We Changed The 4% Rule!?

We Changed the 4% Withdrawal Rule (0:06)

Brian: You heard it here first. We changed the 4% withdrawal rule.

Bo: Brian, I am so excited about this because I think this is going to be incredibly valuable. A lot of people out there are excited about retirement, and even a lot of people are excited about early retirement. They’re trying to figure out: how do I know if I have enough? How do I know if I’ve reached that point? And I worry that some people arrive at a poor conclusion because they’re using the wrong input.

Brian: Well, look, everybody wants a napkin financial plan. Wouldn’t it be great if all you had to do was say, you know what, if I can just take what I think I need and multiply it by 25, that’s retirement? That’s essentially what the 4% withdrawal rule is. Because if you think about doing the math, what’s four times 25? 100%. You should be covered and set. And we want to show you there is way more going on when you’re trying to figure out your retirement than just doing a napkin financial plan.

Bo: Said slightly differently, it’s a retirement guideline that suggests withdrawing 4% of your portfolio in the first year of retirement. Then you get to adjust that amount every year for inflation. So you build up this big pot of money, you take that big pot of money, you multiply it by 4%, and that is what you get to live off of in retirement. That’s what a lot of people have used and that’s what a lot of people use for their planning. But where did the 4% rule come from?

Brian: Yeah, it actually came from financial advisor Bill Bengen, who came up with the idea, and then it was popularized by the Trinity study. But even Bill has come out and said maybe 4% isn’t exactly right. Maybe we can even adjust the 4% rule a touch.

Bo: Yeah. Now realize this has got asset allocation built into it, so you do try to limit volatility based upon your asset mix. But Bill did come out and updated it. It’s not 4%. If you put in the right diversified portfolio, it can be increased. According to Bill Bengen, the author of this originally, 4.7%. 4.7%. So, as you can imagine, when you’re thinking about preparing for retirement, the higher your withdrawal rate number is, the lower your portfolio value needs to be, or the higher the income that you get to experience in retirement. So naturally, people would want to think, okay, if I can have a really high withdrawal rate, that means maybe I can save a little bit less or maybe I get to live a little bit larger. But we worry about that because if you get too aggressive and you assume oh man, what if I had a 6%, 7%, or 8% withdrawal rate, you could get yourself into some really hot water really quickly if retirement doesn’t go exactly the way you thought it would.

Brian: Well, all this is built off of the math. And even when you look back at the Trinity study, they’re assuming a 30-year withdrawal period. But we’ve covered the FIRE movement, where you move from financial independence to the next endeavor, because maybe especially if you’re doing this in your 40s or 50s, you’re not ready just to play golf or sit on the beach. There’s going to be lots of things going on. But think about somebody who’s 45 years old or 50 years old. You add 30 years to that, you’re probably going to live longer than that. And it’s the other thing too, let’s go the other way. What if you’re somebody who loves your work and you actually work until you’re 60 or 65 or 70 years of age? That should not have the same withdrawal rate as somebody who retires in their 50s or 60s. So there needs to be some type of elasticity or flexibility to what your withdrawal rate is.

Bo: Yeah. Instead of having one safe withdrawal number, and again we’re going to talk about where it’s useful and where it’s not useful, instead of having one, perhaps there should be a range. Perhaps there should be a little more elasticity. So we tried to take some Money Guy dust and sprinkle it on the withdrawal rate rule to come up with something that could be a little more helpful for you. And this is what we came up with. If you’re someone who is going to retire past the age of 75, and we’re going to assume a normal life expectancy for most adults, then your withdrawal rate could likely be higher than 4.7%. You can actually likely go up to 5.5%. If you retire in your early 70s, maybe you subscribe to a 5% withdrawal rate. Normal retirement age, 66 to 70: 4.5%. So right there at that 4.7% range. But if you’re someone who’s going to retire early, and maybe you’re going to retire between the ages of 56 and 65, we would argue you should stick with like a 4% withdrawal rate. Someone who’s retiring very early between ages 45 and 55, maybe think about a 3.5% withdrawal. And if you’re someone who’s going to go like major FIRE, major retire early, and you’re going to have a very long retirement, a long financial independence window, we would argue you should be super super conservative. Think about maybe something around a 3% safe withdrawal rate in terms of how you use your back-of-the-napkin planning to arrive at your numbers.

Brian: Yeah, a lot of this, yes, is conservative, and that’s on purpose. Because when you make the decision to leave a good paying job, that’s a threshold that sometimes you can’t come back from. Meaning, it’s hard to get the water back up the hill. Your earning potential might not be what it was once you leave. So you do want to be conservative with your assumptions when you’re making big plans. And so that’s why I think it’s probably a great time to talk about some key takeaways, because I love the 4% from a planning perspective, but there’s way more that goes into this.

Key Takeaways: How to Actually Use the Withdrawal Rule (5:38)

Bo: Yeah. So the very first thing is that the 4% is a starting point. We call it back-of-the-napkin planning. But in reality, in our day job, we are fee-only financial advisers that get to help people make it to and through retirement. And here’s what we don’t do for our clients. We don’t say, “Okay, how much is your portfolio? What’s that number times 4%? Okay, on your day of retirement, you are now locked in at that withdrawal rate for the rest of your life.” That’s just not the way that it works. In practice, withdrawal rates are much more dynamic. You might have a season of retirement where you have a very high withdrawal rate because you’re traveling more and Social Security hasn’t kicked in and these other factors are at play. But as you move through your life, your withdrawal rate might drop as you have pensions come into play and Social Security, or you downsize, or whatever the case may be. So it’s a much more dynamic thing in practice than it is just in the academic thought process, but it’s a great starting point to let you know if you are directionally moving in the right direction to be able to have financial independence.

Brian: But I do think it’s a powerful tool if you’re in the planning stages and you’re decades from retirement. There’s nothing wrong with using a planning rule like the 4% rule. Just understand your retirement age will change the math. As we’ve already covered, if you’re going to start early, meaning you think you want to leave your workforce or your professional earning years much sooner than most people, your peers, you want to be conservative and adjust the math accordingly.

Bo: And you want to recognize that early retirees require more flexibility. The earlier you retire, the more variables are going to change and the more small deviations in the plan have a big impact. If you’re someone who’s retiring at age 75 and you get your living expenses off by 3 to 5%, you’re probably going to be okay. But if you’re someone who retires at 45 years old and you get your living expenses off by 3 to 5%, and that compounds over a 50 or 60-year retirement time horizon, it can have a very very meaningful difference. So the earlier you retire, the more conservative you want to be and the more cushion you want to build into your plan.

Brian: And then that leads to my kind of closing point on the key takeaways: there’s nothing wrong with using this tool when you’re planning decades in advance. But if you are within that five to seven-year halo of landing the airplane and making sure that your retirement is going to be as good as you hope and all variables are accounted for, you need to stress test your plan. That is where you’re going to get a lot of answers that are personalized to you instead of just using this planning tool. Now, it’s possible that you’re out there and perhaps you’re still a long way away from financial independence.

Bo: Perhaps you’re not even really thinking about your withdrawal rate just yet. That doesn’t mean that you can’t still be future-minded. We want you to go, if you haven’t done this, go to moneyguy.com/resources and play with our Wealth Multiplier tool. At least what this can do is you can take the current savings you’ve accumulated up to this point, drop it in the Wealth Multiplier tool, and see what that savings is on track to turn into by the time you get to retirement. And if you get to a normal age 65 retirement, then take that number, multiply it times 0.04, and it will give you an idea of what a 4% withdrawal rate would be able to produce for you at that age. You can begin to ask: am I on path? Am I on track? Am I behind the curve? Am I ahead of the curve? We want you to be able to use these tools to navigate your financial circumstance and ultimately be able to lead the life that you want to live.

Bo: Let’s just have a moment. Love it. Ditto. Love that. We love that we get to show up here at 10:00 a.m. and do this. We love that. Even as things change, we go from a 4% withdrawal rate to a 4.7% withdrawal rate to now a Money Guy dynamic withdrawal rate. We get to be the source for you because we do believe that there is a better way to do money. So much so that we love answering your questions. We love that we get to sit here and load you guys up. So if you have a question right now that you want to get our take on, that you want us to weigh in on, we have the team out in the wings collecting your questions. Make sure you get them in. With that, creative director Rebie, I’m going to throw it over to you.

Rebie: Very excited because I’ve got some questions queued up. Keep them coming. And while you’re putting in your long-form questions, be sure to submit a rapid fire question if you have one, because we will be doing our “It Does Not Depend” rapid fire segment later in the show. Just put RF at the beginning of your question in the YouTube live stream chat so we know that you want to be part of that segment.

Brian: What’s rapid fire? An acquired taste?

Rebie: I think you’ve acquired it though. No. Okay. Last week we did it. I’ve just learned.

Bo: Yeah. It’s kind of like I actually do like broccoli, but I don’t love Brussels sprouts.

Rebie: I feel like they douse them in Nashville and you actually don’t even like Brussels sprouts.

Bo: No, I don’t like them. Oh, I don’t either. If they’re really fancy I’ll eat them fine. I mean, I’ll eat them.

Brian: Who eats Brussels sprouts not fancy? Just like raw boiled Brussels sprouts?

Rebie: Nobody does. Rapid fire is like Brussels sprouts. Not that hot of a take, honestly.

Brian: No, that’s a bad take. It’s more fun than Brussels sprouts.

Rebie: Okay, we’re going to get into some personal finance questions. Can we be honest why Brussels sprouts aren’t good too? They make you gassy. I’m just telling you.

Brian: All right, you heard it here.

Bo: Probably means it’s doing good work for you, though.

Rebie: Well, there’s your first question answered. With that, on to the finance questions.

Q&A: Saving 25% But Not Maxing Out the 401(k) — Can I Start a 529? (11:25)

Rebie: The first one is from Isaac S, and he says, “It’s the first time being here for a live event.” Welcome! Isaac says, “I am currently investing 25% of my income, but I am not yet maxing out my employer-sponsored plan. Should I move on to funding my child’s 529?”

Brian: Age-old question in the FOO. When is it okay, when do you have permission to go ahead and start investing in things like your child’s future and college and things like that? Will you hold that thing up? Brian holds up the Financial Order of Operations. And why would you not want to do it right away? I think that’s a good thing to say too. Well, look, there are several things. What we don’t know from Isaac, and this is where I have to give the it depends, is we don’t know what his income is. We don’t know what his age is. But he has shared with us he’s saving 25%. That gives us a lot of context, because remember step six is to max it out. Now look, ideally yeah, we want you to hit all those government limits, but if you’re somebody who makes under $100,000 a year, you’re going to hit the 25% before you hit the government thresholds, because you’ve done your Roth IRA.

Bo: Yeah, I think we did this math. I think it was like $137,500 before you max out. So a lot of people are going to hit 25% before they hit the government thresholds. And that’s okay. That’s why you can move to step seven. And that’s when you start thinking about how you’re going to use your money. Because here’s the reality of step seven too: if you think you’re going to leave the workforce at 55, your number is not 25%. It might go up to 30, 35, 40%. I don’t know. You have to do the math to know what your number is. Step seven is where you’re going to do the math to figure out where am I at in my financial journey, how do I structure my accounts, what integrates with my goals? But after you’ve done that and maybe you have a normal retirement age, yeah, you get to step eight for sure. Take care of the kids, expand your lifestyle. You’ve done the hard work, you should start living your life and even helping out the kids at that point.

Brian: Yeah. You know, we have a great resource if you go to moneyguy.com/resources. It’s the How Much Should You Save guide, and it shows what a 25% savings rate can do for you. So go find your age, put in your 25%. And there’s a really good chance if you’re someone in your mid-30s and maybe you’re just starting out or you’ve been saving up to this point, saving 25% you’re going to be well on track to be able to accomplish all of your long-term financial goals. So by all means, I would say graduate to step eight, consider funding the 529, assuming that you’re on the trajectory that you want and need to be on. That’s why the Financial Order of Operations can free you up to begin spending money on some of those prepaid future expenses or those abundance goals once you’ve made sure that you’ve taken care of the financial independence saving that you need to be doing.

Rebie: Love that. Isaac, welcome to the live stream and thank you for your question. We’re glad you’re here.

Bo: Does he get a tumbler? It’s his first time, Rebie.

Brian: But if she makes an exception for him, what type of precedent are we setting? I’m just saying.

Rebie: Isaac, if you would like a tumbler, just email winner at moneyguy.com to welcome you to the live stream.

Brian: I just signed the invoice on the reorder of hundreds more tumblers. So why not? We got them to give. Let’s give them away.

Q&A: Should My Wife Have a Separate Bank Account After Marriage? (15:32)

Rebie: All right. Next question is from Hopeful Dreamer 108. It says, “What do you think about a wife having a separate bank account just for her? My fiance and I are getting married soon after three years of being together and we want to merge everything else. What do you think of this?”

Bo: Communication, communication, communication. We say this all the time, personal finance is personal. So what works for you and your household? I don’t want to be so presumptuous to say you have to do it this way or this is the absolute best way to do it. So if you and your spouse have the conversation and say, “Hey, I want to have this separate account that I can spend freely with no real oversight,” so long as you guys have a clear understanding of what money goes into that account, how you factor that in, and you answer all the hard tough questions about that account, I don’t think there’s necessarily anything wrong with it. But I also think you could have that exact same conversation and be on the exact same page doing it jointly. So one of the questions I would have if I was going to sit in between you guys is: all right, why? What’s the reason? What’s the purpose? What’s the thought? Why does this need to be separate? What’s the purpose, the goal, the idea behind it being separate? And could we actually achieve the same type of freedom, flexibility, oneness, and understanding having that in a joint account? Or does it have to be separate? There’s no absolute right or wrong answer. I care more about the question behind the question than the logistics of it being separate or not.

Brian: So I like to give some context here. I don’t know Hopeful Dreamer’s age, where they are in their journey, or what assets they’re bringing into the marriage. These things are unknown currently. But I can give you the philosophy. The reason I say all that is because if you’re both coming into the marriage with substantial assets, whether it’s family assets or you’re coming in as older adults versus young adults, then you do your legal protections on that stuff. Because premarital assets are protected, and if you have family gifts or inheritances, there are some legal protections that we want to be respectful of, whoever funded or put those bequests upon you. And if you have adult children or children from other marriages, there are unique things. But I say all that to put in all the contingencies because when you get married, two become one. And I want you to have all the income flow into a joint account. Because you want to take the power out of the money. And if you’ve got one spouse making six figures and one spouse making $50,000 or $60,000, and maybe down the road you want to do family planning where one of you is going to stay home, money is going to be a unique power dynamic that you never want to have where one of you has to go to the other and ask for more money. Because it just creates what’s mine versus what’s theirs. And it’s supposed to be two become one. It’s ours. When people don’t do that, it really screws things up. We’ve had people on Making a Millionaire, and I think it’s weird sometimes when I see people keeping their money separate and you feel some ownership like, “This is my money versus their money.” That creates some unique dynamics. Now, when you have all the money flow into a joint account, if y’all decide later, “You know what, we ought to set up allowances for each other because maybe he likes to golf or maybe she likes to do a hobby or go on girls trips,” that’s okay. You can set up allowances. I could get on board with that. But going back to Bo’s point, communication, purpose, and let’s make sure the joint account is handling the mortgage, the utilities, the childcare. You want to take the power out of the money as much as possible so it doesn’t create strange dynamics in your relationship.

Rebie: It’s interesting. We had a little extra context come in. Hopeful Dreamer said, “I’m 26, he’s 30. First and last marriage.” Love the sound of that. “And he makes more for sure.”

Bo: So the question that I would ask you, Hopeful Dreamer, goes back to the very beginning. You wanting to have this separate account: what’s the why behind it? Is there something like, oh, I’m afraid he’s going to be upset about the things that I want to spend money on? Well, that should be a conversation. Communication. Even if it is a separate account, he’s still going to be upset about that if you’re not on the same page. My wife and I had to come to an understanding about shampoo and throw pillows. It was a thing we had to get on the same page about. And once we got on the same page, life got that much better.

Brian: If there’s anything that’s going to require secrecy with how you’re using your money, that’s a red flag for me that you might need to have better communication.

Rebie: I’m all for an allotment of fun money for each person. And maybe that’s even like a separate account. My husband and I have done that at different seasons of life, but it’s still like, if I have fun money, he could still technically see it. He just knows, oh, she’s going to spend that money, you know?

Brian: But there shouldn’t be secrets in a marriage. If you’re going to get nekkid with somebody and you can be open about that, why can’t you be open about all your financial goals?

Bo: No, I agree with you 100%. Even though that was a special way of saying it.

Rebie: Put that on a t-shirt. Oh man. Okay.

Bo: It’s marriage. That’s true. You went from Brussels sprouts to get naked, and I just wasn’t expecting that connection in the first two questions.

Brian: Maybe I’m turning into an old man who just says inappropriate things. I’m for it. Let’s go.

Rebie: All right. Well, Hopeful Dreamer 108, great question. Thanks for being here. Hopefully that starts off some really fun and congratulations conversations on the pending nuptials.

Q&A: Car Payment at 5.7% — Pay It Off Early or Keep Investing? (21:48)

Rebie: All right, Big Dog 1313 is up next. He says, “I, 25, and my wife, 26, have $150k income and $95k invested. I have a car payment with $10k left at 5.7%. I hate my car payment, but should I invest and pay off on schedule? Can I accelerate?”

Brian: Well, you know, look. I’ll let you speak first, but I want to give Big Dog a tool. If you go to moneyguy.com, we have the How Much Should You Save resource, and for someone who’s 25 years of age, you’re going to see you don’t have to be at 25% yet. So that’s the context I’m laying out. What, because I can already see you shaking your head.

Bo: My Big Dog. I also do not like car payments. I just don’t. The 20/3/8 rule exists and it’s a thing and I support it. But I don’t like car payments. However, if you have this car payment and you are already inside the confines of 20/3/8, meaning when you bought the car you put 20% down, you’re paying it off in less than three years or 36 months, and the payment does not represent more than 8% of your gross income, you’ve already made the financial mutant decision. I’m going to argue every dollar that prepays that loan might not be the best utilization of that dollar, because I’m going to argue I think that you can make more than 5.7% if you’re out there investing and growing. Now, it’s a little bit talking to both sides of our mouth because we say all the time if you can pay cash you should pay cash. But if you’re going to have to decrease your savings rate and you’re going to have to stop saving and accumulating at the pace you are in order to do this, I’m going to argue I think you would be better served continuing to max out the Roth IRA, continuing to max out the HSA, putting money in the employer-sponsored account, funding the after-tax brokerage account, and that car payment will be gone soon enough if you’re inside of 20/3/8. I love the idea of seeing those dollars work for you. Agree, disagree, want to fight?

Brian: Look, I do agree with you to a degree. But first, are you within 20/3/8? If you’re not within 20/3/8, we’ve got a problem. We got to fix that. But assuming you are in 20/3/8, like Bo said, I would love for you to get the Roth IRA. I agree with Bo that I would be very sad if you didn’t fund your Roth IRA because you were trying to pay off this loan sooner. After you get past the Roth IRA and the health savings accounts with those tax-free opportunities, I do want you going and looking at that percentage savings. Assuming you’re maybe doing greater than 15% at 25 years of age, and that thing is just gnawing on you at night, you’re sitting there going, “Why do I have this debt?” I’m not going to be mad if you pay it off earlier. Maybe come up with a plan where you’re splitting it, where you’re funding an automatic dollar cost averaging plan into either your 401k or additional after-tax accounts, and then you’re throwing a little bit extra on that car payment each month. It doesn’t have to be extremes. There’s a lot of common ground in between where you feel good, get it paid off earlier, but still maximize that Wealth Multiplier. Because that’s the big thing. Bo saw you’re 25 years of age, your spouse is 26. It’s like that old cartoon where your tongue falls out and your eyes get big. When you see what the multiplier is on somebody your age, you get really excited. And that’s why he just wants to help you grow that.

Bo: So did we fight too much? Do you feel like you got to a good answer?

Brian: Look, we both agree. I know where he’s coming from. Either way, realistically, brass tacks: if you pay it off, you’re probably going to be okay. If you don’t pay it off and you invest, you’re probably going to be okay. One is mathematically the optimization. But we know that 80% of personal finance is behavioral. And so if behaviorally getting that gone is something that’s really really important, I’m not going to fight you on that. It it I will tell you, because we both come from pretty humble beginnings, you know, when you get to your first million dollars of investable assets, you’re going to look back and go, where did it come from? You’re trying to figure out which dollars routed how. A lot of small wins stacked up. And paying down a 5.7% loan is not necessarily going to hurt you, but it might slow you down a little bit on reaching that first seven-figure goal. That’s right.

Rebie: There you go. Big Dog 1313. Great question. Honestly, we got a little disagreement, a little nuance. And just for the record, it’s D-A-W-G. The right way to spell it. Just some feedback on the username. All right. Just a reminder, we’re going to be doing rapid fire very soon. So this is your last chance to get your RF rapid fire question in the YouTube chat.

Q&A: When Is a Career Switch Worth the Risk? (28:09)

Rebie: All right. The next question is from PJ Dad Life. He says, “On the Rich Habits podcast two weeks ago, which you guys guessed it on the show, Bo picked career switching as a key wealth-building lever. When is a career switch worth the risk versus staying put and building skills?” And Bo, I kind of know the backstory here. I know this was a draft-style pick of different wealth-building levers and this was to be transparent, spoiler, the last one and you were left with it.

Bo: I did not pick it. It was like, which one of these piles of poo do you want the most? And so, but let’s talk about why do you feel like-

Brian: I feel like Bo’s the worst person to answer this question. Because how many jobs have you had since you graduated college?

Bo: One. A single job. Career switching was not the thing that you did.

Bo: Now, there are a lot of people and we have a lot of clients, especially those that work in high tech, where that is the way that you move up. You have to like bounce around, and the only way to move vertical is to change employers. But I don’t know that that is what’s necessary for everyone. I had this conversation with a prospect yesterday. I think a lot of us fall into the place of thinking, man, the grass is going to be greener. When oftentimes where we are, things are pretty good. If I’m in a really good career, at a really good place that I love, working with people that I love, and I see opportunity and trajectory, there’s nothing wrong with working my way up at that place. I think a lot of young people are told, “Oh well, the only way to progress, the only way to move, the only way to improve your lot is to jump around and bounce around.” I don’t know that that is absolutely true. So I ended up picking that in this draft. And it was a super fun little exercise because it can be a thing if you find yourself in a place where maybe the culture does not fit what you’re looking for, or you don’t love the work that you’re doing, or the people you’re surrounding yourself with are not the kind of people you want to be around. All those things might be reasons to change. That is different from saying the only way you improve, the only way you move up is by bouncing around. I refuse to believe that that is a must for people in their career.

Brian: Look, I don’t mind sharing. I had my third job when I started my company. I’m not counting all the jobs I did all through college: the bus driving, the plumbing, working on the ramp for Delta. All those were jobs through college. But career jobs, I came out in public accounting. I loved the culture of that place, loved my bosses, but I looked around and I was like, man, I don’t see the career trajectory that I need to see to do what I want to do. So that’s why I always tell you: when you start a job, ask yourself what is the opportunity here? You should be able to figure out very quickly, look ahead of you and say, “Hey, how did the people get to where they are? Is the way they’re living their life the way I want to live my life?” Because more than likely you’re on the track of somebody that you’re working with. I had found myself at this public accounting firm kind of in no man’s land. They had just started a financial planning division at this company, and when they hired somebody ahead of me who had worked for Merrill Lynch, I was like, man, they do not know what to do with me. They don’t know how they’re going to get business. This doesn’t seem like there’s a lot of opportunity here. So that’s when I knew I needed to leave. And by the way, I reconnected with my old boss back in 2024, and Bob was honest. He was like, “We didn’t know what to do.” And I love that we got to connect on that. So I think my read was right, they didn’t have it all figured out at the time. Then I went to my second job and they had the business figured out. I mean, this place was a well-oiled machine, corporate, but I looked around and I was like, man, culturally I just don’t know if I love this place. And I think I shared with you guys when my dad passed away, I only got to take like a day off work. Their connection with family was just different than mine. So you need to also ask yourself: what is the culture of this place? Do I fit in here? And if you ask yourself that, that’s why I tell you to do the homework. Because so much content I see out there is, “You have to career switch to get ahead.” If Bo would have done that, there’s no other opportunity that would have done what has happened. Bo’s brilliance is because Bo is so good, so smart, and so likable. I was like, this guy needs to own a part of my business with me. We became business partners. I hate when people give blanket advice that you have to change two jobs to create success. But I think you have to look around and make sure you feel like there’s opportunity. One of my dear friends was doing door-to-door sales and then he moved out to San Francisco and worked in the tech industry and he said, “Man, I would have never become who I am unless I took this.” So you need to be honest. Look at your job. I used to assume everybody got three to five percent pay raises at least.

Bo: If not even more, because most pay raises I got as I was coming up through my career were 10 to 20% every year.

Brian: And I found out there are people who have been working jobs for seven years and got zero pay raises. And I’m like, no, that doesn’t work. So be honest. Go through a mental or financial triage of your life and say, what’s the opportunity? Be honest with yourself. And if it stinks, go advocate for yourself. Go find another job. But if you’re at a place that has great opportunity, there are people ahead of you doing well, you love where you work, don’t just change jobs for the sake of it because you read an article or saw a blog post or watched a YouTube video. You have to make personal finance personal and really make sure you’re doing this for the right purposes.

Bo: Can I give a quick PSA for young people out there? When you accept a job or when you’re looking for a job, I would also encourage you to begin with the end in mind, thinking through opportunity. I’m thinking back, Brian, way way way back when we were going to hire our very first employee. It was literally me and you and an administrator. We’re going to hire our very first associate. And the person we were interviewing actually turned down the job because she got a different job that was $2,000 more in starting salary. That would have been like employee number three at this enterprise. And I just feel like it was very shortsighted to not recognize the opportunity that was there. So if you find a really great opportunity, what that may mean is yeah, you might not be commanding top dollar, top tier, best salary. But if it creates a trajectory that’s going to allow you to move along the course of life that you want to move along, that’s okay. A lot of young people think you’ve got to get as much as you can as soon as you can. You can definitely do that, but it’s going to be a fight. Whereas if you can find really great opportunities where you can actually build some longevity and put the time in and develop some expertise, I think those opportunities are out there too. And I just hate seeing young people miss out on that.

Brian: Well, and sometimes bigger, more established companies can give you better starting salaries almost to trap you in a way. That’s why you need to think about what does the opportunity look like in three years, five years, and if you really love the place, ten years? Does it fit into what you’re trying to build for your life? And if it does, you don’t have to create change to make yourself better.

Rebie: There you go. I knew you had some things to say and we had a few questions about that. So it’s Patrick. PJ Dad Life aka Patrick. Not pajamas, not private jet. These are the things we talk about. That’s been a two-week conversation here at the Money Guy Show. I was really hoping for private jet.

Bo: Because I’ll be honest, I and I know you know this Brian, we still read every single book review that comes in on Millionaire Mission. We read the YouTube comments. We’re out in the Discord. We read them. We try to stay plugged in. So we see some things.

Brian: You can also tell when I’m on vacation because I respond to a lot more comments and then get in a lot of trouble with the content team. Like, “What are y’all doing? What are you doing?” I’m like, oh, I couldn’t help myself.

Bo: You want to see the ones I didn’t respond to? That’s like the math my wife does when she goes shopping. “You should see all the stuff I didn’t put in my cart. You should see all the stuff I didn’t buy. See, we made a ton of money today.”

Brian: Oh man. No, where my wife gets us on that is like she’ll go return $200 worth of stuff and because she only spent $220, she’ll be like, “I can’t believe I got all this stuff for $20.” Look, that’s amazing. You did not get all that for $20. You got all that for $220.

Bo: We’re about to go to the beach next week and Jenna was like, “Hey, just so you know, you’re going to see a bunch of charges come through. But I didn’t know what size the girls and I needed so I ordered like three or four different sizes. And so just know, so long as it all goes back and doesn’t get reabsorbed into the spend, we’re fine.”

Brian: Don’t even get me started about shopping online. She’s super involved in the live chat. My goodness. I hope one day she is. By the way, I do want to give a shout out and a PSA. I mentioned a few weeks ago that I had something cut off my face. No, seriously, it came back that it was precancerous because it was one of those things. Now look, it’s fine. I got it on the early stages. But I want to give a shout out to my PA. She really did a great job of making sure, and she said, “Make sure you put on sunscreen.” And I found out she watched the live stream. So I wanted to make sure I corrected after, you know, making some of the jokes I’d previously made.

Rebie: That makes it sound like he was just off the rails. He usually is with me. You guys are fun. Okay, speaking of fun, it’s time to do our “It Does Not Depend” rapid fire segment. Brian, are you ready?

Brian: Yeah. I was going through what I just said, making sure. Do I need to apologize now or later? Because in three months I have to go see her again.

It Does Not Depend Rapid Fire Segment (40:00)

Rebie: Oh man. The “It Does Not Depend” rapid fire segment is where Bo and Brian have a combined 30 seconds to answer your financial question, but remember they cannot say the phrase “it depends.” We’ve had some people calling out that you are getting creative in how you say basically “it depends.” So I’m going to have my antenna up today. And remember, at the end we will have a segment where they can say all the things that they didn’t get to if there’s some nuance that needs to be clarified. So with that, let’s get 30 seconds on the clock and dive in to question number one.

Rebie: Is it better to pay for a used car in cash and drain my emergency fund, or get low interest financing and make extra payments? I know mathematically lump sum wins, but I am wary of having no emergency fund.

Bo: I don’t like people riding with no emergency fund. So if you must borrow, then that’s okay. Try to get as favorable a rate as you can, either through the dealer you’re buying from or maybe through a local credit union. We don’t love debt. We’d rather you pay for it, but that’s why 20/3/8 exists so you don’t get yourself in a predicament.

Brian: You can’t blow through all your emergency reserves. I’d rather you, if you have the ability, drive whatever clunker you’re currently driving for another few months so that you can keep reserves and pay cash. Otherwise, that’s what 20/3/8 is for.

Rebie: Not too shabby, Brian and Bo. Next question. It says, “I feel like I cannot get out of step two of the FOO. My employer does a 25-cent match to every dollar without a cap. At what point do I move on to the next steps?”

Brian: I mean, a good start is go to our website, moneyguy.com/resources, the How Much Should You Save guide. At least that way, if you’re in your early 20s, maybe it’s 10 to 15%, and then you can move on to get into Roth and other things, but you’re probably going to want to come back pretty quickly.

Bo: Yeah. I’m not going to do the public math on this, but a 25-cent match on every dollar you put in means if you were to max it out, there’s just tons of free money that’s going to come your way. I think you’ve got to get as much of it as you can because that’s what’s on the table.

Rebie: Maybe we’ll come back to it. But that was a pretty good answer. What if they got credit card debt? We’ll come back to it. We might have something that broke the system.

Rebie: All right. Should your dream or luxury home upgrade ever cost more than your total investable assets?

Brian: I’m going to err on the side of no. I think whether it’s home renovation, home improvement, or buying the next home, it says an upgrade, so I’m going to think home renovation or home improvement. No, that’s my answer.

Bo: No, because I mean, I want to talk about this with a little more detail, but I would feel weird if you have a $2 million portfolio and you buy a $3 million house, because homes cost more than just the purchase price.

Rebie: We’ll come back to it. Next question. What is the best way to celebrate financial independence?

Brian: I would immediately plan a trip or do something that gives you tremendous joy and excitement, and take some time to think about the journey you’ve been on.

Bo: I think travel, a big trip, is a great way to celebrate financial independence. But doing something you’ve never done before. Don’t just go to the beach again. Go somewhere you’ve never been before to have an experience you’ve never had before, so that way it really is a monumental, momentous celebration.

Brian: Big family dinner too. Yep, it’s a good one. Love that.

Rebie: Do I prioritize saving for a master’s degree or investing in a Roth IRA?

Bo: 75% Roth. Both? Roth IRA. Yeah, you’ve got to do the Roth. You’ve got to do the Roth. Wait, it depends on your own. It does not depend.

Rebie: You said it. You are disqualified and we will come back to it. Oh my gosh. I hope you’re taking notes because we have a long segment of depending.

Rebie: Next question. I’m a state government employee. Should I use the Roth IRA my employer offers or go through Vanguard, Fidelity, etc.?

Brian: Is there a match?

Bo: When they say Roth IRA, I wonder if they mean Roth IRA or if they actually mean like a Roth 457 or some kind of Roth retirement account. Either way, one of the things we love is when you get to pick your own custodian, your Vanguard, your Fidelity, your Schwab. You don’t have to pay fees for that. You get to choose the investments. Low cost, easy to access, and portable.

Brian : Make sure though, if there’s an employer match, that you get step two, because free money from your employer is very very powerful.

Rebie: All right, next question. How much weight should we give an employer’s 401k match and HSA contributions when evaluating a job offer versus a higher base salary? Is there a rule of thumb?

Brian: I think base salary is more important than benefits, but you’re crazy if you don’t take into account free money when you’re doing your full analysis. It’s toppings to me. The salary and the trajectory and the opportunity, that’s the main course. Then the benefits, employer match, HSA contributions, those sorts of things are the toppings. Now, if it’s RSUs and options and part of your comp, that’s different. But if it’s just employer free money, toppings.

Bo: That’s the frothy part. There it is. Just for the bingo cards.

Rebie: Next question. Is it okay to prepay our mortgage with a refi or recast if one spouse is stepping away from work and we will lose a lot of income?

Brian: You need to determine where you are in your financial journey so that you know if prepaying the mortgage is going to inhibit you from reaching your other long-term financial goals.

Bo: Was that prepaying the mortgage or prepay mortgage with a refi or recast? I’m just going to say, it essentially depends. There are so many variables I need on that one. I can’t give a good answer. With a spouse walking away, I don’t want you taking on more debt.

Rebie: They’re talking about prepaying. They’re talking about doing less debt. But since someone said the forbidden phrase, we’re moving on to the next question.

Rebie: Is it better to take a pension as an annuity monthly payment or as a lump sum one-time payment?

Brian: There’s no way you can answer that one without more context. Lump sum makes the most sense when you’ve done the calculation to determine the net present value of the future cash flows in today’s lump sum. You do the calculation, you determine which one has a higher net present value, and you make the decision based on that.

Bo: Don’t y’all feel like Charlie Brown? We can’t give the details in 30 seconds on that.

Brian: These are all questions that should say “it depends.” They got us. You don’t have to say it depends, you just walk through A, B, and C. You say all the things.

Rebie: Okay, last question. Best midlife crisis purchase: a convertible sports car or a vacation home, if it doesn’t break the bank?

Bo: Oh, how much money you got in the bank? If you’re a friend of mine, I’m going to go vacation home because I will get more utility out of that midlife crisis of yours than I will out of your sports car.

Brian: The car is going to have a limited burn rate on you, whereas vacation homes you might find there’s a lot more cost associated. So I need to know how deep your pockets are.

Rebie: That was a depend, but you did it correctly. You satisfied the rule. All right, that concludes our “It Does Not Depend” rapid fire.

Maybe It Does Depend Segment (48:47)

Rebie: Okay. Let me hit a few of these. We had one where somebody could not get out of step two because they have a 25-cent match on every dollar without a cap, and there was a lot unsaid. So what else do you want to say? Does it depend for that?

Bo: All knowing Brian, what if their credit card is at 26%?

Brian: If I put in a dollar, that means my employer puts in 20 cents. He’s also going to probably have a vesting schedule to it. So there are issues with that too. Whereas the credit card company is going to hit you at 26% no matter what right away.

Bo: So now as I’m having time to think through this, I want you to not have credit card debt. And I also want you to have an emergency fund. But if my employer is willing to dole out free money, I’m doing everything in my power to live as small as I can, doing really creative stuff to be able to do step two, blaze through step three, blaze through step four, so that then I can go back and load up that step two to the full extent. Because if the employer just wants to give you money, man, I want you to be able to capitalize on that.

Brian: Well, the realistic thing is that if you’re in your 20s, you’re probably going to do the employer match first up to 15% of your pay, and then that way you can pay off the credit card, get the emergency reserves, and then potentially do your Roth. Because if you have a Roth 401k, you might go back to the 401k after you get the emergency reserves, just because you could do the Roth 401k and get that free 25%. It is going to modify, but it’s a very generous benefit that you need to plan accordingly for.

Bo: Hey, did you see Erin dropped in and she made a joke about a midlife crisis? Girl, you ain’t midlife yet. You can’t have a midlife crisis if you’re not midlife yet.

Brian: I feel like you can say that to Erin because y’all are in similar stages of life. And Erin, you know, she let us know she’s got some things going on. She said she bought a unicycle. She bought a unicycle for her midlife crisis.

Bo: Sounds dangerous. Erin, don’t hurt yourself. But also, make sure you film that and put that up.

Rebie: All right. Bo had a note on: should your dream or luxury home upgrade ever cost more than your investable assets?

Bo: Here’s what I just want to say. I want to be intellectually honest because I agree with you. If you’ve got a $2 million portfolio, you should be wary of going to buy a $3 million house. But like, what if you’re upgrading and you’ve got like a $500,000 portfolio? Around here trying to buy a home in middle Tennessee, the way that home prices have increased, any second home or upgrade in an area where costs have risen so much, I think a lot of people may find themselves in a million-dollar home before they get to a million-dollar portfolio. That’s a great qualifier, and that’s a great depend in the fact that if you’re under 40 and you’re in the messy middle with kids, I could see a point where yes, the cost of your house might exceed your investment portfolio, and you could still do that following Money Guy home buying rules. Absolutely. You could do 25/3/5. But if you’re in your 40s and you’re doing it because you’re upgrading for the sake of upgrading, I see a lot of people in our area do that and it drives me crazy when I go do the tour of homes every year.

Brian: I do too. I love it so much. And I think about, I’m like, who is buying these? Because I could afford some of these homes that we go look at in these tour of homes. But then I always ask myself, and this is why I end up doing commercial real estate, is because I’m like, wait a minute. I could buy this house for $6 million, but then I think about the opportunity cost. Those assets, my army of dollar bills, living in a $6 to 7 million home versus letting that money continue to build as an investment asset. It just blows up in my mind how that’s why I don’t like the idea of buying the trophy piece. And this is saying luxury or dream home upgrade. If you’re buying your dream home, you need to be far enough along in your financial journey that the dream home is not an impediment to achieving your financial goals. Because upgrading to have a house large enough to raise a family isn’t necessarily a luxury home. The diminishing return on what luxury is gets so small unless you’ve got an incredible view. You put the ocean out there, you put a mountainscape over here, I get why people pay for that stuff. But you’re going to find a diminishing return. Once you can buy the water pumps that give you instant hot water and tankless water heaters where you have unlimited hot water, you’re going to find that there’s just not much more you’re getting. And I always think about this if you’re raising kids: pay attention to the neighborhood experience too. Because if you want your kids to have that traditional experience of going down the street and playing with the neighbors, that’s harder to do if you live in a super nice neighborhood where everybody’s 60-plus and living on 2, 3, or 4-acre tracts. You’re probably not going to get the same neighborhood experience. And you can mess your kids up by giving them too much and living in a weird experience too.

Rebie: Brian, there were two questions where you said it depends and didn’t really end up answering. Do you want to shoot through those? One was: do I prioritize saving for a master’s degree or investing in a Roth IRA?

Brian: Well, I think this goes back to the beginning of your journey. Your career choice is one of the most important decisions you can make. So, before you go back to school, we love education, but I’m mad at the institutions for how much more expensive education costs have gotten over even inflation. So they don’t have your best interest. Buyer beware: is the degree actually going to generate additional income for your family? Don’t go off the brochure anymore. Unfortunately, they want your money. So pay attention. If it will truly increase your earning potential over a lifetime, then that is very valuable to do. I mean, without a doubt, I wouldn’t be who I am if I hadn’t gotten the accounting degree. But you’ve got to be realistic about the ROI of going back to school.

Bo: I would do everything in my power to fund Roth IRAs as early and as often as I can. If it’s between, oh man, I’ve got to write a check for this master’s degree for $7,500 or I’ve got to put $7,500 in my Roth, I’m going to figure out how I drive Uber Eats, I’m going to figure out what I can do to be able to pay for that master’s degree without sacrificing getting money in that Roth. Because especially if you’re young, if you’re around the age that most people go pursue a master’s degree, go to moneyguy.com/resources, put $7,500 in the Wealth Multiplier at your age, and see what every single Roth contribution can turn into for you. Man, I would love for you to not miss out on that if you didn’t have to.

Rebie: All right, Bo, did you have any other notes? I know we talked about taking a pension as an annuity or a lump sum, and prepaying a mortgage.

Bo: I can say one quick statement on the pension. Every pension plan has different assumptions. When they design a pension, they have to put in what is their guaranteed rate of return that’s built into it. There’s also how well funded the pension is. These are all variables. And a lot of times you’ll find that when they come up with early retirement options, sometimes they goose them, meaning they give you really good incentives because they’re trying to offload the liability. In those situations you should probably take the lump sum, because if they’ve front-end loaded it by giving you a lump sum that’s really over the top, that’s a sign. But in other situations we’ve seen where they made too good of a promise and they have a tremendous amount of assets in the bank, and this thing’s not going to blow up. In that case you should take the annuitized benefit. That’s why it really does depend. This is my bread and butter. Don’t just make assumptions, do the math. And sometimes people don’t have the ability to do the math. That’s where we come in and we help clients take the relationship to the next level.

Brian: Yeah, it’s really interesting. We’ve had clients the same age, same size portfolio, relatively same pension offering, different companies. One client it made sense for them to take the lump sum. The other made sense to annuitize, just because the pensions were different. Now, check this out. We’ve had clients from the same company but they retired on different timelines. One retired five years before the other, and because of the way their pension plan worked, for one of them the lump sum made the most sense and for the other the annuitized benefit. It is not something that stays constant in time. So what we tell people is when you’re like four or five years out, do the math. And then do the math again three to two years out. Then do the math again one year out. Do the math up till the day you have to make the decision on the pension because it can change which one is most advantageous. And there’s also the math that gets really complicated because when you die with a pension once it’s annuitized, your beneficiaries don’t get anything. So you have to take into account the higher withdrawal rate because essentially you’re taking it to zero. There’s a legacy factor that we build into our analysis to figure out. So you can make sure you measure twice, cut once and you know all facets of this complicated decision.

Rebie: And the last one that he wanted to start with was the thing about the mortgage.

Brian: All I wrote was “mort.” I don’t know what the question was.

Rebie: It was: is it okay to prepay our mortgage with a refi or recast if one spouse is stepping away from work and will lose a lot of income?

Bo: So they’re going to recap and try to prepay a bunch of money on the mortgage to get their payment down. Here’s the problem. If you do that, you lose access to that money. So if life throws any curveballs, and the house is not completely paid off, it’s a riskier endeavor. Sometimes it’s better to have money in the bank. Yes, you still have your existing mortgage payment, but you also have access to capital that you can use to pay down the mortgage, whereas banks are very unforgiving if you get into any kind of trouble.

Brian: And I don’t want to pick a fight, but in the comments all the time we get, “Oh gosh, you always.” I know we’re going long. Sorry Rebie. But we get this comment all the time: “I’ve never heard anybody say I’m so sad I have that paid-for house.” That’s not true. We actually you have an experience of someone you had a conversation with who said that very thing.

Bo: Yeah. She came to me. You all have heard me tell this story before. I had a widow whose husband passed away, and I think she was in her 40s when this happened. She came into some life insurance proceeds. A lot of people had come to her and said, “Just pay off your mortgage.” So she paid off her mortgage. And she said, “Brian, it was a disaster. Nobody told me how expensive it was to raise these kids without my husband’s income being here.” She didn’t have enough emergency reserves. There’s a process before you write that check to the mortgage company that you go through. Because the banks don’t get excited for you when you’re in a desperate situation. They lick their chops because they know that a house with a lot of equity is potentially going to become theirs again. Be careful with that. That’s why we have an order of operations. I don’t want you to run yourself so thin on liquidity and cash reserves that you can’t even pay the bills. This poor woman was in a situation where yes, she was debt-free now, but she didn’t have the money coming in to pay for her kids and all the other stuff. That money would have probably given her a period of time, probably several hundred thousand dollars, to help her figure out how life was going to work while she was making the monthly mortgage payments. Then, yeah, down the road after she figured out how much was appropriate in cash reserves and how much she needed to live off of, then maybe you throw a little money at the mortgage to pay it down even quicker. But there were a lot of steps skipped just because it was easy advice to give: just pay off the mortgage.

Rebie: Wow, you really covered a lot of bases. And financial mutants, you really stumped them in rapid fire today. Thank you. That was good. A lot of stuff really did depend.

Brian: To close the circuit for me, it’s easier on the midlife crisis question: buy the car. A car versus a vacation house, because there’s just a lot more ongoing expenses to buying a vacation property. That’s why you’ll find a lot of people buy vacation properties and they realize, oh my god, this is a headache. I just went down to ours last week and immediately I had to deal with the landscaper, a pool pump that needed something, and there was a mouse in the house. I was like Wile E. Coyote baiting traps and the thing for some reason wasn’t getting taken care of. When you do vacation properties, just know that it takes your time, it takes your energy, even if you have somebody who helps you with the stuff. Whereas a car that you’re going to do as a splurge is going to be the easier of the two, the less risky likely. Yeah. And I only didn’t really want a house, but I looked at how our life was being used and I was like, “Okay, this makes sense.” And it was a good purchase. Even with all the headaches of a second house, it fits my life very nicely.

Closing (1:05:20)

Rebie: All right. Really good thoughts. Thank you for all of the questions submitted today. Thank you for joining us for the live stream. We’ll be back every Tuesday at 10:00 a.m. Central time. And until then, be sure to check out moneyguy.com/resources, where we load you up with free calculators and downloads about tons of the stuff that we’ve talked about on the show and more. So be sure to go check that out.

Brian: I mean, I don’t know if anybody’s left because we’ve gone over, but hopefully you can tell from the honesty and transparency we flow through on the show. We come from humble beginnings, but we try to tell you the way money really is. I don’t think there’s a lot of people out there doing that. And that’s our promise to you guys. We love that we’ve created the Financial Order of Operations. We want you to be able to use money, this tool of money, and do it that much better. And that’s why we get really excited about creating this type of content. I’m your host Brian, joined by Mr. Bo, Rebie, and the rest of the content crew. Money Guy out. Happy birthday, Jake.