Are you a late starter who wants to reach retirement (or early retirement)? Then we’ve got just what you need! We’re back with Bill Yount and Jackie Cummings Koski from the Catching Up to FI podcast as we share how to invest for retirement as a “late starter.” Did you know there are some serious advantages to investing later in life? Some of these advantages are so secret that even our hosts didn’t know about them! But today, we’re sharing them with you so you can achieve financial freedom on your terms!From top to bottom, we’re sharing everything you need to retire sooner—from the best retirement accounts to debating 401(k)s vs. Roth IRAs vs. HSAs and more! Worried about healthcare if you retire before you turn sixty-five? DO NOT put your retirement plans on pause because of this! With some smart healthcare saving and investing, you won’t have to worry about visits to the doctor’s office!But before you start investing, we need to get your spending in check. Bill shares how he went from paycheck to paycheck to exploding his savings rate by “downsizing” his spending, which makes reaching financial independence even easier! If you’re ready to retire, stick with us and follow these steps to a tee if you want to be financially free!
Mindy:Financial independence is your goal and you have the foundations down, but you’re getting a little bit of a later start. Today we’re going to focus on the advantages you have and how to determine how much you actually need for retirement. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my old soul co-host, Scott Trench. BiggerPockets has a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting, even if you’re getting a later start on your financial journey.
Scott:We’re here today with Jackie and Bill from Catching Up to fi. This is part two of a two-part series on how to catch up to financial independence, a prescriptive step-by-step guide to doing that. And last time we covered four kind of critical pre-work steps, if you will, to put in together a financial plan. And today we’re going to cover the nitty gritty of actually implementing and putting in place and beginning to implement a financial plan that can move you towards retirement by traditional retirement age, even if you’re starting from getting a late start.
Mindy:Jackie Cummings Kowski and Bill Young, welcome back to the BiggerPockets Money podcast. I’m so excited to talk to you today. Thanks guys.
Bill:Well, thanks Scott. Thanks Mindy.
Scott:So look, we left off talking about these steps here about waking up, understanding that it’s time to go and catch up to financial independence, giving yourself some grace. Most Gen Xers, the average Gen Xer has $40,000 saved for retirement. So many people are behind on this. You need to then as the next step here, diagnose your starting point. That means tracking your net worth and creating a budget, understanding where the cash is coming in and coming out of your life. You need to paint a picture of what you want retirement to look like. You need to understand the mistakes and the wins and the losses that have led to getting into the current situation with that pre-work done, now it’s time to actually use that to create a serious financial plan that can move you towards retirement. Jack and Bill, how do we begin that process here of creating this plan once we have completed this? What’s the first step and how do you think about it?
Bill:Well, as I said in the last episode, you got to have an investor policy statement, but people want to know about the numbers, right? That’s where a lot of people start, but in many ways that’s the 20%. That’s where you really need to finish after you pause, plan and now pivot. What we did was take away our finances from a dysfunctional financial advisor that was charging us way too much and I didn’t even know how much they were charging us. I didn’t know what a net worth was and then doing so was pretty scary. I had had my head in the sand for 20 years, but what we did was just go to Vanguard and pull all our funds over there after a year two long education process, a little bit of analysis paralysis, and you do have to jump in and be willing to make some mistakes, but late starters don’t have necessarily the time to make big mistakes.And so if you need a little help in getting your plan started, finding a good financial advisor, which I’m sure you’ve talked about in other shows may be an excellent idea is too overwhelming to take this on yourself. But we did a very simple approach but we didn’t get there right away. We started out with what I call the Paul Merriman approach. We had a tens funds for life, multiple asset classes, difficult to rebalance and I’ve worked back to a very simple approach. We buy a total world fund, that’s our only equity exposure. Then we have intermediate treasuries, short-term, treasuries and cash. It’s really that simple and I enjoy that because you have to plan for your spouse. I may be the CFO of our home, but my wife has to be able to manage this in a simple way. When we get to say the phase of drawdown,
Mindy:That is such a great point to make Bill, not only are you creating this plan, but you have to make it so that your partner who may or may not be as invested in the concept of investing as you are, they have to be able to understand it too. And having a super complicated investment strategy is great if you both understand it, if you’re both able to execute it. But if you draw up this super complicated policy and we’re going to do this and then we’re going to do this and this and your partner’s like I have no idea how to do any of that, then it’s too complicated and you need to either get somebody to help them understand it or simplify it. But even more so than that, I want to know how do I know how much I need for retirement? I
Jackie:Think what resonated with me and what attracted me to the fire community is that they were the first people talking about it in very simple terms is using that 25 times your expenses. And that is boiled down to the simplest way to look at it. Now we know in order to do that you have to know what your expenses are. You have to kind of see what your life costs. So there’s plenty of things you might need to do to get there. But to know the big umbrella is 25 times your expenses, not your income. And I think the financial profession likes to focus on your income because if you’ve got a 30% savings rate, 40% savings rate, whatever, that’s going to make a difference If your expenses in retirement are going to be less because you paid off your house or things like that. So that is how you figure out how much you need and the more simple the better because you’re not going to be stuck in your tracks because you think it’s too complex. Bill, I don’t know if you figured it out a different way, what you guys needed for retirement.
Bill:No, exactly the same way and it works. It is still going to take you time. You’ve got to read the shockingly simple math according to Mr Money mustache so that if I have this savings rate, it’s going to take me this long to get there. So that helps you figure this out. But 25 times works perfectly well.
Jackie:Yeah, and that’s sort of on the front end of that 4% rule. You save 25 times your expenses on the front end, that’s your nest egg. Then on the back end, you take off 4% of that each year and there’s a high likelihood that nest egg will last you the rest of your life. Now, the 4% rule or guideline or whatever you want to call it, we know that that is not perfect and people’s lives aren’t perfect and even like that every year is going to look a little different. So there’s plenty of other ways you can do it, but you need some reference point, some kind of starting point. So thinking it in terms of the 4% guideline in terms of what you need to take off each year, that’s a great starting point, but things will go up and down, especially if you retire a little early, maybe you have some income that’s coming in, maybe you got a pension. There’s all kinds of little variables that will let you make the proper adjustments each year just like we do in our regular working life. What if we get laid off? What if things happen? Well, it doesn’t stop happening once you’re in retirement. So you got to start with some kind of guidelines. So 25 times your expenses on the front end to create your nest egg and then 4% taken off your nest egg each year adjusted for inflation is going to give you a very good idea of where you need to be.
Scott:And this is such a powerful exercise. Once you take control of your budget and your net worth statement and then you understand, hey, what I need to retire is I need 25 times my annual expenses. If I want to spend 40 grand a year, I need a million dollars. If I want to spend a hundred grand a year, I need $2.5 million. That’s so powerful. It makes the game much very achievable, especially when we talk about social security because you can count on at least some of that in your financial planning and that is a big boost to this. I want to get back to that one in a little bit here as well. But that I think really frees up the game and I want to call out the most important variable in getting there. If you’ve been a full-time employee and plan to be one through retirement age is going to be your expenses because every time you reduce your expenses, you reduce, you both increase the amount of cash you have to invest and pile up your nest egg and you reduce the pressure on yourself to build up an enormous nest egg to fuel retirement.If you are spending 80 grand a year, you need $2 million to retire. Well, if you can reduce that spend gradually to $60 million, now you need 1.5 and you’re accumulating more faster. So it is such an incredible mathematical variable and this exercise is very freeing because you can really begin to back into that. Now if we add social security on top of that, maybe these numbers start to be really increasingly achievable on that front. So really,
Jackie:And not to mention a pension as well, and I have to admit, I don’t know Bill if you put social security into your retirement plan, but I did not. So when I was in my thirties when I’m sort of, well, I was actually in my forties when I started really looking at what I needed and I did not include social security at all. I was the biggest pessimist. I was overly pessimistic. Now since I retired, I cleaned out the cobwebs and I said, you know what, I’m really curious about this social security piece. You hear the, usually there’s a lot of political undertones about social security. And I’m like, you know what? I need to do my own research. So I did my own research and there’s no way social security is going to completely go away and be completely destroyed like I was thinking.However, the actuaries, these are the smart guys way smarter than us when it comes to the math, but they put out this report every single year and they clearly will tell you based on our numbers and our research, here’s what the shortfall is going to be. If nothing changes the keyword, if nothing changes, Congress will change it. But they’ll do it literally two days before it’s going to blow up. So basically roughly if nothing changes in 2034, we can expect to get about 75% of the stated benefits that we see on our statements. So I did an example, I’m a nerd like that, but I did an example where I took somebody that retired early, they only worked 10 years. All you need is 10 years to qualify for social security. Most of the time they’re talking about 35 years. That is what it’s calculated off of.That’s fine, but if you don’t have 35 years, they’re going to put zeros. But as long as you have 10 years or 40 quarters or sometimes how it is termed. But I took an example of a person that made 60 grand a year, they worked for 10 years and never worked a day in their life where there’s all of your wages get adjusted for inflation. That’s one thing. And then once I did all the math and applied all the right formulas, that person that made roughly $60,000 a year for 10 years and never worked a day in their life, they would still qualify for about a thousand dollars a month adjusted for inflation the rest of their life. And the government can print money. So there will be something, especially as long as you have younger workers paying that F attack, that social security and Medicare. So the, that’s the research and the data points I looked at because I really wanted some real numbers. So since I didn’t include it in my plans, now I have a little bit more peace of mind because that is my backstop in my older years. So even if you want to think about it as a backstop, it could be a very powerful backstop because hardly nothing else is adjusted for inflation. And of course nobody else can print money.
Scott:And by the way, that’s something that whenever we’re talking about these numbers, like the 4% rule and all these numbers, they’re all adjusted for inflation. The 4% rule already incorporates inflation adjustments, social security already adjust for inflation. And I love what you said about social security there. We interviewed Jeremy Keel on BiggerPockets money episode 3 44, and he came, he had the exact same conclusion. I think it was like 73, 70 5%. Social security benefits could decrease by as much as that if nothing changes over the next few decades. And being a skeptical millennial, I don’t believe I’m going to get any social security, but I believe the people who are currently getting social security are probably more likely to get even higher percentages of that. But I do think that again, you do this analysis and then you think about social security as a buffer, that almost certainly is going to have some benefit that can be really freeing exercise. Now the goal got way more achievable, right? For saying, I just need $40,000 to get by in retirement. That’s my baseline. You can get there in 10 years if you’re smart, make some good bets and make some good decisions over that time period. And you might not even have to get all the way there. Or if you get there, you might have a nice bonus from social security that can up that quality of life.
Jackie:Right. And Scott, to your point, being a millennial, so for our late starters, they’re much closer to social security age, so it’s more likely that whatever changes they make may not impact them or the older generation or mid generation as much as the 20 year olds just coming out of college. That is something to keep in mind as well. Typically if they make an adjustment, and this is not the only time in history, but typically if they make an adjustment to something like social security, people that age, they are a very important voting block and the changes are more likely going to impact the younger generations, the 20 year olds, maybe the 30-year-old. So that’s something good to keep in mind too.
Mindy:Yes, that is a really important point to note. Your social security is not at risk for the later starters, and when they do make the changes, they make them well in advance. The 20 year olds who have a longer runway of time to actually save up for their retirement, but to get rid of social security or for social security to just fall apart, that would be a congressional act and there is no politician in America that is going to vote for reducing or removing social security on the people who vote. Now that is not going to happen.
Bill:Well, social security is part of our plan and I would encourage people to get very strategic about how they take it, which is really important. Mike Piper has done a lot of research in this regard. He has a calculator called Ocean Open social security.com, and often the higher wage earner is supposed to wait ideally until 70 for the maximum benefit. And then you can be more strategic about when your spouse should you have one takes it, but there’s lots of permutations and combinations and Mike Piper’s calculator allows you for free to help figure this out.
Jackie:Yeah, and let me add, you mentioned spouses, so even if you are divorced like me, if you were married for at least 10 years, there are some special provisions in the social security system and the rules where that may add some additional options to you if you were married for at least 10 years and you’re currently divorced. So don’t forget about that, that doesn’t get talked about a lot. Typically people are talking about all the options you have when you have a current spouse, but there are also options for someone that is divorced if they were married for 10 years or more. Coming
Mindy:Up, we are going to talk about unlocking your superpowers of experience and explore some healthcare tools that you can use to your advantage in retirement right after this quick break.
Scott:Alright, we just covered how much do I need to retire and some tips around social security and factoring that in to that question. Now let’s get in to forming the plan and how to get there. Just a little quick tip, since we talked about social security before the break, I want to let you know all you got to do is type in social security calculator into Google and the Social Security Administration has put together a tool that can help you calculate the benefits you would receive in social security either in today’s dollars adjusted for inflation or future inflated dollars downstream. And if you want, you can of course knock those down by 70 down to 25% to 75% or 30% to 70% or whatever you want to factor that into your planning. I think that would probably be wise personally. As part of that I want to talk about now thinking about the plan here and we talked about before the break, how important it is to keep your expenses low, how that helps you generate way more income to invest and reduces the target of total wealth you need to actually retire. And I’ve long held this thesis that there are three big expenses that are essentially the whole game when it comes to planning your financial future and those are housing, transportation and food. Jackie and Bill, have you found that to be true in your journeys? Did you have to grab control of those three buckets in order to catch up to FI or did you do something else?
Bill:Well, I completely agree. If I hadn’t renovated a house and built a house, we’d be retired. It’s really that simple. And then transportation. We bought new cars, we leased cars. It’s one of the biggest, according to Rob Berger who we had on our show, one of the biggest retirement busters out there, I think he listed as number two. As far as food goes, we still eat out a lot and that’s one of the areas you can really cut back on. If you cook at home shop prudently, you can make a big difference there as well. So I agree with you completely, Scott, that you’ve got to take care of the big three rocks and it’s amazing how much of a gap you can find if you do that. It’s just hard to do it as a late starter because it’s reversing that consumption paycheck to paycheck lifestyle. It’s not just downsizing your house but downsizing your life
Scott:Bill. All four of us, I believe made our major progress towards retirement early retirement years ago. Do you think that’s still true today? Do you think people with the lock-in effect, maybe they have too much home but they can’t actually downsize reasonably because of that lock-in effect. Is that a little harder now or have you experienced that in your community?
Bill:Well, yeah, with interest rates I imagine it is much harder to do. So the movement there just isn’t happening. And one thing we did, which made a huge difference, but I have to tell the audience, I’m 58, I’m closer to social security. Hey, I’m almost 59 and a half. So I’m really looking forward to that just in case the whole thing blows up.
Jackie:Well, I don’t think Bill looks a day over 45. What do you guys think?
Scott:I completely agree.
Jackie:I was going to go with 42. Well, I do have something to add with the big three. As I was doing a little bit of my analysis and looking at my own numbers and things like that, I think there’s a fourth one people forget about and that’s taxes. A lot of people don’t think that they have control over their taxes, but you really do from things like doing a traditional IRA or traditional 401k, that’s going to reduce your taxable income. A health savings account, a family contribution is like $8,000 or something like that. That reduces your taxable income. And there’s just so many other ways if you have a small business or if you’re self-employed, you can start making sure you are keeping better track of your expenses and bumping them up against your income. So I feel like I used to never feel like I had control of taxes each year the way I grew up. Tax time was a big refund check and that’s what taxes meant to me. But from some smart tax planning, that could be a big line item that can be adjusted. Are there any tax credits or additional deductions that you could be getting and things like that. So that could add up.
Scott:A big question in the early retirement world is how do I think about healthcare expense in the traditional retirement world? We now have Medicare, so how do I think about that expense into my older age there if I’m trying to catch up tophi.
Jackie:So even if we’re getting a little late start, a lot of people still will end up getting done in their fifties, maybe their sixties, possibly before Medicare. So they have to do the gap. Maybe the gap is not as long of a period of time. If you retire, let’s say 59, well you’ve got five years till you can get Medicare. And there’s plenty of ways, like you said you’ve talked about in the early retirement community, but you are closer to the 65 Medicare age. And that’s an important piece to understand as well because I used to think this, some people still think Medicare is free. Well, the hospital part, which is part A, I think yeah, that part is free. However, for most people, for part B, which is what we normally think of as health insurance and we’re used to when we’re working that part B, there’s a cost to that.I think this year it’s around $180 a month and it gets adjusted for inflation. So you’ve got that and then a drug plan that’s a little bit extra that may be take you to around 200, $250 a month depending on your plan. And then there’s all kinds of other options. But you also have to remember that Medicare doesn’t include dental, it doesn’t include hearing, it doesn’t include vision. So there’s still plenty out of pocket that you’re going to be paying in addition to the Medicare premium that you have to plan for. And there’s some ways to cover for that. But I guess the whole idea is when you are planning, make sure you are using real numbers and you know what to expect.
Bill:Another thing that it doesn’t include is long-term care and people forget about that.
Mindy:That is a very real probability for most Americans as they age. Does Medicare have copays?
Jackie:Yes, Medicare has copays. It works very similar to the insurance that you have at work and there’s some additional plans that you can add on top of the Medicare like Medigap or Advantage or something like that. So you got to really run your numbers on that and the starting point would be the part B, regular insurance does have the copays and things like that. And then the drug plan, you want to look at that. And honestly, as we get older, our healthcare consumption tends to go up and things like vision like man, I used to always have 2020, I have to wear glasses now when I’m long distance. My hearing is not what it used to be. I got my volume turned up on my headphones, I never needed to do that. My daughter tells me the TV’s too loud. So all these little things will start to add up when it comes to health and related things.So we do have to, and I have come through the reality. I feel very lucky that both my daughter and I have been very low consumers. She’s an adult now, so she’s not on my insurance anymore. But when she was, we were both very low consumers of healthcare and we hardly spent anything on healthcare. I know that that’s probably not going to be the case post 50, post 60 as I get older, you can just look at your older relatives and any older people that a lot of ’em, when you start the conversations, they start telling you about their health problems. And I hope to not be one of those people.
Mindy:I’ll keep you in check, Jackie, but one thing you can do now that you are, I mean hopefully we are all going to get older and we are all going to need Medicare. And one of the things you can do now is start contributing to an HSA. You have to have a high deductible plan in order to be able to do this, but your HSA dollars don’t have to be spent right now. So if you are older still in good health, you can cashflow your expenses currently, you can save up those receipts and then cash those in later or use your HSA dollars for your medical expenses down the road.
Jackie:Yeah, that is a great way to use an HSA. And before I even knew what I was doing, we were on an HSA because honestly, like I said, me and my daughter were very low consumers of healthcare. So we weren’t even meeting the low deductible, like the $500 deductible. So when my company introduced a high deductible plan with an HSA and I knew I could invest in it and they were putting money in it too, that sounded great. But as time goes by mad scientists who wrote that amazing article called the Health Savings Account, the Ultimate Retirement Account, I’m like, Ooh, I’m doing something right. So I maxed out my HSA for 12 years. I started as soon as my company started offering them 2008. So from 2008 to the year I retired in 2019, that was about 12 years I maxed, I did the family max and this is a key for family.All you need is you and one of the persons. So if you’re singleton with a kid, that is still considered family. So maxing that out and I invested it as soon as they would let me. I think I had to keep $2,000 in there. So I stopped contributing to my HSA once I retired because now I’m on a traditional plan, but I continued letting it grow. I just have a straight up index fund. I think it’s like a total stock market index fund that’s in there. It’s a growth fund. But today that HSA has now grown to about $200,000 I would’ve never imagined and I don’t want to die with it necessarily. So Mindy, to your point, what I’ve decided to do with it, I thought a lot about the drawdown strategy because when you inherit an HSA, it stops being an HSA, so it’s taxable.It’s not like a regular retirement account. So what I decided to do is to use my HSA to start drawing down to pay one my Medicare premiums. You can do it for the part B and the part D, and you get a nice annual statement. So it’s super easy. You don’t have to track very much. And then on top of that, again, I’m banking on additional expenses and healthcare costs once I am a little bit older, so I’ll use it for out of pocket, I can use it for copay, I can use it for vision, dental hearing. So that is my strategy for drawdown with that HSA and it could be very, very valuable. And for people, I feel like it is a mental shift when you go from paying $5 every time you go to the doctor to now paying let’s say $82. But when you start to add all the pieces together, your premium is much cheaper for a high deductible health plan and you don’t have to be on it forever. You change your health insurance every year. So for me, I had it for 12 years. So even if you have yours for five years, it could create a pretty powerful little nest egg.
Bill:Yeah, I completely agree with everything Jackie said. We have our HSA, we max it out. It’s in a single index fund and I have to plug one company here because I think Jackie uses it as well. Fidelity has a no cost HSA and they do a great job with the HSA. So I would encourage your audience to look at that too. A
Scott:Couple of things here, if I am zooming back out to the parts of the discussion we just had here, and I’m looking, the first thing that we should be doing is saying, can I downsize my house? Because that’s going to be the single biggest variable. I think that’s going to change the trajectory of finances that may or may not be reasonable in your situation. Then it’s what you drive, then it’s your food budget, then it’s tax leakage. But we’re going to actually going to probably attack the tax problem with the investment approach starting with the HSA as we go through our financial planning approach here and then it’s healthcare. And once we’ve made really good decisions on those other three, if we can get those costs down to reasonable, so we’re still living a happy life, but really making sure that we’re getting the value in those three decisions.The rest of the pie chart is just controlling the expenses and making sure that you’re getting value out of all of those other things. All these other categories, control it, watch it. But those big three are going to make those big three or four are going to make all the difference here. And then I love it. The first thing in a financial plan, if I’m starting from zero at age 50 or 55 and trying to catch up to five is max out the HSA and put an index fund. Mindy, of course has supercharged the returns in her HSA by investing in Tesla. That’s a gamble. We can get into that another time about why that might not be the best investment advice there.
Jackie:Mindy. Mindy, do you have Tesla in your HSA? Yes. Wow. Yeah. I mean I went say with a growth index fund, but yeah, that’s super smart because that’s another account where you do want to have high growth assets because when you take it out as tax free for medical expenses, look at that smart girl and it’s not all Tesla, but it
Mindy:Is. I want some growth in there. I want that to grow because you put it in tax-free, it grows tax-free, you withdraw it tax-free. They call it triple tax advantage. And I want to pay all the taxes I have to and none of the taxes. I don’t have to.
Bill:Well, if there’s one place to take risk, it’s in your HSA for maximum growth. I mean that’s what we do too.
Jackie:I’m going to have to revisit my allocation and my HSA look. I’m already writing that down. That’s a to-do once we’re done here.
Scott:Just a couple of things for folks that are thinking about this HSA, because I agree, this is the first thing you’re thinking about how to catch up to retirement, max out the HSA. Now you only can have an HSA if you have a bad health insurance plan, one with a high deductible, a higher out of pocket max and those types of things. So if you’re someone who regularly meets your deductible, you may not want the HSA or are likely to meet that deductible over the next two or three years for whatever reasons that may be a decision. If your employer offers a plan that has better coverage for you, you may not be eligible for an HSA and then we just move down to the next item in the list from a financial planning perspective and put the cash into that bucket. So that’s just one thing to note.And then as you’re thinking about the HSA, we want the HSA to grow because it is the supercharged retirement account. Even if we don’t invest in Tesla stock inside of it, and we want that money to grow. So you have to make a decision, am I going to pay my health insurance costs when they do come up with the cash in my HSA or am I going to let it grow? And I think a lot of folks that get serious about this make the decision, Hey, I’m going to actually pay my copay my doctor and my regular medical bills just with my credit card and my bank account statement because I want that HSA money to grow because it’s a really nice security blanket going into retirement. What do you guys think? Is that how you approach it?
Bill:Absolutely. That’s how we approach it. And all the things Jackie said about paying your Medicare costs and copays. We’ve saved, as Mindy said, all of our receipts and there have been lots of expenses over time and you can pull that out tax free and spend it on anything you want. Actually.
Jackie:Yeah, there’s no time limit to use those receipts and some people don’t want to be bothered with the receipts, even if they’re digital, that’s totally fine too. But again, I can guarantee you your health expenses are going to be a lot more later on in life. So there’s probably not going to be a shortage of being able to spend down that money. And you mentioned the triple tax savings, so that’s how most people label it tax free, going in tax free, going out tax free while it grows. The other little bonus that you get, and again this is back to taxes, Scott, so if you have your contributions to your HSA taken through payroll deduction, you don’t pay the FICA tax. That’s social security and Medicare. So that’s another little extra piece that you get. So if you the opportunity to make contributions through your employer, make those contributions, even if the investments that your company’s HSA is sucky or whatever, still go ahead and get it in there because you can always open up. Fidelity’s one of the most awesome ones that’s low fee, but one, you can have more than one HSA and you could certainly move it out if you want to. So it’s not like your 401k or your employer sponsored retirement plan. You can have multiple HSAs. You don’t have to wait until you leave the company in order to move it. So you have a lot more flexibility than you would with what you have with a traditional retirement account.
Scott:I do want to just throw out here that we are starting this discussion about catching up to retirement from an investment perspective, assuming that folks are going to invest in low fee, low cost index funds in a variety of vehicles, which include after-tax, brokerage accounts, DHSA, retirement accounts, these other types of things, and we’re going to talk about the superpowers that folks are catching up to fi have in terms of tax advantages and additional access to investment opportunities that younger folks like myself, for example, don’t have access to yet. Right after this ad break, we’ll be right back.
Mindy:Alright, welcome back to the show. I really like how Scott said younger folks like myself. Well Scott, let’s talk about what you don’t have access to. I’m
Scott:33. I don’t have access to some of these catch opportunities that we’re going to talk about I think here.
Mindy:So okay, some of our over 50 superpowers, my favorite one is the over 50 catchup contributions. You have the regular in 2024. The regular amount that you can contribute to your 401k is $23,000. That’s for everybody. But because I’m over 50 because bill’s over 50. Jackie, are you over 50?
Jackie:Don’t ask me that, Mindy.
Mindy:Okay, Jackie. When you become over 50, you will be able to do the 23,000 plus an additional $6,000. That’s a small potatoes and because you’re over 50, you probably have the income to be able to contribute that. But wait, there’s more. Your IRAs have a contribution limit of $7,000 this year, Scott, but me and Bill and Jackie, when she turns over 50 will have an additional thousand dollars that we can put into there and if it’s the Roth IRA, that’s an additional thousand dollars that I’ve paid taxes on. Now that grows tax free. So when I pull it out after I turn, what, 55 and a half, I think I can reach that money. I pull it out tax free. So that’s just one of the benefits of our being mature.
Bill:Yeah. Well there’s one more actually we forgot. With regards to the HSA, when you’re over 55 like mo, you can add another a thousand dollars to your contribution
Jackie:Per person that’s on your plan. So you and your spouse are allowed the extra thousand dollars. Is that right, bill?
Bill:I’m not sure about that. Don’t quote me, I’ll defer to you. You’re the CFP.
Jackie:I know, I know I was. I was just checking your knowledge a little bit there, but yes, it’s a thousand dollars per person, but each individual must have their own HSA. Like you couldn’t put an extra $2,000 in your HSA for both of you. Karen would have to open up her own HSA to get the thousand dollars catchup. Oh, oh
Mindy:Oh, hold on because I got to dive into this. I’m an older mom. I started later. I’m a later start on parenting. So if I have four people on my HSA currently and I’m over, well, I’m not over 55 yet, but I will be before one of ’em gets off. So can I contribute 4,000 extra dollars and they just have to have their own HSA plans.
Jackie:Well just remember the extra thousand we’re talking about is for those over the age of 55. Are your kids over 55? Oh
Mindy:No. Oh, okay. So only, well, my husband’s younger too, man. I got to trade him in for an older model, but
Jackie:I can’t tell you this Mindy, so your kids are either of them, are they over the age of 18 yet?
Mindy:Not yet.
Jackie:Okay. So I’m going to mention this for anyone else that might have older, because I had the situation with my daughter. If you have older children, they could be on your health insurance plan until they are 26, but they may not be a tax dependent. So if you are on a high deductible plan with an HSA and you’ve got your kid on there that’s no longer a tax dependent, they can actually have their own HSA and contribute the family max. That’s a very nice little nuance for people that have adult children. I was able to do that for my daughter for several years before she was mandated by law to not be on my plan anymore. That’s a very nice provision. But the key is they can no longer be a tax dependent because technically you can’t use your HSA dollars to pay for someone’s expenses. That is not a tax dependent. So that is their answer to it. I wouldn’t call it a loophole, but it is amazing provision. So if you’re able to contribute, I think it’s like $8,000 this year or close to it, you’re able to do $8,000 and you’re non-tax dependent adult child that’s under 26, that’s on your plan can also contribute the family maximum and you could give them the money to do it. They probably are not. They
Mindy:Don’t have an age.
Jackie:Yeah, exactly. So just a little nuance for older people. That situation may happen for at least a few years.
Bill:That is the first time I’ve heard of that hack and I’m already behind the eight ball on that one. I got a couple of years where I could do that. There you
Jackie:Go, bill. You shoulda asked me. Are you kidding? I didn’t even think about that. You should be doing that already. Well, you
Bill:Are my co-host and you are A CFP. Why aren’t you mating me?
Jackie:I know I need to ate you, but we’ll talk after. But definitely you need to get those because once they get old, even if they’re in their mid twenties or even late twenties, a lot of times it’s hard for them to get traction and be able to live. We’re still sometimes supporting them a little bit and that’s a little something extra you can do for them, especially when it comes to the medical stuff. So yes, that could be a nice option.
Scott:These are awesome tips, but I think we’re all aligned that the HSA is a superpower and one of the first vehicles that you should maximize and you should take advantage of it to the maximum extent because there’s so many use cases for it and you’re going to need a big bucket of money. It can never be big enough to fuel healthcare expenses in retirement and later in life. But I want to kind of come back to another question here. Again, we’re saying basics of the financial planner are lower expenses as much as possible. I’m starting with the implicit assumption that those listening to this are already maximizing their income or don’t really have a means to job hop and make $40,000 more. If that’s part of your plan, you should definitely take on that one. We’re not going to have a big discussion, but the big decision point I think from an investment and cut your expenses, but the big decision on investment standpoint I think is for most after the ah HSA Roth or 401k, I think it’s no contest for someone catching up to put it in the 401k and not into the Roth for most people that are trying to catch up to fi.But Jackie, I want to hear your opinion on that as a reaction to that. Do you agree with that or disagree? And if so, why not?
Jackie:So I think some people kind of get confused. So your 401k or your employer retirement plan, you have an option to make traditional contributions or Roth, you get your choice Now with your IRA, you got the same two choices. You can choose Roth or traditional. So those are two separate things. The biggest chunk obviously is going to be your 401k because that’s like $23,000. Here’s my bottom line. I want people to have a mix of the two to give you as many options as possible. Sometimes you might want to pull traditional because you need to show a little bit of income. Sometimes you might need to pull Roth because you don’t want to show any income if you do traditional, I love the fact that it reduces your taxable income and because you may be closer to that 59 and a half where you can take it out without a penalty.There’s another benefit to that if you ended up doing Roth, obviously you’re not going to get the tax deduction now, but it grows completely tax free. And when you leave that company, and this is what I did when I left my company, when I rolled it over now the contributions that went into my Roth portion, I could get that out tax penalty free for anything. And that became very valuable to me because I had a few years before I turned 59 and a half and I hate to always use depend, but those are things you want to think about. But no matter what, make sure you have a mix. You don’t need to have all Roth when you retire and you don’t need to have all traditional that boxes you in. So have a little bit of both.
Scott:Let me just push back there because I think someone who is, I’m going to put myself in the shoes of someone who’s 55 years old who is starting from zero and says, I want to catch up as much as possible by retirement age. I make $78,000 a year and the last 10 years I just spent all of it. That’s why I have no retirement savings here. I’m going to immediately think about ways to downsize my housing, but it’s going to take me six months to a year to enact that. It’s going to take me, I need to figure out I’m going to down sell my fancy new car and get a downsized one there. I’m going to start packing lunch, but this year I’m not going to generate $40,000 that I can deploy nicely down the capital stack with a $7,000 HSA contribution, 23,000 to my 401k and another 6500, 7500 into my Roth here. I have to make a choice. How do I make that choice that the hard choice of which buckets to fill up? Do I just a thousand into the Roth, a thousand into the 401k or how would you advise someone in that position to make that trade off, especially in the first year or two before they start ramping their savings rate?
Bill:If I can chime in quickly, we have a whole episode on this with Sean Mullaney and he is a hundred percent advocate for traditional 401k for the late starters, it’s unequivocal. You’re at your peak income years and the tax diversification there, well, it’s important you want to have in the tax triangle taxable Roth and traditional 401k type contributions so that you can manage your taxes later, but you can also do Roth conversions later. I don’t completely agree with Jackie and we do all traditional 401k. We don’t do any Roth 401k at this point in time.
Mindy:Well, I think that you’re in a different position. I like the Roth for somebody who has a longer timeline to allow it to grow tax free. You’re a higher income earner and I’m in this position you are. I want to reduce my taxable income as much as possible rather than growing my Roth contributions because they’re not going to be as effective as tax-free wise in my opinion. But that’s always something that somebody can do the math on and send me a spreadsheet that’s easy to read.
Jackie:Yeah, it’s really going to depend on your situation because then if you factor in things like what if you have a pension that’s going to be coming, that’s going to be taxable. Let’s factor in social security where already 85% of your social security benefit could be subject to tax. So there’s a lot of moving parts. That’s why really the only thing I can definitively say is that having a mix of the two, I think the baby boomers, so our predecessors, the Roth was barely available during their working life, so they hardly had any Roth at all. Most of us, me and Bill’s age sort of in the middle, we’ve been doing Roth for quite some time. So we have plenty of Roth, I have plenty of Roth. So honestly in my 401k bill I was doing all now as I was learning this and as we’re learning, we make a lot of little mistakes.I kept going from like, no, I should be doing traditional. Then I’m like, no, no, no, no, I should be doing Roth. So I went back and forth until finally I settled on doing traditional 401k and then I was doing a Roth IRA because for my income I was right around $80,000 for my income. I still qualified for it. Now if you’re really high income earner, you can’t contribute directly, you can do the back door. It’s just going to be an extra steal for you. And I guess I may as well come clean, Mindy, if anybody does the math. I retired when I was 49 December, 2019, so I am over 50. But the fun thing was that I got to max, I got to still max out my 401k and get the catchup contribution the year I retired in 2019 because my birthday is in December. So as long as you turn 50 before the last day of the year, you can. So I did do the catchup for one year. I no longer have an employer obviously, so I can’t do that, but I could still contribute to an IRA if I have any income that would allow me to.
Scott:The way I think about all this is I think that if you think you’re going to be earning less in retirement, you’re going to have it less taxable income in retirement than you do now. You should go with the 401k and if you think you’re going to have the same or more, you should go with the Roth. And because I’m 33 and have a long investing time horizon ahead of me, I mostly invested in the Roth because I think tax rates are going up and I think that I’m going to be glad that I have this tax-free growth ahead of me. But I think if I was catching up, unless I had one of these exceptions, like you said Jackie, these pensions or whatever, that the 401k would be the place I’d really emphasize before the Roth if I had to make the trade off there for that average scenario, I think in many cases. Do you agree with that one?
Jackie:Yeah, and I think that’s a longstanding debate, Roth or traditional. So there’s really no wrong answer, but I think you’re thinking about it the right way, Scott, because people do want to try to come to their own conclusion and they need something to go on. So some of the things you suggested, I think those totally make sense. And again, I try to stress to people with your 401k within that you can do Roth or traditional and then you have the same two choices when it comes to your IRA. I ended up deciding to do traditional inside my 401k and then Roth the other way. But yeah, if you think that is one of the components, if you think tax rates are going to go up more than likely historically long-term tax rates are probably going to go up. So you think about that, but even so I just defer to having some kind of mix and trying to go through your own checklist of what you have going on.
Bill:And we use the backdoor Roth, we are high income earners, but don’t forget you have a spousal contribution as well. People may forget that so you can do too.
Scott:Awesome. So we have HSA 401k and or Roth downstream there. What should I do next? What are the next things that I should be doing with my money after I’ve started investing in those?
Jackie:Yeah, bill, I think one account that’s highly underestimated is a regular taxable brokerage account and certainly real estate as well if you have that. But with a brokerage account, you don’t have to worry about the normal restrictions as with a retirement account. So the brokerage account, there’s no age limit, there’s no contribution limit, and it could give you some additional tax treatment of an investment account that is different from your retirement account, your Roth or your traditional or your HSA. I think that’s something that probably deserves to be in everyone’s portfolio or everyone’s mix of investments and tax treatment accounts going into retirement. What do you think, bill, is there anything else you could think of that probably should be a part of that too
Bill:As your cash flows down the waterfall? Absolutely. It’s a natural and we do that as well. I think it is important because that helps you bridge the gap if you retire before social security.
Jackie:And you know what we were going on the topic of 4 0 1 Ks, there’s that rule of 55. So for late starters, they’re closer to 55 and there’s a provision. If you have an employer retirement plan, that would be a four oh K, 4 0 3 B, and a thrift savings account. Those will, if you retire the year in which you turn 55, you’re able to get money out of that account without paying that 10% penalty. So you got an extra five year bonus that you can take advantage of. You couldn’t do that at 45. You couldn’t do that at 32 Scott. So that’s another little extra maneuver that older people can use if they caught up and decide that, hey, I think I can step away at 55, you have access to that money.
Scott:We spent a long time talking about all this stuff, but it really boils, boils down to a very beautiful simplicity I think that we’ve kind of aligned on here, right? It’s like understand your numbers slash expenses if you can in housing, transportation, food, minimize leakage from taxes using these accounts like the HSA and 401k, invest in index funds and widen that spread as much as you can over the next five, 10, however many years it’s going to take you to get to that goal and you just chunk it along. Now there’s a whole bunch of frameworks and jargon and all these accounts and limits and all these other things to cover in there. So I think that leaves us one last component of the financial plan, the essence of the financial plan. It’s that simple at the highest level and that complex is a whole nother language if this is your first intro to financial planning here. But I think that that brings me to the last thing here, which is an unending journey of learning more about investing and money. And I’d love to hear just a quick recap, Jackie and Bill, if that’s been true for you guys on your journeys and what that immersion may have looked like, how long it took you to feel comfortable with all this jargon?
Bill:Well, you just summarized it perfectly. I mean it’s like a 10 step recovery plan, maybe less, and your summary definitely that should be the real, because that is the bullet point. It is simple. You got to unload the jargon. I mean, the financial industry wants to make it complicated because they want your money and if you take over your finances and follow your six eight step plan, you got to work through the messy middle. It’s going to take time, but you’ll get there. It’s possible. That’s what we’re trying to tell our audience. Start now and you will get there. It’s never too late.
Jackie:Yeah, I think the biggest part is it will take time like Bill said, and you should celebrate your wins along the way. There are going to be some mistakes like me trying to pay ping pong back and forth between the traditional and the Roth until I figured it out. That’s okay. Once I decided to do that, that’s a win. When I sat down to do my expenses or to look at my investments, that’s a win. So celebrate along the way and this learning does not stop. Dale and I are just learning. Look, bill didn’t know about the HSA and his adult children. Mindy’s investing in Tesla, in her HSA. Look, I got all kinds of notes just from today, and I retired in 2019. I’m still learning. Jackie’s
Scott:Going to a bet on Rivian and her HSA. Right?
Jackie:Exactly. There you go. Look, I’m so happy about how well my Nvidia has been doing. I do own some single stocks and I’m a very proud owner of a single stock portfolio, but I’m a nerd like that, that enjoy doing the analysis and things like that. So I can say that after being retired for five years, nearly five years, my main thing is that I’ve learned that precision is not required. So I try to go into this as precisely as possible, and I know that I still made some mistakes. Well, even the mistakes that I made or the things where I knew I wasn’t optimizing a hundred percent, that was okay. By the time I figured out, oh, social security, I didn’t even count that. So that’s a backstop. And then I would look at, oh, when I retire, my net worth was $1.3 million, and five years later, it’s 1.8 millions, right under $2 million, and I’ve been withdrawing from my portfolio.That gives me a little more confidence. I’m like, I shouldn’t have been so worried about that. And not that it’s not important. You do need to know these numbers. You do need to go through the process. But as you build in buffers, that’s going to help you feel comfortable that you won’t get thrust into reverse if something gets messed up or if you make a mistake. So I think sometimes we’re a little bit hard on ourselves, especially late starters, and I learned to not be so hard on myself. Just keep learning, keep learning, keep talking to smart people like you and Scott, and even my co-host, bill, he’s smart sometimes too.
Bill:Start a podcast. What you got to do is start a podcast. You get to meet all these smart people and learn from them.
Jackie:Exactly. And Bill, how much have we learned doing a podcast? There’s just so much and it becomes a lot of fun. It becomes a challenge, and you should say, what is going to help me enjoy this Bill? You’re still working. You’re a hardworking er doctor. And I like to say, when you’re not saving lives at the hospital, you’re podcasting with me. You really love it. And so you find that thing that you really enjoy doing every day, all the time. I’m not getting paid anything for doing a podcast. So when I think about working, I hated to even work 40 hours a week because it just wasn’t my true passion. And now I just feel so differently about it. So even if I’m getting three, four hours a week, sometimes more with podcasting, I’m still going to bed with a smile on my face.
Scott:Well guys, this has been so much fun. Thank you so much for a great two-part discussion here on building a financial plan. It starts with acknowledging the problem, understand the situation, reliving the mistakes, but also coming up with a dream and a vision and a plan, and then translating that into a specific projection model. Projection models much more fancy than what you actually need to do in this process here, but that’s what we’re doing here. We’re still estimating out our expenses and income are and getting there, and then, yeah, it’ll take you years to really optimize this path. And that journey comes alongside hundreds of hours, likely of self-education in whatever form works for you. But you can get there and you can make a huge amount of progress, maybe even a million dollars worth of progress inside of the next 10 years if you start now.
Bill:Totally agree.
Mindy:Yeah. You have to because he’s right and you want to connect with other people who are in a similar position to you. So go listen to the Catching Up to PHI podcast. Join their Facebook group, chat with people who are in a similar position. Don’t listen to the people who are telling you you can’t do it. I know that you can.
Jackie:Yep. And we all do. And one of the big things I want to mention as far as continuing to learn is think about how you learn the best. Are you an auditory learner? Are you a visual learner? Do you like reading books? So find the podcast, find the blog, find the YouTube, and that will continue your learning. Find the community. That was a huge, huge, pivotal time for me and a realization that this is the stuff that keeps feeding my brain.
Scott:Well, Jack and Bill, thank you so much for coming here today on the BiggerPockets Money Podcast to talk about this. This is a huge, huge problem for a lot of folks out there, and hopefully we helped a lot of people get inspired and then actually begin the process of formulating a plan. Thank you for having us.
Jackie:Yeah, this has been amazing. Love you guys.
Mindy:Love you too. And we will talk to you soon. Thanks so much. Okay. I was today years old when I learned that my adult child on my insurance, but not on my taxes, can contribute the family match to their HSA. And you can bet I am going to be putting that to good use in a couple of years. Perfection is the enemy of good. I think this is a great mantra for people to think and take to their heart and really remember when you’re trying to be perfect, good is really good. I just spoke with Christie Shen from Millennial Revolution and her retirement portfolio over the past 10 years has grown from $1 million to $1.5 million even after withdrawing according to the 4% rule every year for 10 years. I think that’s pretty amazing evidence that the 4% rule really works. That wraps up this episode of the BiggerPockets Money Podcast. He is the Scott Trench. I am Mindy Jensen, and because this is an episode for our later starter friends, I’m going to go all the way back to the beginning of the alphabet and say, see you later. Alligator
Outro:BiggerPockets money was created by Mindy Jensen and Scott Trench. This episode was produced by Eric Knutson, copywriting by Calico Content, post-production by Exodus Media and Chris McKen. Thanks for listening.
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