SPEAKER_01: 0:25

Welcome back to another episode of the Make the Most of Your Money podcast. Colin, how are you? Good, Taylor. How are you? I'm great. We had a fun discussion last time about permanent life insurance, and it was kind of triggered by the like the rule of thumb, if you will, of like uh the common saying of like term good, perm bad, buy term and invest the difference, that type of of thinking. And we tried to explore the pros and cons of that and deeper dive on permanent life insurance. But that idea of the shortcut rule of thumb, um, we started thinking there's a lot more of those. Like any rule of thumb, they're generally useful, but sometimes not. And we thought we would just talk through some of the most common ones that we hear and basically explain what it's saying, where it's helpful, where it's not, what the nuance is and and how to think those through. So um let's just jump right into it if you're ready.

SPEAKER_00: 1:15

Yeah, let's go for it. I mean, we came up with a list of twenty or thirty and whittled it down to 10 and try to get a little bit more. Yeah, we'll try to get through as many as we can and and uh just kind of rapid fire.

SPEAKER_01: 1:28

Yeah. So the first one is I uh one I think most people hear the save twenty percent of your income. Or it's at least something that we say a lot on here. Maybe you hear save 15%, save 20% of your income. Where does that come from?

SPEAKER_00: 1:42

Where does it come from? Um Yeah, I mean like my parents were I don't I don't know. You know, I don't I don't know what it's based on from like mathematically, I can I can say like what um you know the CFP coursework gives you is like a um an explanation for how how much you need to save at different points of your life, and with the idea being like if you start saving young, you'll be able to have a normal retirement by uh at a much lower savings rate than if you start saving later. So, you know, you start saving in your 20s, maybe you need to save 13 or 15 percent a year. You start saving in your 30s, maybe it's more like 20 or higher, and you you wait till your 40s or 50s, and like all of a sudden you got to save a huge portion of your income. And so um yeah, the whole save 20%. I mean, if if if people could follow that from the get-go, uh I think everyone would be in pretty good shape for a retirement by a normal age or maybe even earlier than normal. Yeah.

SPEAKER_01: 2:54

Yeah, I I think where it originally comes from, I think generally it's like 15% is like was like the original one that really popular. And and I think if you just take like a in a spreadsheet, if you were to say, like, here's how much I make today, and I'm gonna earn 3% more for the, you know, as a 22-year-old for the next 43 years, and I'm gonna spend another rule of thumb, 80% of my spending and ret of my income in retirement, and you have normal assumptions for investment returns. If you do all that math and solve for how much do I need to save, it ends up being around like 15% of your salary in a perfect world spreadsheet. That's not how the world works. And so um, that's like if you start saving day one, which I don't know, I I didn't. Um and so I think you brought up a huge point. If we if we talk about like where is it helpful, where is it wrong? I think one thing to be aware of is that's generally for retirement. It's not all things, it's not kids' education and everything else. So it's retirement number one. And it's like you said, it's based from based on starting very early. So if you start saving when you're 30, it's gonna be a lot higher. 40, even higher, 50, even higher. You can't just say, oh, I'm 51, I'm gonna start saving. 20% is what they say. Um yeah. And I think that's where like, at least for me, like why I just gross it up to 20 is like 15 is just not enough. Uh it's just not enough to really accomplish what you're really trying to do. Um and so yeah, I think you know that that's where the 20% comes from and and how to think about it. So if you're if you're starting out really early, it's a great target. If you're a little bit later on, you might need to save a little bit more.

SPEAKER_00: 4:25

Um Yeah, and I love the Morgan Housel uh quote or or mentality, or at least that he's espoused is you don't need a reason to save more. Like you don't need necessarily, you know, to have those savings allocated. These are 15% towards retirement, five percent towards college, x percent towards when we need a new roof. Like there will come a time when you will need or benefit from that future flexibility that having a higher savings rate affords you. Um and so yeah, I mean, the rule may be rule of thumb may be a good one. If you start early, you know, save 15%, save 20%. But save more. I don't think you'll be, you know, upset later on if you're able to have more flexibility.

SPEAKER_01: 5:10

That's a good point. If you're an especially high earner or if you have really variable income as well, uh the 20% doesn't like, yeah, you can you're you're totally welcome to save a lot more. You don't need to go right at the minimum. So um yeah, that's saving more is just gonna buy yourself future flexibility. And I also want to recognize for a lot of people, saving 20% is very, very hard if you let me talk about have kids and like it's it's a grind out there right now. So but that's that's a good target. I think most people, if you're saving 20% of your income, you're probably positioning yourself pretty well. Um yeah, don't be afraid to do more. Another one that I hear all the time save like a liquidity planning, save six months of expenses. I think that like there's a couple variations of this. Maybe if you're a single person, it's three months or like single person, six months, dual income, steady job, maybe three months, single income. Save 12 months. It's not just a simple rule of thumb, but how do you think about the six months of expenses or whatever months of expenses rule of thumb for liquidity?

SPEAKER_00: 6:16

Yeah, I think I think it's a great starting point. Um, and especially for for folks out there just starting to save or um you know who don't have an emergency fund, like think just think about the flexibility that having even six months of spending needs in the bank, um, what that allows you. I mean, that allows you the ability to leave a job that, you know, is is not working for you or to take a chance. Um, you know, that allows you the ability to, if you do get laid off, like go find a new job that's the right fit instead of taking the first one that's offered to you. Um so this, you know, I think it's a good rule of thumb. It's one that I tend to follow. Now, are there reasons to deviate from that? Um, I think you alluded to some of them already. Like if you're a dual-income household, if you could carry on your, you know, essential living expenses on one salary or close to it, then maybe you don't need quite six months to be able to have the flexibility. Um, or if you if you're a business owner and you may, you know, have ups and downs in your income, maybe you need to have a little bit more to smooth out those dry periods or slow periods. Um but in general, this is this is one I like. It's a it's a rule of thumb I think is is really helpful.

SPEAKER_01: 7:45

I I always I used to really think it was just way too oversimplicity. I was like, what the heck does months of expenses have to do with emergency? Like, I mean, you know, that to me, like that's the unemployment buffer. What about out-of-pocket expenses for healthcare or homeowners insurance or whatnot? While I do that calculation, I also realized I did it a bunch and it came out to be really close to the rule of thumb.

SPEAKER_00: 8:08

So look at it's amazing how many rules of thumb are like that where Oh, so many. You you can overcomplicate it, add every last thing to a spreadsheet, and the answer comes out pretty darn close to the rule of thumb. That's a lot of these things.

SPEAKER_01: 8:22

So I mean, I I we've talked a lot about liquidity on here. I do think like general, like this is one where more it's not the drag that a lot of people think it is. But yeah, I mean, six months of expense is a great starting point. You won't regret if you have a little bit more. Um let's shift into investing now. Because you know, we've talked about saving and building liquidity, kind of the next thing that you would do is investing. Um aside from our conversation about how to determine your investment allocation, I think one people hear a lot is when choosing between stocks and bonds, have like your age in bonds, right? Like if you're 20 years old, have 20% in bonds. If you're 50 years old, have 50% in bonds. I've also seen some formulas that are like 120 minus your age or something like that. Um what are your thoughts on that? Yeah.

SPEAKER_00: 9:12

Uh I mean, here's what I I like about it. Uh as you are getting older and approaching retirement, your capacity for risk diminishes. Meaning, like if you're trying to retire at age 60 and there's a big market downturn, you know, right before that, that's going to be much harder for you to retire on time. You may have to delay. And so this idea of gradually shifting from um a riskier portfolio that has a higher potential return to a portfolio that has more stable returns, you know, bonds being the more stable. Um, I think that general progression is right. I think where this gets um this is misleading is it's not a gradual um you know, increase my bond exposure by 1% per year.

SPEAKER_01: 10:10

Oh, turn 31, better dial up the bonds by a percent this year.

SPEAKER_00: 10:14

Yeah. Um there's no magic to that. I I would argue like, you know, a young person in their 30s, 40s should probably be uh 100% in equities. You know, retirement is so far away that that you know, that money that's earmarked for retirement could be a hundred percent in a diversified pool of of stocks and index funds. And it's only, you know, as you're you know, those five years, five to ten years before retirement, maybe the five to ten years after retiring, where those are the critical years from a you know sequence of returns risk um standpoint, like then then you should probably be increasing the bonds. And then um, but yeah, I so I think it's overly simplified. I think um but but yeah, it's uh yeah, that's one that's one you do come across once in a while.

SPEAKER_01: 11:06

Yeah. And I I would say uh I think the age in bonds is way too conservative. Like a 20-year-old having 20% in bonds. The 120 minus your age, it requires a little bit of math, but like that would be like a 40-year-old 120 minus your age would be then like 20% in bonds. Um I d I may not have said that the right way, but um sorry for the confusing point there. Is that right? Is it 120? Yeah, yeah.

SPEAKER_00: 11:30

120 minus 40 would be well. So that'd be your percentage in stocks, the options. Okay.

SPEAKER_01: 11:36

Yeah, yeah. That rule of thumb works a little bit better. Because I think the risk here is you can just end up way too conservative later on. Like you could be like 80 years old with no equity exposure, which can be very problematic. And I think really what it's trying to get at is the the reason exists is that the closer you get to needing your money, you can't afford the sequence of returns risk, like you said, as much. So having a less volatile portfolio is really good. That's fine. But I think if somebody wants to personalize that, think about what's your time, like how long until you need to start accessing your money. If you want to retire at 50, your time horizon, that that rule of thumb may be too aggressive. If you want to retire at 75, it may be even more too conservative. And so, like, really, like what it's getting at is saying as you get closer to needing to draw on your money, probably should be less volatile. And so that's a great idea. Um, but maybe adjust it for your own time horizon.

SPEAKER_00: 12:34

Yeah. And I think the other thing it doesn't do a good job of incorporating is other risks besides just market risk. I mean, there's also the risk of inflation. Um, and that's particularly potent to a retiree. And so just because you're retired and starting to draw on that portfolio, yeah, you may not be able to take as much risk as you could when you were 30. However, you know, w big risk to a retiree is is that erosion of spending uh capacity from inflation, you know. And so you need your portfolio to keep up. Yep. Um and bonds don't do a great job of keeping up with inflation over time, um, but equities do.

SPEAKER_01: 13:15

So I think my previous issue is like this is like in theory, it's like a straight line that changes 1% every year. You mentioned it's not like that. Like really, I would say like if you take your standard, you're gonna retire at 65. I mean, I feel like you could have 100% in stocks until you're 50.

SPEAKER_00: 13:29

Yeah.

SPEAKER_01: 13:30

You know, something like that. Like a very long time. And then maybe there's a gradual decline, but then it's got to bottom out at some point. Like you're not gonna go to like a 90-year-old having 10%, like with everything we just said. So I think there's like apply it to that like middle range there, the you know, retirement red zone, the 10 years before or after type of thing is where it's a good thing to have. But um yeah. And if you want, we got other episodes on how to determine your investment allocation. Um, speaking of retirement, moving on to our next one. Um, one of the biggest variables is how much are you gonna spend. And um, for some people, they say, well, how much money do I have? You know, like that they'll determine it that way. But a rule of thumb I hear a lot of times for like how much you should expect to spend in retirement is 80% of your pre-retirement income. Is that right? Is that what you hear?

SPEAKER_00: 14:19

Yeah, I hear that a lot, or or sometimes as a range, you know, 70 to 80 or 65 to 80 or something like that.

SPEAKER_01: 14:28

What are your thoughts on that?

SPEAKER_00: 14:29

Uh it's I I think for a younger person thinking about retirement when that's still so far away, you know, that's a good assumption. Uh just okay, uh, you know, I'm I'm 30 something, I make$100,000 a year. What do I need to sustain a similar lifestyle in retirement? Well, when I retire, I'm not gonna be saving anymore. So so that portion of my income, you know, the portion of that's going to savings, I'm not doing anymore. So if I was saving 20%, that means I need 80% to continue living my life. That, you know, that kind of simplistic math, um, I think it's helpful for a younger person. I think as you get closer to retirement, um, there's really a range here. And it depends on what your income level is, it depends on what your savings rate is, it depends on what your tax bracket is. Um, it depends on what you want to do in retirement. Like if you're gonna be, you know, traveling and and you know, maybe you're gonna go go wild for a few years as you're ticking things off the bucket list. So, you know, overly simplified, it can't I think it's helpful, you know, just if you have to pick a number, that's probably a decent starting point, but it's also not gonna apply to everybody.

SPEAKER_01: 15:46

Yeah. It's useful. It's generally pretty close. I think my the exercise I like to do, and you can kind of do this when you're younger. Really basing it off of income is not the most I don't think that's the best way to do it because if you could have a 50% savings rate, it's like really we're trying to replace spending, so what are you spending today? And so I like to tell people, okay, let's start with what are you spending today? Right now. What part what spending is gonna go away? Mortgage, work travel, disability insurance, you know, different things. And what stuff do you want to add? You want to travel more, you know, maybe some long-term care insurance. Just I I've found that to work a lot easier. And again, but I should also say a lot of times it ends up being pretty close to 80% of income. Um, it it how do you account for taxes? A little bit tricky there. But um again, it's it's it's it's not a bad rule of thumb. Um, but I'd like that framing of like this is where it's helpful too if you have tracked your spending and you kind of know where you spend money. So, okay, how much are we spending today? What part of the, what of this is gonna go away, and what do we want to add?

SPEAKER_00: 16:52

You can get a pretty close number. So yeah, another I mean, one more thought here is like um some folks they they they expect that their lifestyle is gonna change drastically when they retire. Uh, they've got all these trips and and you know, they're gonna go out to eat more and they're gonna, you know, drive nicer cars. And the reality is that like by retirement, your spending patterns and lifestyle are pretty well established. And people don't usually swing wildly from that kind of starting point. Sure, there can be like those bucket list trips or big ticket items that that you know you've always wanted to do that you've never done. Um, but in general, people don't change, you know, where they go out to eat and those s kinds of things. And so um, you know, a good predictor of what you'll spend in retirement is still gonna be s s in the same ballpark as what you're spending before retirement.

SPEAKER_01: 17:49

Yeah. And some will have the kind of we've talked about the spending smile, like spend a lot more early on, a little bit less in the middle, and then more later on. It's like fun stuff, not doing a lot, medical care at the end. You know, more, less more.

unknown: 18:03

Yeah.

SPEAKER_01: 18:04

Okay. What if okay, so on the topic of so we've talked about retirement spending, about generating income for retirement. Like if you say how much I mentioned a lot of people say, how much money do I have? So how much money can I, how much income can I generate from this? Uh I think at least in advisor circles, and I think a lot of regular folks have heard of this as well, the 4% rule. Can you tell us a little bit about the 4% rule and what it means and how it applies to retirement?

SPEAKER_00: 18:32

Yeah. So um it's this, I mean, it basically it's the idea that you you start at the beginning of retirement, you look at what are my assets or my investment assets. Um so say I've got a million dollars in the bank or in investments, you know, a 60-40 type portfolio, million bucks. Um the 4% rule says you can safely withdraw 4% of that starting balance each year in retirement, and I think adjusted for inflation.

SPEAKER_01: 19:03

So it's actually it's 4% the first year. 4% the first year. And then saying adjust that every year for retirement. So the simple math is like a million-dollar portfolio could generate$40,000 a year, adjust that for inflation every year.

SPEAKER_00: 19:18

Yeah. So$40,000 in year one, you know,$40,000 plus you know, inflation, so 2% or whatever in year two.$4,800 the year, second year.

SPEAKER_01: 19:27

Yep.

SPEAKER_00: 19:27

Yeah, yeah, yeah. So and and and and then on. So it's not 4% of the portfolio every year. It's 4% of that starting balance, is like the the rule of thumb. Yeah. In terms of where that comes from, there was a you know, I'm gonna forget the name of the study. Aaron Powell The Trinity study by Bill Bangin. Trevor Burrus, Jr. There you go. Why don't you why don't you tell about it then?

SPEAKER_01: 19:51

Yeah, it was it was a financial advisor back in 1994. I mean, it's very easy to do this analysis now. It was very impressive at the time. He looked at every return sequence in the U.S. uh stock and bond market going back, I don't know, like 100 years or so. Um, basically said, like, try to calculate like what withdrawal rate doing the method of a 60% bond, 60% stock, 40% bond portfolio never ran out of money. And in the basically, so the worst, the lowest withdrawal rate that worked in every scenario was I think it was actually like four point one five. Um and just based on historical math. Yeah. It's so funny. He he just wrote a new book on this, but um it was just like an observation based on history. There's nothing more to it. It's like, hey, cool, look what I saw. Like this worked in every scenario. This has turned into one of the holy wars of financial advice. Uh I'll simplify it. The insurance side says it's way too high, the investment side says it's way too low. Uh I'll try to tell you down the middle. That's what the study says is basically based on his in the like looking at historical data, 4%, 4.15% adjusting for inflation, never ran out of money. Um in a 30-year period, wasn't it? 30-year period. Yeah. Oh, if you're if it's going to be a shorter period, a shorter, if you're going to try to generate income for 20 years, way higher. 40 years, way lower. That's just what the study says. It's an observation. And what that means, if that means 4% worked in every scenario, if that means in every other scenario, you had more money left. And I forget, but it is a frequent amount of the time, you end up with even more money than you started. And so all this to say, 4% is a fine back of the napkin math. It's probably a little too conservative. That was a controversial statement I just made for some people. But this comes back, like I would say, well, a couple angles on this. Um one, it's not like you just sit there and just like, if if you've it all comes down to sequence of returns risk like we've talked about. Like if you have really bad returns earlier on, then yeah, you're gonna have you're gonna be able to generate less income. But if you survive those initial early years and don't have a disaster, and maybe you still have a like if you start with a million, you still have a million dollars 10 years later, and now you only need to withdraw for 20 years, you can withdraw so much more than 40 years. You don't sit there and go, well, 10 years ago we started this strategy. And it's like, so it's a starting point and it's a good back of the napkin. I I generally will run like four and a half percent, just kind of if I'm doing a full back of the napkin and say, like, yeah, this may may need to adjust. Well, all of it's gonna need to adjust, but like that's a comfortable number. But um I don't know, that'll lead you at all.

SPEAKER_00: 22:35

No. Uh yeah, I think this is the number one thing that clients come in with uh having heard when when we're talking about what they can spend in retirement. You know, well i I I I came into this thinking we're gonna spend four percent. And when I actually show them, no, actually, I think you could spend a little bit more based on your age. Like you're already 75, you know, so your planning horizons not 30 years anymore, you know, uh i if only. Um but also just explaining that like what what you said, that 4% was a floor. That means in every other 30-year period, you could have spent much more than that. And so the way I do retirement planning is is more dynamic than just uh, you know, set it and forget it, we'll take 4% out and adjust it for inflation uh from then on. You know, we we may set an initial withdrawal rate that's a little bit higher than that. And then depending on the returns that we experience, we may make small adjustments to that spending. Um but again, it all depends on what your goals are. It all it depends on what your other sources of income are. Um you're not always going to draw the same amount from the portfolio every year in retirement. You may draw more before you take Social Security. Um you may we already talked about how you spend more earlier in retirement in the go-go years than you will later in the slow go and the no-go years. You know, so so retirement spending is not exactly flat. Um you've you know you've already alluded to it's the the this this retirement smile. So all that, you know, uh is is doesn't work with the four percent rule if we're gonna try to match how people actually spend in retirement.

SPEAKER_01: 24:31

I think we found our next podcast episode. We should talk about the 4% rule. But to try to put a pin in that, what it is is saying based on history, that's what you can spend from a portfolio for a 30-year horizon. That's it. I've seen some people think the 4% rule means you can like for infinity. It's it's a starting point. Uh and yes, that's from is it's not your only source of income. That's just like from investment assets. Good.

SPEAKER_00: 24:54

But yeah, I was gonna say, and some people think it's withdraw 4% every year. Whatever the balance is, take 4% out. But you'll never run out of money because you have a hundred bucks left, you can spend four dollars. That's true. Yeah. Yeah.

SPEAKER_01: 25:05

Um I want to get to this other one. It's kind of related to this. Because uh the other thing, the last thing about the 4% rule is we are talking about spending principal. That would draw down your account. And I hear another one a lot of people generally uh older generation I I found. Here's like, don't touch the principal. We're not gonna touch the principal. Yeah. So um, you know, just as long as we don't touch the principal, how much can we generate? Um that's just this is just math. You're gonna have way less spending if you do that.

SPEAKER_00: 25:37

But yeah, and when you talk about not touching the principal, that sounds like a fixed income portfolio. That's like we're investing in bonds and we're only gonna spend the interest. Um we've kind of already talked about why, you know, investing the bulk of your portfolio in bonds in retirement may be too conservative and you're you're putting yourself at risk for inflation. And so this whole you know, n what what principle are we not touching? Are we only spending interest and dividends or um because I I I do get clients who who think that's the the prudent step, or the most, you know, the the most responsible way to approach it is we're just gonna spend what we get in dividends and what we get in in interest, and we won't sell positions ever. Um and like you said, I think it generally that results in a plan that's overly conservative. And so you need a much bigger portfolio to be able to generate income, the income you need that way.

SPEAKER_01: 26:36

Yeah.

SPEAKER_00: 26:37

Or much higher interest rates. Or much higher interest rates, yeah. I mean, that it it's um you get folks that are looking for, I I've I've seen it, they're looking for a higher dividend yielding stock just so that they can squeeze more dividends out of their portfolio. Uh and I think what folks don't realize is is is the the dividend rate that a stock is paying is baked into its price and it's not fixed. And if the company experiences hard times, they're gonna cut that dividend. And do you want to do that? Yeah. Yeah. Or interest rates change, you know. Should that, you know, should what's happening in the in in with interest rates change your spending by that much? Um so yeah, I mean this is one I I people can have different goals and and and and um if we're talking about like folks that have more money than they're ever gonna need uh or or likely to spend and they're investing now for multiple generations, sure, you know, you could live off the earnings. But you're unnecess you may be unnecessarily restricting yourself if you're if that's all you're gonna do.

SPEAKER_01: 27:53

Yeah. Yeah.

SPEAKER_00: 27:55

Let's see, what are the uh we've got to f go a little bit more let's go quickly over good. I was gonna say let's talk about housing because there's a lot of there's a lot of kind of rules of thumb or sayings around, you know, how much housing I can afford or what type of housing even. Yeah, which one which one do you want to talk about? Um I mean let's talk about this is a big topic, but like homeownership. A lot of people think you know home ownership is the way to go. Renting is throwing money away. You know, I'd rather be paying rent to myself. Um what do you think about that? Lords don't landlord for fun.

SPEAKER_01: 28:30

We got a friend who likes to say that a lot. Uh yeah, so it's a little bit related, but definitely different to the like the buy term invest the difference. I d the term versus perm. Like, you know, well, term insurance is just throwing money away. I don't really want to conflate these two here. You're not building principal when you rent, but you also have such a lower exposure to other expenses. I I think to simplify it, if if you're only going to live in a house for like less than five years, renting generally outside of incredible appreciation of the house value, renting's great because there's transaction costs on the front end, there's movement costs. Um renting gives you flexibility. It caps your upside. I think that there's that great saying that like when you rent, your rent is pretty much the maximum you'll pay. And when you have a mortgage, that's the minimum you'll pay when you own something. And so um, yeah, rent renting is is not throwing money away by any means uh whatsoever. The math analysis would depend on a lot of time. Interest rates can have a big effect, but interest rates can also affect rent prices. I the way I think about it is like, yeah, if you first of all, the home's the home and it's not like we're we're talking like you're not buying a house for the investment purpose of it, generally. You shouldn't. Um yeah, if you live in a house for a really long time and it appreciates at kind of historical rates, it generally is a pretty good financial decision. Um But renting is not throwing money away. That's all I'd say, especially if you have a short-term if you're only gonna live like for a few years. You hear people like, oh yeah, I'm moving to Seattle for a job for a few years. I gotta buy a house, though. Like, why would you buy a house? Not anything against Seattle, just why would you buy a house if you're gonna be there for three years? You know, it's like, no. So it doesn't matter.

SPEAKER_00: 30:13

Yeah, I think I think we're we're um our perspective on these, this can be skewed by recency bias and and about, you know, the massive appreciation in home values that's occurred in the last since COVID, but even you know, even before that, you know, although we've seen housing bubbles in the past. Um but you know, we're we're it's hard to it's hard to watch somebody who bought a house a few years ago and and has doubled their down payment in in equity because of home ho housing prices rising. Um, and so we we tend to think like, oh, well, if I had bought two years ago, or if I had bought five years ago, I'd be in such a different place. But that's you know, we don't get the benefit of hindsight and and housing prices can stagnate and and they can fall too. Um, you know, so with when you're when you're planning to buy for a short-term housing need, like you're you are taking a risk. Um totally.

SPEAKER_01: 31:17

Yeah. Yeah. If you like normal home, what are homes normally appreciate nationwide, like three percent-ish? Yeah, something like that. Um kind of outpacing property taxes. Like, I mean, it's it's uh in it, like that's yeah, if you if you if you buy a house 30, like that, that math can work. Um, it's really like yeah, I think the pre-COVID, the COVID like housing prices just exploded everywhere. That's when like, yeah, buying a house was a freaking great decision. In my area, they've gone down the last three years, though. Yeah. So it's just you it and like w I think the the old adage of housing prices always go up was busted in 2008 with the housing crisis. So people are aware it doesn't. Um yeah, I mean, just to get back to the point that renting is not throwing money away. If you're gonna be in a house for a long term, owning probably mathematically works out, but in the short term really typically does not. Like renting is your friend outside of abnormal market prices.

SPEAKER_00: 32:17

And it's a lifestyle choice, too. I mean, I I see folks, especially in in retirement, I think renting's a great option. Like, especially if you're in a place where you don't have to cut the grass anymore. Um, you know, all the maintenance issues are just not your problem. Um now, obviously you want to have a good landlord who's gonna take care of those things and and you pay for that in in the type of place that you're renting. Um, but but yeah, it's it's a lot simpler if you're just writing that rent check every month than having to deal with all the other issues of homeownership.

SPEAKER_01: 32:49

Yeah. My parents owned homes for 30, whatever years, and then they rented for two or three years. Uh never seen my dad happier. He loved it, but mom got tired of it and they bought a house. But um yeah, that it was like he he loved he he like measured his complexity in life by how many toilets he was responsible for. I don't have an office, I don't own a home anymore. This is great. But anyways, um let's do one more. Um well maybe we should do these. I won't I won't do these last two. Can we talk like let's talk about the tax bracket one? Um this is super, super common. Something okay, we're gonna shift to taxes. We hear this a lot about just make sure you don't go into the next tax bracket. So tax brackets in the US, they're they're marginal, they increase as you make more money. So then you start up at 10%, then maybe 12%, then 20%, you know, they go up and up as you make more money. And so it's true, if you make more money, you're paying a higher tax rate. But what you have to understand is only on those additional dollars, you don't retroactively pay a higher if you're in the 20% tax bracket and you jump to the 25, which aren't real brackets right now, you jump to the 25%, you don't all of a sudden go back and pay an extra 5% on all the money that you made. Like that's really what I want to say. Like if you understand that, then you're like, oh, why am I afraid of jumping into the higher tax bracket? Right?

SPEAKER_00: 34:08

Yeah, in in general, like having making more is a high quality problem to have. You get to pay taxes at a higher rate because you made more. And it's only those dollars that are above the bracket that get charged that higher rate. Everything else is the same. Even even people making a million dollars a year are paying taxes in the 10%, 12%, 22%, 24% bracket. It's only the portion of their income that's above the threshold that that's getting taxed in that higher bracket. Yeah, this is this is one that um you still encounter it a lot. People are afraid of going in the next tax bracket.

SPEAKER_01: 34:42

There are some times in retirement planning where like some Medicare premiums can be based on your bracket that you're in, IRMA surcharges, and like that. You maybe you want to be a little bit careful at times there. But yes, I'm not trying to shame anybody, but I've heard it so many times of well, I didn't I don't want to get my bonus this year, I'll jump into a higher tax bracket. Or like, I don't want to this is no, no. Like, that's good. Close the deal. Yeah, anyways. Um all right, the last one is something you want to talk about, so go for it.

SPEAKER_00: 35:10

Uh is this social security? Yeah. Yeah, ooh, big topic. Uh, try to do it fast. We did a whole episode on this, I think it was episode 18, um, talking about kind of the math of of Social Security claiming strategies, when when to claim. You know, a lot of people have have heard you should delay as long as possible because it's true your benefit amount will grow at a defined percent percentage rate. Each year you you delay claiming until age 70, at which point it stops growing. So there's never a point in claiming after age 70, you know. Um, but at age 70, you you qualify for the largest monthly benefit. Um and while you know, so it's a complex topic, it's especially complicated when you talk about a married couple. Um but uh delaying um claiming Social Security can be the right strategy, but it's important to keep in mind um that all of these, all the benefit amounts are actually equivalent. Meaning if you are the person with an average life expectancy, for men, you know, 81, 82, uh women maybe a couple years longer, although the benefits don't um aren't aren't done by gender. Um but if if you have an average life expectancy, it should not matter when you claim um in terms of the dollars you will receive. Either you claim a lower amount earlier uh and get it for longer, or claim that higher benefit later and get it for shorter. It should work out to be about the same. So that's point number one, um, why you know delaying um is not always the right choice, especially if you have a limited life expectancy. Um and boy, this is a tough topic to do concisely. But but yeah, I I think there are reasons to claim sooner. Number one is if you need to, if you need the income. Not everybody has the ability to to fund their living expenses out of savings and uh and be able to delay claiming until 70. And so obviously if you have to claim it early, you you take it um to to to make the cash flow work. Um but even if you have those savings and you're in a fortunate enough position to be able to delay um if you assign any kind of time value to money, meaning like a dollar today is worth m more than a dollar a year from now. Um if you assign, you know, two, three, four percent of of time value of money, um it makes claiming early look uh like possibly the more attractive option. Now there's all sorts of other things that go into um you know Social Security optimizing, but this is one of those where like I used to fall into the if you can afford to delay, you should delay um to 70. And and this is one where my thinking has evolved a little bit, and um it doesn't take much for me to tell somebody, okay, it's okay, go ahead and claim, you know, earlier, 65 or 67 or whatever. Um, especially if it makes you feel better and sleep at night and and you know, not have to draw on that portfolio as heavily. Um yeah, that was a long-winded way to take out number 10 on our list.

SPEAKER_01: 38:53

The the two factors with that comparison, if you just isolate the math, is like how long are you gonna live and what could you do with the money you're not spending now? As far as taking it early. Yeah, that's not a short conversation, but there are about you don't like Yeah, try try like what would you say? So like delay Social Security as long as you can is not right or is is oversimplified.

SPEAKER_00: 39:15

Yeah, there just yeah, talk talk to an advisor who looks at this stuff because it it is such a personal decision and it really depends on you know, number one, if you're married and have two Social Security benefits you're trying to optimize. Um a lot of times it makes sense for the lower benefit spouse to claim as early as possible and maybe the higher earning spouse to delay, um, possibly to age 70, but maybe not. And, you know, for more listening on that, check check out episode 18. Um I stand behind everything we said there, but I I I I would add that this is a this is an area where there it it's not dogma. Um it shouldn't be as dogmatic as it it's been represented. You know, there are reasons to claim sooner.

SPEAKER_01: 40:07

There's also a pretty strong opinion that you should claim as soon as possible because it's all gonna go bankrupt, which is its own issue too. Yeah, that's that's another myth out there.

SPEAKER_00: 40:17

Um, we we talk we talk about that one in episode eighteen, but I mean short answer is I don't think If if you're close to that age 62 right now, nothing's going to change for you in the past. Whenever Social Security has has there've been changes made to it, they've always grandfathered in people who were close to Social Security age. And while I do think, you know, benefits may decrease for younger people, or there may be a you may not be able to claim until a later age. It's not like Social Security is going to go away. Cool.

SPEAKER_01: 41:04

All right. That was fun. I like this. Maybe next time we'll talk about 4% rule. Maybe we'll keep this list going because there's a lot more we could talk about. But uh thank you as always.

SPEAKER_00: 41:14

Any last thoughts? No, I love this head spinning from jumping from topic to topic. More could be said on each of them. But I think it's cool to go through these common.

SPEAKER_01: 41:25

I think the main takeaway is like the rules of thumb, they're oversimplified, generally pretty right. There's a reason they exist. Um, and there's some hopefully we gave you some different ways to think through each of them. So um and when they apply to you and when they don't. But all right, man. Always good to see you. Always good. See you next time.