00:00:00
Hey, before we start this episode, if
00:00:01
you're looking for a nerdy personal
00:00:03
finance Christmas present, look no
00:00:04
further. I'm giving away 25 gifts to my
00:00:07
audience this holiday season. Listeners
00:00:08
here know that I give away a SuperSoft
00:00:10
podcast t-shirt every episode. More
00:00:12
shirts are coming your way, but if
00:00:13
you're not a shirt person, don't worry.
00:00:15
I'm also happy to send you one of my top
00:00:16
five financial planning and investing
00:00:18
books. So, you can either get a
00:00:20
Supersoft t-shirt or a great book for
00:00:22
Christmas. There are three free ways for
00:00:24
you to enter. And yes, you can enter
00:00:25
more than once. In short, the three ways
00:00:27
are you can leave a rating and review on
00:00:29
Apple Podcasts. You can leave a rating
00:00:31
and comment on a Spotify episode of the
00:00:34
podcast, or you can share a link to my
00:00:36
blog or to this podcast or to a specific
00:00:38
episode of the podcast on your preferred
00:00:40
social media channel. And then just
00:00:42
shoot me a screenshot of your review or
00:00:44
of you sharing it online. Just send me a
00:00:46
screenshot to enter your name. You can
00:00:48
email your screenshot to
00:00:49
00:00:51
again, a rating and review on Apple or a
00:00:54
rating and comment on Spotify or sharing
00:00:56
via social media and then you can email
00:00:58
me a screenshot. I'll track all the
00:01:00
entries and announce the winners next
00:01:01
week. I'll reach out to you and you can
00:01:03
let me know if you'd prefer a shirt or
00:01:04
one of the books. Happy holidays.
00:01:07
Welcome to Personal Finance for
00:01:09
Long-Term Investors, where we believe
00:01:11
Benjamin Franklin's advice that an
00:01:13
investment in knowledge pays the best
00:01:15
interest both in finances [music] and in
00:01:17
your life. Every episode teaches you
00:01:19
personal finance and long-term investing
00:01:21
in simple terms. Now, here's your host,
00:01:24
Jesse Kramer. Welcome to Personal
00:01:27
Finance for Long-Term Investors, episode
00:01:29
124. I'm Jesse Kramer. By day, I work at
00:01:31
a fiduciary wealth management firm
00:01:32
helping clients nationwide. You can
00:01:34
learn more at bestinterest.blog/work.
00:01:36
The link is in the show notes. By night,
00:01:38
I write the best interest blog and I
00:01:39
host this podcast. I also put out a
00:01:41
weekly email newsletter, all which help
00:01:42
[music] busy professionals and retirees
00:01:44
avoid mistakes and grow their wealth by
00:01:46
simplifying their investing, taxes, and
00:01:47
retirement planning. And today is our
00:01:49
11th AMA ask me anything episode. I'll
00:01:52
answer questions today about picking a
00:01:54
15-year versus a 30-year mortgage or
00:01:56
vice versa. Uh when it makes sense to
00:01:58
stop funding a health savings HSA
00:02:01
account or to start using that account
00:02:03
to refund your own past medical
00:02:05
expenses. Third, an interesting specific
00:02:07
question about balancing Roth
00:02:09
conversions, ACA, healthcare premiums,
00:02:12
and capital gains. You know, how do you
00:02:14
uh balance these different interests in
00:02:16
any given tax year without accidentally
00:02:18
shooting yourself in the tax foot as it
00:02:20
were? And last, should a confirmed DIYer
00:02:23
or a confirmed boglehead even consider
00:02:25
hiring a financial adviser? But first,
00:02:27
we'll do a quick review of the week.
00:02:29
This one comes from weather guy number
00:02:30
two, who says, "Fivear review. Excellent
00:02:33
personal finance insights and
00:02:34
perspective. Thank you, Jesse, for your
00:02:37
well-th thoughtout information and
00:02:38
content. I'm so glad I found your blog
00:02:40
and podcast. Your deep dives on the most
00:02:42
relevant and important money and estate
00:02:43
planning concepts and ideas are
00:02:45
insightful and delivered in a way that
00:02:47
is easier to understand for both the
00:02:48
novice and experienced DIYer. I truly
00:02:51
appreciate the time you put into this
00:02:52
and your wise counsel. Keep up the great
00:02:54
work. Well, weather guy, thank you very
00:02:56
much for those kind words and a super
00:02:58
soft podcast t-shirt can go your way in
00:03:00
the mail. Weather guy, please just drop
00:03:02
me an email to jessevestinterest.blog.
00:03:04
Send me your shirt size and mailing
00:03:06
address and we will get you a super soft
00:03:08
podcast t-shirt sent out your way. Thank
00:03:10
you, weather guy. And now on to our
00:03:12
first AMA question. John G wrote in and
00:03:15
asked, "Why should you pick a 15-year
00:03:17
mortgage over a 30-year mortgage and
00:03:19
vice versa?" So, first, let's start with
00:03:21
some obvious trade-offs, or at least the
00:03:22
things that most consumers would notice
00:03:24
right away. A 15-year mortgage comes
00:03:26
with all the following. Usually, it has
00:03:28
a lower interest rate. And if you
00:03:30
combine that lower interest rate with
00:03:32
the half the loan term, right, 15 years
00:03:34
against 30 years, there are two obvious
00:03:36
reasons why the 15-year mortgage would
00:03:38
involve significantly less interest
00:03:40
overall. You know, a 30-year mortgage,
00:03:42
here's just an example. A 30-year
00:03:44
mortgage at a 6% interest rate that
00:03:46
borrows $400,000. So, that'll just be
00:03:48
our baseline. 30 years, 6% rate,
00:03:51
$400,000 of borrowing. You'll obviously
00:03:54
pay the $400,000 in principal back, but
00:03:56
that loan is also going to end up
00:03:58
including $463,000
00:04:00
in interest. A 15-year mortgage, though,
00:04:03
at that same 6%. It doesn't even have
00:04:05
the lower interest rate, even though we
00:04:06
know it probably would. But if we just
00:04:08
assume the same exact 6% interest rate,
00:04:10
also borrowing $400,000, that loan is
00:04:13
only going to have $27,000 of interest
00:04:15
payments. $27,000. And again, that was
00:04:18
against $463,000
00:04:21
for the first mortgage. But the payments
00:04:23
themselves on a 15-year mortgage are
00:04:25
higher because you only have half the
00:04:27
payments to repay the full loan. So
00:04:29
again, if we look at the same loan as
00:04:31
above, the 30-year loan that we quoted
00:04:33
above would have a $2,400 per month
00:04:36
payment in principal and interest, while
00:04:38
the 15-year loan has a $3,400 per month
00:04:43
payment. 24,400 on the 30-year loan,
00:04:46
$3,400 on the 15-year loan. And that
00:04:49
means that your monthly household cash
00:04:50
flow is certainly more negatively
00:04:52
impacted during those 15 years. And
00:04:55
therefore, a buyer, a borrower would
00:04:57
risk defaulting on the loan if they
00:04:59
cannot keep up with those monthly
00:05:01
payments. And and since the monthly
00:05:03
payment is higher for a 15-year loan,
00:05:05
15-year mortgage, financial planners
00:05:07
consider it to some extent an extra
00:05:09
forged savings. You know, in other
00:05:10
words, instead of taking the monthly
00:05:12
savings from a 30-year mortgage and
00:05:14
investing the funds into a a money
00:05:16
market account or the stock market,
00:05:18
you're essentially taking your extra
00:05:19
money every month, and you're investing
00:05:20
it in your house, which over the long
00:05:22
run is likely to appreciate. So, maybe
00:05:24
that'll turn out to be a good thing. And
00:05:26
that also means that the 15-year
00:05:28
mortgage has less affordability. You
00:05:29
know, if your family limit on household
00:05:31
spending is $2,500 per month, period,
00:05:34
well, that's the maximum payment that
00:05:36
you can afford to make. And the longer
00:05:38
your mortgage, the more house you could
00:05:40
afford for that same $2,500 per month
00:05:43
payment. And actually, just now, I
00:05:45
haven't dug into the details of this at
00:05:47
all. I'm recording this on Sunday,
00:05:48
November 9th. And I think some news
00:05:50
stories about this particular topic came
00:05:52
out on Friday, November 7th, involving
00:05:55
50year mortgages and and something.
00:05:57
President Trump, I think, wants to
00:05:58
standardize some sort of 50-year
00:06:00
mortgage. And whether good or bad, you
00:06:02
know, that same $2,500 per month payment
00:06:05
over 50 years could buy you even more
00:06:07
house than a 30-year mortgage could.
00:06:09
It's just a matter of if you want to be
00:06:10
in in that level of housing debt for 50
00:06:13
years or 30 years or 15 years or 10
00:06:15
years or not at all. So, I do want to go
00:06:18
down a slightly different argument right
00:06:19
now on this mortgage debate, and I call
00:06:22
it the invest the difference argument.
00:06:24
And the argument goes like this. So,
00:06:26
let's revisit our scenario earlier where
00:06:28
a 15-year mortgage required $3,400 per
00:06:31
month payments and our 30-year mortgage
00:06:34
required $2,400 per month payments. And
00:06:37
let's imagine two people, one in each
00:06:39
scenario. They're paying off their
00:06:40
mortgage, but they're also long-term
00:06:42
investors like all of us listening, and
00:06:44
and they're looking to put some of their
00:06:45
money to work for the long run in in
00:06:48
some sort of long-term investments. And
00:06:49
you can compare these two people and you
00:06:51
could say, "Well, in years 1 through 15,
00:06:54
the lower payment, the $2,400 per month
00:06:57
payment, it's $1,000 lower than the
00:06:59
$3,400 per month payment. That might
00:07:01
allow that person to invest an extra
00:07:04
$1,000 per month that the 15-year
00:07:06
mortgage borrower, they they just don't
00:07:08
have that extra $1,000 a month right
00:07:10
now. So, for the first 15 years, having
00:07:12
the 30-year mortgage allows you to save
00:07:15
and and invest an extra $1,000 per
00:07:17
month. But then in years 16 through 30,
00:07:21
the 15-year mortgage has stopped. That
00:07:23
higher monthly payment has stopped. And
00:07:25
thus, that allows the first borrower
00:07:27
with a 15-year mortgage to quickly catch
00:07:30
up to some extent, right? They can plow
00:07:31
the full $3,400 a month that was going
00:07:34
to their mortgage. Now, they can start
00:07:36
investing that. And meanwhile, the
00:07:38
second borrower, the 30-year mortgage,
00:07:40
they're kind of still stuck at that
00:07:41
$1,000 per month investment amount. We
00:07:44
can look at these two kind of compounded
00:07:46
returns over the full 30 years and we
00:07:49
could vary our anticipated investment
00:07:51
returns or we could vary the actual
00:07:53
interest rates on the mortgages too
00:07:54
which would affect the monthly payment
00:07:56
portions or at least the way the two
00:07:58
monthly payments compare to one another.
00:08:00
And we could ask, does one of these two
00:08:02
investors end up in a better spot after
00:08:04
30 years? you know, does having the
00:08:06
30-year mortgage, which allows you to
00:08:08
start putting more money away sooner in
00:08:11
some sort of investment account, does
00:08:12
that end up doing better than the
00:08:14
15-year mortgage? And it's worth doing
00:08:16
any sort of precise math for your
00:08:18
specific situation. But if I look at
00:08:20
this situation, and I assume mortgage
00:08:22
rates about where they are today, which
00:08:24
is 6%. And I assume long-term stock
00:08:26
market averages, which is a a 10%
00:08:29
nominal return, we can use that. I will
00:08:31
say I recently published an article
00:08:33
where I'm I'm more and more inclined to
00:08:35
use something more like an 8% nominal
00:08:37
return. It's up for debate, but either
00:08:39
case, pick your number based on kind of
00:08:41
the assumptions that you want to bake
00:08:42
into your financial plan. And yes, this
00:08:44
is a a situation where the mortgage uh
00:08:47
rate is fixed. It's not affected by
00:08:49
inflation. And so the investment returns
00:08:52
should also be not affected by
00:08:54
inflation, which is why we want to use
00:08:55
nominal returns here, not real returns.
00:08:58
And at the end of the day, it's a lot of
00:09:00
preamble, I know, the math becomes
00:09:02
pretty stark and pretty clear. The
00:09:04
person with a 30-year mortgage actually
00:09:06
comes out on top because they were able
00:09:08
to put more money to work for the long
00:09:10
run from an earlier age. And I think
00:09:13
this should kind of make sense because
00:09:15
it's as simple as this. Would you rather
00:09:17
put more money toward a 6% loan where
00:09:19
you know your return is a guaranteed 6%.
00:09:23
Or would you rather put that money
00:09:24
toward an investment that I just told
00:09:26
you, right? I have dictated in my
00:09:28
spreadsheet will return eight or nine or
00:09:31
10% per year. [snorts] The choice is
00:09:33
just as obvious as I've defined it,
00:09:35
right? 10% or 9% or 8% is all bigger
00:09:39
than 6%. So I would rather put money
00:09:42
toward an investment that I am saying
00:09:44
will return 8 or 9 or 10% per year
00:09:46
instead of putting that extra money
00:09:48
toward a 6% loan. Now, of course, the
00:09:51
hard part and the nuance and the real
00:09:53
devil in this in the details because we
00:09:55
we realize that the 10% stock market
00:09:57
return or 8% is simply not guaranteed.
00:10:01
The question then becomes how confident
00:10:03
do you want to be that the stock market
00:10:04
will return that 8 n 10% per year over
00:10:08
the next 30 years when we really zoom
00:10:10
out? Or even how confident do you want
00:10:11
to be that the stock market will return
00:10:13
7% per year over the next 30 years?
00:10:15
because the math still works out well if
00:10:17
we choose to compare a a 6% return from
00:10:20
loan repayment versus a 7% return from
00:10:23
an investment. Then we need to take that
00:10:25
math and I think we need to layer on top
00:10:28
of that math the feeling of debt. Uh
00:10:31
this one is certainly personal as I
00:10:33
speak into this microphone. I am many
00:10:35
hundreds of thousands of dollars in
00:10:37
mortgage debt and yet I don't really
00:10:39
feel that bad about it. I don't lose
00:10:41
sleep over it. To me, I see my mortgage
00:10:43
payments as a form of rent and I see my
00:10:45
emergency fund as being able to pay that
00:10:47
rent for many, many months if it needs
00:10:49
to. And while I would love to be free of
00:10:51
that debt, I mean, who wouldn't want to
00:10:53
be free of debt? I don't necessarily
00:10:55
feel a burning desire to to rid myself
00:10:57
of it. Kind of my brain is at this
00:10:59
all-in good time perspective. That's how
00:11:01
I feel about it. It'll it'll be paid off
00:11:03
in good time. But other people don't
00:11:04
feel that way about their debt. Some
00:11:06
people are truly allergic to debt, like
00:11:08
oil and water. They do lose sleep over
00:11:11
debt, no matter the interest rate. And
00:11:12
to that person, I'm not sure if my
00:11:15
investment math from a couple minutes
00:11:16
ago will do them any good. To them, that
00:11:19
15-year mortgage, you know, get out of
00:11:21
debt ASAP, that's the clear path to
00:11:23
them. And ultimately, I I don't see any
00:11:25
major issues with that. It's just like
00:11:27
when, you know, some retirees are
00:11:29
comfortable with a 7030 portfolio,
00:11:31
others would rather have a 50-50
00:11:33
portfolio. Maybe others want to have a
00:11:35
3070 portfolio. I mean, we know the
00:11:37
math, right? We we know that one is very
00:11:40
likely not definitely but very likely to
00:11:42
outperform the other over the long run.
00:11:45
One of those three investors is
00:11:46
certainly likely to be less volatile
00:11:48
than the other two over the long run. We
00:11:50
know that one of those retirees will
00:11:52
likely be able to outspend, outgive,
00:11:54
outbequest the others. And does that
00:11:56
make one portfolio right and another one
00:11:58
wrong? I don't really think so. as long
00:12:00
as we know going in kind of eyes wide
00:12:03
open how our choices are going to affect
00:12:06
our our long-term outcomes. And back to
00:12:08
mortgages, we should also talk about
00:12:09
liquidity. I think that's an important
00:12:11
topic, something I've seen written about
00:12:12
and spoken about plenty. So, it's not
00:12:14
like I'm inventing a new idea here, but
00:12:16
I do think it's something that most of
00:12:18
the 101 info doesn't seem to cover. So,
00:12:20
let's say you have $50,000 in your bank
00:12:22
account in your emergency fund. you owe
00:12:25
$200,000 still on your mortgage and
00:12:27
you're asking yourself, should you use
00:12:28
some of the 50k to pay down that
00:12:30
mortgage? Now, on the one hand, you're
00:12:32
reducing your debt. Yep, you're reducing
00:12:34
your future interest payments. Terrific.
00:12:35
That's great. But on the other hand, you
00:12:37
are taking a very liquid part of your
00:12:40
personal balance sheet and you are
00:12:41
transferring it to an illquid part of
00:12:44
your balance sheet. In other words, it's
00:12:46
very easy to turn cash into home equity,
00:12:49
but it's not nearly as easy to turn that
00:12:51
home equity back into cash. And I know
00:12:54
helilocs exist, home equity loans exist
00:12:56
for sure. It's certainly not impossible
00:12:58
to turn home equity back into cash at
00:13:01
all. But before you ever throw extra
00:13:03
money at your mortgage, I do think it's
00:13:05
worth asking, do I have any liquidity
00:13:07
needs that I can think of, is this truly
00:13:09
excess cash wasting away on my balance
00:13:12
sheet? Or here's another great litmus
00:13:14
test question, and and that is, do I
00:13:16
need to make this extra mortgage payment
00:13:19
right now? Or would I simply feel more
00:13:21
comfortable waiting 3 months, 6 months,
00:13:23
12 months before making the extra
00:13:24
payment? Because the mortgage is still
00:13:26
going to be there a year from now and
00:13:28
the impact from the extra payment will
00:13:29
still be really strong, really great if
00:13:31
I wait this extra 12 months. Do I feel
00:13:34
so comfortable making the extra uh
00:13:36
mortgage payment right now that that I'm
00:13:38
just I'll go ahead and do it or would I
00:13:40
feel considerably more comfortable by
00:13:42
waiting 12 months? I think that's an
00:13:44
important question to ask yourself. And
00:13:45
in a parallel way, taking a 15-year
00:13:47
mortgage is akin to making extra forced
00:13:51
mortgage payments every single month.
00:13:53
You are intentionally making yourself
00:13:55
less liquid for the next 15 years. That
00:13:58
can be totally reasonable and totally
00:13:59
okay, but you want to think about it
00:14:01
first. So, John, thank you for the
00:14:03
excellent question. Here's a quick ad
00:14:06
and then we'll get back to the show. I
00:14:07
send a free weekly email to thousands of
00:14:09
readers that shares two simple things,
00:14:11
just two. The first are my new articles
00:14:13
and podcasts, so you'll never miss when
00:14:15
I publish new content. And the second is
00:14:17
my favorite financial content from other
00:14:19
corners of the internet, so you can see
00:14:20
what's been helping me the most. But
00:14:22
Jesse, I don't want another email.
00:14:24
>> I hear you. I make this newsletter
00:14:26
short, sweet, and full of essential
00:14:28
information, and readers enjoy that.
00:14:30
About 85% of newsletter subscribers are
00:14:32
engaging with the newsletter more than
00:14:34
once a month. They're enjoying it, and
00:14:35
you will, too. You can subscribe for
00:14:37
free on the homepage at
00:14:38
bestinterest.blog, blog and you'll get a
00:14:40
free PDF of my white paper titled the
00:14:42
step-by-step guide to building your
00:14:44
retirement paycheck. That's right, a
00:14:46
free weekly email that thousands of
00:14:48
people like you are already reading, a
00:14:49
free white paper to help you plan for
00:14:51
retirement, and you can sign up for free
00:14:53
at bestinterest.blog.
00:14:55
Now, moving on, both Jeff and Tad had
00:14:58
similar smart questions about HSA
00:15:00
accounts. Essentially, their questions
00:15:02
boil down to when does it make sense to
00:15:04
stop funding an HSA account and or to
00:15:08
start using that account to actually pay
00:15:10
for your medical expenses or refund your
00:15:13
own past medical expenses. And and for
00:15:15
some background, of course, there is a
00:15:17
little bit of an assumption built into
00:15:18
this question, but it's a very
00:15:19
reasonable assumption. And that
00:15:21
assumption is that there is a quote
00:15:23
unquote best way to use an HSA health
00:15:26
savings account. Uh many people might
00:15:28
think to use their HSA as a place to
00:15:30
make tax-free deposits. Yep, we all know
00:15:32
that. And then use that money to pay the
00:15:34
near-term current medical bills. We've
00:15:37
got a daughter here at home and and she
00:15:39
goes to the doctor and my wife and I, we
00:15:41
go to the doctor. And so some people
00:15:42
would say, "Oh, you know, max out your
00:15:44
HSA, Jesse. $8550 for a couple this year
00:15:48
in 2025 and then just turn around and
00:15:50
immediately use some of that money just
00:15:52
to pay your medical bills." And that's
00:15:53
fine. You're still getting that tax-free
00:15:55
deposit upfront, which is great. But a
00:15:58
numerically better way of using an HSA,
00:16:00
at least historically, involves
00:16:02
depositing that money into that account
00:16:04
taxree. Excellent. Investing that money
00:16:07
and then waiting, right? Investing that
00:16:09
money because the HSA is a taxfree
00:16:12
growth account just like your 401k or
00:16:15
IAS are. There's no annual taxes on any
00:16:18
sort of capital gains or interest or
00:16:20
dividends in the account. Awesome. And
00:16:22
then we we wait and we let those
00:16:24
investments grow. And again, they do so
00:16:26
taxfree. And then some years or even
00:16:28
decades down the road, you could use
00:16:30
today's HSA dollars that you save today
00:16:32
for those future medical bills. And the
00:16:34
capital gains again on your investments
00:16:37
are totally free at that point, right?
00:16:38
You can withdraw money for a qualified
00:16:41
need in the in the future. Totally
00:16:43
taxfree. And the best part and and this
00:16:46
is kind of that secret tech that some
00:16:48
people know about and and some people
00:16:49
don't is that you can save medical
00:16:51
receipts during the interim years and
00:16:53
decades and then retroactively reimburse
00:16:56
your past expenses using HSA money. You
00:16:59
can keep that in your back pocket during
00:17:01
retirement, especially if you happen to
00:17:02
be close for some sort of um income
00:17:04
cliff like a whether it's a state cliff,
00:17:07
an Irma threshold, an ACA threshold,
00:17:09
something like that. If you need some
00:17:11
extra money in retirement or maybe in
00:17:13
your early retirement years, one thing
00:17:15
you could potentially do is reimburse
00:17:18
yourself from your HSA using past
00:17:21
receipts that you have saved, thus
00:17:23
injecting some extra cash flow into your
00:17:26
life from your HSA totally tax-free by
00:17:30
reimbursing yourself for previous
00:17:31
expenses, previous medical expenses.
00:17:34
Thus, you've kind of solved your in-ear
00:17:36
cash flow need without realizing any
00:17:38
extra taxes and therefore without
00:17:40
pushing yourself above whatever income
00:17:43
cliff you were worried about. That's
00:17:44
pretty sweet. But there's a a possible
00:17:46
downside here. And I should say there's
00:17:48
a possible downside with the HSA account
00:17:51
in general. And this downside is going
00:17:53
to steer us back toward the heart of the
00:17:55
question. When does it make sense to
00:17:56
stop funding an HSA or to start using
00:17:58
the HSA to refund your own medical
00:18:00
expenses? And the downside is the risk
00:18:03
of dying with HSA money on your balance
00:18:05
sheet. And of course, this requires the
00:18:07
caveat that always exists, which is that
00:18:09
dying stinks for many, many reasons, and
00:18:11
money shouldn't really be that far up
00:18:13
the top of the list. But the show is
00:18:15
about financial planning and long-term
00:18:16
investing. So, of course, we're going to
00:18:18
talk about it from the money angle. If
00:18:19
you have complaints about that, I get
00:18:21
it. Thank you in advance. And you can
00:18:22
send your complaints to uh scream into
00:18:24
the void at bestinterest.blog. That's
00:18:26
the email address for all of our
00:18:28
complaints. Like many qualified
00:18:30
accounts, you need to name a beneficiary
00:18:32
on your HSA. Now, for many married
00:18:34
people, they will name their spouse.
00:18:35
Makes sense. And that's fine because if
00:18:37
your spouse inherits your HSA, nothing
00:18:40
really changes. They get to use the HSA
00:18:42
funds the same way before and after your
00:18:44
death. And by the way, HSA funds can be
00:18:46
used for any medical expenses in your
00:18:48
direct family, whether yours, a spouse's
00:18:51
medical expenses, or a child, assuming
00:18:53
that child is a tax dependent. So that
00:18:55
that tax dependency test really is the
00:18:58
metric of merit when it comes to who can
00:19:00
uh use your HSA funds for their medical
00:19:03
bills. But back to the whole beneficiary
00:19:04
thing. So again, we as we said, not a
00:19:07
big deal if your beneficiary is your
00:19:08
spouse. They get to use the HSA the same
00:19:10
exact way you would have. But what if
00:19:12
you don't have a spouse anymore? What if
00:19:14
your spouse inherits your HSA, but then
00:19:16
they die and they leave the HSA to
00:19:18
another heir, say a grandchild or or
00:19:20
just one of your children or or a
00:19:22
grandchild or something like that, just
00:19:23
a non-spouse heir. When a non-spouse
00:19:26
heir inherits an HSA, the account ceases
00:19:28
to be an HSA on the date of the owner's
00:19:30
death, and the entire fair market value
00:19:33
is included in the beneficiary's taxable
00:19:35
income for that year. The beneficiary
00:19:38
must pay ordinary income tax on the full
00:19:40
amount. So, in case that kind of flew
00:19:42
over your head because it was all a
00:19:44
bunch of, you know, tax and estate
00:19:45
planning jargon, you've got $50,000 in
00:19:48
an HSA. You leave it to your son and you
00:19:50
die. On the day you die, the entire
00:19:53
$50,000 HSA moves to your child as
00:19:58
taxable money. No longer as HSA money,
00:20:00
but as taxable money. And it's all
00:20:03
$50,000 are considered taxable income to
00:20:05
your child all in that one year. There's
00:20:08
no 10-year rule like there would be with
00:20:09
an IRA. It's all taxable money all at
00:20:12
once. So, that is a lot of unintended
00:20:16
taxable income for your heir. And it
00:20:18
might essentially entirely negate all of
00:20:20
the tax benefit that you realized from
00:20:23
your HSA in the first place because
00:20:25
we're taking some of what otherwise
00:20:27
would have been lower capital gains tax
00:20:30
rates on your HSA growth. you were
00:20:33
negating capital gains taxes inside of
00:20:36
the HSA wrapper, but now we're taking
00:20:38
all of those gains and we're charging
00:20:40
higher income rates to your heir on
00:20:43
those same dollars. So, you might
00:20:45
totally negate all of the tax benefits
00:20:47
realized by the HSA and then some. And
00:20:49
your heir might end up paying more in
00:20:51
taxes than you ever would have if you'd
00:20:54
like put the money in a taxable account
00:20:55
in the first place. Like, we're kind of
00:20:57
flirting with that territory here. And I
00:20:59
will say I did learn one interesting
00:21:01
workaround as I research this question
00:21:03
more just in case it ever happens to you
00:21:05
or someone you know the beneficiary can
00:21:07
use. So again let's go back to that
00:21:09
example and say your child is inheriting
00:21:11
the HSA. Your child is a beneficiary. So
00:21:14
in this case the child your beneficiary
00:21:16
your child can use the inherited HSA
00:21:18
dollars to pay the deceased person's
00:21:20
medical bills almost as if the deceased
00:21:23
person were using their own HSA for
00:21:25
their own benefit. And I think that
00:21:26
passes the common sense test. The
00:21:28
beneficiary therefore gets a tax
00:21:30
deduction for those dollars used in this
00:21:32
way. And again, that passes the common
00:21:34
sense test. So, as an example, someone
00:21:37
dies with a $50,000 medical bill and
00:21:39
$50,000 in an HSA. In the worst case
00:21:43
scenario, the hospital bill would get
00:21:45
paid by the estate of the deceased
00:21:47
person using their taxable dollars and
00:21:49
then the HSA passes to the beneficiary
00:21:52
and is all taxed as income. So, that's
00:21:54
the worst case scenario, kind of taxable
00:21:56
on on both ends. But in the best case
00:21:58
scenario, the hospital bill gets paid
00:22:00
using the HSA dollars, you know, that
00:22:02
the beneficiary has to step up to the
00:22:04
plate and and make that payment and the
00:22:06
URSTW $50,000 in the taxable estate
00:22:09
stays in the estate to be distributed
00:22:11
out at a stepped up basis. You could say
00:22:13
there's a weird thing going on here. The
00:22:15
beneficiary is likely just one person,
00:22:17
whereas the estate might be distributed
00:22:18
out to many people. So, will the one
00:22:21
beneficiary decide to be utilitarian and
00:22:24
use the HSA in this way, thereby saving
00:22:26
all the other estate inheritors some
00:22:28
serious tax money? This is the corner
00:22:30
within the corner within the corner
00:22:32
case. You know, we're deep inside the
00:22:33
the daddy longleg spiderweb at the back
00:22:35
of the attic at this point. But I
00:22:37
digress. Let's work our way back out of
00:22:38
this HSA inception. So, ideally, we do
00:22:42
not want to pass HSA assets down to our
00:22:45
non-spouse heirs. I'll say that again.
00:22:47
Ideally, we do not want to pass HSA
00:22:50
assets down to our non-spouse heirs.
00:22:53
Therefore, the inspiring question here
00:22:55
makes a lot of sense. When does it make
00:22:57
sense to stop funding an HSA account and
00:23:00
start using that account to refund your
00:23:02
own medical expenses? Most people
00:23:04
listening are maybe within 5 to 10 years
00:23:06
of retirement or in retirement itself.
00:23:08
So, I think it's important to point out
00:23:10
to all of you listening, HSA money can
00:23:13
pay for Medicare premiums. HSA money can
00:23:17
pay for most long-term care costs. HSAs
00:23:21
can pay for most long-term care
00:23:23
insurance premiums. However, HSA money
00:23:26
cannot pay for ACA Obamacare premiums.
00:23:30
That's an important difference. Now,
00:23:31
some of you might think you've heard
00:23:33
something recently that that sounds to
00:23:35
the contrary of this, but what you've
00:23:37
heard is that many um bronze and lower
00:23:40
ACA plans are now HSA eligible, meaning
00:23:43
that you can save money in an HSA within
00:23:46
that plan, almost like it was a high
00:23:48
deductible health plan, but you can't
00:23:50
use the HSA money to pay the insurance
00:23:53
premium itself. So, again, Medicare,
00:23:56
yes. Long-term care costs, yes.
00:23:58
Long-term care insurance, yes. ACA, no.
00:24:02
Cobra health insurance, in case you're
00:24:04
on Cobra, the answer is yes. You can use
00:24:06
HSA money to pay Cobra costs. Here's
00:24:08
another really valuable stat, and this
00:24:10
one comes from KFFF, a a terrific
00:24:12
healthcare think tank, and this comes
00:24:14
from back in 2022. So, we can maybe
00:24:15
inflate this number a little bit, but
00:24:17
the stat is that the average Medicare
00:24:19
beneficiary, so again, this is someone
00:24:20
65 years or older on Medicare.
00:24:22
[clears throat] The average Medicare
00:24:24
beneficiary spent a total of $6,300 on
00:24:27
out-ofpocket health care costs. And that
00:24:29
includes their Medicare premiums. So if
00:24:32
we inflate it up to today, maybe we
00:24:33
round up, we're probably going to get
00:24:35
something closer to like $7,000 a year
00:24:37
in healthare costs. And that's out of
00:24:40
pocket again, including Medicare
00:24:41
premiums. What I take that to mean to
00:24:43
some extent is that between age, say 65
00:24:46
and 85, it's not unreasonable to assume
00:24:49
that someone might be paying $140
00:24:50
$150,000 in out-ofpocket costs per
00:24:54
person. And again, this is just the
00:24:55
average. Some of us will be lower,
00:24:57
especially if we're on the healthier
00:24:58
end. I know that some of us will be
00:24:59
higher. I get it. But I'm just saying
00:25:01
that because if you're sitting here at
00:25:03
age 55, you have $100,000 saved up in
00:25:06
your HSA account. I do think you have
00:25:08
some interesting choices in front of
00:25:09
you. One of those choices asks, are you
00:25:12
going to be that average person or that
00:25:13
average couple who might spend $140,000
00:25:16
per person on out-of- pocket healthcare
00:25:18
cost in retirement? Now, personally, I
00:25:21
believe in game theory. And the game
00:25:23
theory for most of our investment
00:25:25
accounts is well, if I die, then the
00:25:28
next person in line inherits something
00:25:29
as good, if not better, than what I had
00:25:32
in terms of tax treatment. But as we
00:25:34
discussed, that is not the case for HSA
00:25:36
accounts. Therefore, I would encourage
00:25:39
us to heavily lean toward securing HSA
00:25:42
reimbursements earlier in life. Now, how
00:25:44
early probably depends on your health a
00:25:46
little bit, depends on your spouse's
00:25:47
health a little bit. Option one is, you
00:25:49
know, use your HSA for your kids and and
00:25:51
not that much for investment growth.
00:25:53
That's fine. That's fine. A spreadsheet
00:25:54
will tell you that it's not
00:25:55
mathematically ideal, but life isn't
00:25:58
lived inside a spreadsheet. Option two
00:26:00
is to try to pay current medical bills
00:26:02
out of pocket and letting your HSA
00:26:03
compound until age X and then you
00:26:06
reimburse yourself. Well, what exactly
00:26:07
is age X? I'm going to say right here
00:26:10
that for me and and if I was if a client
00:26:13
was asking me this today, I would say
00:26:15
age X is your late 50s. And I'm trying
00:26:17
to be a little bit of that, you know,
00:26:19
aerospace engineer like I was in my
00:26:21
former career here because we're already
00:26:23
deep in the corner of a corner case. And
00:26:25
if [snorts] we look at mortality data,
00:26:28
your your late 50s is when mortality
00:26:30
data grows from kind of this very
00:26:32
dimminimous and linear growth to a more
00:26:35
noticeable and actually exponential
00:26:37
growth. And by the time 65 and 70
00:26:40
arrive, the mortality graph is curving
00:26:43
up pretty hard. And because we want to
00:26:45
avoid dying with unspent HSA dollars,
00:26:47
I'd rather not see any sort of
00:26:49
significant HSA balance by that age. And
00:26:52
again, this doesn't mean that the
00:26:54
average person is going to die by 65 or
00:26:56
70. That's not what I'm saying at all.
00:26:58
But what I am saying is that the game
00:27:00
theory to me says we don't want to die
00:27:02
with an HSA. So once mortality starts
00:27:05
becoming more and more and more
00:27:07
realistic, I would rather not have an
00:27:09
HSA on my balance sheet anymore. If
00:27:11
you're still working and still
00:27:12
contributing to an HSA at that age, age
00:27:15
65 or 70, that's totally fine. I would
00:27:17
just recommend spending down that
00:27:19
balance to a reasonable degree every
00:27:21
single year. If you're 65 and still
00:27:24
working and still contributing to an
00:27:25
HSA, I don't think you need to save your
00:27:27
receipts and let the HSA grow anymore,
00:27:30
right? I think you're capturing a great
00:27:32
tax advantage on the front end. Maybe
00:27:34
you've been capturing it for decades and
00:27:35
decades and decades and now you just
00:27:37
need to go ahead and and spend that
00:27:39
money. So, back to the uh original
00:27:41
question askers, uh Jeff and Tad, I hope
00:27:44
those thoughts help you guys out. Let me
00:27:45
know what you think. Question three is
00:27:47
from Allison and I think it's kind of an
00:27:49
interesting question. I wanted to share
00:27:50
with it because I want you all to get a
00:27:52
little bit of a glimpse inside of some
00:27:54
real financial planning and to get a
00:27:56
glimpse inside the problem solving
00:27:58
process and some of the communication
00:27:59
and the back and forth and some of the
00:28:01
talk around cause and effect cuz there
00:28:04
are lots of causes and effects in our
00:28:05
financial lives and I think you'll see
00:28:07
that here with Allison. So Allison wrote
00:28:09
into me and you know she said thank you.
00:28:10
She heard me on choose FI originally.
00:28:12
Awesome. She has a question for my AMA.
00:28:14
Allison and her husband retired early,
00:28:16
not crazy early. Uh she's 57, he's 61.
00:28:19
They're selling a rental property in
00:28:21
2026. Okay, so here's an important
00:28:23
point. They want to sell a rental
00:28:24
property in 2026. So the capital gains
00:28:27
from that rental property will blow up
00:28:29
the chances of their income coming in
00:28:31
below the 400% poverty level in order to
00:28:34
get ACA premium tax credits. And she
00:28:37
knows that their ACA premiums will be
00:28:39
about $3,000 a month in 2026. Uh that's
00:28:43
her words. uh and uh they're going to
00:28:45
try to come in under that income
00:28:47
threshold in the years after 2026 up
00:28:50
until they're 65. Why 65? Well, that's
00:28:52
when Medicare kicks in. So Allison's
00:28:54
question is since they don't have to
00:28:56
worry about trying to keep their income
00:28:57
below that ACA cliff in 2026, you know,
00:29:00
she's kind of saying she's thrown in the
00:29:02
towel. The capital gains from the house
00:29:03
are going to blow up that that income
00:29:05
cliff for her. So, since she knows she's
00:29:08
going to be after that income cliff, are
00:29:10
there other moves she might want to
00:29:11
make, they might want to make in 2026,
00:29:14
she's thinking about Roth conversions or
00:29:16
taking some IRA distributions so she has
00:29:18
spending money during the years when uh
00:29:20
she needs to keep her income low. Thanks
00:29:22
for any thoughts you might have. So, I
00:29:25
had some questions for her because at
00:29:26
the end of the day, even though her
00:29:28
question was so detailed, which it
00:29:30
really was, we still need to collect all
00:29:32
of the puzzle pieces before we can
00:29:33
really begin providing good financial
00:29:36
planning answers. And anytime in your
00:29:38
lives, I know a lot of you are DIYers,
00:29:40
anytime you want to answer a real
00:29:42
question about your financial plan, you
00:29:44
really can't approach it just from one
00:29:46
angle. You need to take all of the
00:29:49
financial plan into account every single
00:29:50
time. That's why I've used this analogy
00:29:52
before that financial plans are are kind
00:29:54
of like spiderw webs where everything's
00:29:56
interconnected and sometimes you're
00:29:58
you're tugging on the web over here and
00:30:00
you really think you're only going to
00:30:02
have an effect over on this one side of
00:30:03
the web and you don't realize you're
00:30:05
you're pulling all the little strands
00:30:07
all over the web and and you don't know
00:30:09
where you might break something on the
00:30:10
other side of the web actually. So what
00:30:12
did I reach out to Allison and ask her
00:30:14
in response? Well, I asked her
00:30:15
specifically, how much in capital gains
00:30:17
are you expecting from this home sale? I
00:30:19
also asked her if she's aware of
00:30:21
depreciation recapture because that's a
00:30:23
different type of real estate tax that
00:30:25
many people aren't aware of when it
00:30:27
comes to selling a second property or
00:30:29
selling some sort of rental property. I
00:30:31
asked her if not for the home sale, what
00:30:33
would she expect her AGI, that's line 11
00:30:36
of the 1040 federal tax return, what
00:30:39
would she expect her AGI to be for 2026,
00:30:42
depending on life circumstances? And I
00:30:44
told her that this year's tax return
00:30:45
might be a good proxy for that. And the
00:30:47
last question I asked her, and I was
00:30:49
being nosy in her lifestyle, I was
00:30:51
curious if she was aware of the last 2
00:30:53
years in five rule, if that could
00:30:55
possibly be a creative solution for her
00:30:56
problem. And if you don't know that to
00:30:58
avoid capital gains on a sale of a
00:31:00
house, you must have owned and used it
00:31:03
as your primary residence for at least
00:31:05
two of the previous 5 years leading up
00:31:07
to the sale. It's called the two and
00:31:09
five rule. And sometimes, especially if
00:31:11
someone maybe has a second home or um
00:31:14
you know, they move out a primary home,
00:31:16
they start using it as a rental and then
00:31:17
they go to a second home, it's important
00:31:19
to think, well, if you've lived in the
00:31:21
house for two of the last 5 years, you
00:31:23
can totally negate any capital gains.
00:31:25
Does that mean you move back into the
00:31:27
house for 2 years? Maybe. What's usually
00:31:30
a lot easier is you just sell the house
00:31:32
within the five first five years after
00:31:34
you've left it or you just make sure
00:31:35
that you you sell the house quickly
00:31:37
after you move out to to avoid those
00:31:38
capital gains. Allison was nice enough
00:31:40
to respond and she was familiar with the
00:31:42
two and 5-year rule, but they don't want
00:31:44
to live there anymore. Okay, they just
00:31:45
want to simplify their lives and be free
00:31:46
of the rental. She did have some
00:31:48
estimates for capital gains around
00:31:49
$210,000 in capital gains, but she also
00:31:52
noted there will be realtor costs,
00:31:54
depreciation, recapture, and she was
00:31:56
earmarking $35,000 from the sale in
00:31:59
order to pay her 2026 ACA cost, which
00:32:02
she was estimating at $3,000 a month.
00:32:04
That makes sense. As for her adjusted
00:32:06
gross income, AGI, she was saying since
00:32:08
they're both not working, they can kind
00:32:10
of create their own income by taking
00:32:11
withdrawals. and between an annuity that
00:32:14
her husband receives and some interest
00:32:15
income and social security because she
00:32:18
says her husband will start taking
00:32:19
social security in mid 2026 when he
00:32:21
turns 62. They'll probably have a
00:32:24
minimum of $80,000 in income without
00:32:27
taking any distributions. So then after
00:32:29
2026 they'll be able to easily come in
00:32:31
under the ACA cliff. And okay, now she
00:32:34
said a couple interesting things here. I
00:32:36
know sometimes at least me I I like to
00:32:38
read. I'm easier I'm better at reading
00:32:39
than I am at listening. So, I apologize
00:32:41
if you're listening to this podcast
00:32:43
right now and some of the details were
00:32:44
kind of hard to keep track of, but
00:32:46
Allison said a couple interesting things
00:32:48
in her response. So, I wrote back to her
00:32:50
and I said, "As with all retirement tax
00:32:52
situations, this is multiaceted. As I
00:32:55
was writing, I was playing around with a
00:32:56
1040 tax calculator. I used Allison's
00:32:59
response to make some assumptions in
00:33:00
that tax calculator and I told her I'd
00:33:03
recommend that she play around with all
00:33:05
the precise numbers for herself or
00:33:07
consult an accountant to doublech
00:33:09
checkck the assumptions that that I
00:33:11
made. So I made an assumption of $5,000
00:33:13
in taxable interest, $50,000 of annuity
00:33:16
payments, all taxable, $20,000 of social
00:33:18
security, only $17,000 of which is
00:33:20
taxable, $50,000 of depreciation
00:33:23
recapture, and $160,000 of long-term
00:33:26
capital gains. Now, Allison's original
00:33:29
question was about Roth conversions in
00:33:31
this year. And the set of assumptions
00:33:33
that I used for her, all those income
00:33:35
assumptions I just made put her in an
00:33:37
interesting place called the 27% tax
00:33:39
bracket. It's an interesting place
00:33:41
because if you look at federal tax
00:33:42
brackets, well, there is no 27% bracket.
00:33:45
But here's what's happening actually
00:33:46
under the hood. So, right now, Allison's
00:33:49
interest, annuity, social security, and
00:33:50
depreciation recapture are all subject
00:33:52
to income tax brackets. Now, I will note
00:33:55
for those listening, depreciation
00:33:57
recapture has some pretty interesting
00:33:58
income tax rules and limits, but I don't
00:34:01
think those rules will come into play
00:34:02
here. And the income in this case,
00:34:04
$122,000 minus the $30,000 standard
00:34:07
deduction. That $92,000 becomes subject
00:34:10
to income tax, placing Allison and her
00:34:12
husband in the 12% marginal bracket.
00:34:14
Wonderful. Then we layer on top of that
00:34:16
the $160,000 in long-term capital gains.
00:34:19
Some of those gains will be taxed at 0%
00:34:21
but most will be taxed at 15%. Now, what
00:34:25
happens if Allison were to choose to do
00:34:27
a Roth conversion? In other words, what
00:34:30
happens when we add just one more dollar
00:34:32
of taxable income into her tax return?
00:34:34
Right? Let's just say she does a Roth
00:34:35
conversion of $1. The first thing is
00:34:37
that dollar of income gets taxed at 12%.
00:34:40
Yep, that makes sense. But then also due
00:34:43
to the layering rules, $1 of her capital
00:34:46
gains that was previously being taxed at
00:34:49
zero gets pushed up into the 15%
00:34:52
bracket. So what actually happens here?
00:34:55
What this results in 27 cents of new tax
00:34:59
on $1 of Roth conversion or effectively
00:35:02
a a 27% marginal rate. And that quote
00:35:06
unquote 27% bracket will affect Allison
00:35:09
for a little while, but then eventually
00:35:11
it drops away because all of her capital
00:35:13
gains will then be at 15%. There's no
00:35:15
more step up from zero to 15%. And at
00:35:18
that point, her marginal income tax
00:35:20
bracket will have matured from 12% up to
00:35:23
22%. So she'd likely have $100,000 of
00:35:27
space in the 22% bracket to execute Roth
00:35:29
conversions plus any state income tax
00:35:32
for her if applicable. And in summary,
00:35:35
my belief is that most of her 2026 Roth
00:35:38
conversions, if she chose to do them,
00:35:40
would incur 27% or 22% taxes on the
00:35:43
federal level. But in other future
00:35:46
years, if I use those same exact income
00:35:48
assumptions as I did before, except I
00:35:51
remove the depreciation recapture and I
00:35:53
remove the capital gains because those
00:35:55
are one-time things from this the sale
00:35:56
of the house. It appears that she would
00:35:59
probably have $50,000 per year of space
00:36:01
in the 12% bracket to execute Roth
00:36:04
conversions. So, is that worth doing
00:36:07
something about? I think to be honest,
00:36:09
it probably depends on the size of her
00:36:10
traditional IRA and 401k bucket. If it's
00:36:13
a huge bucket, then it might be worth
00:36:16
accelerating some Roth conversions into
00:36:18
2026, but if it's not a huge bucket,
00:36:20
then it probably won't be worth it. I
00:36:22
guess when it really comes down to it in
00:36:24
that case, I would ask Allison and her
00:36:26
husband to in their financial plan work
00:36:29
all the way out to RMD age and try to
00:36:31
give an approximation of what their RMD
00:36:34
tax brackets will be. And if their RMD
00:36:37
tax brackets are 24%, 32% or higher,
00:36:41
yeah, well then maybe it makes sense for
00:36:42
them to accelerate some Roth conversions
00:36:44
in 2026. But if they're paying lower
00:36:47
taxes on those RMDs in the future, then
00:36:50
I don't see the need to do any sort of
00:36:52
accelerated Roth conversions in her
00:36:54
case. But that's not all. I played
00:36:56
around with the assumption that
00:36:58
Allison's husband was going to start
00:37:00
collecting social security in 2026, but
00:37:02
I raised my eyebrows at that assumption.
00:37:04
I guess what I should say is I included
00:37:06
that assumption in all the income
00:37:08
numbers so far in this analysis, but I
00:37:10
raised my eyebrows at it because
00:37:12
considering the extra income from the
00:37:14
home sale in 2026, I would have Allison
00:37:17
consider delaying or have her husband
00:37:19
consider delaying his social security
00:37:21
claiming until 2027. I'm just doing some
00:37:24
mental math and it's telling me to
00:37:26
definitely analyze that trade-off. One
00:37:28
more important note actually is that
00:37:29
Allison and her husband are probably
00:37:31
going to be in the um the net investment
00:37:34
income tax nit zone for 2026 due to
00:37:37
their AGI being over $250,000. So every
00:37:40
dollar of AGI over 250,000 gets hit with
00:37:44
an additional 3.8% tax which makes the
00:37:47
whole Roth conversion in 2026 idea even
00:37:50
less attractive. And I know that's a
00:37:52
lot. Back to you listeners. I know
00:37:54
that's a lot, but those are the kind of
00:37:56
considerations and and conversations and
00:37:59
questions and back and forth and cause
00:38:01
and effect that should go into any sort
00:38:04
of financial planning question. And I
00:38:06
know for a fact that there are plenty of
00:38:07
people out there who maybe would look at
00:38:10
Allison's circumstances or what I should
00:38:12
say is they would be in Allison's shoes
00:38:14
and they'd say, "You know what? At the
00:38:15
end of the day, I'm probably going to be
00:38:16
okay no matter what. So, I'm just going
00:38:18
to go with my gut and I'm going to sell
00:38:20
this house and I'm going to claim social
00:38:22
security early and I'm going to do a
00:38:24
bunch of Roth conversions, too. And
00:38:25
that's fine. And it really is fine cuz
00:38:27
in this case, maybe Allison's going to
00:38:29
be totally okay either way. But when it
00:38:32
comes to actually trying to optimize
00:38:34
what we're doing here, again, taking the
00:38:36
soft side out of it, all we're trying to
00:38:38
do is optimize the numbers. There are
00:38:40
ways to optimize those numbers. I mean,
00:38:41
that's the point. And if you don't know
00:38:43
all the way that these different things
00:38:45
interact and if you don't know all the
00:38:47
ways in which your your actions might
00:38:49
actually be costing you money, well,
00:38:52
that's where having some, you know,
00:38:53
whether it's improving your own DIY
00:38:55
knowledge or leaning on a professional.
00:38:57
The fact of the matter is there are
00:38:59
better ways to do this than than what
00:39:01
maybe the the average DIYer would think.
00:39:04
Here's a quick ad and then we'll get
00:39:06
back to the show. Serious question. Why
00:39:08
do podcasters constantly ask for ratings
00:39:11
and reviews? Yes, they do help highlight
00:39:13
our shows to new listeners. They help
00:39:15
strangers find us on Apple Podcast and
00:39:17
Spotify. It's totally true and a good
00:39:19
reason to ask for ratings and reviews.
00:39:21
But I have something more important, at
00:39:23
least more important to me. I want to
00:39:26
know if you like this stuff. I want to
00:39:28
know if you like my podcast episodes, my
00:39:30
monologues, my guests, the information I
00:39:32
share with you and the stories I tell. I
00:39:34
want to improve and make your listening
00:39:36
more enjoyable in the process. So yeah,
00:39:38
I would love to read your reviews. And
00:39:40
sure, if you throw a rating in there,
00:39:42
too, that's great. If you like what I'm
00:39:44
doing, please share it with me. It's
00:39:46
such a great feeling to read your
00:39:48
feedback. I'd love to read your review
00:39:50
or see a rating on Apple Podcast or
00:39:53
Spotify. Thank you. And speaking of the
00:39:56
average DIYer or just the dedicated, the
00:39:59
diehard DIYer, the diehard boglehead,
00:40:01
the last question, thank you Allison, by
00:40:03
the way, for the terrific question and
00:40:04
the back and forth. But today's last
00:40:06
question comes from Craig who has a
00:40:08
simple question. Should a confirmed
00:40:10
DIYer or boglehead still consider
00:40:13
consulting with a financial planner? And
00:40:15
the short answer is like consider it.
00:40:17
Sure, you can consider it. Maybe for the
00:40:19
longer answer, do you follow through and
00:40:21
hire someone? Well, it's certainly not
00:40:23
black and white. It's definitely gray.
00:40:25
And for a good analogy, I'm going to
00:40:26
give a shout out to my uncle Frank who
00:40:28
lives here near me in in Rochester. I
00:40:30
would guess that Uncle Frank is in the
00:40:32
top.1%
00:40:34
of amateur hobbyist mechanics anywhere
00:40:36
in the world in terms of you know he's
00:40:38
that guy who you know who takes apart
00:40:41
all sorts of engines, motorcycle, car,
00:40:44
boat, two-stroke power equipment, etc.
00:40:46
just for fun and then, you know, cleans
00:40:48
them, figures out what's wrong, fixes
00:40:50
them up, puts them back together. He's
00:40:52
an expert mechanic despite the fact that
00:40:54
he's never worked as a mechanic. And I
00:40:57
look at Uncle Frank and I say, "Should
00:40:59
he ever hire a mechanic?" And the answer
00:41:01
is like, "Well, maybe." And some corner
00:41:03
cases, maybe as a small safety check to
00:41:06
make sure that the work he's already
00:41:07
done was done right. But when it comes
00:41:09
to like 90% of of mechanical issues like
00:41:12
fixing up a car, putting on winter
00:41:14
tires, changing your oil, doing your own
00:41:16
brake pads, a lot of that kind of
00:41:18
complex stuff, the answer for him is no.
00:41:20
He doesn't need to hire a mechanic. But
00:41:22
then I compare Uncle Frank to another
00:41:24
friend of mine, Nick. And Nick is a huge
00:41:26
F1 racing fan. He's a big fan of cars
00:41:29
and speed. He knows all the European F1
00:41:32
racers. I know like two of them. He
00:41:33
knows all of them. In some ways, Nick is
00:41:35
similar to my uncle Frank in terms of
00:41:37
that kind of gear head. Loves the idea
00:41:39
of, you know, engines and going fast.
00:41:41
But he's also noticeably different
00:41:44
because liking engines and liking speed
00:41:46
is much different than taking engines
00:41:48
apart and putting them back together.
00:41:49
And maybe, you know, Nick is the
00:41:51
equivalent of like someone who who
00:41:53
enjoys uh watching CNBC, but has never
00:41:56
actually looked at a portfolio himself.
00:41:59
And so, does Nick need to hire out his
00:42:01
car mechanic work? Well, yes, because
00:42:03
being a fan of race cars doesn't make
00:42:05
you qualified to fix your own car. And
00:42:07
when I look at the bogal head and the
00:42:10
DIY and the fire world, I see plenty of
00:42:13
Uncle Franks who are like true
00:42:15
expertise. You know, they they know so
00:42:17
much despite only really ever having to
00:42:20
um answer questions about their own
00:42:22
situation. But then I also see plenty of
00:42:25
Nicks. So, does Uncle Frank ever need a
00:42:27
financial adviser? Well, let's start by
00:42:29
giving the DIY bogal heads their due. If
00:42:31
someone has read the little book of
00:42:33
common sense investing, they read all
00:42:34
the blogs, they understand asset
00:42:36
allocation and tax efficiency and the
00:42:38
role of lowcost indexing, they can
00:42:40
rebalance in their sleep, they they roll
00:42:42
their eyes when they hear someone say,
00:42:43
"Oh, but but my guy says he can
00:42:45
routinely beat the market." Well, this
00:42:47
side's pretty simple. If a DIYer already
00:42:49
has all the knowledge, they know how
00:42:50
markets work, how what diversification
00:42:53
means. They know why fees matter. They
00:42:55
value control, right? They like tweaking
00:42:57
their spreadsheets and and pulling on
00:42:58
the levers themselves. that's part of
00:43:00
the hobby to them. They distrust
00:43:01
conflicts of interest. You know, we all
00:43:03
know to be wary of the commissionbased
00:43:05
products and and the free stake dinners
00:43:07
and the investment relationships in this
00:43:10
world. We all know the dark side of of
00:43:12
salesdriven planning that leads with a
00:43:14
product instead of leading with a
00:43:16
process. And and bogleheads and DIYers
00:43:18
for the most part are disciplined,
00:43:20
right? A true bogle head stayed the
00:43:22
course in 2008 and in 2020. They're not
00:43:24
chasing AI stocks right now. They don't
00:43:26
panic when the market drops 30%. If all
00:43:29
of that is true, I'm not sure what kind
00:43:31
of alpha, what kind of benefit the
00:43:34
adviser is going to add. The DIY route
00:43:36
works just fine in this case. But for
00:43:39
even the savviest bogal head, there can
00:43:41
be some cracks in the armor. I think for
00:43:44
one, there's complexity creep. You know,
00:43:45
once you hit your 50s and 60s, life
00:43:48
stops being a a really neat spreadsheet.
00:43:50
you you have to juggle RMDs and Roth
00:43:53
conversions and social security timing
00:43:55
and tax loss harvesting and charitable
00:43:56
giving and estate planning and
00:43:58
healthcare decisions. And while the
00:44:00
simple index portfolio is easy,
00:44:02
especially to accumulate, the withdrawal
00:44:05
strategy that goes with that and that
00:44:06
goes with all those different moving
00:44:08
pieces is is just a different story. Uh
00:44:10
there's behavioral blind spots. You
00:44:11
know, knowing that you should stay the
00:44:13
course isn't the same as actually doing
00:44:15
it when the market's down 40% and your
00:44:17
job feels shaky and and the news
00:44:18
headlines are kind of screaming at you.
00:44:21
A truly good adviser is a behavioral
00:44:23
circuit breaker in those cases that
00:44:25
stops you from from damaging yourself. I
00:44:27
think I've told the story before of of a
00:44:29
reader who reached out to me or I think
00:44:30
a listener actually who reached out to
00:44:32
me. certainly a a DIYer boghead type
00:44:35
person up to this point in her investing
00:44:36
career. And she admitted to me that
00:44:38
during COVID, she abandoned the market
00:44:41
for a good six months from, you know, in
00:44:43
that March 2020 of COVID because she saw
00:44:45
the way that her personal work world was
00:44:48
kind of falling apart around her and she
00:44:50
looked at the tea leaves and said,
00:44:51
"Society is going to really suffer from
00:44:53
this and I do not want to be invested in
00:44:55
stocks right now." And it ended up
00:44:57
being, you know, a 30 to 40% mistake. So
00:45:00
even diyers and bogle heads have those
00:45:03
behavioral blind spots. The next thing
00:45:04
here is coordination. You know, once
00:45:06
you've got a spouse and kids, a
00:45:08
business, multiple retirement accounts,
00:45:10
you're not really just managing a
00:45:12
portfolio, you're managing an entire
00:45:14
financial system. And a good financial
00:45:16
planner is going to see connections that
00:45:18
you might not know about or that you
00:45:19
might miss. Life transitions are another
00:45:22
great reason to consider hiring somebody
00:45:24
cuz retirement isn't only a financial
00:45:26
shift. It's certainly a big financial
00:45:28
shift. It's also a psychological shift.
00:45:30
Same thing with selling a business or
00:45:32
with losing a spouse or with inheriting
00:45:34
big assets. And a good financial planner
00:45:36
helps their clients navigate that
00:45:38
change. The change itself, right? It's
00:45:40
not just the numbers, but it's the
00:45:41
change itself. Speaking of of spousal
00:45:44
loss, actually, that right there is a
00:45:46
reason that I've been hired before. You
00:45:47
know, Jesse, my health is in question.
00:45:49
I'm in charge of the family finances. No
00:45:52
offense. I'd never really hire you on my
00:45:54
own, Jesse, but I need you for the sake
00:45:57
of my spouse so that they have someone
00:45:58
that they can work with if and when I
00:46:00
die. That's totally reasonable. And then
00:46:02
there's just a second pair of eyes can
00:46:04
be a really good reason to hire a
00:46:05
financial planner. A one-time review, a
00:46:08
periodic review that can catch mistakes,
00:46:10
a missed tax nuance, a suboptimal asset
00:46:13
location, an estate document that is out
00:46:16
of sync with what you think it says.
00:46:18
Just getting that second pair of eyes
00:46:19
can be useful. So, when might it make
00:46:22
sense for the DIY investor? An adviser
00:46:24
doesn't have to mean handing over the
00:46:26
keys, right? It could mean a flat fee or
00:46:28
an hourly planner every few years just
00:46:30
for a checkup. It could mean a a
00:46:32
one-time retirement income plan to
00:46:35
ensure tax efficiency. It could be a
00:46:37
full-time fiduciary partner who can
00:46:39
glide your flight in for a smooth,
00:46:40
efficient landing while you go relax in
00:46:43
the back of the plane. The right
00:46:44
question isn't necessarily, do I need an
00:46:46
adviser? I think the better question is
00:46:48
what job would I hire an adviser to do?
00:46:51
If that job is clear and you find
00:46:52
someone who you trust, who can solve
00:46:54
your problems, who works hard on your
00:46:56
behalf, it can be a really high ROI
00:46:58
return on investment decision. Even for
00:47:00
a bogle head, you know, going back
00:47:01
earlier to the the comparison of my
00:47:03
uncle Frank to Nick, the Nick equivalent
00:47:05
here is someone who, you know, they love
00:47:07
to log into Fidelity and and check their
00:47:09
account balance. But to ask them how
00:47:11
their cash flow connects to their goals,
00:47:14
how various taxes work, how to optimize
00:47:17
their withdrawal strategy, or simply to
00:47:18
ask them why different asset classes
00:47:20
perform differently at different times,
00:47:22
to ask them why some stocks go up and
00:47:24
others go down. to just to ask them
00:47:26
questions that go deeper than the
00:47:28
surface level account numbers and they
00:47:30
reply something like, "Well, but the S&P
00:47:32
is up 16% this year and I own VO. Like,
00:47:34
what's wrong with that?" It's not that
00:47:36
they're bad investors cuz they're not.
00:47:38
It's just that Nick and the Nicks of the
00:47:40
world don't necessarily see the bigger
00:47:42
picture or understand the bigger
00:47:43
picture. And it's totally up to them
00:47:45
whether to hire an adviser or not. But
00:47:47
that is someone who I know can get a ton
00:47:49
of help from from a good financial
00:47:50
planner. So in summary, if you're truly,
00:47:53
you know, an Uncle Frank type character,
00:47:55
a a self-taught expert who, and I think
00:47:57
this is actually an interesting
00:47:58
barometer or litmus test, is someone who
00:48:01
when you listen to podcasts like mine or
00:48:03
you you read or listen to other experts
00:48:05
out there, financial planners, people
00:48:07
who are doing some of the best work in
00:48:09
the space, if you're rarely learning
00:48:11
anything new from them, then you might
00:48:13
be that true uncle Frank self-taught
00:48:16
expert. And if that's you, I think at
00:48:18
most that kind of one-time spot check
00:48:21
relationship could do you some good, but
00:48:22
it's really up to you. But if you're a
00:48:24
Nick who just kind of likes to see your
00:48:26
portfolio go up, but then the rest of
00:48:28
the actual financial planning world kind
00:48:30
of feels like a black box to you, then I
00:48:32
think you can gain a lot of good out of
00:48:34
a financial planning relationship. And
00:48:36
that's coming from some firsthand
00:48:37
experience on the other side of the
00:48:38
table. So that's my two cents. Excellent
00:48:41
question, Craig. you know, does a DIYer,
00:48:44
does a boglehead need a financial
00:48:45
planner? Ask yourself, what kind of
00:48:47
questions do I want this financial
00:48:49
planner to answer for you? And then ask
00:48:50
yourself, are you more like an Uncle
00:48:52
Frank? Are you more like a Nick? How do
00:48:54
you find someone who you can trust all
00:48:55
the way down the line? Thank you, cuz
00:48:57
that was a great question. And all you
00:48:59
listeners, thank you as always for
00:49:00
tuning in. Thank you for writing, just
00:49:02
sending in amazing questions. At this
00:49:04
point, I will be honest with you, I'm
00:49:06
probably getting more questions than I
00:49:07
have time to provide answers, at least
00:49:09
under this current regime, even though
00:49:11
I'm doing one AMA episode every single
00:49:13
month. It's just awesome place to be and
00:49:15
and the questions are fantastic. So,
00:49:17
thank you. Thank you for writing so many
00:49:18
amazing reviews and fivestar ratings.
00:49:21
And please send your AMA your future AMA
00:49:23
questions to my email address, jesseb
00:49:25
bestinterest.blog.
00:49:27
Thanks for tuning in to this episode of
00:49:29
Personal Finance for Long-Term
00:49:30
Investors. If you have a question for
00:49:32
Jesse to answer on a future episode,
00:49:35
send him an email over at his blog, The
00:49:37
Bestin Interest. His email address is
00:49:39
00:49:42
Again, that's jessevestinterest.blog.
00:49:45
Did you enjoy the show? Subscribe, rate,
00:49:47
and review the podcast wherever you
00:49:49
listen. This helps others find the show
00:49:51
and invest in knowledge themselves. And
00:49:54
we really appreciate it. We'll catch you
00:49:56
on the next episode of Personal Finance
00:49:58
for Long-Term Investors. Personal
00:50:01
Finance for Long-Term Investors is a
00:50:02
personal podcast meant for education and
00:50:05
entertainment. It should not be taken as
00:50:07
financial advice and it's not
00:50:08
prescriptive of your financial
00:50:10
situation.