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🏦 The Perfect Passive Portfolio for Early Retirement, 2025 Tax Changes, and Time Travel! 🕰️
888 Plays15 days ago
🛠️ What does it take to build the perfect portfolio for early retirement? In this episode, we explore tax-efficient investing, real estate vs. index funds, and even throw in a fun twist with time travel!
Watch and Subscribe on YouTube
🌟 Whether you're planning for financial independence or navigating changes in 2025 tax laws, this episode is packed with actionable insights, debate, and a little imagination.
In this episode, we discuss:
1️⃣ Designing the Perfect Passive Portfolio: The role of index funds like VTSAX in early retirement.
2️⃣ Real Estate vs. Index Funds: Which is better for financial independence?
3️⃣ Tax-Efficient Contributions: How to maximize Roth IRAs, 401(k)s, HSAs, and taxable accounts.
4️⃣ Withdrawal Strategies: Optimizing portfolio withdrawals to minimize taxes in retirement.
5️⃣ 2025 Tax Changes: What the upcoming laws mean for retirees and early retirees.
6️⃣ Social Security and Early Retirement: Planning around potential tax-free benefits.
7️⃣ Time Travel Reflections: A lighthearted look at history, nostalgia, and financial foresight.
🔗 Sean’s Links:
📘 JL Collins’ Book The Simple Path to Wealth
🔗 Carla’s Links:
🎙️ Estate Planning with Sean Mullaney on Mile High FI Podcast
🔗 David’s Links:
💡 The Perfect Passive Portfolio for Early Retirement
🍏 Forget About Money on Apple Podcasts
🎧 Forget About Money on Spotify
#passiveincome #financialindependence #taxplanningtips #seanmullaney
🎧 Listen & Subscribe: Dive into more episodes exploring financial independence, lifestyle strategies, and personal growth! Don’t forget to hit subscribe and turn on the bell 🔔 for updates.
📜 Disclaimer: The discussion is intended to be for general educational purposes and is not tax, legal, or investment advice for any individual. David and the Forget About Money podcast do not endorse Sean Mullaney, Mullaney Financial & Tax, Inc., and their services.
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Transcript
Introduction to Investment Debate
00:00:00
Speaker
Welcome to the Forget About Money podcast. Today, Carla and Sean and I are going to be talking about a subject that got prompted by a comment under one of our YouTube videos. The comment is from BeatricePrice2490, and the comment was, real estate seems a better investment for monthly income versus index funds. Don't you agree? Index funds seems to be better for growing your wealth portfolio, but if you need income from your investment,
00:00:29
Speaker
Which would you recommend? So that actually touched on a lot of things for me. Again, we don't know a whole lot about this person or their particular circumstance or what they're thinking about. And none of this is advice to any individual person. Don't sue me, Sean or Carla for any of this. This is just our
Guest Introduction: Sean Malaney
00:00:43
Speaker
thoughts. But that comment led me to wonder what would be the ideal portfolio for early retirement?
00:00:51
Speaker
And I could think of no one better to have this conversation with than the fi tax guy, Sean Malaney. Welcome, Sean. David, Karla, thanks so much for having me. Looking forward to this conversation today. Yeah. Likewise. We're really excited to have you here. And I just, I do want to give a quick plug for you, Sean, because Just this morning, I listened to your episode on the Bile Hi-Fi podcast where you were talking about the importance of estate planning and I thought it was fantastic. So if no one has, if anybody is out there who hasn't heard that episode yet, they should definitely can give that a listen to you because there's a treasure trove of solid advice in there.
Real Estate vs. Index Funds Discussion
00:01:26
Speaker
But yeah, I'm excited to dig in today and talk about this concept of do we actually need real estate in our portfolios and
00:01:35
Speaker
What is the importance of a monthly income that now this person whose name I'm assuming is Beatrice, but we don't know. Yeah, so let's talk through a little bit pretend we are Beatrice and explain to us why we do we need real estate in our retirement portfolio. So this is a great comment, right? And I have a lot
Income Needs and Financial Independence
00:01:53
Speaker
of different thoughts. And like David said, none of us are here to give tickers or investment advice to anyone. But you step back and you say, okay, in theory, we can fund a retirement in the financial independence realm with real estate, with passive assets, things like index funds that we've talked about in the FII community for over a decade now.
00:02:14
Speaker
or a combination thereof. And I will say most people tend to take the passive asset index investing path, but there are plenty of people who do the real estate path for some or all of it, the bigger pockets community. I mean, there's plenty of people out there doing that. My bias is very much towards the financial assets, the low cost index funds.
00:02:34
Speaker
One thing I want to push back though on the commenter, and it was a great comment on the YouTube video. Fantastic comment. Thanks so much for making it. But one thing I want to push back on is this notion that anyone needs income. And you say, well, wait a minute, Sean, we all go to work every day during the accumulation phase. Don't we need income? Well, I'm going to push back in two ways. One, if I came out to Longmont tomorrow and I gave Carla $10,000 in cash,
00:03:00
Speaker
US currency. Does she need any more income for the rest of her life, assuming her spending is at least somewhat modest? The answer is no. right And I think that proves something. It's not that Carla needs income. She needs heating and cooling. She needs shelter. shelter She needs food and beverage. right She has these needs and income is a way to meet them, but it's not the only way to meet them. And in that case, if she had a pile of cash that was $10 million, dollars that's going to meet them.
00:03:28
Speaker
But I'll give you a more practical example. Many people in the Fi community take the JL Collins path, right? So refer to his book, The Simple Path to Wealth, excellent book, Chestnut in the Fi Community.
Investment Recommendations from 'The Simple Path to Wealth'
00:03:40
Speaker
Chapters 13 to 15, he sort of lays out his you know op ah you know optimal Fi portfolio. And I think we can do a lot of learning from that. And he basically says that most people in the Fi community should be 75% to 100% VTSAX. He gives a ticker, right? So that's his opinion.
00:03:57
Speaker
And you say, well, okay, that's interesting to me. If somebody really needs income to fund a retirement, he's just giving you horrible advice. Why do I know that? Well, I looked up the dividend yield on VTSAX yesterday. And according to my research is 1.32%. So let's think about that for a second.
00:04:19
Speaker
You retire, you have $2 million in VTS AX, okay? At 1.32% dividend yield, that's going to get you $26,000, $27,000, hardly any income at all. But that person might be very successfully retired. So I think that also illustrates that income isn't as necessary as some people think it is. makes us feel warm and fuzzy, getting a paycheck, getting an annuity, getting a 6% yield on something. But there are other ways to fund our financial needs other than income. And you know so we can unpack, there's a lot to unpack there, but that's my initial thoughts on this, you know real estate versus index investing debate.
00:05:02
Speaker
Okay. Well, first I'm super excited that you're going to come to Longmont and cut me a check for $10 million. dollars That was a yes. One of our last episodes, David was quizzing me on, I don't know, some random chat, GPT legal questions. Cause he wanted to make me prove I was actually a lawyer. And so we did learn to have a binding contract. We need to offer for acceptance and consideration. Pretty sure we're missing consideration here, but that's okay. I accept and that sounds fun.
00:05:28
Speaker
No, I think that is a really good point though,
Mental Shift in Financial Security
00:05:31
Speaker
Sean. And I think so many of us get really, really tied to that just very dependable feeling of having a paycheck coming in the door because that's the model that most of us grew up with. And that's the model that most of us had during our accumulation phase is there's just dollars constantly rolling in the door and that's how we meet our needs. So yeah, I love this idea of shifting away from that. And I think it's super, super important folks in the fire community.
00:05:57
Speaker
to be able to pull that ripcord and let that sense of security go. Many of our conversations lends itself to pre-fi and post-fi. So for the sake of this conversation, let's work on that pre-fi. Somebody is in their 20s or stepping into their yep ah first real W-2 income or however they're getting their income and they have money to now build a portfolio. How do you design that portfolio without real estate to maximize the ability to live on the income that would provide post-fi?
00:06:31
Speaker
Yeah, so I start with the J.L. Collins model, right? And I'm going to give you a little wrinkle on that in a second. But you know J.L. Collins, go back to Simple Pet to Wealth. He's saying 75% to 100% in one fund, VTS-AX.
00:06:46
Speaker
and then 0% to 25% in a second fund, VB TLX. And he's essentially saying, buy the US stock market and buy the US bond market. That's essentially what he's telling you. And I think that has a lot of upside, a lot of things to speak for it favorably.
00:07:04
Speaker
right Because what you're doing is you're taking advantage of historical development. Jack Bogle, mid 70s, creates the index fund. It was the first time that American investors could own hundreds, if not thousands of businesses at a very low cost. right So you're keeping your investment expenses low.
00:07:22
Speaker
you're keeping your diversification high so you're not just tied to the tech sector or to the consumer staples or consumer discretionary or financials or mad or whatever it is right you got exposure to all of them and you get to benefit from the upside of hundreds if not thousands of businesses and you don't have to know anything about those businesses are running them.
00:07:45
Speaker
That's an incredible opportunity. So I think that's, you know, when we think about it, what we're trying to do in the accumulation years is literally accumulate and build wealth and our contributions matter so much, but we need some growth, right? We got to have some growth and at participating in the upside of thousands of businesses is a great way to get that growth. And let's think about downside in the accumulation phase for a second.
00:08:12
Speaker
One of the downsides is let's say we're a real estate investor, right? And so we're the landlord on five doors, 10 doors, and something like March of 2020. So recall that's when you know COVID hit the news real heavy. And if my memory serves, two things roughly happened in the March, April timeframe of 2020.
00:08:34
Speaker
One was the stock market was down roughly 30%, give or take, and you have to look at your portfolio and your index, right? But that happened, if ah if my memory serves correctly. And the second thing is the Wall Street Journal claimed that 30% of tenants stopped paying their rent.
00:08:51
Speaker
Okay, and again, you know double check my facts there, but directionally, I think both of those are very true. So if if those two things happen, well, okay, it sucked to open your 401k statement and it's down 30%. It didn't cost you a penny. There was no negative cashflow associated with, okay, my stock portfolio is jail Collins thing, whatever it is, I'm down 30%, didn't cost me a penny out of pocket.
00:09:17
Speaker
Well, what about your real estate portfolio? You have 10 doors and three of those tenants stop paying. Well, all of a sudden, those three tenants are costing you mortgage payments, HOA payments, maintenance, property taxes.
Risks of Real Estate Investments
00:09:30
Speaker
right There's negative cash flow associated with that real estate investment in a way that is not associated with the passive investment.
00:09:39
Speaker
And I say, well, in our accumulating years, that's a really nice thing. right In my accumulation years, I have risk capacity, but it is somewhat limited. right I'm only getting one paycheck or maybe two paychecks, maybe I got a side hustle. you know If these real estate properties through tenants not paying, through vacancies, you know through mortgage payments are bleeding me dry, that's a real problem. Even when the stock market goes down, it's a problem, but it's not that horrible a problem.
00:10:06
Speaker
Yeah, I think those are all excellent points. I do want to add one caveat to your otherwise rock solid advice, which is you don't lose any money when you get that 30% drop in your portfolio if you don't sell. And I think that's really important for folks to make sure you know that old advice, know thyself, make sure you know that about yourself that you are not the kind of person who's going to panic and hit the sell button.
00:10:29
Speaker
when you've just taken a ah really big hit. And just as a fun anecdote, potentially scary anecdote, I was one of those people who thought maybe things are different this time around with COVID. Like we've never had a worldwide pandemic before. And I remember thinking, is this one of those times where things are actually different and we should sell? Thankfully, we did not.
00:10:52
Speaker
And the market came roaring back. So you know I think every time you live through one of those events where you feel like, whoa, this does seem really scary and different than maybe something that's ever happened before, remind yourself, no, no, we've been through a lot of things before in history. This time is probably not different. It's probably not a good idea to sell.
00:11:10
Speaker
Okay. So let's take real estate out of the equation then. This is my first job. I'm making real money. I have $80,000 a year income. I've got the general things offered to me that someone would stepping up into like a corporate world job would have such as a 401k, HSA. i don't I don't know, maybe a FSA. I'm not sure what you see.
00:11:30
Speaker
in your world, know you have access to a brokerage account, knowing and thinking if I'm 23 right now and I think within 20 years, so a 20-year timeline for planning purposes of 43, I want to retire. What's your order of operations and in what percentages for those so that when I do become financially independent and no longer clock in and clock out every day, I can withdraw that money in the smartest, most efficient way.
00:11:54
Speaker
Yeah, David, great question. So I would start with the workplace 401K. That is such a powerful vehicle. And I tend to advocate, especially for an early retiree, traditional deductible contributions. We can get into that a little bit more later.
Investment Strategies for Young Adults
00:12:09
Speaker
I think the opening bid for somebody who's 23 years old is 10 percent, because I would say if you're 23, the odds are you're not going to get overnight to a place where your financial affairs are structured so that you could retire in 20 years.
00:12:24
Speaker
For some 23-year-olds in the audience, maybe that's possible. But for most of them, it's it's a little bit more of the baby step model, or at least the walk before you can run model. right So the the opening bid is 10% of your compensation into a traditional 401k. That does a number of things. It gets you... Most 401ks, not all, you got to look at the plan, have low cost index funds these days. That's my experience. Most of them have that.
00:12:49
Speaker
And 10% guarantees you get the so-called employer match in almost every situation. That's something you have to do, right? If you're going for financial independence, generally speaking, most employers will say, hey, you put in 3%, 6%, some percentage, we will match that dollar for dollar, 50 cents on the dollar, 25 cents on the dollar. You got to go grab that. Even sometimes it's subject to, they call it vesting. You got to stay there for a little while, but usually two years is is enough to get some of it.
00:13:16
Speaker
And if you're not at that percentage anyway, you're probably not going to be financially successful. But then what other things should you be thinking about? And there it's the the biggest takeaway is invest, invest, invest, right? Whatever you're doing, build up those contributions, especially early.
00:13:33
Speaker
Now, some of the things I tend to like for an early saver, Roth IRA, that's a great one. Why not take a deduction at work, try to get as much as possible in the 401k, and then at home have a Roth IRA. These are the type of accounts that tend, especially for a younger person, tend to do well in equity index funds, long-term investing. Roth IRA is a great one.
00:13:53
Speaker
HSA for some people is another great one, another one that benefits from index investing, getting a lot of in there. And then the last one is the taxable brokerage. People sort of worry about, oh, no, I'm going to have a taxable brokerage account. And isn't that going to generate a whole bunch of taxable income?
00:14:13
Speaker
Well, one, it tends not to generate as much taxable income. I talked about VTS AX. Currently, 1.32% dividend yield, you're going to have to have a whole lot in VTS AX for it to generate a lot of money. And oh, by the way, most of that dividend qualifies, as they call it for the qualified dividend income rate, which is the same as a long-term cap gain rate, usually 15% for most early accumulators. And then, you know David, you reference percentages, and that's hard to say, and that's going to be individual by individual.
00:14:40
Speaker
Couple of thoughts. One, start with the 10% and the 401k. That's my rule of thumb. And then build from there. Maybe it's more in the 401k. Maybe it's more in the Roth IRA. And I think one thing you learn in your 20s and your 30s is is a lot of the stuff they're selling you on TV and the internet, it ain't so great, right? Because you get tempted. You're 25 years old. Oh, I got the latest and greatest this and that. And I got to go to this concert and have front row seats. And then you start figuring out, oh, yeah, this stuff isn't really worth that much. Maybe I should just keep plowing that in index funds and get more and more financially independent. So that's sort of my take on it.
00:15:18
Speaker
Yeah, I think that's pretty solid advice. There are very few things that bring you as much joy joy in life as the joy that comes with financial freedom. so So you are the five tax guy, Sean. So I think we'd be remiss if we didn't ask you about some tax implications. So since Beatrice's question was about real estate investing, can you talk a little bit about the taxes for like the taxes that would apply if you are a real estate investor versus the taxes that would apply for investment. So you talked about the tax on dividends, but what about on growth and on your withdrawals? Can you touch on those things a little bit? Yes. So, Beatrice is coming from a place that is very logical from a tax perspective.
00:16:02
Speaker
But it's not the only piece of it. So what do I mean by that? Real estate investing is very tax efficient, right? So you buy the real estate, you get to call it basis in the rental real estate, the house, the apartment building, whatever it is. And you can quote, unquote, depreciate that as that basis over 27.5 years, straight line. So you take that basis every full year divided by 27.5 and you get a tax deduction for that.
00:16:30
Speaker
So that shelter, some of that rental income, that's really powerful. That's great. So some people say, well, real estate is so tax advantage. That's why you should do that and favor that over the passive index investing. I step back and I say, well, wait a minute. On these passive assets,
00:16:46
Speaker
equity index funds, bond index funds, the taxes tend to be pretty good too. right So what do I mean by that? Well, like I said, equity index funds tend to have one low yield, so they don't show a lot of tax taxable income every year. And two, they tend to qualify for these qualified dividend income rates or long-term capital gains if you sell them in retirement. So they tend to be tax efficient on their own. And then the other thing is with the passive, the VTS-AX, the VBTLX and similar investments, I'm not giving you investment advice, they all can be in these retirement accounts.
00:17:22
Speaker
And the retirement accounts have so many tax advantages, right? So it's traditional retirement accounts. You take a deduction at your highest rate while you're working, tends to be lightly taxed when you get to early retirement and you're taking that money back out. We could talk about Roth conversions. People have talked about those. Those tend to be lightly taxed if done right, or even just withdrawing for living expenses. Those tend to be lightly taxed.
00:17:45
Speaker
And then Roth is out there, too, during working years, like I said, like a Roth IRA. Well, that's tax-free in retirement, right if done
Tax Advantages of Index Funds
00:17:52
Speaker
right. So you know I think, yes, there are absolutely are advantages to rental real estate from a tax perspective. But it's not as though there aren't advantages to the passive index investing from a tax perspective as well. And so I would argue that that's not enough of a motivator, in my opinion, right to favor real estate over more passive index investing. I think that's a really good point, Sean. is I do real estate investing, and it's not passive for one thing. It's absolutely not passive. And you make mistakes along the way. So unless you're like in real estate for a long time, you're likely not going to see all those benefits that you probably got into real estate for. Those main benefits are probably not going to come to fruition because you might get tired of it and sell, or and then you've got to deal with that capital gains and all those things. So the long, long-term effects that people tout for real estate may not be may not play out for the individual who's listening to this right now and and has two or three real estate properties and then decides at some point in their life it's just not worth the trouble or the hassle as compared to passive index fund investing like we're discussing. So with the port perfect portfolio, you're saying contribute to the 401k up to 10%
00:19:00
Speaker
then consider Roth IRA. And now would you say when, because now you have the option in most companies to either contribute to the Roth IRA or traditional, I mean, excuse me, like a Roth 401k or traditional 401k. My thoughts are you want a little bit of each the way it's taxed. So me, I would advise just go to traditional 401k with your workplace, but then of course contribute to a Roth IRA outside of that.
00:19:28
Speaker
And once you can max that, then you may, you can have other considerations for what you do next. What do you think about that? How do you prioritize which 401k, traditional or raw to contribute to? So David, I think you had some great thoughts there. So I step back and I say, we generally want to pay tax at the time in our life. We're most likely taxed, right? And for most of us is our childhood, but that's not really part of the equation here. So it's our working years or retirement years. Okay. Well, let's step back.
00:19:55
Speaker
During our working years, we get paychecks and sometimes we get bonuses, right? We tend to be relatively high tax in our working years, especially in the five community, not universally true, but we tend to be at least, especially on the last dollar, we tend to be relatively healthily taxed 22%, 24%, 32% federal. Okay.
00:20:14
Speaker
Well, what about in our retirement years? The dirty little secret is most people are relatively lightly taxed during their retirement years. So if you if you believe that, and I've done YouTube videos for proving that out, I think where you come out is at work when the question is, do we take a tax deduction for the traditional 401k contribution, or do we forego that deduction and do the Roth 401k?
00:20:37
Speaker
I tend to think at work, we take the deduction because we know we're paying that marginal rate. We're getting that benefit at 24 cents on the dollar, 32 cents on the dollar, whatever it is. Let's grab that benefit. And then in retirement, especially if we're your're it Especially if we're going to retire early by conventional standards, we're going to have years that we could probably take that back into income at 10%, 12%. And we're making money that's arbitrage. Take a deduction, say 24%, re-included at 12%. We've just printed a little bit of money on the federal government, pretty good.
00:21:10
Speaker
But you also referenced something that's very impactful, David, which is the issue of the home retirement account, the traditional IRA or the Roth IRA. And many in the audience can contribute to a Roth IRA, but can't deduct a traditional IRA contribution. So that's really interesting to me. So at work, I could do the traditional or the Roth, I don't have to worry about my income, right? So there's a trade off there, deduct or don't deduct.
00:21:36
Speaker
At home, many people don't have that same trade-off because they don't qualify based on the rules, the income limits to deduct the traditional IRA contribution, but they do qualify for a Roth IRA contribution. So why not deduct where where there's a real trade-off and I optimize for that trade-off at work, traditional 401k. And then at home, I say, all right, I'm going to do the Roth IRA and I didn't sacrifice a tax deduction.
00:22:02
Speaker
right There's no negative trade-off for most people. For some people, you could deduct a traditional IRA. It's worth looking into. But for most people, you can't deduct that contribution. So I like where you landed, David, which is deduct at work 401k, do the Roth at home, Roth IRA. And now we're cooking with gas and we're building up a lot of tax advantage savings. so Can you remind folks, because I believe there is an income limit.
00:22:27
Speaker
over which you can't contribute to a Roth IRA. Is that true or am I wrong about that? Carly, you are 100% correct. Okay. I'm actually going, I have a little blog post here on the 2024 limits and these limits just change for 2025. So if you're single, okay.
00:22:45
Speaker
and you make less than 146,000 in the year 2024, anywhere from zero, well, you have to have earned income, but assuming you have earned income to 146,000 of a modified adjusted gross income, you can make a Roth IRA contribution. Over 146 to 161, it phases out, and then at 161, if you're single, no Roth IRA contribution. For the married filing joint in the audience, for 2024, it's 230,000.
00:23:14
Speaker
Under that number, you can do the full Roth IRA contribution between 230 and 240 of adjusted gross income, it phases out. you know So then you say, well, wait a minute, Sean, what about this backdoor Roth? There's been a ton of commentary in the FII community about that.
00:23:30
Speaker
That's a ah theoretical workaround this issue, right where you can make 500,000 of adjusted gross income and you say, oh, but I'm going to do this backdoor Roth. And if you have the right profile, meaning you don't have any other traditional IRAs, SEP IRAs, or simple IRAs, that's a workaround, the income limit on the ability to contribute to a Roth
Roth IRA Contribution Limits for 2024
00:23:51
Speaker
IRA. Now it worked though, traditional 401k and traditional or traditional 401k, Roth 401k, no income limits. right You can be the quarterback,
00:23:59
Speaker
for the San Francisco 49ers and you can contribute to a traditional or Roth 401k assuming the Niners have a 401k plan. That's good to know because i that was my career goal for 2025.
00:24:13
Speaker
No, that's all really, really great information, Sean. Hopefully that helps some folks out there. as there Because, well, I should know, we're doing recording lists towards the end of 2024. And it's not too late for folks to make contributions to a Roth IRA or a traditional IRA if they haven't done that yet, right?
00:24:30
Speaker
That's absolutely correct. In fact, not only is it not too late for the end of 2024, you have into 2025 to make that 2024 contribution you have until the tax filing deadline, April 15th, the one just likely user implementation experience thing to keep in mind.
00:24:47
Speaker
is if you in february you January, February, March, early April of 25 want to make a 24 IRA or Roth IRA contribution, when you go to your financial institution portal, make sure you do the dropdown, the coding, whatever it needs to do to indicate it is for 2024.
00:25:05
Speaker
The default is if you make it in 25, they treat it as in 25, but you can make it in 25 and have it be for 24 as long as you just make sure it's indicated that this is a 2024 contribution. Perfect. I think that's really helpful advice.
00:25:20
Speaker
All right, Sean, this 23 year old employee is now 33 years old. Their income has increased, they're maxing out their 401k, they're maxing out their Roth, or maybe even by this time they came and qualify for a Roth. So they've started an HSA, a health savings account, which has its own rules and everything. So figure that out on your, that person has figured all that out between 23 and 33 and has a nice chunk of change there is the very next thing that they do, if they haven't done it already, is start a started taxable brokerage account. Is that the next step for them?
00:25:49
Speaker
I would say so, absolutely. so And those are easy to set up, right? Because the financial institutions out there, they want your business, they want your assets to sit on the brokerage. It's not about assets under management or anything like that. you know Essentially, especially if you're affluent and you're saying, hey, I want to put $10,000 in this brokerage, you probably pick up... If you're struggling with the website, you could probably pick up the phone and get it done. These websites tend to be pretty user-friendly anyway, but that tends to be the the the best thing to do in a situation like that where you sort of max out your runway in these retirement accounts. And what what it does is it sets up it sets you up for a number of things, especially flexibility in early retirement. right When you get to early retirement, the easiest thing to access is going to be those taxable brokerage accounts. So you're setting yourself up for success later on. And look, maybe you don't really retire. There are people who just love their careers or find a second job or whatever it is.
00:26:45
Speaker
But it's not going to hurt you if you don't ultimately early retire. It doesn't have to be about early retirement. It's not going to hurt to have some money in a taxable brokerage account. That's always a good outcome. And it's just so, so flexible. And these days, it's relatively lightly taxed. yeah that could That could always change. right There's no 100% guarantees, but it's relatively lightly taxed. So I say, go for it.
00:27:07
Speaker
Are there any of these, which of these accounts, if any, the 401K, the Roth, the etc HSA, the FSA, the taxable brokerage account? As that person gets closer to 43, let's say they're 38, do they stop focusing on one and like pad the ah another? Great question, David. The one I tend to disfavor, and it's just my own personal opinion and preference, right you know please don't at me. you know is the FSA. So that's an account that's a spending account. It doesn't really build wealth. It's tax advantage. It gets you a little tax break. But essentially, by early in the next year, you got to spend it. you know And so it's it's not about ah you know versus HSA, Roth IRA, taxable brokerage, 401k. Those build wealth over time. The FSA, it's's it's a nice thing. And I think some people get a nice real benefit out of it, but it doesn't really build wealth. so
00:28:00
Speaker
That would be one I would be less inclined to use. And I will say, as you get closer to the to the end you know of of your working career, you're going to want to be much more intentional around, okay, well, what are the first few years of retirement look like? And for some people, that's the time to really amp up the taxable account. Not that you would stop necessarily like a 401k contribution, but there it's really helpful. Now that said, the Roth can also, I mean, we we'll talk about this more, but and maybe in a later episode, but you know even the Roth, these things can all be accessed before 59 and a half. So it's not a bad place to be to have money in one or the other, but I will say as we get to the early retirement, maybe the Roth isn't quite as impactful, but you can still access that too. And building up the taxable very much helps.
00:28:45
Speaker
Carl, you mentioned the max contribution limits to Roth IRA or more traditional IRA for 2024 and the transition to 2025. This will air at the end of 2024. Sean, are there changes to the tax code coming that we need to be aware of?
Potential Tax Changes in 2025
00:29:01
Speaker
Yeah. so 2025 is going to be a very interesting year in the tax world. This is definitely a stay tuned thing. And so now we're post-election. Trump won small majorities in both houses of Congress for the Republicans. And Trump made some very public promises during the campaign. Now, one of them, I think, is something everybody thought would happen if the Republicans won.
00:29:23
Speaker
which is the extension of the so-called Tax Cuts and Jobs Act, the TCJA 2017. That did two things that were very impactful for the FYI community. One is it reduced rates. The 15% rate went to 12%, 25 went to 22. I don't remember all the particulars. Those rate cuts were only till the end of 2025. Almost everybody's thinking, okay, those rate cuts are now going to get extended into 2026 and at least somewhat further. So that's You know, something that almost certainly is going to happen. The other thing that was really big for the FIE community was the standard deduction. Tax Cuts and Jobs Act significantly increased the standard deduction, but again, it was temporary, very much very helpful for early retirees. That's almost certainly now going to get extended.
00:30:07
Speaker
Now, there's other cuts that Trump, like I said, said, talked about. and No tax on tips, no tax on overtime, no tax on Social Security. From a planning perspective, I would argue for the early retiree, that last one, the no tax on Social Security is the most impactful and the one to watch for.
00:30:23
Speaker
So security is a good thing. It provides income in retirement. It's one way to meet our expenses, right? So we like social so security. But depending on how much other income you have, it may be taxed or may not be taxed. And for those who are relatively affluent, 85% of it has has historically been taxed.
00:30:40
Speaker
Well, if this proposal to get rid of the taxation on Social Security goes through, that means that retirees are all of a sudden gonna have a lot less income or you know on their tax return, and that means one or one or both things are gonna be true. Either you're gonna be able to do Roth conversions at a lower rate, right? Because you have less income that's already hitting the tax return, or you just take the money as distributions from your retirement account and live off of it, and it'll be taxed at a lower rate.
00:31:07
Speaker
And it also means that you can be more flexible in terms of when to take Social Security. A lot of people delay to age 70 for tax reasons. If it's no longer taxable, it doesn't mean you shouldn't delay to age 70, but that'll be out the window. So the big one I'm watching, I would say, is this tax cut on Social Security. Will or will not that happen? There's no guarantees, but you know The electorate is entitled, not to get too political here, but the electorate is entitled to hold politicians to their promises, right? And Trump didn't say this once or twice. He said this publicly many times on the stump. There was one time where he was speaking and I think it was on the font behind him, right? So I think it is fair to hold him to that now. It's a slim majority in Congress, right? So there's no guarantees on that.
00:31:52
Speaker
I can't resist asking, how do you think that will affect the long term viability of Social Security if that tax on Social Security does go away?
Impact of Tax Elimination on Social Security
00:32:01
Speaker
Because I assume a lot of that is rolled back into the Social Security fund to keep it going over the long term. Do you think that will have any loss?
00:32:08
Speaker
Karla, you're opening up a whole Pandora's box fairly, right? So my understanding is there is a mechanism. So the more affluent seniors pay tax on their social security income up to 85% of that income. And there is some mechanism to direct that revenue to social security. And so you're right, you would be reducing a social security funding source if this tax cut were to pass.
00:32:34
Speaker
Now, a lot of folks have been pessimistic about Social Security. And I step back and I say, you know, Social Security and Medicare are the two most popular government programs. So do we really think that a government that has not shown an inclination to cut spending, although that's changing? But do we really think the first thing they're going to cut are the two most popular programs?
00:32:55
Speaker
So long term, I think the political incentives align here to keep Social Security afloat. And there can be other revenue sources, right, that the government has not tapped. So I tend to be very optimistic long term on Social Security. And I think, you know, between, you know, there are different ways that this can all unfold.
00:33:14
Speaker
Some are more favorable than others. you know Some of that involves political choices. right In theory, you could have spending cuts. You can have tax hike. You can have ah inflation, unfortunately, as a way to to take care of it. You just print the the problem out of existence, not a good solution, in my opinion. And there's combinations of all three of those things. So I hear your your point, Carla, and you're right to be concerned about the credit worthiness of the federal government since you presumably are a creditor of the federal government as a Social Security claimant in the future. So I think we all should, we should hold the politician's feet to the fire on the credit worthiness of the federal government. But I just tend to be more optimistic about it. I think this thing will get solved exactly how that I can't tell you, but I think there are many ways it can happen.
00:33:59
Speaker
That's encouraging. I like that answer. OK. Yeah. Anything else I didn't mean to cut you short there, any other changes we should look out for? I mean, I would argue the biggest change for 2025 would be this potential end of taxation on Social Security benefits. That's the biggest one. But definitely follow the TCGA extender bill and you see what happens there. And some of these other ones are you know interesting. But that's like the big one, that the tax on Social Security that I'm focused on.
00:34:26
Speaker
Yeah, that is certainly the one to watch. I would agree with that.
Time Travel Discussion
00:34:30
Speaker
Okay, so we are now going to forget about money for a little while and talk about our fun topic. So the topic we picked for today is if you can travel to any point in time, when would you pick and why? Sean, you want to go first here?
00:34:46
Speaker
Yeah, so I'm going to give you two, because the first one I thought of, it it turns out it probably isn't a really good option, right? So I thought, look, I'm Catholic. So I thought, hey, you know what? I would go back to 30 AD and you know be able to visit with our Lord and Savior, Jesus Christ. But I thought about two things about that. One, I'm Catholic. So my faith teaches that I don't need to a DeLorean to do that. I can go to any Catholic church, any tabernacle in the world,
00:35:16
Speaker
Jesus Christ, body, blood, soul, and divinity is in the Eucharist, right? So I can visit our Lord and Savior anytime I want. The second thing I thought is, well, wait a minute, I don't speak Aramaic. Jesus spoke Aramaic. So there'd be a bit of a communication issue. So, all right, so maybe I'm not going to travel back to 30 AD. Well, where could I travel to? This one, I think I would enjoy and I could i could enjoy it and perceive it.
00:35:42
Speaker
I would travel back to the mid 1980s. And what I would do is I would enjoy baseball from the mid 1980s, especially like the 86 Mets and the 85 Cardinals. You look at baseball today, and I mean, we're all God's children. These are incredible athletes.
00:35:59
Speaker
But the game was so enjoyable back then. When you had like Keith Hernandez hitting 300, you had Tommy Herr was the second baseman for the Cardinals. He had in 1985, eight home runs and 110 RBIs. Like that stat line doesn't exist today. You know, sacrifice bunch, stolen bases, doubles. like Oh my goodness, baseball was so fun back in the 80s and the Mets and the Cardinals in the mid 80s were like two just fun teams. They fought it out in 85. Sadly, the Mets lost that division title. But so I would go back to the mid 80s and enjoy mid 80s baseball, which I think was like the perfect era of baseball.
00:36:40
Speaker
Well, Sean, you know, if you took your phone back to 30 AD, you got Google Translate. You can figure out the RMA. There you go. Problem solved.
00:36:51
Speaker
Were you a Mets fan in 85? Because you said that you were. Oh, absolutely. So yes, I was. I would never have guessed it. Yeah. So yeah, i I was born in Flushing Hospital. My family lived in Flushing, Queens from when I was two years old to when I was almost eight years old. And then we moved out to Long Island, but I stayed a Mets fan. I'm old enough to to remember 86. You know, they won the World Series. I even remember late 85.
00:37:15
Speaker
But I, you know, yeah as a little kid, I didn't appreciate the way I would appreciate now. Keith Hernandez was my favorite baseball player. He had come from the Cardinals. Right. It was interesting. Like the 82 World Series, a great World Series. Nobody talks about in game seven. Hernandez had a huge hit and, you know, they.
00:37:32
Speaker
the the It was funny because I remember as a little kid, I thought, why doesn't my dad play baseball, right? Like, what's going on there? And like today, I don't think any kids think, why doesn't my dad play baseball? You look at the guys now and they're all linebackers, right? My dad doesn't play baseball. He's not 6'2", 250, you know? Yeah, if I'm remembering right. i was i I collected baseball cards right around that time. 88, 89 is when I started getting a baseball card. So I remember Keith Hernandez and and Gary Carter was the catcher, I think. Oh, yes. And Darryl Strawberry. I'm not sure if he was pitching at that time. I think he was right. Darryl Strawberry. Darryl Strawberry is the right fielder. Dwight Gooden was the Mets. Great pitcher. Eighty five. He was twenty four and four. One point five. There were brothers or cousins, right? I think they were related in some way. I don't know. I think are related. Doc Gooden was Gary Sheffield's cousin, I think. So Gary Sheffield was a later baseball player. Yeah.
00:38:20
Speaker
Yeah, but I remember saying, even now you look at the, the 30 on 30s and all that stuff through ESPN, you've got the the grainy, the grainy footage and it's just something nostalgic about it. And they had a great record. It was 100 and almost 110 wins. I think that season's won 108 games in 86, but barely got through two of the greatest playoff series ever. Right. So they played the Astros one in six games, but.
00:38:43
Speaker
if they had lost game seven or game six which is sixteen in game they were faced mike scott who had split finger fastball and was scuffing the baseball and the meds couldn't hit him so it's like oh if they go to game seven and that's not gonna win this thing. And then in and you know game six the famous game six the Mets were one hour away from losing the world series in game six.
00:39:04
Speaker
They rally the fame, you know, the Bill Buckner play, which was he probably doesn't even beat it. It doesn't get Mookie Wilson out anyway. Who knows? And then in game seven, people forget in game seven, the Mets were down big. And then Keith Hernandez again in game seven of that series had a two run hit, got the Mets back to three to two. And they eventually, I think, won that game eight to five. but People forget in game seven, the Mets were down that year. So as great as that team was, it was a knife's edge thing that they won that World Series.
00:39:33
Speaker
I think we should keep on talking about sports as long as we can because Karla loves sports so much. I like have no idea who actually the name Darryl Strawberry does ring a big bell. I remember him. If you'd asked me who Darryl Strawberry was, I would have been able to tell you he was a baseball player. And that's as far as that knowledge goes. Yeah. Sorry, guys. I'm not a sports person. I love that answer. And I think it's actually going to make me change my answer because I love this idea of going back to enjoying the heyday of things that you that you love. Yeah. David, do you want to go next?
00:40:04
Speaker
Sure. As you can see by this picture, well, actually, well, there you go, baseball. There's a Braves picture right behind me, Sean. I don't know if you saw that. I'm a 90s Braves fan as far as like the, my heyday, 14 straight division titles. I'm just going to keep on going because Carl loves this part.
00:40:19
Speaker
you know musician, musician, musician, musician. So music is what I'm passionate about outside of talking in this microphone. So I was thinking, okay, what kind of music is impacting me the most other than Tupac in the 1990s? But I'd say a more common thread is jazz music. So I would go back to the 1920s, the jazz explosion and and more specifically New Orleans in the 1920s. It was just after World War I, I think it ended in 1919. The 19th Amendment was passed or whatever the right word is there in 2020 or 1920. So it was a time as a post-war, he has an economic boom for at least some of the classes of people in the country. Maybe not so much for the downtown New Orleans group, but it was just seemed like a very energetic time.
00:41:05
Speaker
at least in New Orleans, very culturally diverse, awesome food, great music. And I always just imagine a jazz band just marching down ah the street in a parade, just enjoying that kind of excitement and that energy. And I think I'd i'd like that. What about you, Carla?
00:41:21
Speaker
Yeah, like that's also a really fun answer, except have you been to New Orleans? Would you really want to live in New Orleans without air conditioning? I feel like that would have been tough, but... If you had the power to go back in time, I'm pretty sure I can have the power to figure out how to stay cool. No, I love that answer too. Okay, so I feel like I'm the only money grubber person here. like I think I would do the sort of stereotypical time travel thing.
00:41:47
Speaker
and think about money. So I actually might go forward in time, because I'm kind of a worrier. And I would maybe like look at what companies have done the best and then come back and adjust my investments to focus on those things. So I might do something like that. But you guys are inspiring me to be a better person and not focus on just money.
00:42:07
Speaker
So I think I might go back to like the 1830s and hang out with Chopin because he's probably my favorite piano composer of all time and I would love to hear Chopin play live. That would be pretty freaking amazing.
00:42:22
Speaker
Also, no air conditioning, but you're in Europe, so it's going to be more tolerable than it's going to be in New Orleans. Well, you persuaded me to add an asterisk to mine. Okay. And this big market crash on October 29th, 1929. That was in the 20s. Okay. So the whole time I'd be rocking in the 20s and then I'd be like, but but everybody's going to be okay. It's going to be okay. So we'll have a little now, get some canned goods. It's going to be a rough couple of years coming up, but we're going to make it through.
00:42:47
Speaker
Yeah. Yeah. It's all great answers all around, guys. This was fun. I love this topic.
Teaser for Next Episode: Withdrawal Strategies
00:42:52
Speaker
All right, Sean. So that conversation was based on the accumulation phase up to the point where you have reached your magic number and you can reach financial and financial independence. Our next conversation is going to be optimized withdrawal strategies for tax purposes from this perfect no real estate portfolio. I look forward to that.
00:43:14
Speaker
Yeah. Thank you so much for coming back and doing another one with us, Sean. We look forward to it a lot. And thank you so much for joining us today. David Carla, thanks so much for having me. I really appreciate it. And thank you all for watching and listening.