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welcome to the best interest podcast
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where we believe Benjamin Franklin's
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advice that an investment in knowledge
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pays the best interest both in finances
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and in your life every episode teaches
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you personal finance and investing in
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simple terms now here's your host Jesse
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Kramer hello and welcome to episode 81
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of the best interest podcast my name is
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Jesse Kramer today is an ask me anything
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episode some of you who are listening
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only might not realize this but for the
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past month or so in My Weekly Newsletter
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which you can subscribe to for free at
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bestin interest. blog in the Weekly
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Newsletter I've been telling my readers
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hey I'm going to start doing ask me
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anything episodes so submit your
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questions financial planning personal
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finance Basics investing whatever it is
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submit your questions and every so often
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and you'll see the frequency who knows
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what the frequency will be in the future
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maybe once a quarter maybe a little more
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frequent than that but every so often
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I'm going to put out one of these
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episodes and ask me anything episode
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where I'm going to go through some of
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your questions live on the podcast and
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share some answers with you before we
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get to today's questions though I'm
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going to do a customary review of the
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week from Apple podcasts uh this is a
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five-star review from ging 50 who said
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Jesse took my call which I did and G
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cling says after listening to Jesse's
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podcast about the five golden rules I
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was interested when he spoke that most
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of his listeners are DIY people so I had
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some personal questions for him I
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emailed him and he asked me to call he
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spent over 30 minutes with me answering
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all my questions he sent me reading
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materials as well as he forward me names
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who could further help me I've heard him
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say several times on the podcast to
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reach out to him if you have questions
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and I was pleasantly surprised to
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realize this is true he is the real deal
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thanks Jesse well thank you G cing I was
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happy to help you and take your call
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listeners if I get inundated with
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requests for phone calls I suppose I'll
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have to change my system I'm not sure I
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have enough time to answer everybody
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questions via a personal 30-minute phone
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call but I do really like answering your
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questions hence this AMA episode so I
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hope this starts a virtuous cycle and
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the snowball grows and more and more of
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you submit your questions and then I get
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to answer more of them here on the best
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interest podcast so without further Ado
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let's dive into today's AMA okay first
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question from Andrew Andrew says Hey
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Jesse I wanted to shoot you a question
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for the AMA I'm about to turn 30 years
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old I have roughly 185 ,000 in
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retirement accounts and about $30,000 in
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taxable accounts assuming an 8% annual
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growth rate my retirement accounts could
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grow to $2.7 million without any
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additional contributions most would say
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this is Coast fi and we'll explain what
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that is later with a goal to retire
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early I understand the importance of a
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bridge account do you think it's better
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to give up the better tax treatment in
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the retirement accounts knowing I can't
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access them until I'm age 59 and A2 so
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giving up those retirement accounts
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accounts to instead fund the bridge
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account or should Andrew stay the course
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by maxing out his 401k and Roth IRA
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first and then only put remaining money
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into his taxable accounts very good
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question Andrew and actually I'm going
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to combine that with a second question
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which came from Kenton Kenton said good
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evening Jesse I'm about 27 my fiance and
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I are on track for retirement with our
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401ks and Roth IRAs but we aren't maxing
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them out I am hesitant to Max them out
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because I don't want to be quote unquote
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retirement Rich we already have started
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a brokerage account for future vehicles
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but what are your thoughts on increasing
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the amount to that bucket the The
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Brokerage bucket instead of retirement
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accounts in case opportunities arise
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between now and retirement best Kenton
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so both of these questions share a
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pretty similar tenor which is we have
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two young people 30 27 somewhere in that
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age range we have some young adults who
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are doing a really diligent job saving
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for the long run they're utilizing to
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some extent their 401ks their Roth IRA
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other tax advantaged retirement accounts
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but they have this realization that if
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all they do is fund retirement accounts
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they might be in a situation where all
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their money can't be easily touched
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until they're 59 a half and if they
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wanted to retire before then maybe they
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should be funding another bucket okay so
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we're going to dive into some of the
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details now first from Andrew's question
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the first question we're going to talk
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about what Coast fi is if you haven't
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heard of this term in a nutshell Coast
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fi or Coast Financial Independence as
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the name implies it implies some sort of
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coasting right taking your foot off the
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gas and just coasting for a while and
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it's this phenomena that occurs when
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someone's young they've saved a lot and
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they realize whoa I've saved so much
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that I could essentially never save
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another dollar I could depend on
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investment returns to the things that I
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already have saved and my accounts would
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grow over coming years and decades to a
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certain point where I'd actually reach
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most of my financial goals in theory you
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could save so much by age 35 and maybe
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you live a pretty Frugal lifestyle so
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you just take your foot off the gas you
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let that money grow from age 35 to 55
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and by the time you're 55 that money has
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compounded so much that you could just
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retire and in the meantime if you wanted
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to you could say go from some high
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stress job that you were working in your
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early years to save all this money when
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you were 35 and you could go take your
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foot off the gas go to a lower stress
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job switch careers altogether you don't
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really have to save anymore because
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you've reached that Coast fi point and
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so Andrew is saying that he thinks based
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on his math based on the roughly
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$215,000 he has saved and a reasonable
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8% annual growth rate that he's about
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Coast fi which great for you Andrew now
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Andrew talks about a bridge account and
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Kenton in our second question also
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talked about a bridge account something
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to that extent the idea there is let's
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say Andrew or Kenton they want to retire
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well before age 59 and A2 and we know
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that traditional accounts whether it's a
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401k or Roth IRA they're not supposed to
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be touched until age 59 and a half now
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the fire movement the financial
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Independence Movement there is a lot of
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really good material out there about
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things like 72t withdrawals Roth
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conversion ladders the rule of 55 all of
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these Concepts that I just described all
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those strange terms that I just used
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describe a larger concept that allow ows
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people to access their retirement money
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earlier usually there's a caveat or an
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asterisk associated with that but there
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are many ways that financially
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independent people or people who are
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hoping to be fire right financially
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independent and retire early there are
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many ways that those people are actually
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able to tap into their retirement
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accounts 401K Roth IRA well before the
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age of 59 and a half I'm not going to
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dive into all of the details right now
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Andrew and Kenton but I recommend you
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guys look into that but I I want to
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address the questions a little bit more
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head on now there are some scenarios for
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some people where the best advice is
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fill up your 401k first fill up your
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Roth IRA First full stop use those tax
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advantages as much as you can and only
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then if you have extra money to save
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should you utilize a taxable brokerage
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account but there are other situations
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where the best advice is hey as soon as
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you start putting dollars away into
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long-term investment accounts you should
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strike a balance between tax deferred
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accounts and traditional 401k and the
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after tax Roth IRA the taxable brokerage
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right from the start you want to find a
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balance between these dollars that are
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in these qualified accounts can't kind
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of touch them to 59 a half except you
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sort of can as I just described whereas
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the taxable account is totally flexible
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right you can put money in today you can
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let it grow for the long run but if you
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decide to change your mind in a couple
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years you can pull the money back out
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you might have to pay some capital gains
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taxes you might have to pay some taxes
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on dividends and interest along the way
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that is the penalty if you will or
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that's the difference between the
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qualified account where you have tax
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deferred growth which is fantastic
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versus the taxable account where you do
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not have tax deferred growth now there
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are a few general rules that I use for
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these situations for example the first
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one the less defined someone's long-term
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goals are the more likely I am to
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encourage them to first take advantage
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of their tax advantaged accounts now why
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well because each year you are allotted
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a certain amount of tax advantage
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savings and if you don't use that
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opportunity in that given year you lose
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it you know we all know maybe most of us
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know what's the the 2024 max out for a
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401k I think is
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23,500 $23,500 for an individual W2
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worker so if you don't fill up that
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$23,000
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$23,500 bucket in 2024 whatever you
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don't use you don't get to make up for
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it next year so if someone's goals are
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relatively undefined and I don't really
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know much else about them in other words
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if they're kind of saving in a vacuum
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and we don't know too much about your
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future plans I would rather use this
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year's tax advantages as much as I can
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rather than lose it but then there's
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another side of the coin another general
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rule that I use which is the more
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defined someone's long-term goals are
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the better we can plan out the future
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and the more likely I am to recommend
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taxable Savings in concert with tax
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advantaged savings so Kenton if I know
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for example that you want to retire at
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age 45 which for you is 18 years away
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then I'll know that you'll need some
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sort of strategy to bridge the gap from
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age 45 to age 59 that strategy can
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involve the the early withdrawal
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strategies like a Roth conversion ladder
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or the 72t but it should also probably
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involve you leaning on taxable accounts
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so if I know someone's long-term goals
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really well then I'm more likely to find
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a reason for them to start saving money
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today into that flexible taxable
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brokerage account and then there's one
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more general rule that I use for these
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kind of situations more income the more
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income someone is earning the more
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likely they should be utilizing a
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taxable account in some way and there
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are a few reasons why uh I mean first
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off it's easier for people with higher
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incomes to quickly fill up their tax
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advantaged buckets you know we already
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talked about
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$23,500 into a 401k $7,000 into a Roth
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IRA well if you're earning $300,000 a
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year you should relatively easily be
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able to fill up those two buckets and
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then you still might be saving and so
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Boom the taxable the flexible taxable
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brokerage makes a lot of sense there but
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in another way I mean that was just kind
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of basic arithmetic the the marginal
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dollar actually means less to higher
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earners so not only is it simple
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arithmetic from the fact that $1 is just
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a lower percentage of income if you're
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earning that much money but actually
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Danny Conan's behavioral research
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supports that idea too that the $1,000
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First doll we earn is far less
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meaningful than the first dollar we earn
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the millionth dollar we earn is far less
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meaningful than the thousandth dollar we
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earn and there's a reason when you go
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into a small business a small restaurant
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there's a reason that they frame the
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first dollar that they ever earned up on
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the wall it's because that dollar is
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really important to them and the the the
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millionth dollar you earn simply isn't
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that important anymore so for higher
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earners I'm a bit less concerned about
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optimizing each and every dollar in
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their financial ecosystem and I'm more
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concerned about giving them flexibility
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so essentially this whole conversation
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that we're having whether to use these
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qualified retirement accounts like a 41k
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or Roth IRA or not that whole
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conversation is about a trade-off
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between total assets and tax savings and
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flexibility now when you earn less and
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when I don't know as much about your
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future goals I want to focus more on
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total assets and tax savings but as you
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earn more and more or as I'm more aware
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of your total Financial ecosystem that's
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where I start to recommend focusing more
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on time flexibility and maybe we don't
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have to optimize each and every dollar
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If instead we can gain more time so
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Kenton and Andrew I hope that answered
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your question guys thank you for writing
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in here's a quick ad and then we'll get
00:12:14
back to the show a few of you
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occasionally inquire about two different
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topics that are actually related the
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first type of question seeks out details
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about my professional life and the
00:12:23
wealth management firm that I work for
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here in Rochester New York the second
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type of question involves the best
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interest which operates with no
00:12:31
advertising no pushy sales no pay walls
00:12:34
and the question is how can the best
00:12:35
interest stay afloat well to answer both
00:12:38
of those questions I want to point you
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to episode 78 of the best interest
00:12:43
podcast I intentionally recorded episode
00:12:45
78 to shine light on those topics and
00:12:48
inform you how you can actually help the
00:12:50
best interest if you're so inclined so
00:12:53
if you've ever been curious about the
00:12:55
business of the best interest please go
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listen or download episode 78 and let me
00:13:00
know what you think question number two
00:13:02
comes from Justin Justin writes in and
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says as assumed to be dad which is true
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not exactly sure when this episode will
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publish but if you're listening to it
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after June most likely I am a dad by
00:13:14
that point so the question is as assumed
00:13:15
to be dad Jesse is there a personal
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finance topics for example 529 accounts
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that you've really been learning more
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about recently also are there any
00:13:23
Financial to-do items that you're
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choosing to cross off now I'm curious to
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hear how becoming a parent is changing
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how you're managing your money yeah
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Justin absolutely terrific terrific
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question I'm going to answer you kind of
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have it's a kind of a two-parter
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question but I'm going to answer it all
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at once there are some Financial to-do
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items that we've been Crossing off ahead
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of time in fact going to into this year
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we earmarked a pretty significant amount
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of our emergency fund or just our our
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savings our cash if you will for the
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birth itself because we're not on a
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platinum Cadillac Health Plan and so a
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good amount of the birthing costs are
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actually coming out of pocket and birth
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is a very expensive thing but also just
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there are all these ancillary baby costs
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as anyone with a baby can probably
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attest to there's the crib and there's
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clothing and there's diapers and there's
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bottles there's Just Accessories Galore
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there just so many little things car
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seats bassinets and just anyone I think
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many parents can relate to this and all
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this stuff's pretty expensive right I
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don't know if there's a baby premium in
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the same way that there's a wedding
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premium there's just so much baby stuff
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that it's pretty expensive so Kelly and
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I intentionally going into this year we
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looked at our total cash savings as I
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think all of us should be doing on a
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fairly regular basis you should be
00:14:39
looking at your total cash savings and
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understanding what's the purpose of
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those dollars there certain of those
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dollars are there purely as an emergency
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fund some of those dollars might be
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there because you're planning on buying
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a car in the next 12 months and it just
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makes sense to hold them in cash until
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you buy that car well for us because we
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knew this baby was coming around June we
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earmarked a certain number of dollars
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specifically for those baby costs that
00:15:03
said probably the biggest Topic at least
00:15:06
in my opinion the biggest topic that
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I've been thinking about is household
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cash flow for example will we be using
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Child Care daycare will my wife will
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Kelly go part-time to work either way if
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we go down either of those paths we're
00:15:19
talking about either significantly
00:15:21
higher monthly expenses with child care
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or we're talking about significantly
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lower household income if if one of us
00:15:28
go part-time to work we either we're
00:15:30
either going to be earning less or
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spending more maybe even both and so
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understanding how your monthly cash flow
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is changing how our monthly cash flow is
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changing understanding that potentially
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for a short period of time or depending
00:15:43
what you know we have different options
00:15:45
maybe we can actually operate at a
00:15:47
monthly loss for a short period of time
00:15:49
because we have the cash buffer behind
00:15:51
us to make up for that loss or perhaps
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we tighten the belt in a couple areas
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just to make sure that we're operating
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at a a net neutral on a monthly basis
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because we know that some of that cash
00:16:01
flow is going to be changing so I think
00:16:03
that that's probably the biggest topic
00:16:05
on my mind at least and Kelly and I we
00:16:07
do a quarterly financial review together
00:16:09
I think that's something that most
00:16:10
families or most Partners should do
00:16:13
maybe it doesn't have to be quarterly
00:16:14
maybe it's once a year maybe it's every
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six months but it's important to be on
00:16:18
the same page financially with your
00:16:19
partners and this is going to be no
00:16:21
different so when the baby's in that
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first 3 six months of the baby being
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around we're going to be paying
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attention and just seeing how are our
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finances changing changing how's our net
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worth statement our balance sheet
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changing and do we need to rethink our
00:16:34
future child raising techniques because
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you know is our monthly cash flow
00:16:38
healthy enough to support what we hope
00:16:39
to do there uh a couple other things
00:16:41
that I think I'm thinking about that
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most parents should be thinking about I
00:16:45
think most parents should be thinking
00:16:46
about it insurance needs so especially
00:16:49
assuming we do go down to one paycheck
00:16:51
or one and a half paychecks that could
00:16:53
place an even greater Insurance need on
00:16:55
our family life insurance that is right
00:16:57
we're talking about term life insurance
00:16:59
here because now all of a sudden we have
00:17:01
a mortgage to pay off and we also have
00:17:04
18 to 22 years of child related
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household outflows if I got hit by a bus
00:17:10
tomorrow I would want to make sure that
00:17:12
Kelly and and the child were in a good
00:17:13
place so insurance needs that's a big
00:17:15
one and that leads into just the kind of
00:17:17
the General Estate Planning guardianship
00:17:20
guardianship really is coming up for the
00:17:21
first time estate planning is more
00:17:23
serious than ever when you have a child
00:17:25
in your family again depending on when
00:17:27
this episode comes out out I'm recording
00:17:30
an episode with Andy Hill of marriage
00:17:32
kids and money Fame and marriage kids
00:17:35
and money if you haven't heard of it is
00:17:36
a terrific Financial podcast about
00:17:38
marriage kids and money and Andy and I
00:17:41
are going to go deep on a lot of the
00:17:42
financial topics that new parents face
00:17:45
so great question Justin I hope that was
00:17:47
a good answer for you next question
00:17:49
comes from g g says I'm close to 100%
00:17:53
large cap stocks in my portfolio and
00:17:55
it's worked great for me for quite a few
00:17:57
years now and as time has gone by I sold
00:18:00
more and more of my small cap my midcap
00:18:03
my International and I've gone all in on
00:18:05
large cap stocks and it's working it's
00:18:07
hard for me to see why this isn't a good
00:18:09
strategy going forward I'm close to
00:18:12
retirement but why should I change so G
00:18:15
thanks for the question since you and I
00:18:17
went back and forth via email about this
00:18:19
and I know a little bit about you g I'm
00:18:21
going to use a unique Western New York
00:18:23
analogy as part of my answer so imagine
00:18:25
I replaced the words large cap stocks in
00:18:28
your question with Kodak and let's say
00:18:30
it's 1985 so you're a person in 1985 and
00:18:33
you say I'm close in my portfolio to
00:18:35
being 100% in Kodak stock and it's
00:18:37
worked great for me for quite a few
00:18:38
years now as time has gone by I've sold
00:18:40
more and more of my other companies my
00:18:42
small midcap my International companies
00:18:44
my International stocks and I've gone
00:18:46
all in on Kodak and it's working it's
00:18:48
hard for me to see why this isn't a good
00:18:50
strategy going forward now my example
00:18:53
sounds a little bit crazy I know because
00:18:55
we're smart investors here we would
00:18:56
never go 100% into one single company
00:18:59
and of course I've intentionally
00:19:01
cherry-picked a company that we all know
00:19:03
went bankrupt but some of the underlying
00:19:05
principles of why that codak statement
00:19:08
is kind of crazy should ring true for
00:19:10
your portfolio G maybe not to the same
00:19:13
degree but the same underlying
00:19:15
principles are there you are going
00:19:17
further and further into one single
00:19:19
asset class large cap stocks so there no
00:19:22
bonds in your portfolio despite
00:19:24
approaching retirement granted I know as
00:19:27
we discussed G and and the listeners
00:19:28
don't know this G will be receiving a
00:19:30
pension of some sort and it's worth
00:19:32
knowing that a pension serves as fixed
00:19:34
income which should lessen G's need for
00:19:37
any Bonds in their portfolio but it's
00:19:40
still it's worth a second look to
00:19:42
understand I mean you have no other
00:19:43
diversifying assets outside of large cap
00:19:46
stocks you're all in on the US there's
00:19:48
no Geographic diversification there's no
00:19:50
International stocks for example if you
00:19:52
look at Market history and and when you
00:19:54
look at what someone might consider a
00:19:55
diversified or balanced portfolio a lot
00:19:58
of times you're going to see something
00:19:59
along the lines of a 7030 portfolio in
00:20:02
the stock portion meaning 70% US Stocks
00:20:05
30% International stocks maybe 6535
00:20:09
maybe even 6040 60% US Stocks 40%
00:20:12
International stocks and one of the
00:20:14
reasons why is because when you zoom out
00:20:16
which we need to do here when you zoom
00:20:18
out over Market history you would see
00:20:20
that the best risk adjusted Returns come
00:20:23
from that mix of us and international
00:20:25
stocks somewhere between 6040 and 7030
00:20:28
another thing G is that you're all in
00:20:31
large cap stocks you know no small caps
00:20:33
no uh mediumsized companies just the few
00:20:36
100 biggest US companies and nothing
00:20:39
else now it's far far far from the worst
00:20:42
asset allocation I've ever seen But I do
00:20:45
really think it needs some polishing
00:20:46
some pretty important polishing we
00:20:48
cannot and we should not say that the
00:20:51
recent past has been this one specific
00:20:53
way and therefore I'm going to assume
00:20:56
that the future will be that exact same
00:20:58
way or using specifics here you know the
00:21:00
recent past has been most beneficial for
00:21:02
investors in 100% large cap stocks and
00:21:06
therefore the future will also be most
00:21:08
beneficial for investors in large cap
00:21:10
stocks it could be that way but I highly
00:21:12
highly doubt it and I don't only doubt
00:21:14
it because it's you know it's not like
00:21:16
there's some randomization here that
00:21:18
it's like oh you rolled double sixes now
00:21:20
and what are the odds you rolled double
00:21:21
sixes again that's not it at all and yes
00:21:23
we do need to accept that fact that we
00:21:25
can't predict the future and we need to
00:21:27
accept that fact especially in investing
00:21:29
that the past does not dictate the
00:21:31
future but there's something even more
00:21:33
important G and I want to impart John
00:21:36
bogle's famous what he calls the iron
00:21:38
rule of investing and the iron rule of
00:21:41
investing is reversion to the mean
00:21:43
reversion to the mean mean meaning
00:21:45
average reversion meaning in time all
00:21:48
things tend to track back to the average
00:21:51
in investing no asset class can
00:21:54
outperform forever that's a big part of
00:21:56
what John bogal was saying asset classes
00:21:58
they could outperform for a year for a
00:22:00
few years maybe even for a decade but
00:22:02
the asset classes that tend to
00:22:04
outperform for a decade well they tend
00:22:06
to underperform the next decade and in
00:22:08
the long run an asset class that has a
00:22:10
similar risk profile to one another so
00:22:13
say domestic stocks and international
00:22:15
stocks they're both equities they have a
00:22:16
relatively similar risk profile to one
00:22:18
another they will tend to have a similar
00:22:20
reward profile to one another in the
00:22:23
long run meaning when their reward
00:22:25
profiles fall out of sync for a certain
00:22:27
period of time eventually they will
00:22:29
likely revert and we're coming off a
00:22:31
period to G's defense from 2009 to
00:22:35
basically today May of 2024 where US
00:22:39
Stocks have been crushing International
00:22:41
stocks specifically us large cap stocks
00:22:44
the S&P 500 has been one of if not the
00:22:46
best performing Equity asset classes for
00:22:49
the last 15 years and that's terrific
00:22:52
but what John Bogle has preached to us
00:22:54
and John Bogle is not the only one I
00:22:55
mean most people who who talk about
00:22:58
divers would agree with this idea the
00:23:00
idea is that nothing can outperform
00:23:02
forever I think I used that that term
00:23:04
before and the fact that large cap
00:23:06
stocks have been so good for the past 15
00:23:09
years I don't think we should abandon
00:23:10
them all together because we can't
00:23:12
predict the future but it also doesn't
00:23:14
mean that we should put all of our chips
00:23:16
into large cap stocks in fact if
00:23:18
anything it might be time to dial down
00:23:21
that risk diversification is the way we
00:23:24
don't know what the best performing
00:23:25
asset classes are going to be in the
00:23:27
next 6 months the next 6 years the next
00:23:29
60 years we're not exactly sure but
00:23:31
eventually all asset classes revert back
00:23:34
to the mean at least they have so far in
00:23:36
history again hard to tell what the
00:23:38
future will hold but this is where some
00:23:41
basic financial planning comes into play
00:23:43
for G now I would start G by developing
00:23:45
your net worth statement maybe you've
00:23:47
already done that and a 10-year
00:23:48
projected cash flow maybe you've already
00:23:50
done that that cash flow would if I were
00:23:53
looking at it it would help me
00:23:54
understand what your outbound cash needs
00:23:56
are from your portfolio in the short
00:23:58
term you know the next couple years the
00:24:00
medium-term and eventually in the long
00:24:01
term and I'd want to understand
00:24:03
questions about what you want to do with
00:24:05
your money over the rest of your life
00:24:07
and even what you hope to do with your
00:24:08
money after you pass away now all of
00:24:10
those types of input would then allow us
00:24:12
to to back into a more appropriate asset
00:24:15
class for you it might involve different
00:24:18
asset classes of of equities right
00:24:20
diversifying into different midcap small
00:24:22
cap International those kind of things
00:24:24
it might involve some bonds for some
00:24:26
fixed income it might involve some Al is
00:24:28
real estate whatever it may be without
00:24:30
knowing too much more of your your story
00:24:33
G I am pretty hesitant to to suggest
00:24:36
something like 100% large cap S&P 500
00:24:39
stocks I understand how well it has
00:24:41
worked for you for the past 15 years or
00:24:44
however long that's been your portfolio
00:24:45
design and one of the most challenging
00:24:48
things in investing is this thought
00:24:50
process that occurs when something goes
00:24:52
really really well for us in investing
00:24:54
and we go oh we figured it out let's put
00:24:56
more of our chips into that specific bet
00:24:58
oh amazing the S&P 500 has done so well
00:25:01
for me I'm going to put more there and
00:25:02
more there and more there and if there's
00:25:04
anything we can learn from investing
00:25:06
history from Market history from the
00:25:09
wisest people involved in investing that
00:25:11
can be a dangerous game Warren Buffett's
00:25:14
pretty good at it Warren Buffett is very
00:25:15
famous for saying when you find a good
00:25:17
investment you go all in but what Warren
00:25:20
Buffett is doing the way that he's able
00:25:22
to analyze and understand the models of
00:25:24
specific businesses right Warren
00:25:26
Buffett's very much a person who invests
00:25:28
in specific businesses and his analysis
00:25:31
techniques and his patience and his
00:25:33
mindset his temperament is what makes
00:25:35
him really unique he's not the only one
00:25:37
right many there are many individual
00:25:39
investors out there who have found great
00:25:41
success with similar tactics no offense
00:25:44
to anybody out there listening one thing
00:25:45
that those investors aren't doing is
00:25:47
writing in DIY emails to a podcast
00:25:50
saying hey I've got all my chips on this
00:25:52
bet tell me why I'm wrong the idea is if
00:25:55
you're here listening if you're like me
00:25:57
which is you're kind of a DIY maybe
00:25:59
you've got that little extra expertise
00:26:02
diversification is your friend it
00:26:04
reduces the range of potential outcomes
00:26:07
that you have and that that's really big
00:26:09
when it comes to financial planning if
00:26:11
you've already won the game so to speak
00:26:13
if you've put yourself in this great
00:26:14
position in terms of your asset size as
00:26:17
you go into retirement and all you want
00:26:18
to do is is live that successful
00:26:20
retirement you don't have to worry too
00:26:22
much about whether your portfolio is way
00:26:23
up or way down you need to reduce your
00:26:26
range of potential outcomes and the way
00:26:28
you do that is through diversification
00:26:30
the S&P 500 and maybe this will be my
00:26:32
last point cuz I know I'm kind of
00:26:33
beating it to death but the S&P 500 is
00:26:35
very capable of losing 20 to 40% over a
00:26:39
couple years it's also very capable of
00:26:40
going up 20 to 40% over a couple years
00:26:43
but one thing I would hate to see happen
00:26:44
to you g is to see this sudden shocking
00:26:48
reversion to the mean over the next six
00:26:50
or 12 or 18 months where the S&P 500
00:26:54
essentially starts to underperform the
00:26:56
rest of the world or stocks drastically
00:26:59
underperform bonds and you're sitting
00:27:02
there 100% into the S&P 500 and maybe
00:27:05
you lose 30% of your net worth over the
00:27:07
next 18 months if you hold for the long
00:27:10
run maybe most of that 30% drop Will
00:27:13
recover but it's going to be pretty hard
00:27:15
mentally to live through that and it's
00:27:18
going to be pretty hard mentally to live
00:27:19
through that knowing that you could have
00:27:20
been in a little bit more of a balanced
00:27:22
place so anyway that is the argument
00:27:24
that's one of many arguments for a
00:27:26
little bit of diversification a little a
00:27:28
little bit of balance remembering John
00:27:30
bogle's lesson of reversion to the mean
00:27:32
G since I know that we've had a
00:27:34
conversation before by all means feel
00:27:36
free to reach out to me and and we can
00:27:38
discuss it again but I hope that answer
00:27:40
helps you think about what you should be
00:27:42
doing moving forward here's a quick ad
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and then we'll get back to the show
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strings attached subscription at bestin
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interest. Blog the next question comes
00:28:35
in from Whitney Whitney says Hey Jesse
00:28:38
my husband's employer offers both a
00:28:40
traditional 401k and a Roth 401k with a
00:28:44
6% match he is interested in
00:28:46
contributing to both accounts for tax
00:28:48
diversification we are currently 30
00:28:50
years old but we plan to retire before
00:28:52
55 so we have another early retirement
00:28:54
question now a Roth IRA so not the 1ks
00:28:58
you listeners but a Roth IRA seems more
00:29:01
flexible since we can access
00:29:02
contributions without penalty before age
00:29:05
59 a half but then he misses out on his
00:29:08
401k match if Whitney's husband
00:29:10
contributes directly to an IRA there's
00:29:12
there's no employer match in an IRA so
00:29:14
Whitney's question is can a Roth 401k be
00:29:17
rolled over to a Roth IRA without
00:29:20
separating from the employer is that
00:29:22
something that could be done say once a
00:29:24
year thank you for all your hard work
00:29:26
well you're welcome Whitney thank you
00:29:27
for your question we're going to answer
00:29:29
a few different embedded questions wi
00:29:31
within your question Whitney but I'm
00:29:33
going to start directly with what you
00:29:34
asked me which is can a Roth 401k be
00:29:37
rolled over to a Roth IRA without
00:29:39
separating from the employer so some of
00:29:41
you listening might know this some of
00:29:42
you might not know this but typically in
00:29:45
in most 401K plans but not all 401K
00:29:48
plans the only way to roll over a 401k
00:29:52
to an IRA is if the employee in this
00:29:55
case Whitney's husband is no longer
00:29:58
working with the employer to whom the
00:30:00
401K is attached so I've shared with you
00:30:03
before right I was an aerospace engineer
00:30:04
at L3 Harris which is a very large
00:30:06
engineering firm National engineering
00:30:08
firm and the question is for you know if
00:30:10
L3 Harris has a typical 401K then the
00:30:13
only way I could roll that 401K money
00:30:16
over into an IRA was after I left the
00:30:19
company L3 Harris as long as I was an
00:30:22
employee there the 401K had to stay
00:30:24
there and now that that rule that idea
00:30:27
that your 401 has to stay with the
00:30:29
employer inside the 401K plan as long as
00:30:31
your employee that specifically is
00:30:33
written into each employer's individual
00:30:37
unique 401k plan now some employers
00:30:40
though they have a different rule or a
00:30:42
different set of rules written into
00:30:44
their 401k plan that allow something
00:30:46
called an inservice rollover and as the
00:30:49
name might imply as you might be able to
00:30:51
guess what that permits is that while
00:30:54
you're still in service at your employer
00:30:56
while you're still working you can
00:30:58
actually do rollovers to IRAs this is
00:31:01
very interesting for a number of reasons
00:31:03
for one it allows something called the
00:31:06
mega backdoor Ira I won't go into too
00:31:09
much detail there but essentially it
00:31:11
allows you to put away a lot of money
00:31:14
every year into a backdoor uh Ira into a
00:31:16
backdoor Roth IRA so so that's worth
00:31:19
understanding if especially if you're a
00:31:20
high earner you might want to look up
00:31:22
that Mega backdor Roth iray or we can
00:31:24
talk about it another time but more
00:31:26
specific to Whitney question Whitney I
00:31:29
would have your husband reach out to his
00:31:30
employer and for any of you listening if
00:31:32
this is something you're interested in
00:31:33
you can reach out to your employer and
00:31:35
you can ask them hey am I allowed to do
00:31:37
an inservice rollover from my 401k plan
00:31:40
if yes that's a pretty good thing and it
00:31:43
might open up some financial planning
00:31:44
doors for you that previously you
00:31:46
thought closed now I want to go to
00:31:48
another part of Whitney's question
00:31:50
though which is the traditional 401K
00:31:53
versus the Roth 401k a matching fund
00:31:56
from the employer in either case and the
00:31:58
husband being interested Whitney's
00:31:59
husband I should say being interested in
00:32:01
contributing to both accounts for tax
00:32:03
diversification now tax diversification
00:32:06
is certainly a smart thing it's
00:32:08
something that I do personally I
00:32:09
contribute as much as I can to my
00:32:11
traditional 401k and then I also
00:32:14
contribute to a Roth IRA well as long as
00:32:16
I can CU as you might know there are
00:32:18
some income limits to contributing to a
00:32:20
Roth IRA either way I I kind of want to
00:32:22
have money in both pots traditional and
00:32:24
rth and the reason why of course is
00:32:26
because in retirement we don't know
00:32:28
exactly what the tax code will look like
00:32:30
in that future time and it's good to
00:32:32
have some tax-free assets some tax
00:32:34
deferred assets and also some taxable
00:32:37
assets some Assets in a taxable
00:32:39
brokerage account because it it allows
00:32:41
us to play some games in any individual
00:32:44
year depending on what the federal tax
00:32:46
code looks like you know so and so gets
00:32:47
elected president taxes go up so and so
00:32:49
gets elected president taxes go down
00:32:52
depending on the tax scenario you might
00:32:53
say I'm G to pull extra for my
00:32:55
traditional account this year tax rates
00:32:57
are pretty low and I don't mind paying
00:32:59
low income tax in over these years so
00:33:01
I'm going to pull on my traditional
00:33:03
accounts versus other years you say oh
00:33:04
tax rates are pretty high I'm going to
00:33:06
Plum my Roth accounts because it's
00:33:07
taxfree anyway so I'm just going to
00:33:09
avoid those High tax rates altogether so
00:33:11
it is smart what you're talking about
00:33:13
withy or at least the logic is very
00:33:15
sound but I'm I'm going to point out one
00:33:17
potential thing for you and your husband
00:33:19
to think about Whitney or listeners for
00:33:20
you to think about and that is what is
00:33:23
your tax rate right now your total
00:33:25
household tax rate right now for versus
00:33:28
what do you think your tax rate will
00:33:29
look like when you retire Whitney you
00:33:31
and your husband you you you're 30 right
00:33:33
now you plan to retire before you're 55
00:33:36
ostensibly there going to be some years
00:33:38
in your early retirement when you're not
00:33:39
collecting Social Security you're no
00:33:41
longer collecting W2 income your total
00:33:43
income is going to be pretty low maybe
00:33:45
your only income those years is going to
00:33:47
be withdrawals from say a 72t or a Roth
00:33:51
conversions those are going to be the
00:33:52
only way that you're realizing income in
00:33:54
those years and your future income tax
00:33:56
rate in those years is going to be
00:33:57
pretty low whereas maybe right now
00:33:59
Whitney maybe you and your husband are
00:34:01
earning a great living and maybe you're
00:34:02
actually in a pretty high federal income
00:34:05
tax bracket right now maybe you're in
00:34:06
the 35% tax bracket right now Whitney
00:34:11
but in those early years of retirement
00:34:12
you're only going to be in the 12% tax
00:34:14
bracket so my question to you would be
00:34:17
since you have that difference in tax
00:34:20
brackets 35% today 12% in the future
00:34:23
might it make sense for you to maximize
00:34:26
your traditional accounts right now now
00:34:28
to save 35 cents on the dollar right now
00:34:31
knowing that in the future you're only
00:34:32
going to have to pay 12 cents on the
00:34:34
dollar in tax that might make sense by
00:34:37
splitting between traditional and Roth
00:34:39
right now in that hypothetical scenario
00:34:41
that I just painted for you and your
00:34:42
traditional dollars you're saving 35
00:34:44
cents on the dollar but in those Roth
00:34:46
dollars you're choosing to pay 35 cents
00:34:49
of tax on the dollar that you might be
00:34:51
able to save and in retirement sure
00:34:54
you're going to be able to pull on those
00:34:55
Roth dollars taxfree but you already
00:34:57
paid the $5 cents on the dollar today so
00:34:59
anyway it it's just something maybe you
00:35:01
and your husband have already thought
00:35:02
about it Whitney but for those listeners
00:35:04
who are considering some sort of tax
00:35:06
diversification strategy in their own
00:35:08
portfolio it is worth understanding why
00:35:10
are you doing it in the first place and
00:35:11
it's worth understanding what's your tax
00:35:13
rate today what might your tax rate be
00:35:15
in the future and this is just a big
00:35:17
part of tax planning in general are
00:35:19
there going to be specific years in the
00:35:20
future when you can likely pay much
00:35:23
lower tax rates and thus realize taxes
00:35:26
at that future time time instead of
00:35:28
realizing taxes today we've talked about
00:35:30
Roth conversions on this on the show
00:35:32
before and've written about Roth
00:35:33
conversions a lot on the blog and that's
00:35:35
all Roth conversions are the whole Roth
00:35:37
conversion logic is oh can I realize
00:35:40
some taxes today at a low tax rate
00:35:43
convert those dollars to Roth and then
00:35:45
avoid paying higher tax rates later
00:35:47
especially when we get to something like
00:35:48
rmd required minimum distribution age so
00:35:52
Whitney I know that was a lot that was
00:35:53
some food for thought the upshot the
00:35:56
summary is uh your husband should ask
00:35:58
his employer he should ask HR or maybe
00:36:00
they might just point him straight to
00:36:01
the 401K administrator if he's allowed
00:36:04
to do inservice rollovers it's worth
00:36:06
knowing either way even if he is allowed
00:36:08
to do inservice rollovers it's worth
00:36:11
asking yourselves how well you
00:36:13
understand your current and your future
00:36:14
tax rates and whether it's worth
00:36:17
contributing to that Roth 401k today in
00:36:20
the first place Andrew and Kenton and
00:36:23
Justin and G and Whitney thank you guys
00:36:26
so much for those terrific questions
00:36:28
please listeners keep them coming if you
00:36:30
enjoyed this AMA episode please shoot me
00:36:32
an email jessb bestin interest. blog let
00:36:34
me know or leave a review on Apple
00:36:36
podcast let me know and please send me
00:36:38
questions for future amas as long as you
00:36:41
guys enjoy this I'm going to make this a
00:36:43
regular Cadence on the show some fun AMA
00:36:45
episodes I find it pretty enjoyable to
00:36:47
think about and answer your questions
00:36:49
and so this is a win-win what do they
00:36:51
say rising tide lifts All Ships and we
00:36:53
are investing in knowledge together so
00:36:56
thank you all for
00:36:58
[Music]
00:36:59
listening thanks for tuning in to this
00:37:02
episode of the best interest podcast if
00:37:04
you have a question for Jesse to answer
00:37:06
on a future episode send him an email at
00:37:08
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00:37:40
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