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Ask the Money Experts: Debt, Diversification, Retirement, and Real Estate

The BiggerPockets Money Podcast
43 min read
Ask the Money Experts: Debt, Diversification, Retirement, and Real Estate

What should retirement planning look like? How can I invest if I am still paying off student loan debt? What makes a perfectly diversified portfolio? And when is the right time to pay off my rental properties? We went to the BiggerPockets Money Facebook Group to ask what you would like to know from a money expert. And thankfully, we found a couple of them who are friends of the show. Amanda Wolfe and Kyle Mast are here to answer some of your most-asked money questions!

Amanda Wolfe was recently a guest on the BiggerPockets Money Podcast, sharing her story of reaching financial freedom after going through serious financial struggles and childhood poverty. Kyle Mast, Certified Financial Planner, has recently “retired” after helping his clients reach their financial goals with minimal stress and maximum freedom. They’re helping Mindy on today’s show to take questions directly from listeners about everything ranging from real estate to retirement planning and never feeling like you have enough.

If you’ve struggled not knowing how to pay down debt, how much cash to have on hand, or are having a mental block when switching from saving to spending mode, this episode could alleviate your worries. If you’d like to get more connected with the BiggerPockets Money community and potentially get your questions answered on a future show, be sure to join the BiggerPockets Money Facebook Group!

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Listen to the Podcast Here

Read the Transcript Here

Mindy:
Welcome to the BiggerPockets Money Podcast where we are answering your money questions with Kyle Mast and Amanda Wolfe, the She Wolfe of Wall Street.

Kyle:
But one of the best things you can do is maybe transition at your current job. If you’re a valuable employee, a lot of employers would love to have you for a year or two in a part-time capacity where they don’t have to pay you benefits, but you still get paid really well. And then now you’re able to kind of watch your budget for a year or two as you’re in part-time, maybe what you’re making almost covers it and you can pull some out of your investments or your real estate properties. But this, it’s kind of like a trial run to give you a sense of how things look and it’s not so scary.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and joining me today in the host seat for the first time is the She Wolfe of Wall Street, Amanda Wolfe and back for another round is Kyle Mast, CFP. We’re here to make financial independence less scary, less just for somebody else. To introduce you to everybody’s story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own business, we’ll help you reach your financial goals and get money out of the way so you can let yourself towards your dreams.
I’m super excited for today’s episode. Kyle Mast is back. I love Kyle. He is so smart and knowledgeable. If you were lucky enough to have him as your CFP, you won the CFP lottery. He walks on financial water, according to me, and you know him from episode 41 where he gave excellent tips for finding your own CFP. Episode 84 where he came back to talk about traditional retirement and what that looks like. Episode 200, a masterclass in retirement. And last Friday’s episode where we talked about money fears with J Scott. So Kyle, welcome back.

Kyle:
It’s good to be back. Mindy. Thanks for having me.

Mindy:
I’m so excited you’re here. And Amanda Wolfe, also known as the She Wolfe of Wall Street, is back on the show in her first time as host. You know her from episode 329 where she shared her journey on the path to financial independence that included exactly zero advantages. In fact, she had every obstacle you could think of thrown at her and she decided that she didn’t want to live like that as an adult. So she took it upon herself to learn everything she possibly could about finance. Amanda, welcome back to the BiggerPockets Money podcast.

Amanda:
Thanks for having me. Excited to be here.

Mindy:
I’m super excited for both of you to be here. I really like the two of you together because Kyle is formally trained and Amanda has learned everything on her own, she has done her own research. The different approach that you both have to your knowledge base I think is fascinating. So I’m excited to see what you guys have to say about the questions that we have. I posted a question in our Facebook group which you can join if you are not already a member at facebook.com/groups/bpmoney. And I was wanting to know what you would ask a money expert if you had the opportunity. I took some of my favorite questions and we’re about to jump right in.
Kyle, let’s start with you. How can someone strategically pay down student loans while also investing? Scott’s philosophy is geared toward keeping the largest monthly expenses extremely low, but Set for Life is silent on student debt, which can be as large as a second mortgage. It would be helpful to learn two to three rules of thumb for approaching student loan pay down and investing.

Kyle:
Well, this is a tough question. So Set for Life if people listening don’t know that’s Scott Trench book. It’s very good and I actually recommend it to clients. Oftentimes, especially it’s a graduation gift that I give all the time to people. It has a really good plan in there for just getting started. But from the student loan standpoint, it’s not a real easy question. So there’s a couple ways you can come at it and maybe I’ll start initially with what I did personally because maybe that it will kind of show that there’s a little bit of nuance to it.
So, you can kind of come at a student loan debt thing from the standpoint of paying down one that’s high interest rate first, maybe have more of a private loan that you took out for student loan debt that has interest rate in the 6 to 9% range. Maybe that makes sense to pay that one down sooner as opposed to one that has a very low subsidized interest rate. However, early on in my marriage with my wife, one of the things that we made a choice to do was to pay off our student loans first. And the reason we did that was that it opened up flexibility for work and life going forward. The debt burden that you carry of anything, whether it’s student loans, car loans, anything else like credit card debt, anything, it’s a burden that you have to then cash somehow, whether it’s with your investment or with your labor to be able to cover it. And for us, my wife at the time was working a job that she did not like. She was making three times as much as me. I just started the firm I was making basically nothing.
Our goal was to get to a point where our expenses were low enough to where she could quit or take a much more enjoyable job, even if it paid a lot less at that point. The quickest way to do that was to get rid of our outgoing expenses. And looking back on it, we are very happy that we did that. It wasn’t the most financially optimized thing to do because we could have saved that money up, bought a rental property, leveraged that, had it cash flow, built some investments on the side as well, put more into 401ks, Roth IRAs when we’re in a lower income bracket. But what it did do is that it opened up that flexibility piece to where a few years later she was able to leave that job, take a job that she enjoyed a lot more and eventually quit entirely when we had our son.
So it’s not an easy answer, I feel like maybe I’m sidestepping it here, but you have to look at your situation and see what’s going to be right for you. What are your plans? The person asking this question, are you single? Do you have a family? What are your plans for the next five years? If those payments are not huge, then you can continue to cash them and if you want to be able to accelerate your wealth some other way. But it sounds like from the question that they might be pretty sizable payments because you’re saying something about keeping the largest monthly expenses extremely low.
I would lean towards knocking, knocking large payments out really fast. And that’s what Scott’s gist is in that book essentially, and maybe he doesn’t address the student loans directly in this manner. But the reason for that is that flexibility is priceless, you just don’t know what life’s going to throw your way. And another example in a not great example or not as a fun example is that if one of something happens to one of you, you become disabled or you get hurt and one of you can’t work anymore. If you’ve eliminated this burden of debt, you have a lot more flexibility. You can make it on one income if you have a child that has some special needs that you need to take care of.
Amanda, I’d love to hear what you have this to say on this. It is definitely a tough question.

Amanda:
So for me, it’s so funny because I did prioritize paying down my student loans and I wish I hadn’t. So for me, I think that it really depends on how the debt makes you feel, along with what the interest rate is, right? So I mean if you have some really high interest loans, we want to prioritize paying those down. We talk about paying down credit cards, obviously that’s like hustling backwards. We want to pay those things off. But if you have the student loans that are like 3, 4% even up to 5%, I would say for me I would much rather take my money and put it to work in the stock market now because that time is invaluable. You don’t get that time back. So for me, I wish that I had actually put even more away toward my 401k and Roth IRA when I was younger rather than just dumping chunks of money into my student loans and I would’ve just taken longer to pay those back.
But at the end of the day, I think it just really is going to come down to how it makes you feel if they are hanging over your head and it’s just soul crushing every time you look at your balance, pay them off. But if you’re like, you know what? It’s not so bad. It’s causing me more anxiety to not invest, then invest. I think as long as they’re low interest, you have a lot of flexibility.

Mindy:
Now why I brought them both on, because those are really fantastic answers. I think that there’s a couple of things that I want to touch on. What Kyle said, this is not an easy question to answer and there is no easy answer to this question. I think that’s what a lot of people are looking for. Hey, how can I do both at the same time? And you can only spend a dollar once and I’m sure people are going to email, me email at Idon’[email protected] because you can only spend that dollar one time. You can either pay off your debt or you can invest it. And yes, you can use the investments to generate more cash flow to then pay off your debt.
But episode 35 with Craig Kerla, he explained exactly how he did this. He made the minimum payments on his student loan and then started to invest. He had a good income, I think it’s really important to not gloss over that. He had an income that more they uncovered his basic living expenses and his debt service minimums and allowed him to save up for investment properties. He bought a house hack, he bought a duplex. He lived in one unit and rented out the other unit full time, long term. He lived in the unit that he then would… I’m sorry I am laughing because he lived in the top unit and rented out the bedroom on Airbnb and then lived behind a screen on a futon, he would sleep there. It was like he did what he had to do to pay off his debt, but he wasn’t actually paying off his debt. He was living in this place for free so that he could save more money to buy another rental property to do the same thing.
And he bought, I think he had five properties. At one point he bought a property that had five bedrooms and two bathrooms, which is kind of edging into weird property territory. Nobody else wanted this property, so he got it for a good price. He added another bathroom. Lived in one, rented out the other units and lived for free again, cash flowed enormously. And then was able to take all of this cash and throw that at his debt. So that is a way to invest and pay off your debt kind of at the same time. But you are taking a step back from paying off your debt while you’re saving up for these investment properties.
I think that Amanda touched on something really, really powerful. It depends on how that debt makes you feel. If you are so burdened by having debt that you can’t possibly think about anything else, then pay off the debt. It doesn’t matter what the interest rate is. But if you can live with debt then you don’t get that time back. I’m writing out all of these great quotes that Kyle and Amanda are saying. You don’t get the investment time back and the earlier you are in your investment life, the more important it is to put as much money into your investments as possible. I’m talking about the stock market and buying houses. If you can max out your Roth IRA every single year when you’re 20, how awesome is that to just watch that grow and grow tax free forever, hopefully forever. I hope they never come back and like, hey, we’re going to stop this now. But right now that’s tax free growth so why not put as much as you can into that.
Which is another way to say that, I don’t really have anything to add and we’ll go on to, Amanda, how do you transition from this save, save, save, save, save to actually starting to spend? I need this advice because I am stuck.

Amanda:
So I think that this kind of goes back to what I was saying before is it’s how money makes you feel. And we know that money is like 90% psychological. So you can know all of the right things to do. You can create your little budget and know how much you’re spending, eating out and on rent and on your car insurance and all of these things and know how much you’re investing. But if you’re not able to look at everything you’re doing and know the why behind it then it’s going to be really hard to ever overspend and go to saving or save and then learn how to start spending. So, I think it’s really a matter of laying out all of your spending, where you are and then figuring out why do you want to save? What are your future goals? If your goal is to have a million dollars by 30, well how are you tracking? Is your goal to live a fulfilled life and see the world? Well, if you’re saving and hoarding every penny, then you’re not going to be able to do those things. Do you want to wait until you’re 65 to do those things?
So I think it’s a matter of looking at how much you’re saving and spending today and outlining what your goals are and see how you’re tracking toward them. Because, like I said, money is feelings too. Knowing that you are allowed to spend some of your money I think matters. So I think it’s really just laying out your goals and knowing the why behind it.

Mindy:
Kyle, do you have anything you want to add to that?

Kyle:
Oh man, not really. I mean I think that’s really where you need to go to. It’s such a psychological thing when you’re transitioning from the saving mentality to the spending mentality. There might be some assumptions that we’re trying to make here with this question. I don’t know if this is someone who’s just a phenomenal saver and they really have a hard time spending, like Mindy. Or if they’re getting to retirement and it’s maybe kind of tight, but they need to transition to spending. How do I transition to spending from saving but not overdo it? So that there could be maybe two things behind this question. Do you have a sense of where that’s coming from Mindy?

Mindy:
I believe this was copied down word for word from the question. However, I will make my own assumptions because it’s my show and I get to do that. So let’s look at you and your recent unemployment, Kyle.

Kyle:
Oh boy.

Mindy:
You were saving as a CFP planning for early retirement and now you don’t have income, correct? Like traditional W2, steady source of income. You’ve got rental properties, but are you living off the income from your rental properties or are you living off of your portfolio and other sources of income? Are you starting to spend that way?

Kyle:
Yes. So yeah, from several sources but yeah, from rental properties, from savings, from investments, depending on the year. This year’s a unique year because the firm was sold and we’re having to do some tax things to try to not pay as much tax. But to answer this question from how I’m doing and how I would recommend doing it too. In the last couple of years with my firm, I transitioned some clients away, so my workload was a lot less. I wasn’t planning for sure on selling my firm this year, but I was transitioning kind of in that direction. I think anybody that wants to transition from the saving mentality to the spending mentality, one of the best things you can do is make that transition a little bit more calm and not have it be a one time, I’m retiring on this date, have the retirement party and now I need to talk to my financial advisor to figure out how much I have to take out every month to live on.
That happens a lot and that’s okay, but one of the best things you can do is maybe transition at your current job. If you’re a valuable employee, a lot of employers would love to have you for a year or two in a part-time capacity where they don’t have to pay you benefits, but you still get paid really well. And then now you’re able to watch your budget for a year or two as you’re in part-time, maybe what you’re making almost covers it and you can pull some out of your investments or your real estate properties. It’s kind of like a trial run to give you a sense of how things look and it’s not so scary. Because if you go from the first mentality to the second mentality, you have no experience in the second mentality. If you kind of transition slowly, you’re now getting a little bit of experience and you can make some adjustments and say, whoa, I think I need to work a couple more years but I’ll just keep doing it part-time, it’s pretty sustainable now I enjoy my job because I’m not burn out. Or you can say, wow, I have plenty of funds, I don’t need to work part time, I’m ready to check out and go.
So, that would be my recommendation. I didn’t do it exactly that way myself, although other than the fact that I transitioned to less work time, it would be what I did. But yeah.

Mindy:
I think that’s gold. Make the transition more calm. I think so many people think in terms of black and white all the time, either I work or I don’t work and those are the only options. Part-time is valid. My husband is now retired, but he stepped down to three days a week and when he went in to ask his boss if he could do that, his boss was like, yeah, I don’t care. He had all of this nervousness moving into the conversation and the boss was like, yeah, that’s fine. Because he was a valued employee and they wanted to keep him, he had a lot of legacy knowledge about the system that they were working on and they wanted to keep him because they knew that the option was stay or leave completely, go part-time or leave completely.
The testing out your retirement, as you were saying that, I’m like, oh that was Millennial Revolution on episode 55 and 55 and a half, they came on and shared that. They did that exact same thing. They tested out their retirement while still earning this big salary. They tested out their theory, what about my stock portfolio? I’m just going to live off of the stock portfolio let’s see what happens and I’m going to live off of this much money and see what happens, and they were able to do it. And then they retired and the stock market crashed like the month after they retired and they felt calm about that because they had lived off of it and their plan worked. They had seen, I want to say it’s been a long time since we had episode 55, but I want to say it was like they did this for two or three years before they retired and they really tested the theory.
Okay, great. Moving on, what is the best course of action if I’m trying to retire from my nine to five in about five years, keeping in mind inflation, interest rates and the current economic landscape? Do I focus primarily on adding to build my real estate portfolio, optimize current real estate with focus on investing more into index funds or do I continue with a blend of both? Amanda, let’s look at you.

Amanda:
Yeah, so for me, I guess not knowing where the cash flow is coming from, I’m assuming you’ve done a little bit of math to make sure that you can retire in five years, but my first question would be like what are you living off of? Are you living off of cash flowing rental properties? Are you planning to pull from the stock market? I don’t know what your financial situation looks like, but that is the first thing that I would assess is where is this money going to be coming from?
For me, I invest in the stock market. I don’t actually have any rental properties currently. It’s definitely something I want to get involved with in the future, but for me, I’m doubling down on the stock market right now, especially due to the fact that it’s down right now. Now I’m also a long term investor, so for me I’m looking at it as I’m getting everything on sale, this is fantastic, I’m planning to leave it alone for a really long time. If that’s you, then I would say I think this is a fantastic time to invest. I know that that is a question I get a lot as well, people are really nervous, they see the doomsday. But I would just say remember that the headlines are to get you to read the article and if you’re a long-term investor, the stock market has never not recovered.
Now as far as rental properties versus investing, again I think look to see where is that money going to be coming from and how much could you afford of your current lifestyle today. Looking at that, that is where I would determine where I was going to put more of my dollars. Also, I would ask, are you planning to quit entirely or to the topic that we were just talking about, are you planning to work some type of a side hustle or a part-time job or something to keep you a little bit busy or are you going to be 100% no income coming in other than the real estate and the stock?
So that’s kind of my thoughts on it, but I would say you diversifying where you’re investing is always a really good idea, but for me, investing in the stock market is what I’m doing right now.

Kyle:
Yeah. Oh man. So I want to hit on something Amanda said is really good. And I’m not talking about timing the market, but I am going to talk about timing the market. So the market is so down right now. I’ve had this conversation with clients, in the past, what you want is for the market to just about crash three to five years before you retire. And the reason for that is that you are in the highest earning years of your life, usually five years before retirement and your kids are out of the house, you, a lot of times, have a mortgage that’s paid off or it’s 500 bucks a month because you bought it in 1972 and refinanced it once somewhere along the way. So that’s in a place where you can just sock money away most likely, depending on some of the other factors Amanda was talking about, what your budget looks like, are you spending a lot. But if you’re ready to save now, I mean the timing with retirement five years from now, I mean I would make sure you hit your 401K maximum for 2022 and then nail it again for every year until that five year timeframe.
From the stock market standpoint, and just again on that note, because your highest earning income years, if you can get that in there pre-tax, you’re probably most likely, depending on what your other portfolio is, most likely when you quit your job if it’s just you or if it’s you and a spouse, as soon as you quit your job you’re going to be in a lot lower income tax bracket. So if you’re putting in pre-tax now, you can pull that money out the year after you retire and pay way less tax on it if you want to.
A lot of times clients will be, I’m going to do a $50,000 renovation on my house this year before I retire next year. I’m just put it into the 401k this year, save all the taxes and do it on January 1st next year. Pull it out when you’re retired and you pay hardly any tax on that money. Instead of trying to do it all in the year when you’re going to pay a whole bunch of tax on it and not be able to use as much of it. So you’ve got an opportunity here, at least from an index fund standpoint or from a stock market standpoint. The real estate side of it, that really depends on your real estate experience. It sounds like you have some because you’re putting it into the question here, but maybe you don’t, maybe you haven’t done any real estate. So I would say that’s an okay route to go.
I’m more heavy real estate. I’ve worked with clients that are real estate clients for sure, but most clients are not. It’s not because it’s not a good investment. It requires more work, more education, more monitoring. Even if you have property managers, you have to manage the manager. So real estate would be a good diversifier too. The difference between real estate and the stock market right now is real estate has not dipped 40%. 40% is extreme, 30% like a full market fund has. Where that seems like it’s maybe on sale for a five year timeframe, retirement timeframe. Real estate, you have more leeway now than you did six months to a year ago, but there hasn’t been a huge drop in prices and we don’t know if there will be or if there won’t be. I would venture to guess that there is not going to be a 30% drop in real estate prices. The market and the demand for housing is just, it’s just too high. And the echo boomers, the millennials are the biggest generation ever and they’re still here and they’re going to want houses even if interest rates are high.
So I think you can do a mix of both. But I like what Amanda said that doubling down towards the end of your career, if you can max out some of those tax advantaged accounts. Especially if you’re going to hit that cliff of where your income goes really low after retirement, if you can save a whole bunch on those tax accounts. Another thing here, if you live in a state like California, New York, Oregon, these high income tax states, you have another incentive. I’m in Oregon and it’s 9.9% for most people state income tax, that’s the top bracket, but you hit the top bracket at less than 100,000 in household income. So you’re paying a lot in state income tax. So, that’s even more benefit to save it and then move to Washington State the year after you retire and pull it out where there’s no state income tax. But that’s another thing you could try to do. There’s some scenarios in your personal situation that could be really, this is a good situation. A lot of times people five years out say no, the market is crashing, I’m getting close to retirement, the timing’s pretty good, this is pretty good timing.

Mindy:
I really don’t want to disagree with either of you, I want to give this person something else to think about. It is far more difficult to qualify for a mortgage when you don’t have a job. So, if you are thinking about adding more real estate to your portfolio, the time to do that is before you quit your job and before you give notice to your job because your lender will call up your job and say, hey, do they have a job? Yes they do. And then right before closing they’re going to call up and ask again, do they still have a job? Oh they just gave their notice. Your lender’s going to be very angry with you and may not give you the loan. I don’t know for sure because I’m not a lender. But, don’t give your notice until you’re done buying houses with mortgages because it’s so much easier too.
Another thing that I am going to suggest is the xyplanningnetwork.com. This is a place to find a fee only financial advisor who can help you look at your specific situation and see if in your specific situation with your specific circumstances and your specific mix of investments, is it more advantageous for you to do index funds or add to your real estate portfolio. And the XY Planning Network does have CFPs who specialize in real estate portfolios, specialize in small business, specialize in self-employment. There’s all sorts of things you can pick and choose from to help you find a CFP who is really going to fit what you’re looking for. It’s a fantastic network started by Michael Kitces who is another walk on water finance guy.

Kyle:
He actually walks on water, I do not. Michael Kitces, he is the man and the XY Planning Network was a network that I was a part of when I owned my firm and it is a very reputable fee only network. Not to do too much of a plug, but you can find someone who will charge you hourly, not sell you stocks, not put you in a portfolio and manage it, that you will pay. For someone who’s good you will pay a high hourly rate, but it will be worth it because they will look at tax planning, insurance planning, real estate investments, your specific scenario, all the things that me and Amanda don’t know about your question and can’t give specific advice because there’s too many variables. They will have seen it before and they will be able to pull out things that if you pay them 500 bucks or 1,000 bucks for their time, they’re going to probably find 5 to $10,000 worth of value in about 15 minutes to offer back to you.

Mindy:
Yeah, that’s really great advice and you can hear even more tips from Kyle’s first episode 41 on how to find a good financial planner with heavy emphasis on fee only CFP.
Okay. Kyle, what do you do when your five journey hits a major roadblock and you’ve been on disability for a few years because of chronic issues and you are not allowed to contribute to a retirement account? Do you just max out your wife’s Roth IRA or do you consider other options?

Kyle:
Yeah, again, it’s, some of these questions are hard because to know the specific situation, like what it means that you can’t max out a retirement account. But I would say too often in the financial independence community, we assume that the only way to invest is with Roth IRA or a 401K or a traditional IRA or Roth 401k. These specific retirement tax advantaged accounts, you can put money into a non-qualified, it’s called investment account. And it’s not a retirement account, you have way more flexibility with it and you can invest it in the same things that you would invest in IRA or a Roth IRA. You don’t get some of the tax advantages, but you also get some other advantages because it allows you to potentially retire early because you can draw those funds without penalty. You pay some tax on gains and dividends during the time that you have the account, it’s not all deferred. It’s definitely a good option and it’s actually a really well thought out option to add to your overall financial tax portfolio, your tax planning portfolio.
You don’t want just have a Roth IRA in my opinion. You want to have Roth, you want to have pre-tax and you want to have non-taxable or the non-qualified account because they can all serve different purposes. Your pre-tax account, say you accumulate too much during your working years and you end up realizing I’m not going to really use it and I don’t want to necessarily give it to my kids or not as much to my kids. When you turn 70 and a half you can give that money away tax free to any not for profit 100,000 a year. So I had clients that is their whole goal and personally, my pre-tax accounts, those are our giving for fun when we are old accounts. So the government doesn’t get any of my tax money and my favorite charities get all of it.
So you have these different uses for each of these accounts. So if you’re saving for retirement, the Roth IRA, going back to your question, it’s great to max that out for your wife. If that’s the only option you have from a Roth IRA standpoint. And again, I don’t know much about your situation, the Roth IRA is not always the best choice. Are you young? What’s your income look like? If your income is high or your wife’s income is high and you’re getting close to retirement, you might not want to do the Roth IRA, but I would just make sure to think outside the box. And the thing is too, with these non-qualified accounts, if you build up this account and it can be just you on a non-qualified account or it can be you and your wife, it can be a joint account where retirement accounts can’t be that. If at some point you qualify to be able to contribute to a retirement account down the road, you can just move money from that into that Roth IRA if you have some earned income that you’re able to do a Roth IRA account.
I’m trying to think through the scenario here, but I think that would be, try to think a little bit outside the box of maybe… And that’s probably our fault in the financial independence community focusing so much on the Roth IRA and the tradition IRA and the tax optimization. But just saving it in a normal investment account is really good and there’s a lot of flexibility, especially if you have it for a long time because those funds become taxed at capital gains rates, which are very favorable compared to a lot of other things. You do your pre-tax IRA accounts that comes out as income, not capital gains, which is a higher rate later on. So those non-retirement, non-qualified accounts are pretty valuable. Yeah. Amanda, do you have anything to add to that?

Amanda:
Yeah, so a few things. First I would say to give yourself grace, it sounds like you’re going through a lot and I know that we can be really stuck on this goal, this finish line that we’ve set for ourselves and now we’re set. So I would say it sounds like you’re going through a lot, so give yourself grace first and foremost.
Second. Absolutely. You and your wife, I’m assuming are a team, so max out her Roth IRA. But also, I’m assuming your wife is working since she’s eligible for a Roth IRA, but remember that there’s a spousal IRA that is available to you as well. So assuming that you guys are married, filing jointly, you should be eligible to max that out as well.
And then to Kyle’s point, don’t sleep on the brokerage account. Anybody can invest in that. So if you have extra money, putting as much as you can into that. I look at it more as like a supercharged long term savings account. If you end up needing it’s there and if you don’t, great, it’s just extra money. And then if your health issues aren’t so bad down the line, you can make up for that time. But that’s what I would say.

Mindy:
Yeah. Something that my husband and I talked about a couple of weeks ago is that we borrowed from our line of credit against our after tax stock portfolio and bought a house with it. And the reason we were able to do that is because we had contributed into this after tax portfolio for so long. We had grown it to a sizeable amount where it was borrowable borrow-against-able. We’re just making all sorts of new words today. So even though you’re not allowed to contribute to a formal retirement account, doesn’t mean that you’re not allowed to invest. But I like what both of you had to say and I had no idea that you could give away pre-tax account money. That’s great because I would much rather give it to a non-profit than to the government who is absolutely for profit. Okay. No politics here.

Kyle:
A lot of my older clients, it gets real fun for them. When they’re 70 and a half, they have a lot of fun when they realize that they live so simply and they saved all this money and they love the idea that they can just huge benefit to their charities and the whole time they never paid tax on it, it grew tax free though for 30, 40 years and now they can give it away tax free. It is a really cool thing in the tax code.

Mindy:
$100,000 a year.

Kyle:
Has to be from an IRA account, can’t be a 401k, but you can just roll your 401k into an IRA. It’s a qualified charitable distribution and I believe it’s still 100,000 a year. Every once in a while they’ll index these things for inflation. But yeah, it’s a really neat thing.

Mindy:
That’s awesome. Okay. Wow, thank you. Moving along. Let’s talk about diversification. What does a solid diversified portfolio look like for the remainder of the year versus a five year outlook? Kyle, I’m going to go to you first and then we’ll hear from Amanda.

Kyle:
A solid diversified portfolio for the remainder of the year. My answer to that would be it shouldn’t change from what you already have unless you have a major life event or something in your life has changed. A solid diversified portfolio for the remainder of the year. It depends on your long term goals, what those are, the age that you are, when you want to retire, how much you want to give. There’s too much packed into that to give, what’s an allocation? Ideally you’ve already got an allocation, say you’re 30 years old and you’ve set up some Roth IRA accounts, you’ve got an allocation in there that’s like 90% stock, which would probably be a good allocation for long term investing. You’d go 100% stock, that would be fine too. I would say 80% and above is probably where you want to be if you’re young. Of course you got to be able to see it go up and down some, but if that’s the case the end of the year doesn’t make any difference and you know, shouldn’t change anything.
On the other hand, if you’re 65 and you’re going to retire next year, your allocation should have already been adjusted 5 years ago, 10 years ago, getting you ready for retiring next year or in this timeframe, you might not have known exactly, your allocation should not have to change now through the end of the year. So it should stay the same, which probably more conservative. Or, it might not be conservative, I had clients and there are people that if you might be late in retirement but you have plenty accumulated that you would rather just keep it all aggressive and you’re fine with it going up and down because aggressive is the best bet in the long term or has been historically to help hedge against inflation.
This is a question that it’s easier to address the five year outlook as opposed to the end of the year because the allocation going into the end of the year shouldn’t change from the investment philosophy if you are more of a passive investor philosopher, philosophizer, however you want to say it. If you believe in active investing, stock picking, time in the market, all these qualitative, quantitative, fundamental analysis, some of this stuff that you try to pay money managers for, then there’s a different answer. I don’t have that answer for you because I don’t think it works. So I think that would be my easy response on that one.
The five year outlook, you’re going to go back to the same thing. What are your goals? Are you going to retire in five years? Now is the time to really be thinking about what your allocation is. We had that question earlier about with a market down, what do I do if I’m going to retire in five years? You need to look at the income that you have for right when you retire, but you also got to think about 20 years into retirement. You got to make sure some of your investments are invested more aggressively to be able to fight inflation and you don’t want to be all bonds right now through five years from now unless you have just a pile of money and you’re okay with losing some of that money to inflation.
I feel like I’m getting pretty good at not giving this specific advice, I’m sorry for that if someone’s looking for a specific answer. But it just really depends on what you’ve got going on and what your goals are five years from now. Again, if you go back to the 30 year old, if you’re looking at a five year allocation from now, if you’re going to retire at 35, then we got to talk. You got to figure out exactly what that allocation needs to look like. Do you keep going aggressive or is your portfolio going to be what you live off for five years while your real estate goes for a little bit? Because you can do these things in stages, but if you’re 30 and you’re going to retire at 50, 60 or 70, you don’t change anything either. And again, like Amanda said earlier, this is when you’re doubling down. You’re maxing those Roth IRAs and getting stuff 30% off.
So yeah, that’s a tough question. And I’m sorry that I don’t give a specific allocation of like 50-50, 60-40, 70-30, it just depends on so many things like your risk tolerance, what you’re okay with losing, what your goals are for the next few years, for the end of the year. I feel like I’m fumbling through this, Amanda might just wrap this up with a nice bow or something.

Amanda:
No, yeah. I mean for me, my one year outlook is the same as my five year, which is the same as my 10 year, which is to invest for the long term. When you’re investing in something like the S&P 500, which is the top 500 ish companies in the United States or the entire stock market, you’re already getting a diversified portfolio, you’re getting hundreds or even thousands of companies all at once. So you don’t need to go and cherry pick all of the perfect things, you’re already getting a diverse portfolio. So for me, I am not planning to pull my money out anytime soon. So I’m leaving it alone. We’re excited because the market’s on sale right now, but it’s not exciting probably to look at your portfolio, which might be causing a little bit of anxiety. So you could do what I do, which is just not look at it and just keep automating my investments.
But I would just remember that, you don’t need to overthink it. You have a diversified portfolio if you’re buying into just a handful of different index funds, and I would say most people are good with three to five. You don’t need to have 30 different things. If you want to be really hands off, you can just buy a few things and then call it a day.

Mindy:
Okay, I love that. You don’t need to have 30 different things. You don’t need to have a hundred different things. JL Collins would answer this question, a solid diversified portfolio is 100% VTSAX. Sorry JL Collins, I’m putting words in your mouth but not really because I read your book and that’s what you would say. I am personally 50-50 stocks and real estate and of the stocks I am 50-50 individual stocks, which is a sin against nature, I’m heavy on tech, and 50% index funds and I’m comfortable with my allocation. I’m comfortable with the tech stocks that we own because my husband was in tech, he reads every piece of literature about tech all the time. He talks to me about it all the… He talks at me because I don’t really listen all that much. Sorry, husband, don’t anybody tell him this. He already knows.
But I’m comfortable with it because while I’m not the one doing the research, I know that he is doing the research. So if you are going to be buying individual stocks, you need to be doing research, you need to be able to talk about all aspects of that company and why you feel they should get your money over the entire stock market.

Amanda:
And yeah, just one more thing that I’ll say is if there’s any nervous investors, especially with the state of the economy now, is to remember that if you’re buying into something like the S&P 500, this that has never not recovered ever in the history, that would have to mean that all 500 ish companies went under if your portfolio went to zero and then we would be basically in a zombie apocalypse. So, I would just remember that you don’t have to overthink it, you don’t have to do a ton of research if that is not something that you’re interested in. And you can just have a diversified portfolio by buying into index funds like that.

Kyle:
Allocation one cow, two goats, seven chickens, zombie apocalypse. There you go.

Mindy:
The zombies will take all your cows and chickens.

Kyle:
Oh, I forgot the shotgun. Okay. Yeah.

Mindy:
And the shotgun.

Kyle:
Yep.

Mindy:
Okay. What is a good rule of thumb to answer the proverbial, I don’t know that that’s a proverb, when do I sell and pay off my debt for rental properties? It’ll vary by person so that’s why I asked.

Kyle:
Oh yes. Oh man, a rule of thumb. Maybe just talk about a couple things to think about. I don’t think there’s a rule of thumb of when to pay off your rental properties. I think a big part of it is how much you enjoy working with your rental properties. If you pay off the debt of your rental properties, it reduces the stress, the management, it reduces a lot of the time that you have to deal with that property. So a lot of times people will pay them off, and Amanda talked about this earlier on, about how you feel about the debt. If your property’s cash flowing you don’t necessarily need to pay it off unless you need those funds. But if you are sick of thinking, well, should I refinance this year? Should I not? If I sell this property, should I buy another one and put debt on it or not? If you’re done with that and you just want to pay them off and just have some cash coming in, that’s great. That’s totally great. It’s not the most optimized way to build wealth over time, but if your goal is not to continue to build wealth, doesn’t matter. Let’s live the life that you want to live and pay off your properties if that’s the route you want to go.
One thing to think about in this environment, to add to that and kind of swing the other way a little bit, is this kind of the concept of we have these old interest rates that are only a year or six months old now that were so low and a lot of investors have those interest rates on their properties. There’s a huge case to make with inflation where it’s at and depending on what you think about what inflation’s going to do, it is very unlikely that if you have an investment property at 3, 4 or 5%, that you’re borrowing money less than inflation. The bank is losing 4 to 6% on your loan every year, and that’s a huge case to make to not pay that loan off. Where at the same time, your income side of that equation, your rents are going to slowly inflate over time. The value of the property will slowly inflate over time. Again, this is not a guaranteed in each year but if we’re looking historically real estate’s like a 4% real easy slide. The last two to three years, take that out of the equation completely. But if you look historically, that’s what you’re going to get. If you can cover that debt with cash flow, you can keep that until you’re 90. There’s no reason that you need to pay that off. Again, this is a personal preference.
The other thing with that too is depends on how big your portfolio is. There are tax advantages to getting another bigger property if you have to sell a property for some reason and getting another bigger property down the road to do something like a cost segregation study to be able to reduce your income for that year. There’s some benefits to keeping debt on a property if it cash flows, we’re not talking about doing something stupid. But this is a very personal situation.
I can say that what I have seen most with clients that when they get to 65 in that area, even I would say 50 to 60, they want to pay their properties off. That’s the mindset. There’s a lower risk factor to having… I’m going to back that up. There’s a lower of a certain risk to having less debt. But on the flip side of it, some people would argue when you have less debt on a property, you are actually increasing some litigation risk. This would be a BiggerPockets real estate podcast question, but when you have more equity in a property, you become more of a target for litigation. If an attorney looks up and finds out that your property is 80-20 leveraged, they’re going to think, ugh, I got to break into the LLC and I got to try to get what’s left of this property, there’s a whole bunch of debt on it. The bank gets that first. But if you have 100% owned property and someone breaks their ankle in front of it, there’s a big pot of gold at the end of that rainbow that an attorney would love to go for.
Again, you can’t really plan completely against that. But those are some of the variables that you have to think about with this property and debt thing. It’s a real personal decision that you can mitigate some of these different risk factors, but at the end of the day, you just have to do what you think is going to be the best fit. If you’re younger too, just the goal of paying them off. We have the benefit in the US of this 30 year mortgage, which is a rare thing in the world. And if you are able to really use that to leverage and cash a property and have the tenant pay that property off for you over an extended period of time, that’s going to be the wealth builder. But again, maybe that’s not your goal. Maybe your goal is to just sleep good at night and have a really low maintenance life that you don’t have to worry about these properties hardly at all.

Mindy:
All right. Amanda, are there any good money moves if you don’t have cash but have high income and low debt? How do you stop stressing about money and retirement and how do you relieve stress that doesn’t cost money? What are some ways to relieve stress that doesn’t cost money and no exercise doesn’t help. So my first comment, I’m going to comment on this quickly, is my first comment is exercise does help get out there and run off your stress or bike off your stress or squat off your stress or push up off your stress. Because at least you can say to yourself, God, I hate this. I’m not going to be stressed anymore because if I am stressed that I have to keep working out. But I want to know why you have a high income and no cash. If you have low debt and no cash, where is your money going?

Amanda:
Yeah, no, that was my initial reaction as well is do you mean you don’t have cash as in liquid cash in you’re checking account and you’re investing it all, or you don’t have cash because you’re spending all of it? So I don’t really know what you mean by that, but-

Mindy:
I’m going to guess it’s the second one. I’m going to guess that they are spending it all.

Amanda:
Okay. So I think that there are a few things here. First of all, I get that exercise isn’t helping the anxiety for this specific situation, but health is wealth baby. So you definitely still got to exercise and it’s probably relieving more stress than you even realize.
But as far as stressing about money and retirement, I get you here. For me, I grew up really, really poor. So money has always been an enormous stressor in my life. Even when I got to a point where I reached coast five, which is, you could coast into retirement, I wouldn’t have to save any more money, I could still retire comfortably at traditional retirement age. But the idea that all of my money could go away one day still very much existed. So I would say that if the cash is the issue or the stress is the issue, I don’t know, first of all, if the cash is the issue, but you have a high income, you need to see where that money is going. That is also going to relieve your stress. Literally laying everything out on paper, understanding what’s coming in, what’s going out, what are your account balances, what are you working with.
Spend an hour and do a little bit of math and see, okay, if you were to lose your job tomorrow, get divorced, lose your house. If all that happened overnight, what would happen? How long would you be able to sustain a life suitable for you based on the money that you have? And for me, I don’t want to bring us back to zombies, but it’s kind of like my zombie apocalypse plan. So if all of those things were to happen to me, I know exactly how much money based on my checking account, I could survive, maybe that’s three months. And after that then what would I do? Okay, well I have a brokerage account that I could start pulling from. That would last me quite a while. And then after that then what? Well, I know I can pull out my Roth IRA contributions with no penalty. So then I would do that. Okay, then what would I do? Well, I know that I could take a loan from my 401k if I needed to do that. Okay, then what would I do?
Go through your disaster recovery plan and see how long could you go on if all of those terrible things that we imagine in our heads were to happen probably a lot longer than you think. And I think that just laying it all on paper and understanding what that plan would look like can relieve a lot of stress. I know it does for me, even though I feel like I kind of have my financial shizz together, there are still times where I get really concerned, Do I have enough though? I don’t know that those feelings will ever go away just due to my history as a child. And I don’t know what your history is, but I would remember that our money habits are established by age seven. So however you grew up around money is affecting you today.
So sitting back, realizing why do you feel so much anxiety around money today? Where does that stem from? Coming up with your own disaster recovery plan, seeing how long you could survive, I think is going to relieve a lot of the anxiety. Anxiety tends to come from the unknown and it’s probably due to the fact that you haven’t sat down and looked at it. So that’s what I would say is come up with a plan, lay it all out and go from there.

Kyle:
That is awesome. I love that disaster recovery thought process, that is so helpful to anyone who is really deep in anxiety with money. I mean you guys should just rewind this and listen to how she laid that out. What will my checking account get me? And then what will my brokerage account get me? And then what can I do with my Roth IRA? And then the loan from the 401k. I have some silver under my bed, what could I sell that for? Whatever it is, I have some Bitcoin that’s not worth anything, I could get a little bit for that. Then if you look at that timetable and say, wow, I’ve got a year or a year and a half, what could you do to put yourself in a better position in a year and a half if something bad happened?
That’s a lot of time to plan and even get a new certification of some sort. Really look for a job hardcore. If you really need to get yourself up on your feet knowing that you have a runway, it’s going to reset you to some extent. But a lot of times when something like that happens to somebody, you end up coming back real fast from where you were. But that thought process is golden.
This question, the first thing I thought, high income, no debt, what should I do? I’m like save. Save money. So my guess is they’d say low debt, so I’m assuming they don’t have trouble with credit card debt, which is great. And it sounds like they’re probably just spending what comes in, which is a lot of times in this scenario I’ll tell people to do the lazy budget, set up another bank account online like allybank.com, some online account that you get 2.5% or something, set up an automatic lazy person budget where your check comes in, the next day a transfer goes out to that account and then you just spend through your checking account. That’s fine, just spend through there, pay your mortgage out of there, whatever. But then that way that your good income is getting peeled off right away. It’s just like your pay stub, you’re just trying to do it before you can get your hands on it. Because that’s kind of what it sounds like I’m trying to think of the scenario of how this could be happening and that’s the only scenario that I can think of. You got high income, low debt, but no savings.
The other thing too is you could have just got the high income, you might have just got an awesome job and you’re just trying to ask what should we do? How do I handle this? I don’t have much debt. Maybe I didn’t have a high paying job before. Which that’s great, good for you if that’s the case. But I would say in that case the same thing set up that lazy person budget where something is transferred to a savings account and then you can look at that and figure out what to do with that. If you want to put that in brokerage account, Roth IRA. But get it out of your eyesight for a little bit, especially if you just got a big raise or something. Because then you can live on that old one too, that old income that you’re used to and just kind of sock that away. But yeah, I love that thought process, Amanda. That was super good.

Amanda:
Yeah, I’ll just add onto that, automation is everything. I never would have saved a dollar or probably invested if it hadn’t been automated. So if I have any other ADHD friends out there or anybody who has any type of mental health, impulsive type of behavior and you just like black out and are like, where did all of my money go? That automation is going to help you a lot. It’s kind of like what Kyle said, the lazy budget or a hands off way of budgeting. You only have to spend what’s in that checking account, you move the rest of the money that you want to save into a completely different one that you don’t even see. And then if all things crumble and you need it takes three days to get to you. So you got to make a little bit of a plan for it, but it makes it less convenient to spend all of your money. So I just wanted to add that. I thought that was a really awesome suggestion, Kyle.

Mindy:
Oh, I love that. Make it less convenient but still accessible to spend that money because then you’ve got three days to think about it. If it’s an absolute necessity you can throw it on a credit card so you can still pay for it. But you’re stranded in the middle of the nowhere with a flat tire, here you go. Now I can pay for it, but I’m not now scrambling to pay my bill. I can just pull from this, that takes three days. I love that so much. That was awesome.
Okay, well clearly you can see why I invited Kyle and Amanda on the show because they’re awesome and I am so excited that you guys were able to join me today. This wraps up our episode. Amanda, I really appreciate your time. Where can people find more about you?

Amanda:
Yeah, thanks again for having me. This was fun. So SheWolfeofWallStreet on Instagram and Wolfe is W-O-L-F-E. It’s my last name. SheWolfeofWallStreet on Instagram or just SheWolfeofWallStreet.com for any classes or anything else that I’m hosting.

Mindy:
And Kyle, where can people find more about you?

Kyle:
Kylemast.com. If I’m doing anything, it shows up there.

Mindy:
That’s awesome. From this episode of the BiggerPockets Money podcast, she is the She Wolfe of Wall Street, Amanda Wolfe. He is Kyle Mast, CFP extraordinaire. And I am Mindy Jensen saying hot diggy dog. My kids get so embarrassed when I say this, they say nobody over says that mom. So I’m saying it publicly so everybody can hear me say hot diggy dog and I hope I start a new trend. There you go. When your kids turn 15 to 12, you can embarrass them too, Kyle.

Kyle:
Oh man. I look forward to the opportunity.

Mindy:
It’s so awesome. Okay, thanks for listening. We’ll talk to you soon. Bye.

 

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In This Episode We Cover

  • How to invest while paying down student loan debt, or any other debt for that matter
  • Transitioning from saver to spender when you have enough to finally retire
  • Real estate vs. index funds and which is more optimal for a post-retirement portfolio
  • Roadblocks on the way to financial freedom and why you DON’T need retirement accounts to invest for retirement
  • What a diversified portfolio looks like (it’s much simpler than you think)
  • Money moves to make if you don’t have much cash, but do have consistent income
  • And So Much More!

Links from the Show

Connect with Kyle and Amanda

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.