if the market takes a

10:52

tumble for a couple of years, I've got enough

10:54

money in cash and cash flow to get

10:57

myself through those couple of years so

11:00

that I can stay in a

11:02

place where I have a shot

11:04

at beating inflation. Got

11:06

to stay in equities as much as you possibly can, I

11:08

think. Sarah, you also mentioned that

11:10

you love to travel and you do plan to

11:12

leave the house when you retire so you're not

11:15

necessarily going to be at home all the time,

11:18

which is great because first there's a

11:20

lot of part-time work that you can

11:22

do that's remote. You're living in

11:24

the new normal of remote work

11:26

and so there is

11:28

a ton of opportunity for you there.

11:31

But also, what's wonderful about

11:33

travel is that it can actually be

11:35

a path to saving money because depending

11:37

on where you go, a lot

11:39

of locations, particularly outside of the United

11:41

States, have a lower cost of living

11:44

than locations in the US. And

11:47

so you can decrease

11:49

your cost of living by

11:52

going to another country and spending

11:54

six months there, working

11:57

remotely, geo-arbitraging such

11:59

that the dollar exchange rate really works in your

12:01

favor. What I think a

12:03

lot of people forget when people talk

12:06

about long-term travel is

12:09

that a lot of people sometimes

12:12

mistakenly assume that long-term travel

12:14

is expensive. It's

12:16

actually often a money-saving

12:20

tactic. If

12:23

you rent out your home

12:25

and then geo-arbitrage go to

12:27

a different location where

12:29

the dollar exchange rate works in your favor, where

12:31

the cost of living is significantly lower, you

12:34

spend six months there, you actually end

12:36

up saving money by virtue of doing

12:38

that. It's the best of both worlds

12:40

in that you get to enjoy

12:43

long-term travel, slow travel,

12:46

and you end up with a bigger

12:50

savings account than you

12:52

had at the beginning. I

12:54

think it's applying some creativity like that, Paula,

12:57

that can really bridge the gap, not

13:00

just for Sarah, but for a lot of people. Right.

13:03

Now, I know someone who, when

13:06

he reached his 60s, he didn't really have

13:08

much in the way of retirement savings. He

13:10

had not much of a plan and not

13:12

much in the way

13:14

of investments or anything like that. He

13:16

moved to Colombia in South

13:19

America. He moved to Medellin.

13:21

By virtue of

13:23

moving to Medellin and working

13:25

remotely, he was able to put

13:27

himself into a much

13:29

better position. Certainly

13:32

far, far better than what he

13:34

would have experienced had he stayed in the US. I've

13:37

also heard there's a wonderful expat community

13:39

there. Yeah, there are great

13:41

expat communities in a lot of places.

13:43

Cuenca in Ecuador, another great expat

13:46

community. Well, and in Bogota

13:48

as well, I've heard there's a great

13:50

expat community. Yeah, yeah, all over the

13:52

world. There are expat communities everywhere. A

13:55

Great one in Texarkana, by the way. I Get

13:57

along great with all the expats who've moved here.

14:02

Fantastic. One in Katmandu if I can give a

14:04

plugged. My home country to assess as I went

14:06

there. I was a part of it for a

14:08

couple weeks. Yeah. You met my

14:11

sister in Katmandu. Seeing. That photo.

14:13

Of you and her that was crazy. It

14:15

was so fun! We'd a wonderful breakfast and

14:17

yeah on New Year's day so or you

14:20

sister was like we hung over. The

14:23

Nepali New Years. That was April New Years

14:25

in. April and yes, so fun

14:28

is so wild. realizing that

14:30

it's a twenty eighty. Yes,

14:32

Happy twenty eighty! Yes,

14:34

I've aged and I look, I look gray system

14:36

with what we're talking the second bedroom show. But

14:38

how jail or does it age look at. It's

14:42

one year the and look at I look like

14:44

a moment my deceased. J. J.

14:46

Saw doesn't. A to say Sawyer

14:48

say saw say softly. But.

14:53

You can, there's is arbitrage. Go back

14:55

to the point. There is this arbitrage

14:57

that exists that if she chooses to

15:00

travel that way Sarah could use in

15:02

her favor. Absolutely absolutely says I

15:04

would add. I would definitely consider that

15:06

as well. or rent out your home

15:09

so that you're collecting some type of

15:11

an income on it. at least enough

15:13

as an income to cover property taxes,

15:15

insurance, maintenance, none management. All of those

15:18

are operational costs and then. Indulged.

15:21

That love of travel and go to places

15:23

where. The. Us dollar stretches

15:26

further. And. Work remotely while you're

15:28

there. It's a great way to. Have

15:31

an adventure while also building up

15:33

your savings coffers. Before

15:35

he signed off thera, there's one other.

15:39

Detail that I would be remiss

15:41

not to bring up. It's and

15:43

it's a controversial one. The we

15:46

started this answer by encouraging you

15:48

both still and I agree that

15:50

you ought not to take social

15:52

security until you reach full retirement

15:55

age which the social security. Administration

15:57

designates as age.

16:01

67. But, but your benefits

16:04

will increase if you

16:07

further delay taking Social Security to

16:10

the age of 70. I'm

16:12

curious to know what you think because this is where you

16:14

and I might disagree. Joe, do you

16:16

think that she should delay Social Security

16:18

until the age of 70? So she

16:21

should delay it past full

16:23

benefits age? I think, I

16:25

think the first thing to do is consider

16:27

your family's longevity. Um,

16:29

if there's extended longevity, then I think

16:32

that works in favor of that. But

16:34

generally, my bias is against it. Let

16:37

me tell you why my bias is against it. It

16:39

has nothing to do with money. The

16:41

cool thing about this show and the cool thing about

16:43

what we do is our goal

16:45

is not to manufacture more

16:47

money. Our goal is to manufacture more

16:50

happiness and to get the goals as

16:52

you stated them. And the further we get

16:54

away from that, the more strain she's going to put

16:56

on the rest of her portfolio, which

16:58

means that it's going to start putting cracks

17:00

in what she told us she wants to

17:02

do. And so what I

17:05

see often is people delay happiness in

17:08

favor of more money. I don't know, Sarah, but,

17:10

but I could see just based on what she's

17:12

told us about her portfolio value

17:14

and where it's at, I could see you're

17:16

making that decision. No, I'm just not going

17:18

to retire until 70. Well, that's horrible. You

17:21

told us you want to go five years from now. We've

17:23

already talked about delaying social security, whether she

17:25

retires or not, it's a different thing. Now,

17:28

let's say Paula, let's

17:30

say that she finds income that's meaningful,

17:32

that she really likes, and

17:35

she finds that the drain in her portfolio, those first

17:37

few years is what she thought it was. And

17:39

she has some longevity in her family. Then

17:41

I start changing my mind. But

17:43

my bias is against because I see

17:46

too many people delay what

17:48

they say is going to bring them more joy. Interesting.

17:52

So here's what I would recommend. So if you

17:54

go, we're going to drop a link in the

17:56

show notes, but the social

17:58

security website, ssa.gov slash. benefits

18:00

slash calculators, go to

18:02

that page on the Social Security

18:04

Administration's website. And they

18:07

have a calculator where you can see

18:09

an estimate of what your benefit

18:11

will be if you take it

18:13

at full retirement age, which for you

18:15

is 67, or if you take it

18:17

at the age of 70. So you can

18:20

input your data to see

18:22

what the expected future income will be

18:24

for either decision. Take a

18:26

look at the differential between the

18:29

amount you would get if you took it at 67 versus the

18:32

amount that you would get if you took it at 70. And

18:35

based on that differential, I think when

18:37

you see the actual numbers, that

18:40

is going to inform which one

18:42

you are more likely to want to do.

18:44

Again, we'll put that link in

18:46

the show notes and you can

18:49

subscribe to the show notes at

18:51

affordanything.com/show notes. The

18:53

benefit enhancement if

18:56

you delay Social Security by an additional

18:58

three years is significant

19:01

enough that it at

19:04

a minimum it warrants looking at the numbers,

19:06

it warrants looking at that estimate. But

19:09

I agree, Jo, a lot of it is also going to depend

19:11

on will she find some

19:14

type of remote part-time work that

19:17

she enjoys that also complements

19:19

her lifestyle. Yeah. We'd

19:21

have to have a much longer discussion about

19:24

how she feels about the stickiness of that

19:27

five years from now number. There

19:29

are some people I met with like, oh yeah, it'd

19:31

be nice to go in five years. Yeah, if I

19:33

could, I might. There are people like,

19:35

I gotta get the hell out of here. Yeah.

19:40

Well, thank you, Sarah, for asking that question and

19:43

best of luck and enjoy your travels. Hey,

19:45

Jo, do you want to talk about

19:47

the difference between an index fund and an ETF? I

19:51

was hoping you'd ask. Wow.

19:53

Well, what a coincidence because

19:56

we have a caller who also has

19:58

asked for a call. asked that question and

20:00

we're going to get to her question in just

20:03

a moment. But first, we are

20:05

committed to making sure that we can spread financial

20:08

education and financial literacy to

20:10

the public at no cost. And there are

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20:22

let's dive into some index

20:24

fund versus ETF nerddom.

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24:15

our next question comes from Lauren. Hi

24:19

Paula and Joe. This is Lauren from Portland,

24:21

Oregon. Thanks to you and the information you

24:23

provide on this podcast. I have a pretty

24:25

solid on my personal finances.

24:27

But one question I can't seem to

24:29

wrap my head around is index funds

24:31

versus ETFs in investment accounts.

24:34

I have about $190,000 in a 401k, about $63,000 invested in an HSA, $190,000

24:40

in an IRA, and $168,000 in a taxable brokerage account. What should

24:42

I look at to determine

24:48

whether to have those accounts invested in

24:50

index funds or ETFs? Does

24:52

the answer vary by account type? Currently

24:55

I'm in mostly S&P 500 index funds

24:57

and I'm trying to learn if there's

24:59

any benefit to switching to the ETF

25:01

equivalent in any of my accounts. Thank

25:03

you. Oh

25:06

Paula, this is such a great,

25:08

nerdy, interesting question. And I love

25:10

it because it just gets into

25:13

the history of mutual funds and

25:15

exchange traded bonds. It

25:17

gets into the taxability of those

25:20

positions, but there is good

25:22

news. All right. What's the good news?

25:25

They're both great. They are.

25:27

There are lots

25:29

of little differences between them,

25:32

but it truly isn't going to

25:34

make a lot of difference

25:36

on your ability to gain

25:38

financial independence. Right. At

25:40

a practical level, at an academic

25:42

level, it's fascinating, but at a

25:45

practical level, it doesn't really matter.

25:47

Yeah. But super, super fun. Let's

25:49

talk about the distinction at the academic level.

25:51

Yeah. So mutual funds are

25:53

older. This is what we have to remember

25:55

is that mutual funds became more prominent in

25:58

the exchange

26:00

traded funds much, much, much lighter really didn't

26:02

find any prominence until the 2000s. They

26:05

were certainly around before then, but

26:07

even the prints of exchange

26:09

traded funds and low cost

26:11

investing, Jack Bogle back in

26:13

the 1960s talk about how

26:15

ridiculous low cost index investing was.

26:17

He wrote a paper on it, right? Before he

26:19

became the guy who was behind it, he was

26:22

the guy that said, no, thank you. Right.

26:25

So, but obviously everyone's feelings have changed

26:27

there. Exchange traded

26:29

funds though, because they were created

26:32

later are more efficiently created. So

26:34

to very succinctly answer your question

26:36

before we dive into the nerdery,

26:39

an exchange traded

26:41

fund is nearly

26:43

always better than

26:46

a mutual fund. They're going to be

26:48

slightly less expensive. They're going

26:50

to be more efficient when

26:52

they trade out positions, exchange

26:54

traded funds inside of the

26:56

packaging of the exchange traded

26:58

fund can swap out

27:01

positions without tax consequences because

27:03

of some legal loopholes where

27:05

mutual funds have to replace

27:07

and sell. Let's say

27:09

you've got Nvidia and now some

27:11

of that Nvidia needs to be replaced, needs

27:13

to be moved inside

27:16

of a mutual fund. We

27:19

will pay a tax when

27:22

some of that Nvidia gets sold

27:24

off to redistribute to make sure

27:26

that we stay exactly where the

27:28

S&P 500 is, which I'll use

27:30

as an example because that's what

27:32

she's invested in. When

27:35

that happens then, regardless of if you've

27:37

gotten in last week, last month, last

27:39

year, at the

27:41

time of record, which is generally late

27:44

November for most mutual funds, at the

27:46

time of record, everybody who owns it

27:48

on that day, if you're outside of

27:50

any tax shelter, you're going to pay

27:52

the tax. Let's say that, Paula,

27:55

you go buy this in mid-November not thinking

27:57

about the tax. You just pick some up.

28:00

And then they sell off this Nvidia

28:02

with this monster capital gain because they

28:04

sold it. No fault of

28:06

yours. You're going to get a gigantic tax

28:08

bill. Even

28:11

though you weren't there for most of those gains, you're

28:13

going to get a tax bill. And it's just purely

28:15

the way that mutual there's no fair way for them

28:17

to distribute the capital gains tax. So what

28:19

they do that is fair, they tell everybody ahead of

28:21

time, they're like, hey, this is the day in late

28:23

November. We're going to do it. This is how much

28:25

it's going to be. You decide if you're

28:28

on board or not. And they make that

28:30

public information every year. But

28:32

if you're in a mutual fund, you're going to pay

28:34

the tax. If that's an ETF, that doesn't happen. There's

28:37

a different mechanism they use where they're able to

28:39

swap it out and swap in

28:41

another one and technically not sell.

28:44

And like I said, it's just a loophole

28:46

that ETFs get to use because it's more

28:48

modern invention. And so there will

28:50

be no tax on the ETF.

28:52

So ETFs generally more tax

28:54

efficient. So to directly answer the question,

28:57

outside of your IRA is where this

28:59

matters more. It's going to matter anywhere.

29:02

It's going to matter outside of your IRA, inside

29:05

of an IRA, because you're not going to have

29:07

any of these taxes. That doesn't matter.

29:10

The only thing that matters then, Paul, are two other things.

29:12

The difference in fees and expenses, Hugh

29:15

Joe's gigantic eye roll, who

29:18

cares? Because the fee on

29:20

the mutual fund is still going to be super tiny,

29:22

but the ETF will be tinier. Right.

29:26

The bigger thing is, is ease

29:28

of buying, which

29:30

ease of buying currently is

29:33

in favor of the mutual fund.

29:35

Mutual funds, because they're older, also

29:37

have this wonderful on-ramp where you

29:39

can just say, I want to put 100 bucks

29:42

into the month and the mutual fund company can

29:44

hook that up. And you just buy whatever percentage

29:46

that happens to be on the day. It's easy

29:48

to dollar cost average in. Most

29:51

ETFs still don't have,

29:53

this is like 90, 99% of

29:55

ETFs, still don't have that mechanism.

29:58

So every think a month, you're going to have. to

30:00

go buy that $100 worth

30:03

of ETF on your own. You can automatically have it

30:05

added to your Schwab account, your Fidelity, your Vanguard, whatever

30:07

your account is, but you're going to have to go

30:09

in and buy it every month. Behaviourally, we

30:11

just don't do that. Yeah, we just

30:13

don't do that behaviourally. So behaviour

30:15

always wins the day, always

30:18

wins the day. Buy the mutual fund

30:20

if you're buying in. If you're not buying in, if

30:22

you're just lump summing a bunch of money in, or

30:24

you have a bunch of money sitting there and you

30:27

want it, almost always choose

30:29

the exchange traded fund because

30:31

if you're going to have to make the move once

30:33

manually, then the ETF is going to be the way

30:35

to go. By the way, I do think, and

30:38

I believe you're on board with this, Paula, I do

30:40

think that's going to change. I think they talk about

30:44

breaking news. I think it's

30:46

coming. I seriously

30:48

think in the next five years,

30:51

because of how sexy exchange

30:53

traded funds have become and

30:57

how much these companies

30:59

know that the word is out

31:01

about exchange traded funds. So I'm

31:03

thinking in the next five years,

31:06

we are going to see that change where

31:09

ETFs will be as easy to

31:11

buy as mutual funds. Right,

31:13

right. And by the way, I should make a

31:15

note here, and we probably should have said this

31:17

upfront, that index funds are a type of mutual

31:20

fund. So an index fund is an index

31:22

mutual fund. So for anybody who's

31:25

wondering, hey, wait a second, this question was about

31:27

index funds. Why are we talking about mutual funds?

31:30

Index funds are a subset of mutual funds. Yeah,

31:33

they are passively managed funds, meaning

31:35

they are just going to try

31:37

to do, their attempt is to

31:40

do exactly what an index is.

31:42

And Lauren is in one that mimics the

31:45

S&P 500. So

31:47

different companies have products that do

31:49

this. iShares has one, there's another

31:51

one called the spider that does

31:53

it. There's several different iterations of

31:55

this. But an

31:57

index fund is generally a mutual fund.

32:00

fund that mimics the index. And

32:02

the only difference between it and

32:04

the index really is the fee

32:06

they take out, which is miniscule. It is

32:08

a tiny fee they take out. So you

32:10

will always just barely underperform

32:12

whatever index you're trying to mimic.

32:15

One we like for new investors

32:18

to make it just to press the easy button

32:20

and get rid of the freak out factor everybody

32:22

gets. What should I invest in? Forget about that.

32:25

Just go by the total stock market index,

32:28

which for a beginning investor, I think Paula, I

32:30

can even speak for you here. I like better

32:32

because you're buying a little bit of everything. You

32:34

get some small companies, some medium-sized companies,

32:36

some international exposure,

32:39

large companies, and

32:41

they're all in proportion. It is truly pressing the

32:43

easy button for a new investor. Right.

32:45

And as I said on a recent

32:47

podcast episode, as I said on the

32:50

May 2024 first Friday episode, another

32:53

reason that I love the total

32:55

stock market index fund, particularly right

32:57

now, is because I'm extremely bullish

32:59

on AI. And I think

33:02

the best way to invest in AI is

33:04

through a total stock market index fund because

33:06

the future of AI and the future of

33:09

the US total stock market

33:11

are moving in lockstep. Yeah.

33:15

It is an interesting time to be an

33:17

investor. I love, by the way, what Professor

33:20

Scott Galloway said recently about this,

33:23

because you know how Paula, everybody is worried

33:25

about AI, but you talk to smart people

33:27

and they're not worried about it. And

33:29

so many investors are like, how can you not freak

33:31

out about AI? They're coming for all of our jobs.

33:34

They're coming for all our jobs. You've heard this.

33:36

You know what Scott Galloway said? And I love

33:38

this quote. I wish I would have thought of

33:40

this myself because I 100% agree.

33:43

AI is not coming for your job. People who

33:45

understand AI are coming for your job. Hmm.

33:48

Beautiful. Beautiful.

33:51

Yeah. And it's 100% true. Get

33:53

on board or get left behind. You

33:57

certainly need to know what AI can

33:59

do. for you in all

34:02

aspects of your life, because it is

34:04

very exciting. Right. Absolutely. Absolutely. And

34:06

I said this also on the first Friday

34:09

episode, we are living in 1999 and learning

34:12

about the information superhighway. It's

34:14

the brand new information superhighway. Exactly.

34:17

And the people who embraced

34:19

the internet in the year

34:21

2000, we're the first

34:23

to have flourishing careers that

34:26

were online based by 2004, 2005, 2006. The

34:30

ones who were slow to adapt to

34:33

the internet suffered some career hits. I

34:37

certainly saw that in the world of

34:39

journalism and I know that you saw that in

34:41

many other fields. So be

34:44

bullish, be optimistic, get

34:46

ahead of it. You know, don't

34:48

swim against the tide. And

34:51

as an investor, the US

34:54

and specifically the US total stock market

34:56

index fund is an

34:58

amazing way to get exposure to

35:01

the growth that

35:03

is coming. But

35:05

back to the original question, the

35:07

distinction between an index fund and an

35:10

ETF while interesting is

35:12

in practice, not

35:14

something that the average investor needs to

35:16

worry about because

35:18

we're talking about squeezing a couple

35:20

of basis points, too

35:22

few basis points to really worry about.

35:25

We're talking about picking up

35:27

pennies and it is in

35:29

a life that has limited time and

35:31

limited cognitive bandwidth, simply

35:34

not a good use of time or

35:37

energy to worry about a

35:40

minor expense ratio

35:42

differential between an ETF versus

35:44

an index fund. Save your brain

35:46

power for the big things. The

35:49

only time that this may be big is

35:53

if you're considering buying a mutual fund with

35:55

a lot of money outside of

35:58

an IRA. before

36:00

the capital gains tax. Right,

36:03

in early November. Yes, yeah.

36:05

Under that incredibly

36:09

specific circumstance. Then

36:12

it is truly material and can change

36:14

your trajectory because you could end up

36:16

paying a big tax which is not

36:18

yours. Right, but if

36:20

you simply wait until December to

36:23

do the same thing, which December

36:25

is right around the Santa Claus rally

36:27

anyway, which is the historically,

36:31

the stock market typically has a December rally

36:33

known as the Santa Claus rally. Great

36:36

time to invest. Yeah, exactly. Just wait

36:38

two weeks. Yeah, exactly.

36:40

You avoid the capital gains problem and

36:43

you may pick up a few points, you know, which

36:45

you never count on, but hey, if you

36:47

do, you do. Yeah, yeah.

36:50

There's certainly a lot of enthusiasm for

36:52

investing in early December in

36:54

anticipation of the Santa Claus rally. You

36:56

know what the theory is around that? It's because

36:59

so many companies are giving year-end bonuses. There's a

37:01

lot of money that is just

37:03

automatically put into the sideline as bonuses

37:05

get paid out. So the rally, historically,

37:07

if you look at charts, in

37:10

years where the economy does really, really well,

37:13

that rally is bigger in years when the economy

37:15

doesn't do as well. Less companies paying the big

37:17

bonus. So that's one reason a lot

37:19

of people making moves the last week of the year

37:21

for tax rate for all kinds of reasons. There's so

37:24

much movement that last week of the year to try

37:26

to get things in under the wire

37:28

that that's why that rally occurs. It's

37:31

almost like that rally is collateral

37:33

damage or collateral wonderfulness that happens

37:36

as people do things for things

37:38

that have nothing to do with

37:40

the market, you know. It's like

37:42

collateral benefit. Collateral benefit, yeah.

37:44

I don't think I've ever used that term

37:46

before, but that is correct. Right,

37:51

as people make moves for tax-related purposes

37:53

or for, you know, shifting money from

37:55

one account to another account, from one

37:57

hand to another. Yeah. Selling

38:00

out of certain positions and into others. Were.

38:03

Thank you Sarah for asking that question!

38:06

And. Remember. You. Can't

38:08

go wrong with either one. Index funds and

38:10

easiest. Are both great tools. Or

38:13

it showed you. remember at the start of the show when

38:15

I asked you about. Slow. Matting.

38:18

Like. New. Adding that slow. Would.

38:20

Be wild if I said no, no, no, I

38:24

have no recollection. I can

38:26

neither confirm nor deny. This is just

38:28

still it was recorded decisis episode that

38:30

they had. Caught.

38:34

On the record Again, Yes, I remember. I

38:36

can't wait! Oh excellent. Well

38:38

we are going to take one final

38:40

break to appreciate the sponsors who allow

38:42

us to bring you financial literacy at

38:45

no cost to you. And after that.

38:47

We. Will have a discussion

38:49

about slow madding. And.

38:52

For this particular color, slow.

38:54

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41:08

Final question today comes from

41:10

an anonymous caller. So.

41:12

We give every anonymous caller a nickname. what

41:14

would you like? Any discipline. Med I

41:16

was just looking at new movies coming

41:19

out so many is finally you get

41:21

the feeling that the strike really made

41:23

during the movie theater horrible but coming

41:26

out Pixar got a new one

41:28

inside out to and one of the

41:30

main characters is is joy and does

41:32

this person's looking for more joy in

41:35

their life So. How. Bob

41:37

oh we calendar is the emotion.

41:39

Let's call them voice. Within our

41:41

final question today, consume Joy Hi

41:43

Paula This is anonymous and I'm

41:45

calling because I am on disability.

41:47

the I have still unable to

41:49

do a lot of days including

41:51

travel and I'm about to sell

41:53

my home at about half a

41:55

million dollars and I would love

41:57

to know what I should. Too.

42:00

Not gonna buy another home for a while.

42:02

I'm going to be no matting or slow

42:04

madding I like I used to do on

42:06

the a carefully as to. Cater to

42:08

my needs and take care of myself

42:10

on so the not have a flare

42:12

up. With my disability which I've

42:15

already done a test drive last

42:17

year and the year before and

42:19

it's ago soon as the song

42:22

as I can have some really

42:24

good safe investment styles and diversification

42:26

strategies this house nine dollar windfall

42:28

that would be wonderful. Paula Thank

42:31

you. Thank. You

42:33

so much for calling in! I

42:35

absolutely love the plan that you've

42:37

made. You know what love is? The

42:39

fact that you have done a test

42:42

drive? Was given to have another to There

42:44

was like the right thing. Exactly.

42:46

Exactly because And and I said love the

42:49

fact that you've done to you. Did a

42:51

test drive last year. And

42:53

of the year before. right? So

42:55

you've tested this out, you've run a

42:57

sample, You know that it works. Can

42:59

we talk for a moment about why

43:01

that's so important in? this is a

43:03

message really for the broader audience Because

43:05

to a you have set such a

43:07

great example Joe, You know we hear

43:09

over and over and over from people

43:11

and in both of our communities who

43:13

say. I. Really want to do.

43:16

Acts. But these never actually

43:18

done it. A test drive of X

43:20

so people say I'd like to retire

43:22

and go sailing. I'd like to retire

43:24

until are being it's I would like

43:26

to move from Florida to Oregon Or

43:28

Oregon to Florida or wherever. As you

43:30

know, Polo's one of those people. Right? Exactly

43:33

exactly. You yourself sold your home

43:35

in Texarkana and decided you were

43:37

getting to live somewhere. I know.

43:39

this. Is my house in Michigan. Ah,

43:42

House of Michigan we were going. we sold all of

43:44

our stuff which is amazing because you were to set

43:46

my house let's look at night ruff you can regulate

43:48

and her. Sister. Cities

43:51

amazing our ability to to make themselves seem

43:54

like we never sold or stuff but we

43:56

sold the vast majority. We didn't sell everything

43:58

we saw. the vast majority. The Things We

44:00

sold our house. We were going to live

44:02

this remote nomadic lifestyle where we would live

44:04

in different places for a few months at

44:06

a time. I can work from anywhere Cheryl

44:08

was going to do. These are these based

44:11

on her career, she was going to be

44:13

able to do the six months denser between

44:15

those. We were just gonna go to live

44:17

in Portugal for months, live in Brazil for

44:19

a bug, live in Nyc wherever it's an

44:21

dumb and I realized. After doing

44:23

that for six months, I freakin' hated it.

44:25

It wasn't for them, but it was that

44:27

test drive. Paula if I hadn't has driven,

44:29

that's this was the big thing in my

44:32

head. The I thought for sure was my

44:34

quote retirement Vision We were going to have

44:36

no possessions we're going to travels gonna be

44:38

awesome. I love traveling still

44:40

as you know, but also loves having a

44:42

home base far more than I thought that

44:45

I would have had I not test drove

44:47

it so that is wonderful. Yeah, exactly

44:49

exactly. Sweet and it to have a house in

44:51

Texarkana. and he sold it and he thought you

44:53

were gonna live elsewhere. And then he came back

44:56

to Texarkana. We moved to Michigan and then

44:58

we thought we were going to be nomads. And.

45:00

So we sold our house and we tried

45:02

out the nomadic living. We lived in Palm

45:05

Springs for a while. We lived in Vermont

45:07

for a while. we lived about a month

45:09

at a time. for that six months in

45:11

different places and dumb and yeah and then

45:13

decided that you have to families. You've the

45:15

family that you're born into and you of

45:18

the family of friends who truly are that

45:20

network that you crate during your life. And

45:22

it was back here and beautiful. Tsk. Plow.

45:25

Wow. Your story

45:27

and Julie story I think both highlight

45:29

the importance of test driving. Whatever it

45:31

is that you. Think. That

45:33

you're going to do right? So I'm so

45:35

joy. Thank you for sharing that because it's

45:37

such a good. Example.

45:40

That you're setting for the community and such a good

45:42

lesson for all of us to take which is. What

45:45

ever it is that you think that you want to do. During

45:47

retirement. Test. Drives

45:49

the idea. Make sure that

45:51

it were a said i love what you've

45:54

done which is it's you did to separate

45:56

test drives into different years you know that

45:58

work so you could have total confidence in

46:00

the plan that for had. Felt

46:02

First, I want to commend you for

46:04

that. and now to answer your question.

46:07

which is how do you handle this

46:09

five hundred thousand dollars at? The first

46:11

question that I have that to you

46:13

is how much of that five hundred

46:15

thousand are you going to invest in?

46:17

How much are they are you going

46:19

to spend? I'm gonna take this on

46:21

the assumption and I don't know if

46:23

this is the case or not, but

46:25

I'm going to take this on the

46:27

assumption that you'll be investing the entire

46:30

five hundred thousand and lump sum and

46:32

living on a four percent withdraw. Now

46:34

I don't know if that's actually a

46:36

plan or not, but is the goal

46:38

is to preserve the principal and to

46:40

live off of the games. then on

46:42

ball address. The question is though, that

46:44

is the plan but of course yeah

46:46

York no pun intended. your mileage may

46:48

vary. Oh. Wait,

46:52

Success! I want to thank

46:54

you joke some. We're all

46:57

week, folks. So

47:00

if I guess as we were just

47:02

discussing with Sarah, if you are going

47:04

to invest this as a lump sum,

47:06

don't do it. In early November says

47:09

assess is our enemy in a one

47:11

year in a mutual fund in a

47:13

taxable. Brokerage account. Glad

47:17

we just had that conversation. Generally

47:21

speaking, lump sum investing is

47:23

better than metering this out.

47:25

And because if you do invest it in

47:27

a lump sum. Statistically,

47:30

Speaking at, you are better off deploying

47:32

that money into the markets immediately then

47:34

he would be if you were to

47:37

hold it in cash and slowly. Start

47:39

metering. it's. I into the

47:41

markets so when you sell your

47:43

home. Putting. That

47:46

entire lump sum into the markets right away.

47:48

In. A manner that is asset

47:51

allocated based on your timeline. That

47:53

lump sum investment is better than.

47:56

Keeping a portion. Of it in cash. And.

47:58

For a detailed explanation as. The Why:

48:00

I'll refer you to episode size:

48:02

oh sad and afford anything.com/episode Five

48:04

o' seven. I think

48:06

there's a discussion Paula we

48:09

need to have around the

48:11

word safety because when people

48:13

think safety's the default ceiling

48:15

people have is, that means

48:17

a freedom from fluctuation. The.

48:20

Thing that I will I will

48:22

encourage you to do is think

48:24

about safety in a different way.

48:26

Safety is making sure this money

48:28

last for a long long time

48:31

and. Unfortunately,

48:33

If you're going to try to beat inflation. Then.

48:36

Then fluctuation comes with the

48:38

territory and it's much more

48:41

about being getting more comfortable

48:43

as the passenger on that

48:45

moving. Portfolio. That's

48:48

going to be on a bumpy road that

48:50

it is about safety because if you go

48:52

for things that are Fts he ensured this

48:54

one is going old not less for and

48:56

right? All right. right? Yeah, You need an

48:58

equity been split. Yes, safety is for

49:00

me. as much of this inequities as

49:02

possible. So Order of Operations pay down

49:05

high interest debt because that's a guaranteed

49:07

rate of return. Next is make sure

49:09

that you've got your emergency fund money

49:11

that you can get to if the

49:13

markets go haywire. The don't worry about

49:16

that, your of the I see money

49:18

a high yield savings com for that

49:20

and then the rest of it. as

49:22

aggressive as you can stomach. Know when

49:24

I say aggressive I don't mean going

49:27

and picking individual stocks like you're some

49:29

stock. Jock that saw that.

49:31

Betting we don't wanna bet,

49:33

but certainly buying some. Responsible.

49:36

Large companies. Neutral.

49:39

Funds or exchange traded Funds. I.

49:41

Think that asset allocation know. Should.

49:45

The. Have a bias toward equities. The

49:47

cool thing is is that you can

49:49

buy different types of equities. That done

49:52

that will give you some cool diversification.

49:54

This this piece blew my mind. which

49:56

is that you can buy large company.

49:59

A large com. The eg. of like the Snp:

50:01

five hundred. Then you can

50:03

add to it. Three other exchange

50:06

traded funds that generally are are

50:08

more aggressive. Let's a small company,

50:10

midsize company international. Your overall volatility

50:12

for their portfolio will go down.

50:15

Even. Though you're added three more

50:17

volatile. Each yes to that

50:20

which blows my mind. How do you

50:22

have more aggressive stuff to it? And

50:24

it's that it's less volatile. The reason

50:26

is Iran for different ah, up and

50:29

down roller versus one. And.

50:31

So I think diversification is your friend,

50:33

not ft. I see insurance right? Exactly.

50:35

And Morningstar is a fantastic. Resource

50:38

particularly the efficient frontier

50:40

via. Your portfolio

50:42

visualizers as well. Willing to

50:44

all of that in the show. Notes: Now.

50:47

Joy. You'll notice that we did not

50:49

recommend a specific asset allocation. There are

50:51

some people out there who do that.

50:53

There's some people out there who use

50:55

these very broad rules of thumb that

50:57

says all you know your age minus

50:59

ten is the percentage that you should

51:02

put in bonds with the remainder in

51:04

equities ice thirties broad rules of thumb,

51:06

but it's been a problem with those

51:08

rules. Is that

51:10

they are so generalized.

51:13

So. Blunt. And.

51:15

When I say that, I don't

51:17

mean blunts as in direct, I

51:20

mean blinds As in. Doves.

51:23

Unsharpened I on.

51:25

honed, uncut, Rights.

51:28

These broad generalized

51:30

dulled. Types of.

51:33

Broad. Rules of thumb. Are.

51:36

Use for teaching tools for the

51:39

sake of getting a big picture

51:41

framework of directional he Were we

51:43

going? But. They should never

51:45

be applied to a d as

51:48

in individual. So what you

51:50

should do but you specifically I

51:52

should do if you want to

51:54

find great asset allocation for yourself

51:56

Good Morning Star or and we're

51:58

going to put this link in

52:00

the show notes and again you

52:02

can subscribe to the show notes

52:04

for free Afford anything.com/show Notes. You

52:06

can also go and see the

52:08

Sooners have any given episode by

52:10

just searching afford anything.com/and then right

52:12

the words episode and then the

52:14

other sued number. So for that

52:16

today's episode, it's Afford Anything dot

52:18

com/Episode Five One One episode, Five

52:20

Hundred and Eleven. At any rate,

52:22

Good Morning Star. And they

52:25

have a particular page where you can

52:27

see these model asset allocation portfolios. So

52:29

what you'll do is you'll go to

52:31

asset allocation Portfolios right the main page

52:34

which were going to linked to in

52:36

the show Notes: Click on the button

52:38

that says view Portfolios. And

52:40

then you'll be taken to a

52:42

page where you can choose among

52:45

a variety of portfolios. There's yes,

52:47

she there's act as mutual funds,

52:49

there's fixed income allocation. What you'll

52:51

want to do is assuming that

52:53

you want a passively managed, low

52:55

cost tax efficient strategy which is

52:57

what we promote your on the

53:00

Afford Anything podcast is. click on.

53:02

Died. Choice that says he T s

53:04

It's right at the top of the page so

53:07

you click on each yes and then. You

53:09

can use the slider to.

53:12

Choose. Your time horizons And they do.

53:14

You want to To the time horizon

53:16

of, let's say, five to seven years

53:18

or as high rise of three to

53:21

five years Or time horizon fifteen years,

53:23

right? So you choose the time horizon

53:25

for a batch of investments that you

53:27

want and then you can look. Click

53:29

the button says full portfolio overview and

53:31

you can see some model portfolios. So

53:33

this is a really good resource for

53:35

not just you, but for anybody who's

53:38

listening who wants to get a sense

53:40

of what their asset allocation ought to

53:42

be. And remember. With

53:44

the five hundred thousand dollars that you

53:46

have, this big lump sum has different

53:48

timelines and different goals with in it.

53:50

So there's going to be some portion

53:53

of this five hundred thousand that has

53:55

a fifteen year time horizon. There's also

53:57

the to be some portion of this.

54:00

One hundred thousand as a five to seven year

54:02

time horizon is going to be some portion of

54:04

it that has a. A three

54:06

year time horizon, right? So you'll

54:08

want to divide the money that

54:10

you had into different buckets based

54:13

on the time horizon of each

54:15

buckets, and then you'll want to

54:17

as the allocate for that particular

54:19

time horizons. Let's just say, for

54:22

the sake of keeping it simple,

54:24

let's see that you break this

54:26

five hundred thousand dollars up into

54:28

spies different buckets. And each

54:30

of those buckets has a different time her

54:32

eyes. And you've got one bucket that is

54:35

that. Fifteen. Plus, your time

54:37

horizon. You're the second bucket that has a

54:39

time horizon of ten to fifteen years. You

54:41

have a third bucket that has a time

54:43

horizon of to seven years. Before

54:46

spoke it has a time horizon.

54:49

Of three to five years. And then

54:51

you have assist bucket that has a time horizon of

54:53

one to. Three years. Rights.

54:55

You'll want to. Asset allocate

54:57

each a bucket differently.

55:00

Based on its time horizon

55:02

for using a tool like

55:04

morning sars, Asset Allocation

55:06

builder. Will. Help you

55:08

see what some model portfolios might

55:10

look like. We're gonna link to

55:13

that. The Show Notes: Subscribe for

55:15

anything.com/show Notes at no cost. You

55:18

can also view it on the

55:20

website Afford anything.com/episode Five One One.

55:23

Thank you Joy for the question. And

55:26

enjoy your know matting and

55:28

you slow matting. That

55:30

concludes today's episode. Thank you so much

55:33

for being part of this community. If

55:35

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55:37

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56:28

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56:30

Paula pants. Thank. You

56:32

again for tuning in. I'm Paula

56:35

Pants. I'm Joseph. See hi? This

56:37

is the Afford Anything podcast and

56:39

I'll meet you in the next

56:41

episode.