Welcome to the 61st edition of the Bogleheads On Investing podcast. Today, our special guest is Cody Garrett. I'm John Luskin and I normally host our Bogleheads live show for the folks of Twitter. I'm taking over for the normal host Rick Ferry while he takes a summer sabbatical. Please allow me to introduce Cody Garrett. Cody is an advice-only financial planner, passionate about helping families refine their path through financial independence as do-it-yourself investors. Cody specializes in comprehensive financial plan development, topic research, and personalized financial education. Some announcements before we get started on today's episode with Cody Garrett. This episode of the Bogleheads On Investing podcast, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a non-profit organization that is building a world of well-informed, capable, and empowered investors. Visit BogleCenter.net where you'll find valuable information, including transcripts of podcast episodes. And at BogleCenter.net-slash-donate, you can make a tax-deductible donation to support the mission of improving financial literacy. And finally, a disclaimer, the following is for informational and entertainment purposes only, and should not be relied upon as a basis for investment or personal financial advice. And with that, let's get started on our interview with Cody Garrett. Cody Garrett, welcome to the Bogleheads On Investing podcast. So glad to be here. Thanks so much, John. I'm super excited to get to meet you in person for the first time at the 2023 Bogleheads conference. I'm going to be there. And folks, as of this recording, there are roughly 60 spots left. So if you want to register for that conference, go to BogleCenter.net-slash-2023 conference. Let's start with our first question. This question is from username 95 suited. He writes, does Cody have a process he uses with his clients to ensure their non-financial lives will be fulfilling in early retirement? What I realized is a lot of people focusing on retirement, they're really focused on what they're retiring from. This emphasis on escaping something, right? It's like, I cannot wait to stop working. But it's really important that anytime I'm working with a financial planning client, they're really focused on what they're retiring from, but it's my job to help them understand what are they retiring to. I recently asked over 40,000 retirees on a Facebook group, what's the thing that you miss most about working besides the paycheck, besides the benefits? They missed conversations with colleagues and clients, collaborations with team members, challenges to solve, and contributions to a greater purpose. Now, you asked me about this process that I used to ensure if non-financial lives will be fulfilling, I asked them, especially of pre-retirees, hey, in which ways would you like to continue connecting and having conversations with others? In which ways will you collaborate with other people? Sometimes that means collaborations with other organizations or maybe a charity that they support. Which types of challenges would you like to solve? So some people retire and they really want to do maybe woodworking or they want to do those projects around the house. So they can be physical or mental challenges that they want to solve in retirement. And then lastly, how are you going to contribute in retirement to a greater purpose? Going to the Bogleheads conference, right? That's a way that you can have conversations, you can collaborate with others, you can learn some new challenging things. Some of the mental challenges you have possibly solved at going to a conference like that. And then you can contribute to something bigger than yourself by just being surrounded by other people within your community. So community, conversations, collaborations, challenges and contributions. So start asking yourself, even now, if you're not retired or you are retired, how can I do more of those things now that I'm retired? And for folks who are looking to get some community, they should check out their local Bogleheads chapters. We have a great chapter here in San Diego with a lot of retirees and it's a great forum where folks can help each other, make friends and talk about low-cost investing. For folks who want to get involved with the Bogleheads community locally, check out the Bogleheads forums where we have a page that lists local chapters. I'll link to that in the show notes for our listeners. One thing I want to add to that is we think about fire as standing for financial independence retire early. But I actually call it financial independence recreational employment. Financial independence isn't necessarily about stopping work or escaping from work. It's really about doing work because you want to, not because you have to. A lot of people who assume they're going to retire early, they end up working once they're financially independent. So keep in mind that financial independence doesn't mean you have to leave the work that you love. It means that you can do work that's even more fulfilling moving forward. Cody, can you talk about what some of the folks you've worked with have done in early retirement? In terms of conversations, I think a lot of people in retirement, they talk about spending more time with their family. And I think it's really important that when spending time with your family, it's not just travel a lot, right? But also being really intention about the conversations you're having with your family. So visualize, when we go on this trip as a family together, which type of topics do we want to discuss?  Sometimes families don't talk about money ever. But going into retirement, when you're talking with your family right after you're retired, they're probably thinking about money. You're thinking about money. This might be a good time to start talking about some estate planning. So what are some of your expectations and their expectations financially in terms of multi-generational wealth? This can be a very difficult conversation to have. But I think this is the most fruitful conversation when done with grace and compassion. Instead of having them with colleagues and clients who are used to work, maybe you can have those deeper conversations with your family. And not necessarily your kids. What are the conversations that you'd like to have with your spouse?  Maybe it's time you can actually start having conversations. You can start talking with people who live down the street. Your friends that you know that have been retired for a long time and you can finally spend time with them. A really good example is clients who, every Wednesday, they have a morning breakfast with all the friends they used to work with who are also retired. So think to yourself, what type of conversations do I want to have that build me up that are energy-giving, not energy-draining conversations? The second is collaborations. I think collaborations can happen a lot of different ways. Sometimes you might have a work project that I've spent some time with. A client that I worked with, a fascinating story about what he wanted to retire to, he loves the Volkswagen Vans, the big Vans from the 60s. And he says, I've never had one. I've always wanted one. And he said, when I retire, I'm going to buy my first Volkswagen van.  I don't want to buy one that's turnkey. I want to buy one that's torn up and that I can work on and tinker with. First of all, that's a challenge to solve. That would be a challenge for me working on an old van from the 60s. He said, okay, well, maybe I can invite my son to help me work on this van together. And once it's drivable, I can take my son. We can have a father-son trip in this van that we've really tinkered with together. That's a very powerful way to continue building relationships with your family.  If you're retiring and you do have kids, start thinking about what are some conversations I can have with them? What are some ways we can collaborate on projects together? Maybe we can have challenges to solve together, not just individually. And one thing that's really important for me to mention here is that your physical, mental, spiritual, relational, and financial wellness are interrelated. Going into retirement, we're usually primarily focused on the finances.  If you're listening to this and you haven't retired yet, how can you improve your physical, mental, spiritual, relational health and not just be focusing on your financial spreadsheets? Because when you get to retirement, sometimes you have all the money in the world that you need to retire, but then you turn around and all your relationships are gone or they're not like they used to be. So building up those relationships, doing the exercise that you've always been wanting to get into, maybe hiring a counselor or a therapist to talk about some of your mental health struggles, start having those conversations when you get into retirement. This one is from a user named John, aren't from Twitter who writes, what's the best method for determining sustainable spending rates? For instance, how do you adjust the 4% withdrawal rate for retirees in their 40s? The 4% rule or guideline, it's a decent rule of thumb. People are using the 4% rule. They're making an assumption that they're going to be living in retirement solely off of their portfolio without other sources of retirement income, such as private and public pensions, social security, real estate income. But the best way to visualize variable sources of income and expenses in retirement is to use an advanced financial planning software. Now there are actually planning softwares even available to consumers, non-advisors. One, for example, is new retirement. I know there's a lot of other Excel or Google Sheet versions that people have made. Keep in mind that financial planning software, the output is only as good as the input. When you're making assumptions for rates of return, inflation, life expectancy, it's better to be on the conservative side. So conservative meaning that you're expecting to live a long time, maybe 95 plus in terms of your age, testing out different levels of inflation, testing out really conservative rates of return. So with that said, use financial planning software but understand that it's only going to show you information based on a lot of user assumptions and historical performance, which we know cannot guarantee future results. Take it with a grain of salt, but at the same time, I think that using a financial planning software for those variable sources of income and expenses could be a much better way than just saying, I'm going to use the 4% rule just based on our portfolio. And that 4% rule from comes from Bill Bengin, who first looked at that question, how much can I spend in retirement without running out of money? We interviewed him on episode 35 of the Bokeheds Live show. We also interviewed Christine Benz on episode 37, who sought to answer that same question through her research. And then lastly, in episode 41, we interviewed Derek Tharp of Team Kitsis, where he talks about how to use retirement planning software. I'll link to all those in the show notes for our listeners. One of the big things that accumulators miss that aren't retired yet or about to retire, they're thinking about the 4% rule in terms of multiplying their current expenses by 25. But let's say you have 10 years until retirement. The 4% rule does include inflation assumptions, but only once the distributions begin, not for the 10 years between now and when you start taking those distributions. So make sure that you inflation adjust your expenses if you are going to be thinking about the 4% rule even now, 10 years out from retirement. This question is from Man of Clouds from Boglehead Reddit who asks, what percent of bond slash stable value allocation does Cody recommend for someone 5 to 10 years from retirement? To manage sequence of returns risk, I prefer either a barbell approach, which would be really having equity on one side and ladder fixed income on the other side to set up typically about five years of short-term stability. Another way to do it especially popular within Boglehead's community is to just use a total portfolio approach, but then have maybe one to three years of short-term liquidity, cash equivalent. So you're not chasing growth and income with that portion. You're really focused on stability and liquidity with the three to five years of short-term fixed income. And on the flip side, you're going growth with the equity side of that barbell. Although the second bucketing approach that I mentioned is often said to be irrational, especially people will say that during bull markets. If you hold on to so much cash, when the market's going up, it can be a reasonable way to sustain portfolio withdrawals while reducing that sequence of returns risk. And as important that most people don't think about is the reduction of investor anxiety. So when I work with a retiree or somebody who's about to retire, they love knowing that the stock market of volatility will not affect whether or not they're going to order dessert with dinner tonight. I always tell people we don't want to make long-term financial decisions based on short-term volatility. We also don't want short-term volatility in our long-term assets to affect how we spend and enjoy retirement in the short-term. Having three to five years of short-term liquidity and stability can really give you permission to enjoy your lifestyle in retirement without having to look at what the stock market does every day because what the stock market's doing every day is for my six-plus year money, not my money that I'm spending within the next five years. And as we know, even the greatest recessions, depressions that we've seen have really not lasted longer than that. I just say having three to five years of short-term liquidity helps emotionally and also helps hedge against that sequence of returns risk, especially in the first few years of retirement. Certainly on average, if you hold a little bit more in cash or in short-term high-quality bonds, the smaller investment turn that you're going to get from that is going to drag on your portfolio, which means having a little bit less money that you'll be able to spend annually. But if you can have that extra cash cushion to make you feel more comfortable with your long-term investing approach, generally I think that can make some sense for those folks who are nervous about their long-term investments. Now, it's not the most optimized approach, but again, if you can feel better about having that cash cushion that can make you stay the course with the balance of your investments, that can often make a lot of sense. People ask me all the time, I'm scared about retiring, so I'm just going to work for one more year. I'm just going to work for a few more years. So if taking some type of bucketing approach like this, having a few years of cash, to make you feel a little better and make you pull the trigger on retiring earlier when you can actually quantitatively rationally afford it, I think it's a really good way to keep people from just waiting a few more years to retire. Each year you wait to retire, that's fewer years in retirement. So think about what you're giving up. Again, you have to go beyond the numbers in these conversations. This question is from the Bokeh Heads forums. I'm looking at retiring soon in my late 40s. I'm lucky enough to have a pension that is coal or protected from the military and very cheap healthcare for life. How does Cody go about calculating how much pension slash healthcare that is worth in the future? This question often comes up when you're going to choose a pension or take the lump sum, but when calculating a lump sum versus taking a pension, there are really two steps to this. The first thing that people make a mistake on when calculating whether they should take the lump sum or the pension is they divide the annual pension amount, the income amount into the lump sum amount to figure out what their quote-unquote rate of return would be. But this is one thing that we shouldn't do. A few differences there is one, you're effectively looking at an annual yield of something, but by the way at the end of life, that pension's gone. You don't have any more money at the end of that. So a lump sum you can take the same amount of income possibly and actually at the end of life you still have money there that can be distributed to your heirs. Instead of just dividing the pension amount into the lump sum option, you need to use two time value of money calculations, TVM calculations that require a few assumptions. So life expectancy assumptions, those things we talked about earlier with rates of return, inflation over time, you talked about COLA protection, cost of living adjustments on your pension. A lot of pensions don't have that, so you have to figure out what is the value of that pension going to be if there isn't a COLA adjustment. There are two calculations that you would do. One is a present value calculation which is saying what is the present value of those future cash flows assuming a certain life expectancy. If I were to end that pension at 95, how much would I have received from that? Effectively you want to understand if I took the lump sum, what type of investment return inflation adjusted if it's not inflation adjusted pension that you're receiving, what would be the required rate of return needed to take that much out of the portfolio through the end of life and end with zero. In terms of using your financial calculator the number of periods would be the number of years between taking the lump sum at the end of life. The interest rate would be really typically your inflation adjusted return or your rate of return for your investments. The lump sum pension calculations are effectively saying hey if I were to take the lump sum would I be able to create effectively my own annuity that would quote-unquote outperform the pension's actuarial assumptions. When you're looking at the pension versus lump sum options these weren't given to you as a challenge to say which one do you think is best hopefully you choose the right one. These were all actuarially calculated by insurance companies that are way better at math than we are. So keep in mind that if you're comparing a lump sum versus a pension they're actually equal in a way to them based on their assumptions but it's up to you to figure out which assumptions do I have that would be different than the assumptions that the insurance company is using. If I know I have a chronic health condition that probably would make the case for possibly taking a lump sum because you're not going to live long enough to take advantage of the longevity that the insurance company might be assuming for you. Which assumptions might the insurance company be actuarially calculating and then which of those assumptions might actually be different for me what are the things that I could plug into those assumptions for example chronic health conditions whether or not I'm married whether or not I'm married or not. So those are the assumptions that can change whether or not you take a lump sum or a pension. One thing I think about the annuitization versus lump sum distribution question hey should I take the lump sum or should I take the annuitization I am obsessively focused on that worst case and for me I think about how to best manage that worst case which is you living forever and that annuitization option is going to do that it's going to help manage that because as long as you're alive you're going to get that annuity payment. Now if you guess wrong and maybe you die the next day that won't be great but perhaps that risk isn't as financially impactful as living forever and running out of money so my approach generally is to take that annuity option because it's a risk management approach not necessarily the way they're going to transfer the most amount of money to your heirs but certainly can help you have a higher quality of life during your lifetime. When you talk about beneficiary designations when choosing between a lump sum and a pension you also have to think okay is this money just for me or is this money that I want to last beyond my lifetime if I have a spouse maybe I want to think about using the joint survivor pension option versus a single life annuity start to visualize what you want your retirement to look like and also what you want your generational wealth transfers to look like because that can also change whether or not you choose a lump sum versus a pension and to add emotionally behaviorally there sometimes taking a pension can actually give you permission to spend so if your only source of income and retirement is from your portfolio you're probably going to be obsessed with your portfolio when the market goes down you're going to be like I don't know if I can afford going on that trip next year so the last thing you want is to let the short-term volatility of the portfolio really dictate your spending and retirement I know it's an important thing to consider but the last thing you want is short-term stuff to affect your desired lifestyle so yeah sometimes taking the pension can provide that cushion behavioral emotionally for you to spend the money that you actually can't afford to spend I always encourage folks to try and keep it simple as well and man decide a newization option keep it simple you get that deposit into your checking account monthly every two weeks whatever that sure makes it easy another thing that I always encourage GIWIRES to think is not just about what investment approach is most interesting and fun for them when putting it together but what sort of legacy plan you're going to be leaving you're possibly less interested in your spouse that annuitization option that's pretty great for that non-financially interested spouse because worst case you pass they're still going to get those regular deposits into that checking account that can really be a great way to plan for legacy investing this one is from using Wanna Retire early for the Vocal Eds forums who writes I'd like to better understand planning for health care managing income to maximize affordable care act subsidies and also my kids will be in college I want to be thinking about managing income to maximize subsidies for higher education and for folks who want to learn more about how to manage the cost of health care in early retirement we have a great Vocal Ed chapter series video on that I'll link to that in the show notes for folks to check out so managing health care in early retirement before Medicare actually isn't as difficult as you might think there's a lot of concern about the uncertainty of future health care costs there's like seven or eight different options for health care in early retirement but since you mentioned maximizing subsidies you're talking about this premium tax credit so the premium tax credit for health coverage before Medicare and student financial aid are two major forms of subsidies which may be worth prioritizing in early retirement so if a family is able to maintain its desired lifestyle in early retirement due to control over sources of taxable income between taxable pre-tax and tax free accounts people on the path to early retirement they'd be much better off creating some diversification in their asset location if a family is able to maintain that desired lifestyle and have control over sources of taxable income in early retirement it's definitely worth running those scenarios against the opportunity cost of implementing other early retirement strategies such as Roth conversions to maximize after tax wealth don't let your health care subsidies or a kid completely run your financial plan they are important variables to consider and to plug into the numbers but don't let that rule all of your decisions so your ability to maintain your desired lifestyle in retirement I think that should be a prioritization and then secondary to that should be any type of tax planning strategies that's worth doing sometimes but just make sure that's not prioritized over the things that are much more important in early retirement Cody you mentioned doing partial Roth conversions that's a great strategy however that's going to generate some taxable income and as that income increases that means now we're looking at less subsidies for health care through the Affordable Care Act what's your preference doing partial Roth conversions or keeping income low to optimize for subsidies for health insurance in early retirement that's a tricky and great question the big thing here one reason that you might want to consider maximizing those subsidies is that the premium tax credit is that it's a credit it's not a deduction a credit is a dollar for dollar return of taxes paid so this is very different from looking at the effect on Irma or the taxation of Social Security these tax credits are substantial I actually just talked with a family member yesterday that is receiving $460 a month of premiums completely for free so you really have to understand the numbers you need to go to healthcare.gov slash c-plans to really look at what does healthcare cost on the health insurance marketplace based on where you live you also type in what's your anticipated modified adjuster gross income in this case in early retirement it's going to show you what your estimated premium tax credit could be and what you can do it's really nice on that website you can just say well what if my income is $80,000 instead of $60,000 a year what does that effect my premium so these are based on the federal poverty level up to 400% of the federal poverty level broken that ceiling at least temporarily for premium tax credits you have to understand what is the credit I'm going to receive if you don't have an estimate of what those credits might be then you want to make sure you do that first once you understand what those credits may be you can start filling in those marginal tax brackets or Roth conversions say what if I were to convert up the top of the 10% 12% 22% 24% in terms of Roth conversions and then what would that level of modified adjuster gross income do to those premium tax credits a lot of people come to me and they say okay how much should I convert to Roth over the next 10 years don't make 10 years worth of assumptions here take one year at a time so at the beginning of each year at the end of each year determine how much am I going to convert in this year am I going to prioritize premium tax credit or am I going to prioritize maximizing after tax wealth with Roth conversions I do it in mid-November every year for Roth conversions keep it simple one year at a time and it'll take some of that anxiety out of the way doing those calculations in mid-November certainly makes sense because you'll have a better idea closer to your end what your taxable income is going to be for the year Diplo Investor from the Bogle Ads Farms writes we are four to five years out from retiring in our early to mid fifties and we will both have decent federal pensions maybe a question about what order to withdraw from TSP or Roth IRA taxable when RMDs are still long, long way off the typical order of operations for early retirement distributions is first starting with your checking and savings accounts taking money out of those accounts there's no age requirement there's no taxes to take money out then you go to your taxable brokerage accounts these are the accounts that are holding those investments that may offer qualified dividends and long-term capital gains tax with no early withdrawal penalty savings, checking accounts and then taxable brokerage accounts these are all of the accounts that provide what I call cash flow flexibility but they are taxable along the way so that income and dividend and capital gains distributions and the taxable brokerage accounts they're taxable along the way even if you don't take money out of the accounts but the good thing about those accounts is the money you can actually take out of the accounts are not taxable then after the taxable brokerage accounts then we move on to the pre-tax retirement accounts traditional IRAs, traditional 401Ks 403Bs, 457s and so forth if you are retiring early right before 59 and a half you'd have to be using some sort of early retirement distribution strategy so those may include whether it's called substantially equal periodic payments some people call it the SCPP the 72T payments there's the rule of 55 which is you retire from that employer in or after the year you turn age 55 and that's specific to that employer's retirement plan some people use Roth conversion ladders the reason they're called ladders is because there's a 5 year holding period for Roth conversions before 59 and a half to avoid that 10% additional tax also sometimes called the tax penalty so after you've taken money from your savings checkings, taxable brokerage accounts and pre-tax accounts then lastly, usually as a last resort those tax-free accounts such as Roth IRAs or HSAs the reason those are typically used last is because the best use is long-term tax-free growth that we all love so usually letting those accounts grow long-term as long as possible is typical order of operations so once your desired living expenses are met in early retirement take going through that order of operations then you would say maybe we need to do some gradual Roth conversions on top of that to reduce those future RMDs even if they're a long way off as you mentioned in your question Mike Piper talks about this question at the last booklets conference in 2022 what accounts should I spend from in retirement there's a great video you can check out, I'll link to that in the show notes for our listeners here's our name, Intradon from the booklets forums writes I have VYM in my IRA does it make sense to have an investment that gives qualified dividends taxed at the 23.8% rate once RMDs kick in as I will what was likely to stay in a high tax bracket in retirement since you mentioned you're in a high tax bracket what was likely to stay there qualified dividends, if they were held within a tax with brokerage account those qualified dividends would actually be taxed favorable tax treatment but for you in a high tax bracket you're looking at either the 15 or 20% qualified dividends or long-term capital gains tax treatment plus a 3.8% investment income tax so a total of 23.8% if held within the tax with brokerage account versus being tax deferred but potentially taxed at a much higher marginal tax rate which could be 24, 32, 35, 37% when distributed from the IRA I guess the first thing is usually want to take advantage of favorable qualified tax rates on those qualified dividends secondary to that though I would say for people with high income I prefer not to purchase high-income paying investments in general whether equity or fixed income but rather take a total return approach so on average I prefer to keep the equities within the tax with brokerage accounts and Roth IRAs because they receive that favorable tax treatment I know that you're in a higher bracket but actually effectively the lowest capital gains tax rate is 0% so some people might call that tax gain harvesting rather than tax loss harvesting usually I want to keep equities within the tax with brokerage accounts if there is fixed income keep the fixed income within the pre-tax retirement account so based on your circumstance being a high tax bracket I'm not a big chaser of dividend yield to begin with I'd most likely have my qualified dividends in the place where it's most favorable which would be the tax with brokerage account and then keep my IRA invested for the less favorable tax consequences speaking of dividend investing we interviewed van guards calling jack and eddie on episode 26 of the book that's live show where we talk about just this dividend investing investing for income and calling sums it up as saying investing for income means more risk and more taxes I'll link to that in the show notes for our listeners they can check that out this question is from Dennis Lee from Facebook who asks should a person even bother trying to do a back to a Roth if they have a fair amount of money in nutritional IRA from a previous 401k roll over I've already tried to see if I can roll these into my solo 401k and thus far I cannot there's really two parts here the first is should a person even try bothering doing a back to a Roth if they have a fair amount of pre-tax money specifically in a traditional IRA from a previous 401k roll over so if you do have access to a workplace retirement plan that's not an IRA like a 401k might allow incoming rollovers of that pre-tax portion this question is really talking about that pro-rata rule if you do a Roth conversion the coffee and the cream is mixed within your traditional IRA some pre-tax money some after tax cost basis you're gonna have this pro-rata calculation that you're actually gonna end up paying more taxes to do that Roth conversion so first off if you do have access to a qualified retirement plan such as a 401k that allows incoming rollovers a lot of people do roll over the pre-tax portion into that so they're only left with their after tax portion that can be converted tax free that requires that pre-tax portion to be rolled into typically a 401k by December 31st of the Roth conversion year the second part of this is you mentioned that you have a solo 401k and that you cannot roll over your IRA into it actually in the last few years some solo 401k plans do allow incoming IRA rollovers Vanguard might be one of those that now allows incoming IRA rollovers into a solo 401k also called a self-employed 401k but keep in mind this is very plan specific so you mentioned that it's not available in your solo 401k but it might be available in another solo 401k plan really look at the plan rules verify if that's accurate if you cannot avoid the pro-rata taxation it's typically not worth it if you have significant pre-tax balances sometimes it's better to just avoid that hassle we call it return on hassle so instead of putting money into there trying to do the back door Roth IRA go ahead and just put that money into a taxable brokerage account instead there's a lot of great benefits to a taxable brokerage account I think the taxable brokerage account is just like one step under a Roth IRA there's a lot of great benefits of a taxable brokerage account especially for early retirees that if you're going to be subject to significant pro-rata taxation of the back door Roth IRA I'd probably just say skip it this question comes from username baddynatty from the Bokeheds forums who writes when you encounter families who are planning to stop working in about five years but already have the savings to retire now do you put together a plan to spend more than usual over the next five years to start maximizing experiences memories and happiness absolutely yes especially once a family is financially independent with the ability to work because they want to not because they have to they can significantly expand their current desired lifestyle while they're working this question mentions a family who has the savings to retire now but they plan to stop working about five years if they have enough savings to retire now they plan Y5 years is there something they're anxious about maybe a limited belief that they have that they must do five more years because that's how long their dad worked or their mom worked so there might be some behavioral emotional things behind the scenes to really figure out Y5 years if you have enough money to retire now why are you waiting but one great exercise that I do with clients especially what you talk about here is even while they're working I created this blank calendar exercise to help pre-retirees recognize you as a family so imagine you have a seven-day 24-hour blank calendar you take it as a family and you fill it out and say if we had a blank calendar how do we want to spend time as a family they fill out that calendar now how can we plug in the numbers to this some things they said hey on Monday and Wednesday we want to do a picnic at the park we want to go pick up sub sandwiches from our favorite sub shop down the street the first question I ask is is it possible to do that even now while you're still working because a lot of the things that we want to do more of in retirement there's actually nothing stopping us from doing it now but we somehow have this limited belief that oh you have to wait until you retire before you do the things you want to do Cody I love that calendar exercise that is phenomenal this question is from a user named Ariel Wombat from the Boogalud's forums who writes I'm about two years into early retirement in my mid 40s what unknown unknowns do as fire clients experience 5 to 10 years into early retirement that they didn't anticipate financially or otherwise first of all as I mentioned before physical, mental, spiritual, relational and financial wellness are interrelated so many early retirees don't realize until they retire that they've actually sacrificed their physical, mental, spiritual and relational wellness for the sake of financial health along the way and aren't actually able to enjoy retirement as much as they expected they don't have all the money they need in the world but they don't have anybody to spend it with they don't have the mental capacity to spend it in a way that provides a lack of anxiety for them it provides joy and not just more stress most people who plan to retire early don't consider the potential reality of becoming a caregiver in the future for other family members their parents, their siblings so we assume that early retirement will look the same in year 10 as it does in year 2 and what you expected to go along with that think about what you were like if you think about how different you were and how different life was 10 years ago but yet we somehow assume that 10 years from now our life is going to look very similar to what it is today and we're going to be the same person in 10 years that we are today once you realize that the way you assume you're going to be in the future is going to be completely different in reality the biggest unknown, unknown that you're going to realize later on and you're also going to be caring differently for people a lot of people retiring early their parents are actually going into traditional retirement somebody's retiring at 40 their parents might be in their 60s or 70s retired and there might be a time in terms of long term care in terms of cognitive decline that you might actually be spending not just your time and energy but also your finances helping to support other people so before you retire early especially financially think about will I need to financially support somebody in the future including my own parents or my children even by the way when my children are adults there are plenty of adult children who still need time, energy and financial resources from their parents what's IRR from the book of the forums has Cody seen any trends with either successful or unsuccessful fire folks trying to get to fire there's actually a trend within the fire community of discovering within one to two years of early retirement that they actually miss aspects of working but thankfully now that they have command over the who, what, where, when, why and how work is done some early retirees end up actually going back to work usually often as entrepreneurs as well they end up making more money when they're financially independent than when they had to work I've also seen patterns within the fire community of being financially successful but unsuccessful in the non-financial areas so you talk about people being unsuccessfully fire we're typically thinking about the financial part of fire I've seen a lot of people who are successful financially but they're unsuccessful in those other ways that we've talked about that they have all the money in the world but every other part of their life is crumbling apart so again that's just one more reason that on the path to fire it's not just the path to fire it's the path to continuing healthy relationships continuing health, physical and mental sometimes we've been kind of plugging our life into the numbers rather than plugging the numbers into our life so we're starting with the spreadsheet and saying how can I live given my spreadsheet rather than how do I want to live and how can my spreadsheet support that so on the path to and through early retirement ask yourself what do I visualize my ideal life looking like and then only then plug in the numbers and say hey is that actually possible rather than saying I have this much money what can I do with it and I don't see our financial we're in reality in retirement most of your time is spent doing non-financial things that by the way just happen to require money sometimes absolutely money is a tool for our personal goals it is not the end goal home stretch from the book of his forums writes and he's got a bunch of questions here he writes great topic five years before retirement should one asset allocation I'm going to say yes to that usually within five years before retirement you're really starting to think about creating some short term liquidity some people choose like one, two, three years of short term liquidity as mentioned before three to five years of de-risking or de-risking the total portfolio if you're using that approach you might have been 100% equity during your whole accumulation but if you're five years until retirement you just start thinking about de-risking the total portfolio changing that overall asset allocation down from 100% equity or 80% depending on your other income sources certainly start thinking ahead in five years how much income will I need from my portfolio to supplement my other forms of income and start really timing out they call asset liability matching what are my future liabilities going to be how can I turn my assets into income over the next five years so that usually means creating some type of bond ladder or just starting to put some bond allocation within your total portfolio so yes five years before retirement I would change the asset allocation assuming that you hadn't changed it years before and I'll link to the bullet's wiki that talks about some basic considerations for investing and taking the right amount of risk that is part of it five years before retirement you certainly want to be taking the right amount of risk not too much not too little question number two should I five years before retirement build a cash balance or Roth ladder for retirement so to start if you're not familiar with a Roth ladder they're talking about a Roth conversion ladder so before fifty nine and a half if you take money out of a qualified retirement plan before fifty nine and a half there's an additional ten percent tax when you do a taxable Roth conversion from a pre-tax retirement account into a Roth tax free retirement account you have to wait five years before you can take that conversion amount back out to avoid that ten percent penalty so the government doesn't want you just converting that money taking out right away they want to penalize you for taking money out before traditional retirement ages of fifty nine and a half plus should we build a cash balance or a Roth conversion ladder in early retirement first of all there's a misconception about the Roth conversion ladder usually when somebody is using a Roth conversion ladder they're usually only thinking about their future living expenses five years from now they're not thinking about also having to cover the tax liabilities from initiating those Roth conversions themselves so when you're doing a Roth conversion in early retirement before fifty nine and a half you should not withhold the taxes from the conversions themselves because that portion that's withheld for taxes would be subject to the ten percent penalty before fifty nine and a half so before early retirement you typically want at least five years of liquidity to cover not just your living expenses but also the tax liabilities needed to pay the taxes on your Roth conversions so if you're going to do a Roth conversion ladder in early retirement before fifty nine and a half you need enough cash to sustain yourself for at least five years of living expenses but also the five years of tax liabilities to make those conversions question number three while still in high marginal tax rate years should one stop contributing to tax deferred accounts to save more cash or save in Roth accounts so thinking about marginal versus effective tax rates here marginal being what's the tax rate on your last dollar earned that's the tax bracket we talk about ten, twelve, twenty-two, twenty-four, thirty-two, thirty-five, thirty-seven those are marginal tax rates but you also have what's called an effective average tax rate so when you're contributing during your high marginal tax years it's typically best to contribute pre-tax because you're either deducting or excluding that income at your highest marginal tax rate then retirement especially early retirement you're probably distributing that income at much lower marginal tax rates or just a much lower effective average tax rate so in terms of this question because we have the detail of being in a high marginal tax rate year usually you're going to want to contribute tax deferred rather than Roth unless you're talking about the backdoor Roth which is for high earners so typically you want to max out your pre-tax retirement accounts in high earning years then focus on building up taxable brokerage accounts so the backdoor and the mega backdoor Roths are great but only if you don't have to touch the earnings in those accounts in early retirement because you have to wait until fifty-nine and a half to touch those earnings without tax or penalty the taxable brokerage account again is so undervalued within the FHIR community so once you max out those pre-tax accounts think twice about whether or not you want to put money in Roth or just build up some additional flexibility and cash in your taxable brokerage accounts which have no 10% penalty or 50 and a half credit to Jeff Levine for sharing something during a webinar he did for team kits this once and Jeff made the point that sometimes it's just simpler to pay a 10% tax so if this guy is in that higher marginal tax rate let's say the 37% bracket he makes that contribution today gets that 37% deduction now he's in retirement he's going to be in the 0% bracket so 0% bracket plus 10% penalty that is still a 27% savings compared to when he put that money in compared to saving at the 37% rate today yeah and to add to that I think a lot of people start getting really excited about Roth at the end of their working career and they start Roth conversions too early or they start contributing to Roth too early I would say that if you're in your highest earning years and you're planning to retire early or to spread out the taxes of those conversions you're much better off doing a traditional pre-tax contribution not a Roth contribution and then a huge question for number 4 from home stretch how to plan for claiming social security early retirement health care Roth conversions minimize Irma and higher marginal tax rates in later retirement after the start of RMDs I feel like we can do a whole episode on just that one question yeah I love it one note here is that the start of RMDs would usually happen after claiming social security but just to make a simple answer here if you retire before paying into social security for 35 years you'll likely see decreased retirement benefits versus what your social security statement says before you retire your social security statement assumes that you continue earning what you did last year through the age you claim benefits whether it's 62, 67 full retirement age 70 etc. in terms of Irma Irma is an increase in your Medicare part B and D premiums do not let Irma be the tail that wags the dog if you're paying increased Medicare premiums through Irma that's a good problem to have because that means that you're modified to adjust to gross income is pretty high you can definitely afford the Irma if your income is that high it is one of those shelves where you don't want to go just a little bit over one of those shelves but don't let Irma be a big concern in retirement mostly early retirement health care as we mentioned before the health insurance marketplace healthcare.gov plus the use of those premium tax credits if you can control your modified adjusted gross income in early retirement that is really the best way to start with thinking about health care in early retirement and Cody mentioned if you're looking at your social security statement for the benefit you may expect when you retire you point it out you've got to work until that year you get a better idea of the ultimate social security benefit you might expect if retiring early you want to check out ssa.tools it's a pretty neat tool that helps you determine your future social security benefit amount where it lets you toggle your future income and how long you plan to work for then it shows you what benefit you can expect at different claiming ages pretty neat tool to check out and then lastly before retirement should one update a state planning docs simple answer here I think that you should review these documents every few years and when any significant change occurs such as a birth a death a move a marriage a divorce or a changing family relationship once you have let's say you know your wills your powers of attorney your trust in place review there's every few years if kind of life is normal but if any of those significant changes happen that's when you should at least review your state documents to figure out whether or not they should be updated so it's not necessarily five years before retirement update your state documents just you should be doing this regularly throughout your life absolutely well said Cody private ID from the bogus forums writes want to start social security for the lower earner so I'm assuming you're saying a lower earner means that there's spouses one was a higher earner which means that they're going to have a higher benefit and a lower earner which means they're going to have a lower social security retirement benefit in general the lower earner typically is going to claim earlier if they do claim earlier that's because once one of the spouses dies the surviving spouse will continue the higher of the two benefits so the lower earner will typically claim earlier but with that said there are many variables that exist here including life expectancy age difference other income sources multi-generational wealth objectives charitable giving intentions there's a lot that goes into this question but just to tell you in general yes if anybody is going to claim earlier it's typically going to be the lower earner and unsaid by this question and unsaid by Cody is that generally for the higher earner you're going to delay until 70 that's going to give that lower earner if they live longer than the higher earner that higher earners benefit that's a great point John so that begs the question when does the lower earner claim Mike Piper and I talked about this on episode 23 of the bogus live show you can check that out I will link to that in the show notes and then Mike Piper has a pretty tool open social security that allows you to play with different claiming strategies one to have that lower earner claim earlier versus later and that can show you the dollar amount difference you might expect for claiming earlier first later that'll help your household decide what might be the right strategy for you I'll link to that open social security calculator by Mike Piper in the show notes as well as that podcast episode for folks to check out to learn more private ID goes on to say question number three insurance my company's retirement plan or ACA with potential subsidies yeah so continuing coverage through your company's plan sometimes they might offer Cobra up to 18 months typically usually that group plan may provide better coverage but is typically really expensive because not only are you paying the employee side that you were paying before but now you're taking over the employer premiums too so you're typically paying 102% of the combined employee employer premiums so some people stay on Cobra for a little while maybe they've already hit their max out of pocket or they're deductible for the year they want to continue at least the rest of that year with their current health plan but otherwise if you do have control over taxable income in early retirement especially the affordable care active ACA as they talk about that's the health care marketplace with those premium tax credits is usually the better bet just keep in mind that it's not just about the money you know think about your health care needs think about your prescription drugs also don't just jump to doing a high deductible health plan just because you've heard that's a thing worth doing a high deductible health plan with an HSA is a great tool but only if it actually makes sense for your health specifically and your family's health one benefit to using workplace plan is that you don't have to worry about keeping your income low to maximize those ACA subsidies which leaves you a better opportunity for those partial Roth conversions yeah that's a great point and also just another reminder that some people wish Cobra could last forever but typically yes again it's typically only limited to 18 months this question is from work to live from the Bill Gates forums who writes my question is how to plan for and estimate tax expenses in retirement given those of us who have been placing retirement assets in a diversified basket of tax free tax deferred and taxable accounts I have no idea to even begin planning for my tax expenses I recommend learning the difference simply between marginal and effective tax rates the difference between adjusted gross income AGI and taxable income right so that's really understanding how the standard deduction works and the benefits of tax brokerage accounts so including the qualified dividends the long-term capital gain tax treatment tax optimized charitable giving for example itemized deductions the use of donor advice funds things like that once you understand the tax formula and consider your distribution order of operations that we covered earlier that typically is going to include the taxable pre tax and then tax free accounts then you can gain some clarity around your average effective retirement tax rate most of the assumptions we make will actually not come true because most of the things that we optimize for are out of our control rather than things that are within our control so try not to over optimize and estimate what your electricity bill will be in 30 years from now for example don't optimize for the 20% leaving the 80% on the table so visualize your long-term projections but then step back again take one year at a time most of the decisions we make in retirement aren't permanent so you don't have to have a plan for estimating how much taxes you'll owe over the next 20 30 years just continue to improve your education I know the Boglehead forum for example that you wrote this question on has great educational insights and resources just continue learning and give yourself some grace and compassion that you don't have to know everything this one is from username USAF perio who writes I'm four and a half years out for my military retirement I'll be 51 and with my pension with a cola and my portfolio I'll be financially independent and not needing to work again for money the only big downside is we haven't owned a home in many years and therefore we have no home equity can you comment on what I should be considering as I plan to finally purchase a home such as paying in full for taking out a mortgage in retirement I could pay for a home outright for my brokerage account but it'll be a big capital gains tax it although I'm enamored by the idea of having no mortgage payments interest rates have been like really going up mortgage rates are now at a place where people are starting to think maybe I pay off my mortgage early you're enamored by the idea of having no mortgage payment but you're worried about capital gains tax hit it could make sense for you to finance a mortgage but pay it off more aggressively than minimally so looking at a 15 year versus a 30 year I'm actually a fan of a 30 year mortgage but paid off within 15 years I actually have a mortgage flexibility calculator showing if you get a 15 year mortgage or a 30 year mortgage or scenario 3 is what if I get a 30 year mortgage but paid off in 15 years because of the change in interest rate between a 15 year and a 30 year mortgage you might be paying for that opportunity cost but it provides some breath and flexibility in your payments moving forward because it's very hard to turn a 15 year mortgage to a 30 year mortgage but it's very easy to turn a 30 year mortgage into a 15 it probably makes sense to get the longer mortgage but pay it off aggressively especially given your situation yeah I think about I'm enamored by the idea of having no mortgage payment but it would be a big capital gains tax hit I just go back to money is a tool it's not the end goal if you're going to feel good about having a mortgage payment and I won't even go down the nerd rabbit hole of sequence risk and borrowing at 7% to invest at bonds paying in 4.5% but again money is a tool if you can use money to feel better and certainly it's not unreasonable in this scenario that's certainly something worth considering taxes aside I love that you mentioned their preference for not having no mortgage this could also mean getting a mortgage but paying off the house within one year but splitting that capital gains tax hit into two years rather than just one always learning more from the logo's forums writes does Cody help folks develop a backup plan to re-enter the workforce in case of a fire failure that is a big portion of their budget for conferences to maintain skills or at least advise to keep up their professional context so both risk management and flexibility are fundamental tenets within the fire community if you're retiring from a profession that requires a lot of continued education to avoid losing your license you may want to spend the money and continue your education just to keep that license just in case you have to go back to work by the way not just financially but you might be three years into early retirement and realize you know what I really miss my career I actually love to do that career we've got another question from want to retire early how to avoid the regret of waiting too long to retire and what are the telltale signs how to partner with your spouse so you are on the same page for early retirement so in terms of regret of waiting too long to retire one of the signs first of all know your numbers consider how you'd manage risk and this is a big part embrace uncertainty and self-compassion so the fear of retiring usually isn't about the money there are deeper cognitive issues and opportunities there one way to have regret waiting too long is if you're on the fence of like I don't know if I'm ready to retire or not this is actually a good time to hire a counselor or a therapist having a mental health professional in your life is just as important as hiring a financial planner or listening to the bubble head podcast so part of your education should be not just learning about money learning about your money but learning more about yourself so invest in your mental health by the way if you don't already invest in your mental health in terms of your time energy and finances just really really consider that and also if it helps like just go beyond the stigma of that like I see a counselor once a week and I think it's really important for us even in the profession to be vulnerable about the need for mental health services so the telltale signs are when financial planning software says 100% quote-unquote probability of success even with conservative assumptions but yet pre-retirees they don't want to believe it they're like there's no way that's true there's no way that I can like there must be something wrong with the software right and not only that a telltale sign is with confirmation bias pre-retirees they're often seeking out fear driven financial and political media I'm sure we all know that person who you know they're on the fence of retiring or not and they're spending all their time watching investment news reading every article they can about you know this is how much you need to retire so if you see yourself going down a rabbit hole almost having confirmation bias and trying to find something that supports your fear of not retiring if you're reading articles about how you need four million dollars to retire about who you are like that's a telltale sign you know not just going too deep but you're also you're probably ready to retire and lastly take away the numbers for a minute right so talk about and visualize your family's ideal life together and then only then should you explore how your current and future situation can support that mutual vision you talked about your spouse this conversation usually goes sideways when one spouse wants the other spouse to be on their page not on the same page so I hear all the time people say hey like how can I get my spouse on the same page in terms of being on a path the early retirement when you say same page what you're really saying is how can I get them on my page and it really takes stepping back and understanding that they have a vision of their ideal life as well so let them create a vision for their ideal life only then plug in the money plug in all the ideas you have about you know how to get on the path the early retirement and it'll help and by the way listen don't talk is the best advice I can give when trying to get a spouse on the same page great advice Cody well I can't say that my wife and I did earlier retirement we did do a sabbatical gap year we took roughly a year off to do some traveling and that just started with us having a conversation about it making a couple dates to talk about what that would look like so just talking about it that was the first step Cody thank you so much for joining us today any final thoughts before I let you go I've got to say I actually have a trademark this phrase it's keep finance personal we're all personal finance nerds we're all listening to all the podcasts we're reading all the articles about quote-unquote personal finance but keep finance personal what this means is when you think about the advice somebody else is giving you even the stuff I said today right I do not understand your personal situation or most people giving you advice are only giving advice based on their circumstance and how they think about things and their biases so when you're making financial decisions when you're gaining financial education keep finance personal always think about whose financial plan is this is this the financial plan of the person writing the article you really think anytime I consume financial information how does this actually apply to me a good example of this so John you live in a California right yep San Diego so if I ask you John hey where should I go to lunch today you might say oh you should go to In-N-Out Burger and I would be like well I don't have In-N-Out Burger where I live you gave me advice on where to go to lunch based on where you could go to lunch not based on where I could go to lunch so keep in mind that when people are giving you financial advice they're saying what they would do not what I'm going to give you a few parts to this your comprehensive financial ecosystem and your unique values and desired outcomes as a family recognize understand the numbers understand your values and desired outcomes before you start asking other people for advice wonderful thank you Cody Cody I'm super excited to meet you at the Bullets conference this year folks will get to meet Cody and all sorts of amazing guests we're going to have this year at the 2023 conference it's going to be in Maryland October 2020 23 conference we've got around 60 spots left to register as of this recording so make sure to grab your spot before we are full up Cody thank you so much for joining us absolutely anytime and that wraps up our interview with Cody Garrett and depending upon how long it takes for the last few spots of the conference to fill up you might still have a chance to register for the 2023 Bogleheads conference go to Boglecenter.net slash 2023 conference for more information I'll be back next month returning as guest host for the Bogleheads on investing podcast it'll be my final month covering for Rick Ferry before I return to our live twitter series for the Bogleheads until next month you can check out a wealth of information for do-it-yourself investors at the John C Boglecenter for financial literacy at Boglecenter.net and check out Bogleheads.org Bogleheads Twitter Bogleheads Wiki the Bogleheads YouTube channel Bogleheads Facebook Bogleheads Reddit the John C Boglecenter for financial literacy on LinkedIn and local and virtual chapters and a thank you to all the folks who helped make this possible including Nathan Garza our podcast editor and Jeremy Zook our podcast transcriber I could not do it without their help and finally this is my plea we had over 20,000 downloads per episode over the last few months if we could just get some of those folks to leave a review subscribe and to rate the show that'll help more folks find this resource for do-it-yourself investors thank you again for checking out this episode of Bogleheads on Investing Podcast until next month for our next show have a great one


lie detector test scans your eyes to determine whether or not somebody is lying or telling the truth. Yeah, it's called eye detect. It's one of the crime fighting technologies that was on display here in San Diego this week at the police chief's convention. The company that makes eye detects says that the test works on the premise that when you lie, it requires more mental effort. So the device uses a computer screen and a small infrared tracking camera. It looks for things like changes in the eyes, size of the pupil, all of that goes into an algorithm that helps determine truthfulness. Unless you really know the person like a mother talking to their child, it's really difficult to know whether they're lying simply based on where they're looking or their facial expressions. So we're measuring things that only a high-powered infrared camera can measure that can't be seen with the naked eye, basically. Well this test claims to be 85% accurate. Right now it's used for job screenings by a number of law enforcement agencies and in the future it'll be used to screen refugees entering the country or people on a terror watch list. It will also help keep track of sex offenders as well as parolees. Interesting technology as we look into our future, which is here. Very cool. Yeah, and Jodi, I can hear you in the background saying you love this thing. I love it. At home. I love it. Looking here.