Q&A: When a Million Dollars Feels Like a Burden
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Let's afford anything dot com slash in roll. I'll see you in class. Joe, when you were a financial adviser, did you ever have clients who came into sudden? Well.

I did. And IT is the toughest time. Polar, because as you can imagine, you are emotional about the money. You may be emotional about the circumstances by which you receive the money or the people received the from, if that was an inherited ance. But hey, I mean, even if you won the lottery polar, it's an emotional time.

And so many people listening might think emotional like great. Who wouldn't want sudden wealth? But IT is actually quite chAllenging.

Yeah, absolutely. I think you feel this weight of responsibility to do the right thing with the money.

Well, we are going to talk today to someone who came into sudden wealth and is now grappling with what to do next, particularly because his entire life he has been saved, save, save, save, save. And now suddenly he's playing with different dissemble points. He's playing in a pool of of orders of magnitude different than anything he's ever really been a custom to.

So we're going to talk to him. We're also going to talk to a listener who has an adjustable rate mortgage that he's going to have to refinance and is wondering how to game that out. And also, we're going to a discussion about roth versus trade retirement accounts.

Welcome to the afford anything podcast, the show that understands you can afford anything, but not everything. Every choice Carries a trade up, and that applies is not just to your money, but to your time, your focus, your energy, your attention to any limited resource you need to manage. And that opens up two questions.

First, what matters most. And second, how do you make choices accordingly? Answering those two questions is what this show is all about.

My name is Polly pant. I trained an economic reporting at columbia, and I help you prioritize every other episode. We answer your questions, and I do so alongside my body, the former financial planner .

joe sousa. Hi, what's up, joe? Hey, I am sitting here with a cup of lua coffee ready to go. Have you had lua coffee?

I have not. What is this coffee?

Lua coffee has a Better name. I think lua coffee is the marketing name.

Way, is this the asian civic pop coffee?

This is more commonly known as whistle pop coffee. Yes.

wheel poop coffee. When I was a freeLances writer, I used to be a full time freeLancer rider. I wrote an article for special coffee retailer magazine about whistle poop coffee.

IT actually doesn't come from whistle. That comes from the asian civic yeah and they eat the coffee beans and then pup IT out. And there is something about the digestive process that makes the coffee beans taste Better. I suppose there's two things.

There's a digestive process, but there also is the animals only pick out they are very discernment and they only pick out the best coffee beans. IT is the least to see the coffee of ever head, as you know, because you've written about IT, there are places in new york where people are paying a one hundred dollars for a cup of this coffee. And I got IT when I was in southeast asia recently. And it's amazing. It's so good.

Well, I hope that you use the energy from that coffee to bring IT for this first question, which comes from an anonymous collar.

Hey, pollen, je anonymous color here. I'm thirty two, work in accounting, make about eighty thousand dollars a year in salary. I'm single and rent in apartment where I can pretty easily afford my fixed cost of living with my salary, paid athole car, no credit card debt, no student lands.

My question is more money psychology based. My grandfather, who passed away in twenty twelve, has set up a trust for me that I gained control up two years ago when I turned to thirty. The account is worth about one million dollars, with about fifty thousand in a money market fund, and the rest is invested in mutual funds and single stocks.

I really haven't done anything with the account except reinvest dividends and mostly Operate as if it's not there. I've been raised to live below my means and work and safe, safe, safe. IT feels strange all the sudden have a lot more wealth than my close friends, none of them aware of this change.

And it's weird to inherit this much money because IT feels unearned. I became a money air before I got control of the trust. I've about one hundred thousand dollars invested outside of the inherit account from my four one K A S A rah I R A in a taxi berkery count.

I max out my rough and H C. And with my employer match, I get up to fifteen percent into my four one key. I'm putting aside money for a house down payment as well. That all leaves me really tight as far as money left over for on essential spending.

Knowing the power of camping makes you wanted not undiscussed IT and keep feeding money into the machine since I have no idea what my life would look like in the future and I want to have a family and home and leave behind money like was done for me, it's really hard to predict how much I need since that's so different from where I met now. And I always find myself on the overly cautious with money. I didn't want to use the term coasts five for Jessie, but that kind of feels like maybe that's been reached.

What kind of things do you tell people once they reached that sort of critical mass with investing and maybe they can afford to back off some? Or should I keep going since I don't know what the future is gone to hold? You've had discussions with people about wind falls, uniform inheritance and waiting to more and and not make rash decisions and now that I know that I won't you go crazy with IT.

Um after that period, what do you kind of tell people whose financial life is completely changed in a positive way to help them feel safe about using that money? Finally, right. Thank you.

anonymous. Thank you for the question. That is such a beautiful question. And the first thing I want to say is that your grandfather is very lucky to have a grandson like you, because there are many people who devote their lives to building a legacy for their future generations, for their children and grandchildren.

But there's wide variation in how those children, grandchildren actually treat that legacy with some squaring IT, with others neglecting IT, which is kind of a derivation of squandering, but not in a spending way, just in a avoiding way, with some falling victim or pray to scams, which is perhaps one of the saddest outcomes of a legacy. There are many, many ways that legacy can go wrong. You have had control of this for two years, and over those last two years you have handled that beautifully.

You also, generally, in other arenas of your life, practice financial responsibility. So you are a well qualified recipient of the work that your grandfather has done for you. So that's the first thing that I want to commend you on. The second thing, we have to give .

you a name more .

important, right? And joe, i've got .

one good.

So there is this syndrome. It's called sudden wealth syndrome, and sudden wealth syndrome symptoms include feeling isolated from your former friends, feeling guilty about your good fortune, having an extreme fear of losing your money, IT can cause stress, IT can cause confusion, IT can cause adjustment issues.

There are many, many cases of people who have had to grapple with sudden wealth syndrome, people who come into that sudden wealth and have a hard time adJusting J K rolling, who famously was a single parent struggling to pay rent, and then became a billionaire in rather quick time through the success of Harry potter. J K, rolling is a one of many examples of someone who has suffered from sudden wealth syndrome. Seldon, another example.

He was one of fourteen kids. They had no money, and of course, now he has a ton. So there are a lot of examples of athletes, of actors, of musicians, one of the most prominent examples are is a couple by the name of Willy and dona.

silly. They want the powerball in twenty thirteen. They want three point eight million dollars through the powerball lottery. And they went through extreme depression and paranoia. The reality is that sudden wealth can lead to a bit of an identity crisis and a recording, and it's unfortunate and experience for which the wider world does not have a lot of empathy.

If you try to talk about this publicly, if you ever try to talk about IT on social media, everyone's gonna like a play me, the word's smallest violin, boohoo. But it's unfortunate that people are so quick to the emotions of those with money, because people with money have emotions that are just as real. People with money have stresses that are just as real. So, anonymous, I would like to name you Stephen, after Stephen goldberg, who is the psychologist who coined the term sudden wealth syndrome.

Steven and I like that too, because by identifying what the issue is is easier to solve the problem, right? The first step is identification. And I love that Stephen has identified that he's really not sure where to go from here. And like you, pal, I love the fact that he has done nothing right yet .

that that's the best when in doubt, do nothing yeah.

Which also Paula brings up the critical piece of information that we truly need help out, which is this, maybe you could slow down like you suggest IT, because you said it's a 舞台， you could change your lifestyle today. You said you want to buy a house. You could maybe buy the house early.

The biggest issue that I have, pola, is I don't know what Stephen wants. And I think when you start with what do I want, which becomes, by the way, talking about problems when you're want to control by a limited supply of assets and income, it's actually an easier question because the field is very narrow. And now Stephen suddenly has a million dollars, which could every seven, eight, nine years could double.

He's his potentially looking at a lot, lot, lot more money than that if he saves IT for later in life. So this potentially is a ten million dollar problem, not a one million dollar problem. So the field of what can I do becomes much more open.

So I know there's lot of people listening that will go well, this isn't evy is five a million dollars I would. And you don't you freeze and you think that i'm going to do the wrong thing and i'm going to blow IT use people blow through powerball money all the time. We read that over and over over.

We see pro athlete to blow through their income, huge income stream, only to realize later on that they made a bunch of on forever irs. And you don't want to be that person. I think it's a critically important question. Here's what I wouldn't do. I wouldn't change my lifestyle just because I can.

And I kind of heard a little bit of that in the question, should I back off my saving? Should I back off what I do now, if you're comfortable doing what you do now and you like doing what you do now, pretending like that money doesn't exist in continuing your life style, if you'd like IT, all that does is buys you flexibility in the future, which you mentioned. So I might want a house, I might want a family in the future.

If you just keep going the way that you're going and have this as money that buys you flexibility, that's a great thing to do. You don't have to do anything now. But if you've always thought I would like to live a little bit more extravagant feste le, today, I will take that million dollars, and I will leave IT invested, and i'll slow down the investment in my four one k that freeze up cash low.

And I can now do some of the things that I felt like I was able to do before. fine. The issue is polo.

A lot of the time people make these decisions in a vacuum. And I think what Steven is feeling, and rightfully so, is that the Stephen coffy can underline of the stick, right? If I do this with the stick today, the other end of the stick comes with IT.

If you pick up one end of the stick.

if I pick up one into the stick, there's going to be the other end that comes with IT. And people forget that there's going to be a consequence. So if I expand my lifestyle today, I am not going out the flexibility tomorrow.

Let's go to the other side. I don't expand my lifestyle today. There is a possibility I may pass away and I never enjoy myself the way that I thought that I could have. So each side has a consequence that comes along with IT. And I think this is a very serious game, of which consequence am I most comfortable with when I decide to do this, which is why I think you start with what I want to do.

given that Stephen is thirty two. And from what I heard in his question, his future is totally open. He might meet somebody that he wants to marry.

He might not. His sounds like he's may be hoping for that, but that's not a guaranteed thing. So he might want to buy a home.

He might want to start a family. If he does, who knows? He, mayor may not need I bf, he may have one kid.

He may have three kids. He may have eight kids. I don't know, but there are so many unanswered questions about his life. And so I think that, as he pointed out, you hate the term coast fy. But I do think the concept is really appropriate here because I think that he can take this million dollars buckets this as money that he will use when he is age sixty five plus, and then use the remainder of his money to save before these shorter term and more ambiguous goals.

So use IT to lock in the far future. Yeah, exactly.

Then he also has the piece of mind, because there's such an emotional component of receiving an inheritance. In theory, money is fungible. In theory, any one dollar can be substituted for any other one dollar.

But what we know from behavioral economics is that if one dollar was given to you from your deceased grandfather, who spent his thirties and forties slowly building IT. Whether a different dollar was given to you buy your boss in your paycheck for which, lets be honest, you are kind of growing twitter for an hour at work the other day. Anyway, you're onna value that dollar from your grandfather far more than you're gna value a dollar from your last paycheck.

We attach emotion and value differently to each dollar you're saying even though exactly the money, even though .

is a motion to different acts of. And so I benefits when you get an inheritance, that saying i'm going to put this into a bucket for when I am age sixty five plus, is that you know that I will be there for you when you are in your most vulnerable phase of life. Because IT is when we are seniors, that we are most vulnerable as adults. What are the two times in a human life that you have enormous vulnerability is when you're under the age of ten and when you're over the age of seventy.

in the absence of a goal that Stephen n. Told us, I like that strategy I would prefer Steven to assign. What do I really want to do? I just still want to hear that.

But in the apps that that people, I love that. But here's why I love you. I love IT. Because if you secure the future, IT makes your decision making process in the present much more value of life focus than what do I need to do to get through to tomorrow.

There was a piece i've told my story here before, but there was a time when was just worried about the next paycheck. I couldn't think about what strategically I wanted to do with my money because I had to be so tactical. Every dollar mattered to get out of the hole that I dug myself into.

I had to assign my future income to the next day and the day after that, the day after that. But knowing that Stephen doesn't need to do that, he can make career decisions with a much more clear head, can decide on live path much more based on what do what I want to do than what do I feel like I need to do. IT clearly buys so much flexibility in the present by securing the future.

The other thing I like about this discussion is that because there is no time frame that this money he's been assigned to, it's impossible to know if Stephen's grandfather's investments are appropriate or not. This was a question. I got a lot. Hey, I got this narrow dance.

Do you like these stocks? You like these mutual funds? I don't know. But once I know pola what the time frame is, then it's much easier to apply that lends to. Is this appropriate or should this be sold for something that's more appropriate.

right? And so by virtue of assigning a time frame to this bucket of money, and in this case, that time frame will be when you, Steven, is age sixty five plus IT solves the asset allocation question as well. We know yeah I mean, we don't know .

exactly what you want to do. There are some more questions there, but it's certainly takes this huge field of investments and narrows IT by a ton. exactly.

We know we're investing on a thirty plus year time horizon. Yeah and I get given that this is an inhalant, the emotional health to inherit money is the lingering question, would my grandparents be proud of the way that I handled this? And I think anyone who takes that a bucket of money that was passed down to them and says, i'm going to preserve this for my own retirement.

Now I think any grandparent would be proud of that, right? absolutely. And honestly, a lot of IT goes back to when you're in your thirties or forties or fifties, assuming that you are healthy, you have the ability to go stand on your own two feet. Assuming that you're healthy when you're in your thirty forties, fifties, sixties, even you're in the prime of your life and you can go out there and make IT and be a grown up. So emotionally, IT can be a little bit more difficult to think, oh yeah, my grandparents sacrificed for their entire lives so that I could have extra padding during phase in my life in which I am perfectly capable of taking care of myself anyway.

By contrast, if that money is saved for those more vulnerable senior years of your life, those elderly years of your life, and then you redirect the paycheck that you're making today into the shorter term goals, buying home, possibly getting married, possibly starting a family, maybe traveling, whatever that is that you want to do in five, ten, fifteen years, you get the solace of knowing that your grandparents would be proud of how you preserve their money. And you also get the pride of knowing that you built your own adult life through your own effort involution. I think there's a big part of adult self actualization in which we need to know that we built our own path, that we paved our own way.

You look at even very wealthy children who technically don't have to work. Paris Hilton, right, could have easily not work. SHE built an empire valued at over a hundred million dollars.

why? Because he didn't want to just have a hand out from her parents. SHE wanted to put in the seven a mornings the conference calls, the meetings, the slack threads like he wanted to put in the effort to build something of her own. And that is so common among even the richest among us there. There is, I think, a very innate human need to know that this life I have is one that I built.

I think on the tactical side, don't forget though, if your companies giving you free money in terms of a match, I would still, Paula, build that in. Make sure make sure that you take a vantage of any spot where there there's free money. I wouldn't give that away, but directly I really like where you're going.

And the other thing that I will also say is even directionally if you told me what you want, I still directly like the bias toward what pola is telling you, even like the bias tard later with that money in securing later that said, IT doesn't have to be in all or nothing. You could assign part of IT to now to maybe help with the house down payment, or whatever IT might be. You are to have the fifty thousand sitting and cash from the inheritance, maybe part of that. But IT doesn't have to be just all one way or all the other way. But I do like the bias of what policy toward use this to secure the far future and then work back toward today and build IT for yourself.

And the last thing i'll say, so what you just said reminds me of a call that we answered on a recent episode from a collar who said that he was working towards work optionality. And the way that SHE approached IT was the first SHE completely filled the buck of age sixty plus. And once that bucket was filled, now she's trying to infill the bucket of age thirty three, sixty.

Yeah, I remember that that was great.

yeah. And that framework, that approach is, I think, of a very smart one because it's life planning taken from you start to age one hundred and then you just work backwards to today and you do that incrementally in buckets of a decade at a time.

IT gives you great feeling doing that too, because you know that once you reach x bite, that I am very comfortable pivoting, I can be incredibly comfortable doing something completely different because I know that I get to excited the things we're going to be OK and is funny because IT isn't so much about reaching that line as IT is knowing that, that line exists and exactly where that line is or where you're never going know exactly where IT is.

But you get my meaning that I know it's probably going to be in twenty twenty one or twenty thirty five or twenty fifty year, whatever that line is. I know ish that i'm going to be good after that date. I think a lot of people have difficulty with uncertainty.

I certainly do just when there's something out in the air, let's say that poland, I were having a chat and policy, something very weird, and I don't know what that means. Whatever he said, I will spend the next six hours going. What do you think, parliament? What is mean by that? And I will drive me crazy.

So I said, how's the pop in your coffee?

What do you mean? So I have to pick up the phone just because I don't like uncertainty. I would like Paula, what I mean when you said that. So i'm not alone there though. I know that when I was a financial planner, just the certainty of, yeah I have to work harder or the certainty of I don't have to work as hard just knowing and getting rid of that was is so important, I think, to the human psyche, and definitely influences our behavior.

So Stephen, I hope that was helpful. I want to commend you once again for being such a worthy recipient of your grandfather's efforts.

So thoughtful with this money.

Thank you, Stephen, for asking that question. And best of luck, we're gna take a break to hear from the sponsors who make this show possible. And when we return, we will tackle two questions, both from a color name to jack.

I don't know jack.

We know you don't know jack. So it's the holidays right now. It's the beginning of the wali, which in the palace nas the so my family has a lot of holiday traditions around that. In terms of doing put, I would like doing the blessings, but I know for other people, other people have different types of holiday traditions.

Maybe you bake cookies are, you sing carls by the fire, maybe you make a turkey thankful ving, you know, ever IT is you do like every family is different, and the heart of holiday traditions is family, and families is important. The family, especially in the season, we really cherished that time. It's also a time to think about protecting your family's future so that your loved ones have some type of the financial safety net in the event that the worst happens with policy genius, you can find life insurance policies that started just two hundred and ninety two dollars per year for one million dollars of coverage.

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Welcome back up. Next, we're going to talk about refinancing a mortgage. And after that, we're going to tackle a question about traditional versus routh retirement accounts. So our next two questions both come from jack.

Hypo jacker, i'm calling in to get some advice on a soft spot I had in my personal finance knowledge, and that's concerning the area of refinancing a mortgage. So my wife and I are proud hooo NER. And our first mortgage payment was june twenty, twenty three, and we gotten adjustable rate mortgage seven year that kicks in the gear, I guess, june to twenty thirty.

So we got this on a physician assisted mortgage plan, which for your listeners out there, they don't know about a great option for doctors who are going through medical education. We did zero dollars down, got a four point eight seven five percent mortgage rate on a foreign and thirty five thousand dollar house. To give you a few more facts that maybe will help the situation, our credits gid over eight hundred, and we could out right by the house.

But we've decided to have the money stay in the market rather than pay down the interest that we'd have to pay. We're in a good place. But basically, I don't know the first thing about refinancing, and I have been LED to believe that come june twenty thirty, I could get walked with something way higher than four point eight, seven, five percent interest, right? We don't plan on ever selling the house.

We want to basically be landlords if we ever move to a bigger place. Or we might actually expand the house if we welcome some children in the family. But this is all to say that at some point, we're going to need to refinance um either by the force of the end of the seven year period or voluntarily. And I don't really know what goes into that.

So do I have to use the same lender? Should I do IT now? Should I do IT later? Is this something that I will have to pay closing costs for if I do IT now? And I would have to do IT wouldn't have to pay closing cost later.

But you can tell I don't really know much about that. So hence why am I even knew this voice male? Thank you so much for the podcast and all the advice and I look for to hearing .

what you have to say is a fabulous question. Jack, thank you so much and it's really great, pal. This type of decision making I love because we often will go to work and we will make very pragmatic decisions on behalf of the organization we work for.

And then we come home and our emotions get involved. And we really for this question, jack, we want to put on our CFO head if i'm the chief financial officer er of my company, that's the way I want to think. And so the cool thing is the CFO of your family, A K A U.

You've a lot, a lot, lot, lot more flexibility than you may realize because let's say that your time runs out on the adjustable rate mortgage. Seven years comes up. The critical thing that the CFO needs to know is if you do nothing, what will IT adjust to? And that'll be in your contract.

And often polis, you already know, but a lot of our audience may not know, is maybe IT goes up one percent per year until you do something or until IT finds equal. Liberum, whatever equilibrium means, prime plus, whatever the thing might be that IT will adjust to, there will be a cap on how high it'll go. I want to know what that is. I want to know every year that I do nothing what IT goes to. Because if you're sitting at four point eight, seven, five percent, you may have another year where the interest date is higher than IT is now, but it's still lower than anything else that you can get.

I seriously doubt IT because even if he made that move today, there may be products which will allow him to get fairly close to four point eight, seven, five, but they're going to just very quickly, like if he does IT an adjustable rate mortgage, pola, that's going to adjust day after tomorrow, hate somebody might give him some money that is on a very short timer for a lower interest rate. Basically, jack, what happens is the longer the period is that the company is going to loan you money for, the higher the interest rate is going to be, the quicker that you're going to repay them and more certainty they have, they're gonna repay them because it's quicker, the lower that interest rate will be. So I don't know what the interest strait is today.

Know when your arms I can see the look and polis face. She's probably looking IT up right now. But there are some adjustable rate products that are going to give you a lot of flexibility in terms of interest rate that allows youtube use a football metaphor, punch the ball down the field, meaning delay my long term decision making until later because interest rates are where I want them to be.

So in the next seven years, I don't know what's happening. I do know generally that right now, interest rates are expected to lower over the short run. So i'd be paying attention to over the short run. Is there an opportunity for me to lock this in to a fixed rate product instead of the adjustable rate product that I have now? Is there an opportunity so the H O.

to answer what you just mentioned earlier, the current rate on a one year ARM as of this is actually as of a couple of weeks ago was seven point one, two, five percent. okay.

And you would I know that's gonna down. Yeah.

exactly. I wanted take a pause here and zoom out and give a little bit of broad lesson on how arms just worried mortgage work. Let's do IT. There are four variables that you need to know.

The first variable is the obvious one because it's right in the name IT is what is the period of time for which the interest rates fixed? So jack, you've got a seven year ARM. That means for seven years your adjustable right mortgage is going to stay at four point eight, seven, five percent.

So on a seven year ARM, that interest rate IT stays fixed. For seven years, on a five year ARM, the rate stays fixed for five years. On a ten year ARM, the rate days fixed for ten years.

Three year ARM IT stays fixed for three years you get the picture. So that is one of four variables that you need to know, and that's the most obvious one because it's right there in the name. There are other three variables that every person whose considering an ARM should know.

And that is the periodic incremental time that the mortgage adjusts, the amount that I can adjust for adjustment period and that maximum cap, which you talked about earlier. So for example, and this is just a hypothetical, there might be a given mortgage that adjust once per year and each time IT adjusts, IT can go up by a maximum of two percent is a purely hypothetical. IT is just once a year.

IT is just a mp two percent per adjustment period and IT can go up to a grand total of no greater than a maximum cap of ten percent. That would be a hypothetical set of variables. There is the adjustment period, there's the maximum rise per adjustment period and then there's the overall absolute max.

Those are the three variables that they're going to be written into your mortgage loan documents. So you can read IT right there in your loan paperwork. But anyone who is considering an adjustable rate mortgage should know all four of those variables because those four variables together, peace together, the full .

story at any time during the next seven years and even after once, you know how much money this is going to go up by per year and what that means for your cash flow. You could make the decision based on cash flow, based on interest rate, based on whatever is going on in your family. So as an example, if you just want to delay the decision a year and get the lowest rate possible, you may do a one year adjustable rate mortgage. There are even products that are one year adjustable rate interest only products, meaning you're gonna pay down any of the principle because with the difference between seven point x, what's the one year polo .

as of a few weeks ago, current rate on a one year ARM was seven point one .

two five percent. So if you're just solving for payment and you don't like how much the payment is going up, you could do an interest only loan. Obviously, you're not making any headway on your debt, not my favorite product, by the way.

But if you're solving for payment, you can do that. If you're solving for payoff s, you can do that. If you're solving for interest rate, you can do that.

So there's gonna jack, a lot of levers between now and then. And when you ask about lender, I think my CFO analogy, pola answers that question immediately. If you're the CFO of a company, i'm going to look at all different lenders. Yeah, i'm always gonna are .

it's a check. It's a free market. You are welcome to go with any lender you want to you have no obligation to stay with your current ler.

So I think knowing that the clock is ticking for the next seven years, what I would do is this, I would pay attention to interest rates. I don't know that you're going to five, four point eight, seven, five again in Normal circumstances, in a Normal market polo.

But we have no idea what the economy is gonna like in twenty thirty.

We do.

We maybe in twenty twenty nine, we have a huge market crash or another pandemic or as zombie pocalypse, we have no idea.

But if I going to start making a long term decisions, where do I want to be? And I want to get away from adjustable rate mortgage. I want to use a longer term lens aware of markets been historically right and you know a third year.

i'm being slightly facetious that this on the apocalypse, I had no idea trying to underscore the uncertainty. We cannot predict black swan events that could throw the best laid plans out of weak.

But I think over long period time, if we look from the nineteen fifty, let's say, to today, so that gives a seventy five years ish, if you find something in the sixties that you can lock in long term, thirty year fixed, that's a good place to start making permanent decisions because any time interest rates have gone below six, we're in a pretty extraordinary market at that point.

So if your goal is to lock in a long term interest rate and you get probably six point five or less if we get to that point, that I make a long term decisions, obviously, if you can afford to make a long term decision before that, that said, a higher interest rate and by you more time. I don't know if I do that or not. I really done if I would do that or not or wait until we get closer to that seven earmark and maybe refinancing another adjustable rate mortgage to just keep the interest rate as low as I possibly can. Until i'm ready to pull the trigger on a six point what whatever IT might .

be yet he's got such a good interest state four point eight, seven, five.

that's the problem.

He's got such a good interest story. I would leave good enough alone.

He could leave that alone for all seven years, and probably for another, let's IT goes up by two percentage points. He could leave IT alone for eight years because he's now is only at six point eight, seven, five. And once again, this depends on what that does to as payment and what that means for his budget, which we don't know. Tear point, he has more flexibility than he thinks he has. Yeah.

I would not refile out of IT for the next seven years because I don't here. I don't think you're going to find anything Better.

I don't know, polite, because interest rates just generally over one pards of time, below six and a half percent are so hard. Define right? Let's say that three years from now IT goes to six point two five, thirty year fixed.

I may make that move because I don't know how long it's gonna last. I don't know if it's going to come around again anytime soon. I don't know. And so if he can get below six and eighty percent and buy more certainty, I might do that even if he's at four point eight, seven, five and these two or three years away.

Wow, that's a difference between with me. I would not do that. See where that's coming from based on historic trends. But if we get into an environment where interest strates start dropping, it's because the fed is creating stimulating activity and that might mean number of things that might simply be that they have a whole lot of confidence that inflation is under control or IT might be that the economy is contracting and we're trying to pull ourselves out of a nose dive.

So I would I think we definitely quit your point. You and I both saying right now, the fed the current fed likes to telegraph which way they're going. And I think if we get to the point that i've got to thirty years, six and a quarter ability right now, i've got that ability today.

I want to look at what the feds kind of saying at that point as well because to your point, if they're saying we're either going to leave things the same or we're going to lower IT, well, then I wouldn't do anything. But if we get to six and a quarter and the fed signals that we are done lowering for the time being, yeah that I think historically, I M sitting in a spot where interest strates are lower than they are than the mean is historically. And there then just looking at reversion to the mean, the next up move would be them more likely to be up and down? I'm onna.

Go ahead. And i'm going to luck at that point. So I guess I need to know where i'm mad.

Yeah, i'd be reading the fed pretty carefully. I'd be spending a lot of time looking at economic indicators because the question is, is the fed regna stimulate the economy because we are heading towards the recession and in which case, there's a likelihood of interest rates continuing to drop? Or are we simply mean reverting?

I generally, and this is youtube pola. We generally on this show tell people don't pretend you a Christal don't pretend that you do. I will say this though, the fed makes IT really easy like out of all the indicators we get yeah this current federal reserve anyway likes to give you a road map of what they're thinking and where they're heading.

And IT isn't looking into a Crystal ball. They are telling you, hey, when we meet again, we're probably gonna lower. IT is not like deciding where microsoft cks gonna go next week. If you ask me where microsoft ks is going, I have no idea. Fears me with the feds going to do I like y're pregnant to lower interest rates.

Yeah, there are a lot of indicators that can sort of feed into that. You look at the jobs report, you look at unemployment claims.

you look at CPI.

Yeah, exactly. You look at CPI, you look at r star, there are a lot of indicators that you can sort of pulled together in order to get a much more clear picture of where interest strates are going to be headed. Yeah, but I don't think he needs to worry about that until it's funny. Thirty, if he just has such a good interest rate right now that again, I would leave good enough alone until .

I think I would not. I would look at what the feed is doing. I would any time I have any adjustable rate product, I want to know where safety is today and what the trend is.

Is IT told safety years that away from safety, and that means in this case, interest rates going down is safer, interest rates staying the same with the probability of trending up that i'm losing safety. And if I find that i'm losing safety, then if i'm the CFO of my company, I want to think about how dangerous IT is to leave things the same. And certainly, put to your point, twenty thirty is so far away right now. If the trend reverses in the next few months and interest strates are headed up, i'm staying right where i'm mat right because it's so far away. But if it's twenty twenty late twenty twenty eight or twenty twenty nine, i'm thinking much more about what my options are to extend that clock.

Part of the question, one unknowable piece of this puzzle is after those seven years expire, what is the period term in which his rates go up? What is the duration of that period term? Is that a year is at six months.

So what is IT? The other question that we don't know is how much will that mortgage ge rate go up in that first period term? And then of course, the third question we don't know is what is the absolute maximum? What's the worst case scenario? What's that cap? Those are the three questions that would also play a role in any year twenty twenty nine decision that he makes.

One question that I may also ask of your current lender is, is there a possibility to request this mortgage? And I don't see this a lot. Polar and adjustable rate products.

I see IT much more often and fixed rate products, but I wouldn't not ask this question. I would definitely ask IT. Testing your mortgage means you're going to change the interest rate on the product without changing the length of the mortgage.

So if he gets a favorable interest rate that he wants to lock in, he may be able to have a twenty three year mortgage at a fixed rate, you know, because he's already seven years in a twenty three year mortgage. So he's still on the same payment, still the same payout time frame, not have to do the full refinance. And sometimes the fees to get that done are much, much lower.

So sometimes two hundred and fifty, three hundred and fifty dollars to do that versus all of the the pain of a refinance. Recasting a mortgage is also a question I would ask when you're looking at all of your options. I don't think in this case, we'll be able to because it's an adjustable rate product.

but i'm not familiar with recasting on an adjustable only on a fixed yeah.

I would still ask though i'm .

guessing that the duration of his adjustment is probably one year. He didn't say that he has a seven one ARM, but that seems to be the most seven year. That seems to be the most common.

I would totally bet IT to .

seven one yeah but he didn't say IT. So I don't want to make that assumption, but just have brought in this out for everybody when you are looking at a mortgage. Remember how earlier I said that the mortgages was described as the fixed three period of time.

So five year adjust orate mortgage keeps that interest rate for five years. The seven year mortgage which jacked is what you have a seven year. I just worry mortgage keeps IT for seven years, but there's another number typically after that, that indicates the duration of time after which had adjust.

So as if I was a seven one ARM, for example, then it's fix strap for the first seven years and then that duration is every one year. So for example, if a person has a five one ARM, then they knew they've got that fix trade for five years and then that duration of time is every one year. Subsequently, if a person has a five ARM, it's a duration of time fixed rate for five years.

And then I had just every five years, typically with a seven year mortgage. Those usually commonly come with seven one arms. But jack, I don't want to make that assumption because you didn't see that IT was a seven one ARM.

You said that was a seven year, and I want to be very cautious about making any assumptions that are not stated within your question. So I would absolutely check your loan documents, but i'm guessing you likely have a seven one ARM that is the most probably tic answer. What we don't know again is how much I will adjust in any given one year incremental time, nor do we know what that maximum cap is going to be.

However, those are knowable numbers. They're in your contract.

they're in your loan e documents. You can just look those up yeah the answers to those two questions will, I think, resolve the the disagreement that joe and I are having right now over whether, in my view, to leave good enough alone, or in joe view, to lock in that bird in the hand? Well.

here's what I changed my mind. Pola is an example that only goes up by one percent yeah if IT all goes up by one percent per year in year eight and it's at five point eight seven five, still much Better than historical averages. The next year is six point eight seven five, still not bad. So I almost look like he's got nine years instead of seven years where that interest rate still is pretty kick s when IT gets to seven point eight seven five, not horrible, but not wonderful. And then certainly the next year, we need at eight point eight seven five in most Normal economic circumstances that's above .

average but not .

like the eighties. Yeah, it's an above average rate. We can probably find Better given a one percentage point maximum adjustment per year.

He may have safety through year nine, maybe even ten yeah. So he may have a long, long time until he truly is going to be looking at doing something. And you can see them mathematically if it's two percent, yes.

if it's two percent, that shortens your window for in terms of making a decision at .

that point and much more worried about certainty quicker.

So jack, and to everyone listening, I hope that was a good overview of how to think about adjustable rate mortgages and remember the four variables that you want to look for when you are assessing sing, any given adjustable rate mortgage fix duration, adjustable duration, adjustable increment and total max. Are you will, jack? Thank you for asking that question.

And our next question also comes from you. We're going to take one more break to hear a word from the sponsors who make this show possible. And what do we come back? We will have a discussion about roth and versus tried retirement accounts.

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Welcome back. Our final question today comes from jack.

Hypo jack here, I hope I have a straight forward question, and that's basically, what should I do next year for one? Ky, should I max out the rough for N. K, should I max out the pretext for N. K.

Or should I do a mix above? If IT helps? I think if I did pretax, I would bring us down my wife and eye from the thirty two percent tax racket to the twenty four percent.

So that's kind of the ordinary income we would be saving, at least in the short term. Care for your thoughts. thanks.

Okay, he doesn't know. Have effective tax rates work first as tax rackets?

Yeah, exactly.

Which is common.

jack. Thank you for the question. I remember how for the adjustable right mortgage ge question. There are four variables that I need to know from you in order to be able to Better answer this question.

Now for this question that you've just asked, roths versus trade, there are a few variables that i'm going to need to know from you. And I want to expand this answer out. So for anyone who is listening, who has a similar question, should I put my money into a rah account versus a trade account? Here are the questions that I have.

Number one, do you expect that in the future your income will be substantially higher than IT is today? Number two, do you expect that in the future your income will be substantially lower than IT is today? For example, do you at any point in the future want to take a sabbatical in which you will have either no income or substantially lower income?

Do you plan to take any time off for caregiving duties? Do you have any chronic health issues that might render you unable to work for some limited period of time? And by limited period, I mean, maybe a few years at some point in the future, do you have a simple desire to take a year off to write a book or to drive a motorcycle across central europe?

Do you plan on moving to a different state at either in the near future or in your retirement in which your state tax bracket will be significantly different? Do you plan on a massing investments in anything that would have passed through income? So anything that has either an L, C or s corp.

Structure, do you plan on becoming a business partner in any of those in the future because that will substantially change your tax brackets? The reason that i'm asking all of this is because the fundamental question of auth versus trade unpacking that to answer IT at an individual level hinges on your assumptions about how much you are making now relative to how much you will make in the future. Because what you're doing is you're gaming out paying taxes at your current tax bracket versus paying taxes at your future tax bracket.

Now in the absence of those answers at an individualized level, if I were to make a road epm generality in general, I think it's Better to pay the taxes now and therefore to biased towards raw accounts. And the reason that I think that is because in general, and again, i'm just speaking in generalities, most people tend to have income that goes up over time. Now again, there is a risk if you know you have a chronic health condition that's probably going to render you unable to work for a five year incremental time starting in the year.

Funny, thirty, that's a different story. But in general, most people tend to have income that goes up over time, meaning your tax bracket will be higher over time. Most people tend to a mass greater investments as they age, which means that you likely are going to have higher income through L, C, S.

And s. corp. Through higher Price, through income from private ownership and business in the future then you do today. And then the part that we haven't address yet, but that is absolutely unknowable. What are your assumptions about where the government is going to set tax rates if you assume that the government will raise taxes in the future? That's yet another reason to bias towards raw accounts today. And the reason that I am emphasizing how much of this changes on assumptions is if you know that you are going to move to porter rio or to do by that's gona change the answer if you know that you're gna be geo arbitraging into a place where your tax brackets are going to dramatically change IT changes the story. But in the absence of planning to move a porter reo and also planning around chronic health condition and a few sebak les, in the absence of that, I would .

bias towards a rough that's always generally my bias as well with regard to the government. If we think that at some point, the government is going to begin addressing the debt, it's just mathematics that tax rates will go up to address the debt. They have to go up to address the debt. If we think that there is gonna another avenue that magically appears, then that may be poor. But I do like the fact that at the end of the day, pola, this is an assumptions answer.

And you have to know what the assumptions are because when you assume something is always going to go differently than what you assumed and then you'll be able to know the extent of the course correction you'll have to make to make up for what the change is versus what you assumed, which I like knowing what that delta would be if I assume incorrectly. But generally speaking, up with you my biases toward the rough. And then you will talk me toward the traditional for a one key given what your circumstances are.

And jack, also, when you said that your tax bracket will go up, one thing that a lot of people don't understand, I don't if you understand IT or not, but your tax going into the next tax brackets is not the huge tax burden that a lot of people think that IT is. I have had married couples polo back when I was an advisor that would come to my office, and they would explain to me that one family member works in, the other ones stays home. Because all of the money that the person makes you staying home would be at the higher tax bracket and they did the math and all that money would go toward taxes. So IT doesn't make sense. And I would answer, I have great news for you if you get to go to work.

right.

because tax brackets are incremental. So if we start with the lowest bracket that fills up at the lowest rate and then starting with the next dollar, that next dollar gets text at the higher rate. So if he said the words twenty four and twenty six, that means the very next dollar is so is at the two percent higher, right?

right? exactly. So if you imagine your money as a teared pym ID, the base of that pyramid, or I guess, depending on how much you make IT could be an pyramid. But the base of that pyramid has money that is text at the lowest possible rate, a dollar number one that you make no matter who you are, no matter what tax break you're in, dollar number one is text at the lowest possible rate.

And so IT isn't as though you cross some freed hold and all of your money is magically text at this higher amount, is that those incremental dollars are text at a higher rate. So think of IT as A A tired system in which this tear of money or this bucket of money has a given tax rate, and this other bucket of your money has another tax rate, and this other bucket of your money has a different tax rate. And so when people say i'm in the x tax bracket, that number that x that they're referring to is a reference to the sliver of their money that has the highest, right?

What we're really concerned about is what your effective tax rate is, and that's very easy. Go to last year or tex return to find out what IT was last year. You take the amount of money that you paid in tax, which will be at the bottom of the back page for most people on there, ten, forty, and look at the top line income that you had come in, which is at the top of the first page.

So I want to lay out a little bit about why I biased towards the, and why when answers this question in generalities. My typical answer is, use a rah account, unless there is a very specific reason not to.

I can tell you.

mind to OK. All right, all right. Well, i've got to, we ll see if either of these stealer thunder, one of them is because you then are locking in a lifetime of tax exam t growth. So all dividends, all capital gains, all the growth for the remainder of your life is completely tax exempt.

And given the power of compounding, given how much that money is going to grow, and of course, the Younger you are slashed, the longer you expect your life expectancy to be, the more that money is gonna compound, right? The greater the timeline on that investment, the more compounding you have. There's an enormous power to having a tax exemption on all of that compounded cumulative growth.

So the math of that is one very powerful reason. So that's one of my two reasons. The other of my two reasons is because a rough account functionally allows you to to make greater contributions. So think about IT like this. Let's say that you have seven thousand dollars and you are either going to put seven thousand dollars into a rah I R A, or you're going to put seven thousand dollars into a traditional I R A IT sounds as though you're contributing the same amount of money.

And you're just trying to decide, do I put the seven thousand into a rough versus traditional account? But what is actually happening is that a greater percentage of your money is getting invested because by virtue of putting that seven thousand dollars into a rough account and paying income tax on that seven thousand dollars, a greater amount of your money is going towards the funding of that contribution. There's the seven thousand contribution itself, plus there's the amount of money that you used to pay the tax bill.

And so by virtue of taking that same seven thousand dollars and choosing to put IT in a roth account instead of a traditional account, you are functionally making a greater contribution. And as we all know, IT is the size of your contributions. That is the single biggest determining of your lifetime returns.

Yes, I ve of those. My favorite way to look at the routh advantage takes your first example, but we states IT differently.

Oh.

let's hear. Which is when you make a traditional four one k contribution, every dollar that makes you are split ting with your uncle and washington, and not even a real .

uncle is uncle sam.

Ed slot says, yeah, not even my real uncle so but I got to split IT with as I make money, i'm taking the government along for the ride. And the Better I do, the more. Better washington does.

And don't keep me wrong. I want to pay my fair share, but with a roth polar. And this is, again, just a restate ment of what you said.

But I like the imagery of this. When I put money in the rough, a dollar in the roth, any money? That dollar makes us one hundred percent mine.

IT is one hundred percent mine, assuming that I follow the rules of the rough, right, when I can take IT out, how I can take IT out. And they're very simple rules, but assuming that I just follow the simple rough rules is all mine forever. And then what I like about that is we talked about all of the assumptions, all the assumptions that we make around the tax brackets and tax rates.

Those are all find. But when I know that it's mine one hundred percent, the only thing that I truly embedding on is that the rules are going to stay the same with the respect to the fact that the government is not going to teach this in the future. So that's my feeling about the rough and why I buy ice to the rough .

certainly makes tax planning in retirement to hack a lot more fun. Because you get to look at the bucket of .

money and be like, this is all mine. So much easier, much easier. Which is another reason the government also has all these provisions that allow you to use the roth ira for college.

And I will often meet people that will say, no, I don't like the five, twenty nine, because what of my kids don't go to college? So i'm many used the rock as my college plan. I do not like that because I like don't get me wrong, I like the rules around college with a roth, but i'd like the retirement planning so much Better with a roth. I would rather find a different means to pay for college and to do any of your college planning, short term planning, whatever the planning is, leave that rough money for later in life because you're really going to have five yourself that you simplify everything, right?

So jack, there's your answer. We both are big fans of the roth. I would default roth unless you have a good argument for something else.

Yeah.

and if you do have fun, enjoy your move to porter ego .

and apparently polar. We do know jack.

maybe a little 哦， we do know jack. Look at that alright. Will show when you're not drinking civil poop coffee.

delicious.

Where can people find you?

You will find me pola at the stacked Benjamin podcast. You know what's .

going on this week on.

we are playing some of our top mentors, top guests from past episodes. So for people that have never heard the stacking bedrooms in show, we're going monday through friday with some of our favorite episode. So come join us because it's a funny or having .

the greatest hits week.

IT is the greatest this week.

this week greatest. Tk.

those are fun, super fun, because we get to pick some of the ones that dog be wrong. I think we always have some great guest that bull is over. But the ones that really maybe go wow, we're playing this week. So come find them at the stock management show.

Oh, beautiful. Well and thank you for tuning in to the afford anything podcast. If you enjoyed this episode, please do three things.

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I've just to see hi.

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