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Episode 200 Special: A Personal Finance Masterclass

We love when guests come back on the show, especially when that guest is Kyle Mast. You may have heard him back on episodes 41 & 84, but now he’s here to celebrate our 200th episode with us! Scott and Mindy have come up with their own questions to ask Kyle ranging from retirement accounts, to asset allocation, to the future of cryptocurrency, and more.

If you’re worried about retirement, Kyle has you covered. We go over some great topics like whether you should choose a traditional 401(k) or a Roth 401(k). From there, we talk about whether a pre-tax account or a post-tax account makes the most sense, based on your income, tax bracket, job security, and more. We’ll also touch on HSA (health savings accounts) which are a fan favorite as well as a tried-and-true winner for almost anyone who qualifies for one.

Post-retirement is another topic that rarely gets discussed on the show (since we’re all so focused on getting wealthy, not deploying that wealth). If you’re worried about hitting required minimum distributions soon, you may have the ability to save hundreds of thousands of dollars in the long run with some tips from Kyle. We’ll also talk about diversifying your accounts now so you can be nicely positioned upon retirement.

Lastly, we talk about inflation, rising house prices, tech stocks, and (Mindy’s favorite, of course) cryptocurrency. All of these are incredibly relevant right now and it’s great to hear from someone as neutral as Kyle on the pros and cons of each.

Mindy:
Welcome to the BiggerPockets Money Podcast show number 200. Two hundred, woohoo! We are bringing back certified financial planner, Karl Mask, to talk about things you should be considering on your journey to financial freedom.

Karl:
Don’t know what comes up later on. And if you have a million dollar 401(k) or a pre-tax IRA, you don’t have a million dollars, you have a million dollars minus tax. What you have in there, there’s a liability built into that account still. And that needs to be mitigated somehow.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me, as always, is my paragon of virtue co-host, Scott Trench.

Scott:
Is that a signal, Mindy?

Mindy:
Scott and I are here to make financial independence less scary. Less just for somebody else to introduce you to every money story, because we truly believe that financial freedom is attainable no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, going to make big time investments and assets like real estate, start your own business, or deal with the good problems that come from becoming wealthy early in life. We’ll help you reach your financial goals and get money out of the ways, so you can launch yourself towards those dreams.

Mindy:
Normally, Fridays or finance Fridays, where we dive into a listener’s financial situation, and see what ideas we could give them to consider that may further them down the path towards financial independence. But today is episode 200, and we wanted to do something really fun for this momentous occasion. We brought back a show favorite, Karl Mask, to come in and give us some things to think about on our journey.
And frankly, some of these questions are rather selfish questions, because they’re questions that I have. And I figured that if I have them talking about financial freedom all the time, I’m sure other people have had them too. So, Scott, without further ado, let’s bring in Karl. Karl Mask, welcome back to the BiggerPockets Money Podcast. I am so excited to have you on again for our very special episode 200.

Karl:
Thanks for having me back. It’s always good to talk to you guys. I appreciate the chance.

Mindy:
Today is a bit of a selfish episode for me, because these are questions that I have based on some of my personal situations right now. And I thought, well, if I have these questions, I bet other people have them too. So, I figured what better way to get them answered then by Karl, the master of everything. Oh, Karl, master of everything. Did you catch that, Scott? I made it fun.

Scott:
That was pretty good. I like that.

Mindy:
Okay. Let’s jump right into it. I have the option at work to contribute to a traditional 401(k) or a Roth 401(k). And I’ve always thought that I should contribute to a traditional because then, I reduce my taxable income, I pay less taxes, the world is all wonderful. But Scott here contributes to the Roth 401(k), and we had a rather lively discussion over which one was better. And we’re not sure. So, Karl, which one of us is right?

Karl:
Both of you, probably.

Mindy:
When does it make sense to choose Roth over traditional?

Karl:
Yeah. So, you have different factors. And I always will ask people what your ultimate goal is. If your ultimate goal is you’re going to retire in three to five years, and in three to five years, your incomes going to plummet. So, you’re both working right now, or one person is working right now, and your income is higher. Putting that $26,000 into your 401(k) for those three to five years till retirement. Pre-tax, non-Roth is probably the best way to go just because your income’s so high right now.
If you’re thinking of it, you’re a traditional retiree, you’re going to retire in those three to five years, you can start pulling that money out in a way lower tax bracket than you’re in right now, in general. So, that’s maybe a base case when people think of a retiree who work in a typical nine to five job. However, the Roth accounts, Roth IRAs, and Roth 401(k)s are very, very special. The fact that you can put something in and get tax free growth forever for the rest of your life, anyways, is a big deal.
And it’s becoming a bigger deal as we have programs in our country that are maybe a bit underfunded. I don’t want to get too political. I want to talk about numbers. But if you look at the math of things, there’s two ways to pay for social programs. You can either raise taxes or you raise inflation. And you print money, inflation happens. Or you raise taxes to pay for those programs. Either way, if you have money in a Roth account that’s growing tax free, all that growth helps you hedge against that inflation, or the printing of money, or the raising of taxes, because you don’t have to pay taxes on it.
That’s more of a long term game. And maybe if you’re in a higher income bracket and you’re paying a lot of taxes anyways, and contributing to a pre-tax account will save you on taxes. But you have a long term goal of giving some money tax free to your kids, or you just believe that taxes will go up in the future. Then, you want to go with a Roth. I am partial to a Roth in many, many cases unless there are other specific things you want to stay below tax bracket, like for health care subsidy qualification, if you’re self-employed.
It might be a reason you want to stay below a certain tax bracket. There’s other reasons you’ll want to stay below a bracket. This last year, we had these stimulus checks that came out. And there’s huge incentive to stay below the $150,000 mark for a jointly filing couple. So, that would be a reason to stay under. There’s everything from enhanced child tax credits this year, a lot of different things. So, it really depends on the situation.
But in general, I’ll say I lean towards Scott’s opinion, in general. If you’re thinking of building long term, good, stable wealth, I would envision, and people said this for a long time, and it’s taken a long time to happen, but I would envision that the Roth accounts will be less and less available from governments. Not just in our country, but in the future, they may say, “Okay, there’s a cap on this Roth account. You can’t put any more in it because you just have so much in there.”
You can’t contribute to Roth accounts anymore, but everything that you’ve put in them is okay. Things like that could happen. They eliminated the Roth IRA stretch, which is basically, you could have a million dollars in your Roth IRA, pass it to your kid. And they have to take a required distribution from it based on their life expectancy. They wouldn’t pay tax on it. But they could take out just a little bit each year for their whole life, and let it grow the whole time.
That was eliminated. So, now, there’s a smaller timeframe when your kids get to take it tax free, but they can’t stick it in there for their whole life and let it grow. So, that’s just the precursor, in my opinion. And there’s other people that would agree with me and people that would disagree with me. That maybe down the road, more stuff like that will happen to where Roth IRAs, and Roth 401(k)s aren’t as available. So, yeah, any questions on that? That’s a broad sense of it.

Scott:
I just wanted to chime in and say, I agree completely with the analysis. And that’s exactly how I think about-

Karl:
Yeah.

Scott:
Because I think about, if you’re running a formulaic approach to phi inside of a spreadsheet, and saying, “I make $100,000 or $150,000 a year. And I’m going to retire with $1.2 million in the bank across my retirement accounts and my after-tax brokerage accounts. And I’m not going to earn another penny. I’m going to retire at 35 or 40. I’m not going to earn a penny until I formally retire, hit retirement age, and get social security or whatever.”
Then, the 401(k) makes a lot of sense to me, because that’s when you do things like the Roth conversion ladder. And that’s where the Mad Fientist’s approach really comes into play, and a lot of those types of things. And inside of that formula, the 401(k) makes a lot of sense, because, “Hey, I’m able to reduce my taxable income now in a lower tax environment in the future. I’m going to be able to do that.”
But to me, and in spite of all the things you can argue inside of that, like our tax rates going to go up. And even though you’re in $150,000 tax bracket today or whatever the tax bracket is at that income, maybe they’re higher for the $30,000 or $40,000 that you’re going to withdraw every year in retirement. And you’re still going to pay more in overall taxes because you’re not actually arbitrage in those tax rates.
So, even if you get outside of that argument, the big thing for me is a simple and perhaps, I don’t know, aggressive arrogance about my life and the way this is going to go, where I just don’t see a world in which I failed to earn income below a really low tax bracket in my adult life even if I stopped working for a number of a period of years, because I plan to have investment income, real estate income, side hustles that happen to generate money, those types of things.
I am married. My wife may work because she loves it, not because she has. So, there’s so many different ways that this could go. For me, I just feel like the Roth is the safer bet even though I’m in a high tax bracket. I think they’re going to be higher in the future in a general sense. And I believe it’s unlikely that I’m actually going to go on and earn very little money. Mindy, you’re financially independent. Have you stopped earning income even outside of the BiggerPocket’s shop?

Mindy:
No. I have two full time jobs. I’m also a real estate agent. And in this market, that is a full time job. Yeah. So, I’m glad we had this discussion, Scott, when we did a while back. Because it started me thinking, “Oh, I’m reducing my taxable income, but I’m only reducing it by $19,000.” And I know this sounds so snobby, and I don’t mean it to be. But when you’re selling a lot of real estate, you’re making obscene money. And when I’m reducing it, it’s only by a small amount.
So, what’s the point when I could be making that as a Roth contribution, and paying no taxes on it as it grows tax free for a while? And what really got me thinking about this, and saying, “Well, I have to have Karl on Episode 200, is one of the guys that work is early 20s.” And we just had this big change to all of our retirement plans. And he reached out to me, and he said, “Should I choose the Roth or the regular?” And I’m like, “Huh, I don’t know, Karl.”
I don’t know. That was Collin. I don’t know, Collin. I’m going to have to ask Karl.

Karl:
Yeah.

Mindy:
So, in the context of a younger person who has so much time, maybe he’s not even considering early retirement. He’s just going. Let’s say he makes sub $100,000 a year, not married, no kids. It seems to me that the Roth would almost be the smarter choice because he’s got so much time to let it grow. When can I start taking distributions from my Roth 401(k), tax free, penalty free?

Karl:
Yeah. So, I’ll back up a little. We’ll come back to that. So, I should say, I didn’t say at the beginning, of course. I am a financial professional. And what I’m saying here is, and I know you guys do a disclaimer, which is awesome. But I don’t know everyone’s situation, so I’m trying to give general advice here. So, just keep that in mind. This is not specific to someone’s situation. But someone younger, it gets a lot easier to make that rough decision for sure.
Even if they make a lot of money when they’re younger, someone comes out, they build a business in three years, and they’re making a lot of money. If you think of paying the taxes when you’re that young as an investment itself, them investing and paying their taxes ahead of time, then boost the return of that Roth account. And you can think of that later in life too. But it’s just a lot easier when someone’s in their 20s, when you have 70 years of life left, potentially.
That really makes a huge difference and what that is. And another thing is, as Scott was talking about that formulaic approach, that really needs to be taken into account. There are significant savings in our tax system to be able to keep your income below a certain bracket. Not everyone is doing two or three jobs, side hustles. There’s a teacher, there’s even a doctor, different pay scales. But they do one thing, and then they retire, and that’s it.
So, you have to take those variables into account. But what I’ve seen is the Roth accounts provides so much flexibility later on. So, if you retire, and you say, “I have a couple rental properties. I’d really like to buy some more rental properties. Oh, one came up down the street. I know this neighborhood. That’s a smoking deal. But I’ve got to pull $200,000 out of my taxable 401(k) account. That’s going to bump me into a higher bracket. I’m going to have to pay more in health insurance, because I’m not to Medicare.”
It just blows things up. If you want to jump on an opportunity, if you’re 60, and you have $200,000 sitting in a Roth, so you have a million sitting in a Roth. But you want to pull $200,000 out to buy a smoking deal on a rental property for passive income and diversification. You can do that. And there’s no consequence. You have $200,000 sitting there, you pull it out in one day, have it wired to your bank account, it’s done.
I’ve seen that a few times over the years and made me even more support the Roth accounts, because you don’t know what comes up later on. And if you have a million dollar 401(k) or pre-tax IRA, you don’t have a million dollars, you have a million dollars minus tax. What you have in there, there’s a liability built into that account still, and that needs to be mitigated somehow. And we can talk about this. I think we might address RMDs in a little bit.
So, required minimum distributions, and there’s some strategies there. But the Roth account, once you hit 59 and a half, 401(k), Roth IRA, you can pull it out tax free, always penalty free as well. Before that, the Roth IRA account is, and I’ve done this personally, to buy a rental property with a Roth IRA account. We’ll get a little bit personal here. So, this is what I’ve done into financial planner’s portfolio. With a Roth IRA account, you can pull out all of your contributions at any time, tax free, penalty free.
So, if you put in $50,000 over time, it grows to $80,000. You can pull out that $50,000 without any penalty at any point. You can also pull out $80,000 as long as you put it back in within 60 days. Once a year, you can do an indirect IRA rollover. So, if you need to do something with a rental property, and you need to find financing somewhere else, you can pull money out, put it back, and that can be an IRA or a Roth IRA. But that is a strategy that can be used.
Those contributions can be pulled out of a Roth IRA if needed. I’ll often even have clients that are building emergency funds and not fully funding their Roth IRAs. I will tell them to put that money into their Roth IRA, put it in the cash account, add it at Vanguard. So, it’s not going up or down, but at least have it in the Roth. So, you’re taking advantage of those Roth contributions or even a little bit more than the cash account. So it’s getting some.
But they can always pull out. If they put $5,000 in, and say, over a few years, they have $20,000 in there, and they want that as emergencies, anything above the $20,000, you have best more aggressively. But the $20,000, originally, you put in, you can keep it really conservatively invested, and pull it out whenever you want. But all the interest, all the growth you earn in there is tax free in the meantime. So, every year that you miss contributing to a Roth IRA and a Roth 401(k), you can never go back and do it again.
So, you just want to make sure that you’re making that decision with your eyes wide open.

Scott:
For me, there is a case for why not to contribute to a Roth. And it was in a very brief window of time, and that was, I am 24 years old. And I have the opportunity as a single 24-year-old to house hack in a duplex in Denver, Colorado. And that is a 200% or 300% annualized return and average market conditions. So, it was for me with a lot of risk there. And that was the only time I did not contribute to the Roth IRA. It was when I felt that my first 20 years or $1,000 would be put to better use in that. And maybe I could have still done it and kept the $8,000. I’ll have left over after the purchase in the Roth in my savings account. But that was my emergency reserve, or at least that was how I was thinking about it. But that was the time when I didn’t do that.
And from then on, yeah, I think the goal is that 60, 59 and a half, 60, to have several million dollars in that Roth if possible, because that’s yours. The government can’t take that. There’s no taxes. There’s just spendable equity.

Karl:
Yeah. I think that’s always a trade. You’re always weighing tradeoffs, short term and long term. And in your situation, the tradeoff for you to not house hack would have been a bad one. When you’re looking at the returns that you can get with a low down payment, you live in the property, paying less for your mortgage, someone else’s paying your mortgage down. I mean, that outweighs the 70 years of tax free growth in the Roth IRA, because real estate has its own tax advantages that you can facilitate.
And with that type of return that you can get with a primary resident loan on it, that makes a huge difference. But that’s why you always have to weigh those tradeoffs, and just make sure that you’re very intentional about that instead of just 5% to the pre-tax 401(k). Don’t even worry about it.

Scott:
How does the match change for you with the match?

Karl:
The 401(k) matching?

Scott:
Yep.

Karl:
Give me a scenario. Like the math as far as the priority of what to contribute to, or?

Scott:
Yeah. I think the traditional. We’ve talked about this a million times in the Podcast, but I want to see… we just outweigh, overemphasize the Roth, and got a nice little tirade about how wonderful it is. But that doesn’t eliminate the fact that a 401(k) match is a still free money. And our conventional, I guess, advice that we’ve talked about on the BP money show here many times is, if I get a match, I take the match, and then I max the Roth IRA.
Is that still how you’re thinking about it?

Karl:
Yeah. So, a couple pieces there. Usually, if you have a Roth 401(k) available at an employer, usually, the match that they have will match… that it will be pre-tax dollars that they do, but you can do your Roth. So, you do 10%, and they’ll match half of that. So, they do five in pre-tax dollars. So, you want to do that. If your personal choice is, “I think the Roth is better, I’d like to do that.” You do it in that fashion with your Roth 401(k) instead of doing the pre-tax 401(k).
If you don’t have the option of the Roth 401(k), you only have the traditional 401(k) at your employer. Then, I usually do, and this can be different for people. There’s more flexibility with a Roth IRA, but I usually do say, “Take that match. That’s free money.” Even if they match 50% of it, that’s an instantaneous 50% return. That’s not even an annualized return. It’s like an infinite math. It’s their ride away. So, I usually do say that. And usually, very few employers match a whole lot of 401(k).
So, usually, if you’re serious about saving for retirement, your employer might match three to five percent. Do that, and then go to your Roth, if you’re really passionate about the Roth. But again, your situation could be different. You could say, “I want to max out my Roth IRAS. First, for the flexibility that they have, because I can draw out contributions anytime I want to, because I can invest them in other things that my employer plan does not offer.”
There’s other nuances there, but like you said, in general, match probably should take priority.

Scott:
Great. And then, there’s a growing debate about the HSA in relation to all of these different things. And so, I have the privilege of being able to maximize my Roth 401(k) and my HSA. But if I had to make a choice between the two, where would you start between the two of those?

Karl:
Oh, goodness, man. It’s dialing right in on me. It depends on the situation. But the HSA is very valuable. That one, you pay no tax at all if you do it right. So, that would be my… oh, boy. I think I’d still probably do the match, because that free money that gets in there and gets growing for you, even if it’s pre-tax, and then your HAS, and then the Roth IRA. Again, it depends on your situation. It depends on health insurance too.
If one spouse has access to the HSA, someone else doesn’t, there’s numbers in there that it can mess with. But the HSA, that is the account that I see people overlooking the most, which is unfortunate, because it’s in a lot of employer plans, and a lot of younger people that are healthy. The numbers make more sense for them to pay lower premiums, higher deductibles. If you are smart with your money, put into that HSA.
And if you do it right, you can get all that money out tax free. And there’s a whole debate around taking it out right away, when you have medical expenses or saving the receipts. And then, taking it out later in retirement to do your optimization of tax brackets and things like that. You need to read a lot of Mad Fientist for that. And that’ll be all outlined for you but that-

Scott:
We’ll link to that. This is a whole rabbit hole. We could spend the whole hour on this. But yeah, the HSA, I want to make sure. I love that. Take the match, then the HSA, then the Roth after that. And hopefully, that matches in your Roth as well there. But I think, that’s exactly the way I think about it for my personal finances.

Mindy:
Yeah. I want to jump into the HSA thing just for a minute. So, my family is, we have the benefit of being very healthy. We go to the doctor very few times a year. And I think that’s really important to consider if you have a chronic illness, if you are just somebody who gets sick frequently. The HSA might not be the best plan for you, especially if you’re not making a lot of money right now. And you have that high deductible. But we don’t use our health care.
So, there’s no reason to have the great policy that we never use when we could have the HSA where we are able to. Because we’re a family, we’re able to save $72,000 in the HSA every year.

Karl:
That sounds right.

Mindy:
Or $71,000. I mean, it’s a lot of money.

Karl:
Yeah, it just up a little bit each year. But I think it is $71,000 or $72,000. I’m not sure which one it is right now, if you’re married.

Mindy:
If you’re married and have kids.

Karl:
Yes, if you’re married.

Mindy:
If it’s a family. I think it’s cut in half if there’s just one of you or two of you. But still, that’s a huge, that’s more than my Roth IRA right now. So, I am maxing that out. And because we’re healthy, we’re not going to the doctor very frequently. I saved my receipts so that my account just continues to grow. And then, when I retire, the first thing I’m going to do is cash in all of my receipts. Again, it’s a prescription here or $40 doctor visit there.
It’s not $100,000 and transplant surgery or something, because that would be a bit more difficult to cash flow. But it’s these little receipts, but they add up. And as soon as I come home, I scan it into the system, I put it into my online folder, so I never lose it, fingers crossed. And then, my plan is, once I stop working, I’m going to be able to just cash in. It’s probably $1,000 of receipts right now. But down the road, my account has grown.
And then, when I’ve got $50,000, $100,000 in my HSA, pulling out $1,000 is not such a big deal. But when I only have $2,000 in my HSA, pulling out $1,000 is a huge ding to it. So, if you can forego withdrawing it, that’s the best way to go about it, in my opinion.

Karl:
Yeah. So, the HAS… with everything, there’s risk. So, with every strategy that you implement, there’s risk. And so, I just want to point out for people like in your strategy, Mindy, it’s the most optimal strategy to let that money stay in there and grow. But you actually pointed out a risk in there. If you lose your receipts at any point, that’s going to be a tough one. You can get new receipts, which later in life, you most likely will have more medical bills, and that’d be fine.
You can pull money out that way. The other thing is, legislation change could say, you can’t go back in definitely 30 years to use your receipts. Most likely, if something like that happens, they’d have a grandfathered period where you could pull everything out in time because it’d be such an uproar. Any time that you can harvest a tax-free gain or guarantee a tax-free gain but choose not to, there’s a little bit of a risk there.
So basically, if you put money into an HSA and you have a medical expense, if you pay that off tax free, with tax free money, you’ve ensured that that went through tax free. No risk in the future. It’s already done. If you’re waiting to optimize that, let the account grow, it’s a great strategy. But then, you have a risk at some point in the future, you are not totally realizing the benefit of that account until you do it down the road and something could change, just for people to keep in mind.
A lot of times, I would say 90% of the time I usually tell people, if they’re not a Financial Independence podcast listener to just pay for your medical expenses out of your HSA. The benefit of the time that you spend tracking the receipts, unless it’s something you enjoy doing and you’re good at, and you keep track of it, I tell them, “Just pay for it.” But for Mindy, this is what you should do, keep the receipts. But I just want to make sure people understand that.

Mindy:
I will say that those listening are probably really good at the spreadsheets, everybody we talked to is like, “Oh, I’ve got spreadsheets from 1984.”

Scott:
Not me.

Mindy:
Except Scott. Okay, let’s switch gears then, and let’s look at post-retirement. So, the setup to this question is a bit of a chore but just bear with me because it’s really good. There’s this thing called, the Rule of 72, which in a nutshell says, “Assuming a 10% return on your investments, your investment, your nest egg will double every seven years.” And of course, past performance is not indicative of future gains, your mileage may vary, blah, blah, blah.
But if you’re 30 years old, and you have $1 million, that means at 37, you’ll have $2 million, 44 you’ll have $4 million, 51 you’ll have $8 million, 59 you’ll have $16 million, and 66 you’ll have $32 million. Again, just going by these numbers, you’re going to be hit with some pretty hefty RMDs, according to current legislation. $32 million is a really nice problem to have, but you started at age 30 with a million dollars. And I hear people saying, “Oh, well, you’re withdrawing it all the time.” So, we had Michael Kitces on episode 120.
And he shared, we talked some about his amazing article, the Ratcheting Safe Withdrawal Rate, a more dominant version of the 4% rule. And he says that in many cases, the portfolios are exponentially larger 30 years out than when the person initially retired. So, he says, in fact, not only do 90% plus of retirees finish with more than their starting principal after 30 years by following the 4% rule, the typical retiree actually finishes with many multiples of their starting wealth with this spending approach.
Over two thirds of the time, the retirees finish with more than double their initial principal and the median wealth at the end of 30 years is almost 2.8 times, and one in six finishes with more than quintuple the initial wealth. So, let’s talk about RMDs. Let’s talk about thinking about them now because I think a lot of people-

Scott:
Well, aren’t we done now? Didn’t we discuss the Roth? Moving on, next question.

Mindy:
No, not everybody… zip it, Scott. Not everybody is in the Roth. Some of us have some money in a 401(k) because we didn’t have this discussion with Scott 17 years ago when we were first starting to contribute to our 401(k). So, let’s talk about the RMDs. If you’ve got your $32 million in your traditional 401(k), because you hadn’t listened to this episode until right now, Scott, we’re not here to make people feel bad for past mistakes that they’ve made, including me, how do you mitigate or reduce your RMDs?
And again, totally acknowledging that this is a really great problem to have. But I want to pay less tax if possible.

Scott:
Yeah, what we’re saying here is you’re going to be… if you retire with a million or $10 million by the age of 40, you’re going to be so rich by the time you reach traditional retirement age, as long as that balance isn’t really declining too much that you’re going to have crazy problems in terms of wealth transfer tax. It required minimum distributions, those types of things. So yeah, I think it’s a great thing to noodle on.

Karl:
Yeah. Okay. So, I tried to make some notes while you’re asking that really prolonged question to make sure I touch it all. So, a couple things to make sure. So, the Kitces article versus the Rule of 72. So, we’re talking about two different rates of return there. So, that Rule of 72, you’re assuming a 10% return, which if you’re in the broad stock market, you’re going to get 8% to 12%, depending on what time period it in and if you’re looking at historical, who knows what will happen in the future, but we can only look at what’s happened in the past.
So, that’s assuming a 10% return, the withdrawal rate will reduce that. So, if you’re doing a 4% withdrawal rate, your return is less than that each year because you’re pulling some out. You’re not going to get that doubling as fast. So, those numbers will not double quite as quick, but the same principle will still happen. And in his article, even with that 4% withdrawal rate… and listeners, if any of you want to nerd out and you have not read his stuff on 4% rule, you need to read it. I mean, it is top notch stuff. But that’s a real problem.
And as financial planners, we run a Monte Carlo analysis for a lot of clients and people to see, what’s the probability that we can retire with $5,000 a month at this point in the future. And it runs a thousand scenarios, and you get this statistical curve, and it shows you all these different scenarios. But what happens is, we run it so conservatively because people just want to make sure they’re guaranteed that they’re going to be retired, or be able to retire.
And that’s what the 4% rule came from, the research behind it was run so tightly that we want to find that rate that people can feel really comfortable retiring at. But when you do that, it turns out that most people just end up with a lot of money. So, there’s several ways to mitigate that. And to anyone who has a lot in a pre-tax account, good job. There’s definitely nothing wrong with that. The Roth IRAs weren’t available until sometime in the ’90s. I can’t remember.
And the Roth 401(k)s were not even available until later. So, you actually can’t have contributed to those accounts for that long of a period of time, unless you start to do some conversions and really build those accounts up. But the biggest thing to do is try to have tax diversification. We already talked about HAS. We have pre-tax accounts and Roth IRAs. If you can have all of these different pieces, when you do start taking income to try to pay as little tax as possible, you can fill up tax brackets with certain amounts of income.
Fill up the first $80,000 in taxable income with your taxable amount. So, you’re in the low bracket… or your pre-tax accounts, or it’s all taxed. And if you need more, pull some out of your Roth or your HSA. So, you want to have those different accounts, it’s not bad to have these pre-tax accounts where you paid less tax, or you defer the tax while you were working when you’re in a 30% bracket, say, federal and state, and then you’re not working and you can take it out at 15% or 20%. That’s a real thing.
That’s definitely worth it. So, that tax diversification is huge. The other thing is, you really got to think about what your goal is for the money. So, people really need to think about, “Okay, I’m laser focused on financial independence in the next five years, or in the next 10 years. But what happens when I have quintupled the amount of assets or even double the amount of assets that I need at age 70?” So, at age 70, you’re getting close to the RMD age, the required minimum distribution. They upped it to age 72.
So, age 72 is when you have to start taking a percentage out of those pre-tax accounts. There’s a percentage calculated on your life expectancy, you got to take it out, you pay tax on the full amount. It’s a little over 3% in the first year of the account balance that the balance of the account was on December 31st of the prior year. That’s how they calculate it. And each year, you get a new calculation. So, you need to think about the amount of income you need. But what are your other goals? Are you charitably inclined?
Do you have lots of kids, you want to give them a bunch of money? Do you have lots of kids, you want to give them no money? You want their last check to balance… these are things that you have to think through, and you can make decisions now whether you’re 60, 50, 40, 30 years old, that affect that. I work with clients that are more giving minded. So, if your goal is to be able to give charitably to your church, like tithing, things like that, where anything where there’s a 501(c)(3) involved, at age 70 and a half, you can do what’s called a qualified charitable distribution.
So, as soon as you turn age 70 and a half, I have clients, right away, you do all of your giving to charities from an IRA. And the reason for that is you put the money in pre-tax, it grew tax deferred. And if you send it straight out of your IRA account, it can’t come to you in the mail or into your bank account, it has to go straight to the charity. If it goes straight to the charity, it’s tax-free distribution, which is just wonderful. And you can do… I think the limit is 100,000 a year that you can do right now.
So, if you are very charitably inclined, say, for example, you have five rental properties, and you have a Roth IRA balance, and you have an HSA balance, and you have a little tiny pension, and then you have a million dollar 401(k) balance. So, we’re talking about someone who’s done fairly well, saved pretty well. You’re not going to need that 401(k) balance most likely. Most likely, by the time you stopped working, those other assets will cover you, and you can get money out of those very tax efficiently.
If you’re given inclined, you could probably eliminate your entire 401(k) balance over the rest of your life and have a lot of fun doing it and had a lot of impact on your community, people around you by using that account and not have the government get any of it and have the charities get all of it. So, there’s some real… that’s a wonder. The best way that I know of to get rid of that account or to reduce that required minimum distribution, and that qualifies for the minimum distributions.
So, if you have to take 35,000 out of that account, because that’s your required minimum distribution, you can send that to your local community center or Red Cross, and that takes care of it for the year. Next year, same thing, or another place or split it between a few. But that’s one of the most wonderful ways that I see clients doing that, that I’ve done a good job saving. And boy, it’s a lot of fun when someone has saved so well, and have felt like they can’t give, and all of a sudden, they have more than they know what to do with. And they can just write checks and make a big, big difference.

Mindy:
Okay. Several questions about that, you threw out the $100,000 limit, is that per year or per donation?

Karl:
Per year.

Mindy:
Okay. And that is, let’s see, that’s tax… oh, RMD taxes. If I were to take that $100,000 as my RMD, I would pay taxes on that?

Karl:
Yeah. So, say, you live in Oregon, where I live, and you’re in the 22% tax bracket. So, you take that $100,000 out, you pay $22,000 federally, and you pay another 9.9 in Oregon. So, you’re paying 31% in taxes on that $100,000. So, you’re getting $69,000 of that $100,000, if you instead have other income that you can live on, and you’re giving inclined anyways, I’m not saying to give away money so that you become destitute and don’t have retirement funds.
But if you’re giving inclined anyways, do not give from your Roth IRA account, do not give from your checking account, unless it’s to a person or… not a charity. But if it’s a charity, have that $100,000 sent directly to the charity. It all goes to the charity, zero tax, gone.

Scott:
This is awesome. And I’ll state it arrogantly, this is a much more likely problem for most people who are achieving fire than running out of money, I believe. Given the way we’ve built all this stuff up the 4% rule. You talk about how conservative the 4% rule is. The 4% rule is literally the inverse of it is 25 times your savings. Of course, 25 times your savings is going to last 30 or more years in most scenarios, if you eke out even a little bit of return, right?
And we’ve already had this discussion million times, but we’ll go over a few points in case this is the first time you’re listening to this discussion. But the 4% rule of retirement also assumes things like, you never earn another dollar from any other activities, you never get social security, you have no pension, your spending stays perfectly flat and does not change in the event that you have a bad year with your investments. It assumes you have no cash cushion, like no six months to 12 months or two-year emergency reserve.
It seems you have no rental properties, all that stuff. So, you have a much higher probability in my mind of having way too much money at the end of your life than not having enough according to the principles that we discussed here with this. And what a great solution. You’re going to have to figure out a way to give it away versus giving it to Uncle Sam. So, I think that’s awesome and a great approach. That said, I do want to get one little snarky comment in here.
And you don’t have to play the game of giving away $100,000 out of your 401(k) and not avoiding paying tax Uncle Sam, if the money is in a Roth because you could just give the money away.

Karl:
Yes, yes.

Scott:
If it’s in the Roth.

Karl:
Yes.

Scott:
And it’s the same deal.

Karl:
That’s exactly right.

Scott:
Just a little snarky side comment there to add into the discussion.

Karl:
That is true. But you also would have paid… if you know you’re going to give anyways, you would have paid tax for the-

Scott:
That’s with that Roth earlier.

Karl:
So, if you know you’re going to be given inclined, so I’ll go personally for me again here. So, I have some rental properties, I have a business and I have retirement accounts. And I have basically, my pre-tax retirements and I have a solo 401(k). And this is something I advise for a lot of clients. And we can talk about that type of account too, it’s amazing. But basically, the pre-tax money that me and my wife were saving, at some point down the road, I just want to be a guy writing checks. Like that’s all I want to do.
We don’t live on very much. We don’t need very much to live on. So, that type of thing. If you know you’re going to do that, it can help you now. Those pre-tax accounts are valuable now. So, reduce your tax now, save it, and then there’s that much more in there growing for these charities that you have in mind down the road. But you don’t have the flexibility that you would with a Roth.
But I guess my solution, the optimal way would be to have Roth and have pre-tax accounts. Because then, if you want to give money to your neighbor that lives across the street, that their water heater went out, and they have no money to take care of it, you can do something like that. Or if something bigger, if you want to give someone $20,000 and not have a tax consequence, a person is not a 501(c)(3), you can’t deduct that on your taxes.
So, you wouldn’t get that qualified charitable distribution. But with a Roth type of account, you could do that. So, having both of them is probably the best way to go for that flexibility.

Mindy:
Okay, you mentioned the solo 401(k), and I want to talk about that. But I just want to quote Michael Kitces one more time from this article, which is, yeah, if you want to nerd out, go to nerdseyeview.com and just read everything because Michael Kitces, just assume that all the math is done correctly, because it is. And he does all the math for you. I think he really just loves doing all of this. Every scenario is right there, and it’s so great.
But he says in this article, “In only 12 of the 115 rolling 30-year time periods, did the retiree finished with anything less than the original principal?” Only 12 of 115. That is really amazing. I don’t even know what percentage that is.

Karl:
And that’s not even zero, that’s just less than what you started with. So, you’re still fine. That still means, if people would be fine with that, most people will be, “If I have a million dollars when I retire, or $2 million when I retire, if I end with zero, but I can live the life that I want to through retirement, that’s fine.” And that’s a much rarer scenario than that 12.

Mindy:
Yeah, and I believe that was one, one time out of 115.

Karl:
That sounds right.

Mindy:
And it was like, they retired at the end of the 60s, followed by a huge period of inflation in the early 70s. And in that one time, they dipped below zero when he did the math.

Scott:
Yeah. If you want to hear Mindy and I in violent agreement with Michael, you can listen to BiggerPockets Money podcast, Episode 120, where he was a guest with us. That was a fun one.

Mindy:
That was a really fun episode. Okay. Since you brought up these self-directed… okay, did you bring up self-directed solo 401(k), or just self-directed?

Karl:
Just solo 401(k). So, yeah, I’ll define some terms, I guess, that would be good. So, a solo 401(k) is a retirement vehicle, just like an IRA, just like a 401(k), just like a Roth IRA. A self-directed IRA, Roth IRA, or solo 401(k) is one that you use an alternative custodian to be able to hold real estate or something fancier or non-typical paper asset like stocks or bonds. I won’t go into that.
There’s just so many tax issues that you really… if you go self-directed with accounts, you really need to know what you’re doing, or talk to a tax professional that can let you know the tax issues that could potentially come down the road. Because if you use loans… there’s just different things you need to be aware of. The solo 401(k) is just a simple 401(k) account that a self-employed individual can set up, and you can’t have any employees, it has to be just you. It can be you and your spouse, which is probably the most optimal way to do it because you can do in just an amazing amount of contribution.
For solo 401(k), instead of having… so if you’re self-employed and you don’t have a 401(k) like you would at a normal employer, you can do your IRA or Roth IRA $6,000 a year you, your spouse, that’s it. $7,000 if you’re over age 50. Solo 401(k), depending on how much you make, you can put up to $57,000 a year into the account. So, you can do as… you’re the employer and the employee.
So, to try to keep it as simple as possible, you as the employee can put in the maximum $19,500 a year. But then, you as the employer can match up to 25% of your salary into that account up to a total amount of the two to be $57,000. Now there’s some other calculations depending on your structure, if you’re an S Corp, or if you’re a sole proprietor. This is something that you’d want your tax preparer to just run a calculation for you and say, “How much can I contribute to my solo 401(k)? When do I have to have it contributed by?”
Because there’s different deadlines depending on your entity structure. But this is something that if you do a side hustle, or if you’re a real estate professional, depending on the structure of the work that you’re doing, and the income that you’re making, many people miss out on this. And you can do a Roth solo 401(k). So, you do $19,500 in Roth contributions. The match is pre-tax. You can match that, but that has to be pre-tax, but it’s a huge accelerator of retirement account.
If you are self-employed, you have complete autonomy on how much you make, how much you pay yourself, how much you contribute to this account. If you start a business on your own, and it really takes off, this is an account that you do not want to neglect looking at.

Scott:
Can you do this in addition to working for an employer? So, for example, Mindy is both a BiggerPockets employee and a real estate broker. So, can she set that up for the second business and contribute to both? And how does that math work?

Karl:
She can. The math is still $57,000 total over all the accounts. So, if you have five-

Scott:
And does that include the HSA?

Karl:
No, it does not include the HSA. You can only have one HSA though. You can’t have an HSA at five different employers. So, I’m going to extreme. So, I’ll say five different employers. You can only do $19,500 in individual contributions as salary deferral from your paycheck. That’s $26,000 if you’re age 50 or older, and then $57,000 is the max that you can do of those, of everything combined at your five different employers, between your contributions and your employer contributions.
So, if you work somewhere, that you work for someone, and you’re getting a match, you’re getting some of your own contributions in there, you need to take that into account to what you do in your own side business. But no, it’s not. You can do both of them. You just can’t do $57,000. You can’t do one for each different employer.

Scott:
So, if I have a cool like $120,000 just lying around after all my expenses every year, I can put $7,600, $7,200 into the HSA. And then, I can put in $57 and a half, and then my spouse can also put in $57 and a half across these things. If I do it right, and dot all the i’s and cross all the t’s across these different ventures.

Karl:
Yes, your spouse has to work in the business. So, it’s not just like the Roth IRA or the IRA where you can contribute to it if they’re not working. And that would be something that you would want to make sure that you can prove. You don’t want to just say, “Well, she does my bookkeeping,” or “He does my bookkeeping,” then they write a check.
You need to actually have something that shows that you can pay them $50,000 and they can contribute a certain amount to the account. But yes, say, you have a say you have a couple that’s fairly successful, and they run a business together, and it’s just the two of them, which is more and more, especially with this last year with COVID and a lot of working from home, a lot of businesses, a lot of overhead has been eliminated, this type of scenario is very common.
Or becoming more common, I should say, to be able to have a business that is growing and be able to contribute a lot to it. So definitely, there are things that you need to be aware of. It’s a little bit of a unique account that has to have a plan document, but usually you can go to a custodian like fidelity, an investment company, and they have a boilerplate one. So, it’s really not something to be intimidated about. You at least just need to know that you should check into it.
And a lot of times, you’ll find that you’ll have to actually push a tax preparer to make sure that they know what you’re talking about because a lot of them will instantly recommend a (SEP) IRA for a self-employed individual, which is another type of IRA where you can contribute a little bit more than an IRA, but it’s nothing compared to a solo 401(k), if you really want to get serious about socking stuff away. So, you just want to make sure that you’re having… I just had this conversation on Saturday, today, happy Tax Day everyone.
As we’re recording this, I know this is going to come out later. Yeah, where we had to make sure the tax preparer, they put a (SEP) IRA on the tax return and said, “No, we want to solo 401(k).” And it went from a $16,000 and change contribution to a $42,000 contribution that we were able to do. So, you just want to make sure that you ask about it. And then, you should be able to be directed either by a financial planner or a tax preparer and how much and what you need to do to make it happen.

Scott:
So, say, you contribute $100,000 a year to a qualified charity at retirement and to your neighbor’s cat surgery as well with the tax optimized giving strategy for both?

Karl:
Yes, yes.

Mindy:
So, I just have one thing to point out because I don’t know that people are thinking about this. But the $19,500 that you contribute as your personal contribution is also income that you have to earn. You have to earn the $19,500 in order to distribute it. But 25% of that is $4,875. So, you can automatically contribute $24,375 to your 401(k) just by maxing it out and earning that income through your self-directed. So, your minimum goes up.
And that’s even before the age 50 bonus contribution. So, that’s just another way to think of that as well. My husband and I have a self-directed solo 401(k) because we want to do real estate in it. And that’s what we do. And we maxed out his contributions first because he’s retired and doesn’t have another job. And then, we max out mine if we can. And if not, then I’ve got BiggerPockets to put into… or contribute to their 401(k), which is a nice problem to have.

Karl:
Yes, so you brought… that’s a very good point. So, just to paint a real simple scenario. Say, you work at a job and you make $80,000 a year and you do a little bit of contribution. Say, you do no contributions to their 401(k) plan. I’ll keep it real easy, but you have a side hustle where you make $25,000 a year. Not nearly as much. But you can basically put away that $25,000 entirely into your solo 401(k) real roughly, your $19,500 in income and another… whatever you said, you did calculation, $4,000 in change on top of that as that 25% employer match.
So, you can basically, if you’re doing this side hustle, that’s meant to help you save for retirement with a solo 401(k). You can just scoot all of that money, not spend any of it, even though you’re only making $25,000 a year out of it, which I say only, that’s a big deal. But compared to a full-time job, it’s on the smaller end, but you’d be able to throw it all into the solo 401(k). That’s the power of the solo 401(k). You can do so much. You don’t have to make $100,000 to $200,000 a year to put a lot into it, especially if it’s a side gig.

Mindy:
Yeah, it’s 25% of your income that your company can match. So, that’s all tax-free. And that’s just a bigger contribution to my retirement account.

Karl:
Yeah. And again, make sure you have a tax preparer calculate that for you because there is a different calculation for a sole proprietor versus something like an S Corp. So, the sole proprietorship, it’s gets wonky. It’s like a calculation of between 20% and 25% because you have to back out self-employment taxes and do some weird things there. But the general idea is, it’s about 25% of a match.

Mindy:
Yeah, I do want to underline that tax preparer thing. And in this instance, a tax preparer is not your local H&R Block guy that you walk, or girl that you walk into and say, “Hey, let’s do taxes.” This is somebody that you are paying a nice amount of money for their tax expertise, you do not want to cheap out on this particular one. You don’t have to see them every single year and have them recalculate all this stuff and rack up $10,000 in tax preparer bills every year. But it’s definitely worth paying for.

Scott:
All right. I have a hard pivot and change a question here. So, I think the third theme of the show here that I want to get into, and it’s a whopper. Karl, stocks are very high right now. Real estate prices are going up like 20%, 24%, year over year, and we think inflation is coming. So, I can’t stick money into my savings account. Otherwise, the dollar is going to lose value. Do I invest in crypto? Do I invest in Wood or other commodities since they’re shooting up? Bond yields are at historic lows. Do I invest in debt? Which asset class… how do I think about asset classes in your general sense right now in 2021?

Karl:
Man, these are hard questions. Come on, [inaudible 00:52:40] softballs, softballs. So, I’m glad you asked that. Actually, I have written down here inflation discussion because it’s a real thing that we need to consider now and for people thinking about their retirement and any financial planning in general. So basically, for the last three to five years, there have been a lot of people saying… or actually, since the Great Recession, when a lot of money printing first happened, there have been a lot of calls for inflation from conspiracy theorists to normal people.
There’s just people across the board has said, “There’s money printing, we’ll probably see inflation.” We haven’t seen it for so long, but we’re actually starting to see it finally. And it’s not surprising with the volume of money printing compared to the volume of the money supply. So, during that time, I’m a junkie for reading, like historical financial books. And I like reading about… like Zimbabwe had a major hyperinflation crisis. Germany had one in the past.
So, several countries that have… this tape is played out before. And basically, what happens is the people that own assets survived and do okay. And we’re talking extreme scenario, super high inflation, that people that hold cash loose. And that’s a very oversimplification of it. So, I’ll maybe break it down a little bit. The people that hold assets and buy assets, I mean, good assets, not something that not only holds value, but also produces income in the meantime.
So, that can be stocks in your portfolio, that can be rental real estate. I’m not including gold in that or precious metals. I would say, those are good for a portfolio, especially if it helps you sleep good at night, but it’s also a store of value. It’s something that as inflation goes up, most likely gold and silver will go up in the dollar amount that it takes to buy them. They don’t go up in value, they go up in dollar pricing. They hold the same value, just like a lot of assets.
Whereas, something like real estate, and I love that this is BiggerPockets because I can emphasize real estate a little bit more, but that goes up in value. But you can also force value in it. You have a little bit control there, and you can also reinvest dividend or rental income into it to help for some of that. So, that’s the mitigation strategy. Oh, go ahead.

Scott:
Would you lump into that precious metals discussion crypto, and specifically like a Bitcoin?

Karl:
I would not lump it into the same one, but it would be another, I would say, it would be another good diversification piece, especially in the digital economy that we live in. A lot of financial planners are very much against crypto. I’m not completely against crypto, I’m very cautious on crypto. And this is an interesting time because everything is doing well. Real estate stocks, crypto is… if you follow Dogecoin, my goodness, or Elon Musk and what he says… I mean, what’s it up? 24,000% in 2021, and this is not a recommendation. No, I don’t want everyone after this podcast to go out and buy those coins.

Mindy:
It started off as out a joke.

Karl:
Yeah. So, you just have to keep that in mind. And these things have happened before. And everyone talks about the tulips that people were buying and arbitraging tulips. So, these things happen and they go up. But we do live in a time where digital transfer of property, digital block chain… and I’m not an expert on this stuff, for sure. But this is becoming a reality. So, holding some of that could be a good idea. I’m not going to say that you need to hold it.
I don’t think I would go that far to say that. But personally, I own a little bit, but it’s mostly so that I can talk about it decently and walk people off the ledge when they want to throw their whole life savings into it. But I would say it’s different than gold or silver because the biggest risk that I see with cryptocurrency is that it goes against sovereign nations money supply.
And all government has to do is say, “We outlaw crypto because it no longer allows us to inflate our currency to allow us to keep the monetary policy where we want it, like our Federal Reserve.” Every country has a central bank, pretty much.

Scott:
The crypto fans are screaming at their car radios now, saying, “That’s exactly right. That’s the whole point.”

Karl:
Yes, that’s true. But if you can… it then becomes a black market, which becomes a whole another thing. But gold was outlawed in the ’30s, I can’t remember. And then, we couldn’t own it for a couple of decades. So, some of those things where it’s a personal choice, and some people would say, “You should just buy guns. Guns would be… they’re going to hold value and they go up. Its precious metals guns lumber, plant a timber forest.”
There’s all these different things that you can do. So basically, now I’m going on a tangent, I’ll try to back it up a little bit.

Scott:
2021, money grows on trees.

Karl:
Yes, it does. So, okay, that’s a good segue. So, right now, people are awash in cash, in many ways. People that have done well at saving have put themselves in a good financial place. A lot of people are definitely hurting. But a lot of people that have investment accounts or some real estate are doing well. What people need to think about right now is, “What should I do now to make sure that if things change, I have some stability?”
So, this last year is a good lesson in the reason to have cash. Despite inflation, having cash… March last year, I didn’t know if I was going to get rent payments for six months or more on rental properties. So, having cash, even though you’re going to lose value to inflation, you still need to have it. And that’s just a risk that you need to be okay with. If you hold six months to a year in cash reserves, and you know that that’s going to be worth 5% less at the end of the year, 10% less at the end of the year because of inflation, that’s okay, if you have other assets that are appreciating in the meantime.
That’s your hedge to be able to make mortgage payments, to be able to make house payments, to be able to pay for food if you lose your job. That’s the risk you’re mitigating. I can’t give the advice of what you should do. I would say, with inflation looking like, it’s going to happen that Roth accounts get more valuable because they inflate the assets inside them tax-free and assets that are real, which means real estate, gold, I would maybe say crypto in there. Maybe.
I don’t know that. And I’m just going to… I’m in two camps here. Some people are going to love me and some people are going to hate me. I don’t know that I would call it a real asset yet. I think it’s got some ways to go some people…

Scott:
A way to get a currency, right? It’s currency like gold was, like gold Bitcoin dollars, euros, yen. They’re currencies, right?

Karl:
Yeah, yeah. So, I guess maybe I should rephrase that. I wouldn’t necessarily call it a good store of value yet. If we compare it to gold or something to store the value against inflation. It could be, but that’s why you diversify. I’m more partial to things that you can force the appreciation on. Like passive investing in the stock market, you can’t force the appreciation but you can make good tax decisions there. But in real estate, you can force, you can put your sweat into it and you can find deals, you can make improvements.
So, being able to do that is a good thing. And having control of your own income is something that maybe doesn’t get talked about as much, and even in retirement planning. In the later years, having a side business that you can fall to if you lose your job. If you have your own business and you work with 20 clients, your graphic designer or financial planner, or whatever you do. You have 20 employers, three of them could fire you and you still have 17. If you work for a company, you have one employer, they fire you, you have zero income.
And if you’re in the fire community, and you have your own business, and you have 20 clients, and if you follow the five principles, basically, you’re probably living on the income of 10 or 12 clients. So, the eight is extra. So, if you lose eight clients, you’re still in the same position. So, that’s another way that people could mitigate risk. And I would say real estate rentals would qualify as a side business. Your stock portfolio starts to qualify as a side business because it starts creating its own income. But any other way, you can add value.
And in retirement, you talk about a way to make sure your retirement portfolio lasts for you or you don’t outlive it. If you just work five hours a week in retirement to bring in a little bit of income. It’s amazing what a part time job will do to the numbers that you don’t have to take out of a retirement account to keep you afloat. And it also gives you something to do.
I mean, if you’re a halfway motivated person that saved well for retirement, you’re not going to want to just stop and do nothing completely. Hopefully, during that time, you spent the time to try to find something that’s enjoyable to still add value to people and society. That’s my little soapbox. I’ll step down now.

Mindy:
Okay. You brought up crypto. Scott brought up crypto. And you didn’t immediately say, “What a horrible investment never ever, ever, ever, ever buy it ever.” I am not a fan of crypto. But it’s also because I don’t understand it. I’m not asking people to send me a letter telling me all about it. I don’t really want to understand it. But I can also identify with people who are watching Dogecoin go from a complete joke to… what is it like 60 cents a coin or something?
What did you say, 600% appreciation? And you feel like you’re missing out on something? If I was not in debt and was wanting to test the waters on crypto, as a financial planner, what percentage of my nest egg would you suggest testing in crypto? Because my pet answer is just only by however much you want to lose completely.

Karl:
That’s a good answer. I would say that the stage that cryptocurrency is right now it’s not old enough to think of it as a good store of value, as a good asset allocation for your portfolio. For me, the best thing that can happen to people when they try to start investing in single stocks, to try to do stock picking, or invest in currency. The best thing, and this is mean to say, but what I would love to happen is for them to lose 50% of their money right away.
Because it gives people the emotional anchor to say this is a real thing that I don’t have control over. The worst thing that can happen is you invest in Dogecoin at point .002% and it goes to 50 cents. And you think, “Wow. I’m a genius.” I got $200,000 from my $2,000. And now, I’ll invest in three more other cryptocurrencies. And now, I lose it all. So, I would say your answer is spot on only invest on what you want to lose as a percentage. It’s really hard.
It just depends on… a lot of people have an investment portfolio. But a lot of people have pensions or things. So, it’s hard to, I would say, no more than 1%. I mean, if you have $100,000, don’t put more than $1,000 in it. I mean, literally, only the amount that you won’t feel if it’s gone. So, maybe here’s the case for it. If you put $1,000 in and you pick the next Dogecoin, great. You’re going to do well. You might regret not putting your whole $100,000 in but that’s like winning the lottery in one in 350 million.
I want to make sure. I’m thinking, maybe I should have come down more on cryptocurrency. It’s not something that is going away in some form or fashion from what I’ve been seeing and from what I’ve been reading. And this is Ray Dalio and Warren Buffett, and some of these large hedge fund managers that have seen cycles for years and have studied history. A lot of them are saying, “The government have the ultimate control.” Governments have the tax control.
They have the military contract. We live under the government of where we live. And if cryptocurrency gets out of hand, we’re already seeing it with China a little bit. If it gets out of hand to where everyone’s flowing out of the US dollar into a currency and they can no longer manipulate or help the economy in the way that they want to, they’re going to say, “No more Bitcoin.” They’re going to say, or only for these transactions. And it’s a fact.
I would be very surprised if everyone just went from the dollar to Bitcoin. Basically, it can’t be done. The US wouldn’t let it happen because they’d go bankrupt.

Scott:
Moving on from the Bitcoin and crypto discussion here. We just talked about inflation. And your answer was, in an inflationary environment, which tentatively looks like what is happening currently and may happen in the future? Real assets, stocks, real estate, things you can touch, things you can hold, things that have real value, these types of things, commodities. Things where the supply is limited. The crypto Bitcoin people will argue the Bitcoin supply is limited.
Those kinds of things tend to do well. And my big next question is, if we think we’re in an inflationary environment, and all these asset classes are reasonably high but they’re going to go much higher, they’re going to inflate in this environment, is the answer not to take out a tremendous amount of debt, and put it out on a fixed 30-year term on things like real estate and those types of things? Is that not the logical next step and answer in managing your portfolio as scary as that sounds?

Karl:
Yeah. It’s very counterintuitive to how a lot of personal finance has been taught. But we do live in a debt driven economy now. I read a book and someone used the term, instead of capitalist, it was like “datalist”. It’s something like that. But basically, the way the economy functions, credit, forces a lot of things. Anytime you take out debt, you gain risk, because there’s a liability of you to pay that back. So, you take that 30-year mortgage out. You got to have the cash flow to pay that back.
However, if someone has good cash reserves to cover payments for an amount of time, for unsuspected things that would happen like a pandemic, like taking out a 30-year mortgage at three percent is a very good financial move. I think we will not see rates like this in the future. I just think we’re at an inflection point. And I hesitate because I’m getting into my personal opinion and what I think is going to maybe happen.
But if you look at where we’re at now in making good financial decisions, what you’re talking about, taking on long term debt at historically low rates is a good financial move if you have the cash reserves to cover unforeseen events. You don’t want to over leverage yourself. That’s just not smart. But if you have, I would say, right now, it’s less important to pay off your mortgage. I would say, you can consider that in some ways.
And actually, I listened to an episode that you guys just did recently with someone who had a pension that was affected by earning income, and paying off a mortgage may be a good route for that. So, there are instances that it really can make sense. But I think you’re spot on, Scott. I think debt is cheap right now. And because the US government has debt itself, it’s in the US government and other governments, I shouldn’t even single out the US.
It’s in their interest to inflate the currency, because it makes it easier for them to pay off their own debt, any country. And we can ride that wave if we have good long term fixed debt. Because then, you’re on the side of the policymakers that are pushing the same agenda as increasing the debt or increasing the inflation to be able to reduce the value of the debt.

Scott:
Yeah. I think that’s terrifying to take this to the logical conclusion on a personal finance podcast, but there’s no escaping where that next step goes, right? If you can capitalize and feel like you can manage not to go bankrupt, and you believe yields are low at historical lows, and inflation is coming, then the answer is blindingly obvious. It’s to take out as much 30-year fixed rate debt as you can and back it with real assets and cash flow that can sustain it.
And now, you’re borrowing with dollars that are expensive today, and paying them back with dollars that are cheap later. And as interest rates rise, the equity value of that debt declines. That’s another topic. We can get into a whole another show on the inverse relationship between interest rate and bond equity value. But that’s the math, right? And so, that’s something to think about. We’ll let everybody just leave it there, I guess, and think about it as we say, again, to the end of the show here.
But that’s, well, maybe terrifying and interesting.

Karl:
Yeah. One last thing on that. Maybe a caution for people that have pensions as a large part of their retirement, or even social security as a large part of their retirement. Those are wonderful things to have. I mean, there are many people that have many more, and they really help. But those are things that get hit pretty hard by inflation, historically. The other countries that have gone through not even hyperinflation, just higher inflation.
The inflationary cost of living increased. It’s done on social security. They come out with it every year. It never feels the right amount for retirees. It always feels low. And that’s a way that they can mitigate the overfunding or the underfunding of social security. And with pensions, if you have a pension that is based on a fixed dollar amount, and you get 10, 20 years into your retirement, that’s going to feel a lot less if we have four to 10% inflation.
The ’70s, 80s, you have in the teens to 20%, inflation. We’ve had so low inflation for so long. We forget that it can happen, and it might not. It definitely might not, but we just have to, like you said, you got to do the math and think about what would happen in that case. So, a lot of people think in a time like this, things might crash. I should pull everything out of the stock market because everything’s so high. But you just got to be careful with that.
Because if you want to hedge against inflation, you need to have something that inflates over time. And stocks do that. Real estate does too, but just your stock portfolio because prices go up. Other smart investors try to plow their cash into companies that have goods, that they can raise the price on so Netflix can bump their monthly thing up by $2 a month. People don’t care. They pay $2 a month but they just increase the revenue by 10%. That’s inflation.
And you want to be able to ride that somehow if you pull everything out and put it in cash. I’m just having a conversation with a client tomorrow in a meeting, and that’s what they want to do. And I have to try to talk them down from that. And it’s a hard thing to wrap your mind around. Just want to make sure that you realize that if you’re not invested in something, you’re going to be hurt in the long run.

Mindy:
We’ll look back at March, March 2020. It was riding high, and then it crashed. But then, two months later it was back up almost to the same high that it was in. February, I think, was the absolute highest. We talked to the Mad Fientist right after that big crash. And he said, “I thought that I was going to be able to just ride this out. But this really freaked me out seeing such a dramatic drop so quickly. So, I’m going to re-evaluate how much I’m in stocks and bonds, but I’m not going to pull everything out.”
He was just going to re-evaluate his asset allocation. And I think that is a really great little tight time window. Look, if you were up here in February, and you thought, “Oh, it’s so high. I should pull everything out.” You missed the drop. Sure. But then, you also miss the growth again. And what are we at now? I don’t know. I don’t pay as close attention to the stock market as my husband does. He gets up every morning and reads all the numbers, and because I’m not taking my money out right now.
So, it doesn’t really matter what it’s doing right now? But I mean, I get what he’s saying that he wants to miss the big drop. But when is it going to drop? What day is it going to drop? I want to know so I can pull it out. I made the spectacular prediction that it would drop on March 14th. And I think it dropped on the 13th because I forgot about the leap year. But then, yeah. I was actually just guessing. I don’t know if you guys could tell when you’re listening to that episode.
I was completely guessing but I called it spot on. So, if he knows, I’d love to know what day it is. Because then, I’ll pull my money out, wait till the drops and put all back in. But until then, yeah, it just goes up and down. Okay.

Scott:
Karl, that’s a perfect segue into that. That’s exactly what you do with your personal money, right? You put it, you look for highs and lows, you sell high, buy low.

Karl:
Oh, yeah.

Scott:
Regularly repeated basis.

Karl:
All the time. Yeah. Just no problem. Yeah.

Scott:
Where are you investing your money? And we don’t have to get specifics, just in a general ballpark and across which asset classes. Maybe a glimpse into your strategy.

Karl:
Yeah. So, basically what we’ve been talking about, we have Roth IRAs. I have a Solo 401(k), and its long term, aggressive, high stock portfolio. For me, personally, I believe in a basically perpetual portfolio. I don’t want to ever reduce the risk on my portfolio. I want it to be something that I pass on as I give in the organization to my kids. So, I don’t plan to ever back even when I’m 70 years old. I’m just going to keep and letting it ride.
Because the discussion that we’ve had so far, I think the dollar amount will be at a point where there’s no reason to do that. Even if the market drops by an incredible amount, why would I dial it back if my lifestyle is super small compared to the portfolio? So, from an investing standpoint, I’m a little… and this is not advised for anybody. For me, personally, I’m more heavy, small stocks, because historically, they have done well. They’ve done better in the long run.
You have to stay in them for at least 20-year to 30-year timeframes to benefit from that. But when I think of my portfolio as an endowment portfolio, that should live forever. And that’s how I invest it. So, I do investments in retirement accounts for a lot of, the tax advantaged purposes, the Roth IRA, the future qualified charitable giving. So, I try to max those out so that we can do that. But the wealth building is real estate for me.
We have rental properties, again, in Ohio and Florida. And these are not recommendations of where you should go to invest in properties. But I think real estate, and that comes from a personal experience working with clients, honestly, when I look at clients that have built good wealth over the time, over a long period of time frame. A lot of them, it’s real estate. Some have done it in investments, and that’s becoming more popular with the phi movement.
But when I look at clients that right now are in their 50s, 60s, and 70s that have substantial wealth, it’s well placed real estate investments, and where they forced equity on it. And I want to teach my kids that. That’s the idea behind that in the long run. I want them to be able to do whatever they’d like to do from a work standpoint. But from a financial standpoint, I think some of these little investments on the side, like couple real estate properties, and you’re set.
You don’t have to make that much money. You just let it get paid off, and you’re done for retirement. Real estate is too much work and you need to really learn and know the market, know what you’re doing. But for me, personally, I love it. But I do across the board. And I think I have $4,000 or $5,000 in crypto, which from a network standpoint is-

Scott:
Which is now worth like $40,000 or $50,000?

Karl:
No. It’s worth $5,000 now. So, yeah. No, I’m not. Yeah. I don’t even know. I won’t even say which ones I’m in, but it’s so that I can talk to clients about it, so that I can see it going up and it going down. Anything you invest in, you research on the internet, you get news feeds, you get information on it. So, the more I’m in different things, the more information I get on things. And I can talk semi-intelligently about them. And it’s hard to…
Yeah, crypto is a unique industry right now. We’ll see where it is in a year from now.

Mindy:
Okay. Well, I think that wraps up our episode. I asked all the questions that I really wanted to talk to you about. And I’m really, really pleased with the way that this discussion turned out, because this was super helpful for me. I really think that the Roth option is the best choice for me. And I’m going to make sure that Collin listens to this. So, he can hear you say that it’s probably a really good option for him too.
And of course, he should do research as everyone listening should. If you want any more information about this, Google is your best friend. We will have a lot of links to the things that we discussed in the show notes, which can be found at biggerpockets.com/moneyshow200. 200. Yay. I’m so excited. Kyle, thank you so much for your time today because this was fabulous. Karl has been on previous episodes, number 41 and number 84.
So, if you would like to hear his answers to our famous four questions, he’s got some really great ones because he’s so smart. Karl, master of all the things, thank you so much for your time today. We really appreciate you.

Scott:
Yeah. Thank you. This was a great discussion.

Karl:
Always a pleasure. Thanks.

Mindy:
Okay. That was Karl Mask dropping all the knowledge bombs. Scott, what do you think of the show today?

Scott:
I loved it. I think we had a great debate. I love the Roth discussion. I love the discussion about what to do with too much money at the end of your life, and how to plan around that because people don’t really think through that. But if you’re going to achieve phi, and you’re going to be conservative about it, and go by the four percent rule, and maybe have a couple of other secrets up your sleeve, like a pension or rental properties or whatever in addition to that 4% rule, you’re probably going to end your life much wealthier than wherever you start your retirement from.
And that’s something to plan around, or at least to know what’s up, and to know the options, the good options that we’ll accrue from there. And then, of course, I really love the discussion about where to invest here in 2021 with every asset class seemingly high, and inflation on the horizon. What a conundrum. What a fun challenge at this level.

Mindy:
Yeah. I learned a lot from talking to Karl as I always do. And Karl is not the only source of information. He’s not the end-all-be-all, and he doesn’t know all the tricks and tips. So, we would like to invite you to join our Facebook group, which can be found at facebook.com/groups/BPmoney. And come in and share your tips and tricks. The Roth 401(k), I thought, was a fantastic discussion. It has actually changed the way that I am investing in my 401(k).
We’ve actually maxed out my husband’s 401(k) this year. So, since it’s self-directed, we’re going to go in and see if we can pull back those contributions, and re-contribute into the Roth category just to get a little bit more into our Roth 401(k)s. But I’m super excited for everything that I learned today. And I would love to hear your tips as well. So, please join us in our Facebook group, so we can chat with you too.

Scott:
Yeah. And this is the fun stuff. I mean, we talked about a lot of things that are…there’s always black and white and gray. There’s always gray in the world of personal finance. But sometimes, we can get to a little bit closer to black and white when we’re hearing about certain expenses like, “Hey, you really got to cut back expenses here if you want to build wealth.” The fundamentals just aren’t there. Today was all gray.
And this is the fun stuff to discuss in the Facebook group because there’s going to be a lot of smart people who will disagree with Karl and me and maybe Mindy on a couple of these things in terms of the approach with Roth versus 401(k). There is no right answer. You’re guessing at future government policy and your future income, your present versus future income states 30 years down the road in some cases. That’s literally the guest that I’m making right now with the Roth versus the 401(k).
How can you possibly have a concrete right answer? No way. There’s an art, and I love to get pushback or feedback or debate and dialogue about the right versus wrong there, and especially on the crypto side as well. As a lot of you are aware, I’ve had an evolution of thinking on the crypto side over the last couple of years to my embarrassments and all that good stuff.

Mindy:
I would like to say I have had an evolution of crypto so people don’t bombard me with, “Oh, here. Let me show you all the great things about crypto.” But I am looking for a crypto expert to come on and explain it to us, explain it like I’m five, so that we can share this information with our listeners, so they can make their own decision when armed with the facts. Okay. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 200 of the Bigger Pockets Money Podcast. He is Scott Trench and I am Mindy Jensen saying thank you for listening these last 200 episodes. And here’s to at least 2,000 more.

 

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Episode 200 Special: A Personal Finance Masterclass is written by The BiggerPockets Money Podcast for www.biggerpockets.com

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