Q&A: Why Your Retirement Math Isn’t Adding Up
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So when you were a financial planner, did you ever have a client who tried to calculate their own retirement number or their own financial independence number, but they severely miscalculated?

No, actually not that I can remember what I do remember though, which is equally as interesting as people would come to me specifically because they wanted to know how much they needed, what that number was and how close they were. And then can of gross a question I didn't like, how do I compared everybody else? That part I didn't like because I didn't matter, but that's what's everybody wanders. But a lot of people though came to me because I like, I bet you've got to good calculators and you've done this before. So can you help me come up with that number?

absolutely. wow. Well, we are going to answer a question from a listener who is trying to calculate her financial independence number, but she's worried that SHE is acutely miscalculating. This is exactly major oo. We're also going to here from a listener who is wondering about some of the advice that our guest, paul merman, shared on our recent interview.

Paul moran very much advocated for a value funds, but she's wondering ing, what about growth funds? Why value are not growth? So we're going to answer her question, but we're going to kick off with a question that comes from someone who is codified about the money that she's saving for the short term, confident about the money that she's saving for the long term.

But what about that messy middle? How should that money get invested? We're going to answer all of these questions in today's episode, of them, all of them in one episode, one episode. Can you believe? IT.

oh my goodness, I got to ask for a race.

What's five percent of zero?

Oh, crap. Foiled again. Maybe if somebody had .

a negotiation course, maybe that would help if one day, well, welcome to the afford anything podcast, the show that understands you can afford anything, but not everything. Every choice Carries a trade off. And that's true, not just for your money, but for your time, your focus, your energy, your attention for any limited resource you to manage.

So what matters most, and how do you make choices accordingly? Those are the two questions that this podcast is here to solve. I pola pant, your host, a trained economic reporting at columbia.

I'm here to help you priorities so you can build wealth. Every other episode, I answer questions that come from you. And I do so with my buddy, the former financial planner jos c. Hi, what's up to?

I am super happy to be back and your new studio almost done. Last time you and I were together, IT was just starting to get done in. Man, we're just about there.

IT is still very much under construction. I'm not recording for many of the official equipment yet because we haven't done proper sounds checks with that.

We haven't run .

IT through its battery of tests at the base set up. We've made some serious progress in the past week. I'd say probably by the time that you and I are together next, this thing should be ready.

Now i'm hold you to IT.

Well, let's hear our first question, which comes from joe.

Hypo and joe, my name is joe. I am a forty five year old single mother of two kids, and I recently divorced. My kids are ten and twelve years old.

I've worked for over twenty years and planned to retire or semi retire in a month too. I have a doctoral degree in my field, but that doesn't mean I know anything about personal finance. I really didn't start learning until very recently as my partner had always taken care of things.

And so what i've really had to catch up and your shows spend a key part of that for me. My question is about medium term investing. But before I asked my question, i'll just give you some my background.

I have one point five million and retirement accounts. I've been making about one hundred and fifty at my job, which I planned to quit very soon, and i've been making the contributions. I've been pretty good about that.

I believe i'm a good state for a post age sixty retirement. I also own two condemned ms. When I first divorced, I downsized to a small condo and approved to be too small for me and my kids.

And so luckily I was able to buy the adjoining unit and connect them. And so now the kids have their space, and I have my space as well. Once the come of wage to go to college, i'll seal up the condos and sell one back and make that money back.

They're worth about four hundred k each at the moment, and they are both pay off right now. I have about five hundred k and cds and A C, D. latter.

So I was nervous about money after getting divorce, and I thought i'd be conservative. This includes a two year CD, three year CD and three, five year cds, all at a little over four percent. So that's five from, okay.

In this latter, I have some passive real estate income from a family, real state property with this money, along with interest from investments like currently these cds and some child's support money that goes to living expenses for the kids. I think my expenses for early retirement will be pretty much covered. I will also be receiving additional settings payments from the divorce for the next four years, and some of this money will go into funding my children's s five twenty ninth for college.

As i've been learning about personal finance, there been some basics that are cleared to me. You know, I need to have a fully find emergency fund I need to have for me, it's like one to two years of living expenses and cash so I can feel comfortable like the short term part. It's like i've got that down.

I also understand about long term investing, like letting things right out in an index funder, a target date fund, although in my case I have the second condo right that I can sut back in ten years. So my question is, what about the middle term? Like what about money i'll need in five years? I was lucky enough, for some might say, too conservative, I don't know, in building this CD latter, which will reach full maturity in five years as the cd's mature, i've gained interest.

And that will you get the liquid cash back at the end, but that opportunity is going away. So now how plan for the medium term? Like do I do more bonds or some bonds when the cds mature? How do I reinvest that money? That's really my question.

joan. First of all, I am honoured to hear that this show could be a part of your personal finance education. You are absolutely correct in that even people who have the highest possible level of formal education within their particular field don't necessarily have any training in personal finance.

I think one of the major shortcomings of our society is that we give no personal finance education to our teenagers or to our Young adults. So big congratulations to you for taking the initiative and being proactive about seeking out personal finance information. And that extends joy not just to you, but every single person who is listening to this. You are all taking the initiative to go out and get the learning of that. You didn't get in school.

I had a discussion, by the way, pola, with a usual friend of ours, jackie e. Comings, costi. And jackie went through divorce in her late thirties and tell me this wonderful story about how SHE used to get upset because her husband handled the money, and he would get upset when he had to go to the bank to sign, like refinancing the mortgage papers SHE diwan.

Anything to do with anything. And so then after her divorce, SHE was horrified, because now he has to handle all of IT. And what was really empower ing for her was when he started handling IT and joe am speaking directly.

Do you know, not only did he find that he was easier than he thought, he actually liked IT enough that now she's in the podcasting ring with us. She's teaching people about money all the time. And our big messages, you can do this. So join, you can do this. It's going to be a really fun ride.

but not just join, not just that you can, but he has I mean, the long term and the short term. John, you've nailed IT both. And as you acknowledged in your voice mail, some people might say that's too conservative, but showing you've clearly identified that your risk comfort level is aligned with the amount of money that you have in short term investments.

So you are aware of the fact that some people might call IT too conservative and maybe if you compare yourself to others short. But joe is, you said earlier, don't play the comparison game. No, no, no. You have clearly given a lot of thought to what helps you sleep best at night. And you ve identified the amount of money that you need in later red cds so that you can have short term money.

Yeah but when I also like polar, is he is identified also that that is a problem, right? Because IT is a problem. But and now that she's at the point if she's ready to do something more, definitely he needs to do more because the key to this game is going to be to beat inflation and those cds are not going to beat inflation.

Yeah, IT was a viable path when we had that very particular moment in history when inflation was high. And so cds were paying four percent rates and but inflation was rapidly coming down. So you could sort of, at that very particular point in history, grab onto these high rates.

Inflation is good for savers. So you could grab onto these high rates that reward savers and lock that in into an economic context. For now, we have two point six percent inflation as of october twenty twenty four. So now you've got a city that's going to handsomely beat inflation, but that was an opportunity that existed at a moment in time that no longer does.

yes. So definitely he needs to change. So what do you think? Because this isn't just hard for you. This is hard for everybody. I've been doing this for a long, long, long time.

The middle is the most difficult part to plan for long term equities, meaning anything that is a stock based widely diversified investment or diversified real estate investment is going to be a share fie way to beat inflation short term. Having those cds is fantastic. Having money in a high yellow SaaS a gone is fantastic. But that messy middle polo.

right? Well, okay, so i'll tell you, and I agree, the messy middle is the hardest part. So joan, you identify that perfectly.

The idea that I don't like, and john curiously know what you think about this. I don't like the idea of tilting two heavily into bonds. Now i'm gonna put a big air sphere, especially for the sake of everyone listening. Of course, the average person should have a well baLanced acid allocation that, if you choose, might have some barn the allocation. But I don't like the idea for that messy middle of and overreliance on bonds because if we do have an inflationary environment that will beat up bond Prices, and you saw recently bond Prices tanked, an investor worries about increasing inflation in the future.

Mico host on the stack bedroom ment show and your friend og and quite a few other cfs for the very reason you talk about embrace a keep more money in cash for that middle and then have more money in the stock portion, deflect to big, huge companies that are going to move less than the stock market in general, talking about things like utility companies, that sort of thing. But because of the fact that stocks tend to go where the economy goes by keeping more money in cash and keeping more money in stocks, you actually historically have done very well.

So what you're describing, joe, having more cash and more equities, that's referred to as a barbel allocation. The reason it's called that if you think of a barbel at the gym, you've got that tiny, tiny little rod in in the center and then all of the weight is on one extreme end or the other extreme. And so just like a barbell, you would want to have a lot of cash, a lot of equities, and that's the barbel allocation. And personally, that's what I have.

And the whole goal, pal, is to do what you emphasize, that the beginning you don't want to over emphasize bonds. And that is going to be really more about johan's ability to take on the risk, the .

psychological risk you .

will make IT there with the barbell allocation. Will you sleep at night with that allocation is really the question.

So when we talk about risk, there's two components. There's risk tolerance and ric capacity. Risk tolerance is psychological and risk capacity is logistical.

So a person might have either a small or a large amount of risk capacity, their logistical spread sheet based dollars and sense mathematical capacity to take on risk without ruining themselves. That's a person's risk capacity. But your psychological risk tolerance is different, and risk tolerance is not necessarily related to rise capacity right here. The the psychology of money is in many ways independent of the actual logistics of your money. And so when we talk about risk management, we're talking about both risk capacity and rest tolerance.

But between the two, what we have seen over and over over is that the psychological behavioral risk tolerance is more important because for the same reason that I don't eat steamed broccoli at every meal, and i'm not saying that the only thing you should eat, but I know I would be healthier if I ate more steamed broccoli. I have full education on that. There's no knowledge gap, there's an implementation gap.

And the implementation gap is psychological. It's because I am more likely to reach for spicy casso and a chocolate bar, then I am steamed brockley. That's not due to a lack of information or education or awareness that is purely due to the psychology of food. So what we know is that people treat their money in the same way they treat their food. Psychology matters most.

I have this with my own risk tolerance. I've talked. A lot in the past about using myself as an example because I think people think that because we do this podcast that we're perfect investors.

I have some money that is same box money that I could put into cypher. I get the cypher argument. I say I like the crypto argument when i've owned IT in the past.

I don't love on in IT. I don't understand what makes you go up. I don't understand what makes you go down. And I have been an investor for so long, pola. I feel much more comfortable with taking a risk that I understand that one that i've realized i'm not to understand.

So could I make more money? Could I have made more money? If my brother in law back in two thousand and seventeen had convinced me to get in a bit going like he did, he's made well over a million dollars just in crypto to and I SAT a longside tem and went, yeah, can't do IT do IT is nothing to do with my belief in crypto to has to do with me when I owned IT. It's too big a roller .

coast ride for me, right the .

psychology of IT yeah well as an example um for ai, I talk to you about my crazy investment in lemon, this company that has had a lot of debt that now is refinancing their debt. I love my investment in lemon. IT might be the dumbest thing i've ever done.

Love IT think it's great just for the same box part of my portfolio. One works in one dozen. But IT is clearly risk capacity, not rise tolerance.

My rist tolerance is fine with bitcoin. It's fine. My risk capacity? no.

Thank you. Going back to the subject bonds. There's one pervasive myth about bonds that I want to bust, and that is the myth that bonds and stocks move in inverse correlation to one another.

They do not bond Prices and bond yields move inversely to one another, but bonds and stocks are not inversely correlated. They historical often have moved that way, but there have been times like in twenty twenty two when they didn't, when in twenty twenty two, they moved in tandem. And so people will off in try to allocate a portion of their portfolio towards bonds because they think that, that will offset some of the volatility of equities, but IT won't. Well.

the answer is this on a different fulcher yeah but the reason is it's a different fulcher not because it's verse.

right? So it's independent rather than inverse.

Yeah absolutely. We saw that also going back in time in a two thousand and seven, two thousand eight, when everything went down, there was truly no place to go for safety. Yes, gold historically has been the thing that relies a lot. When the stock market down polo, even more than bonds, gold has been the ring cme, two thousand and seven, two thousand and eight was in the case there either. Gold also went to the floor, didn't matter what you earned.

people were selling IT. Yeah well. And so what's happening now to take a look at the current economic landscape, it's a wait and sea game, but there is anticipation of the possibility that Prices might rise in two thousand twenty five ve across the board. And the reason that bond yields have skye rocket and therefore bond Prices have fAllen is because of that anticipation. And so we're seeing that plays out in the market right now.

We can talk about specifically because I definitely have a weight ency approach and I rule my eyes a little on stack budgets. We did a headline talking about this where economists predict that the national debt will go up somewhere between one point one trillion dollars and fifteen point six trillion dollars, which is hilarious for those who you not watching the video. Apologies gave me me the same look that og did when we did this headline, which is nobody knows just looking at the huge that field goal is yeah.

that's what you said. A field goal that is the size of planet earth.

IT could go up a little or go up a lot. So that shows how little people know what's going to happen. And that is because our incoming president, Donald trump said, the reason why people worry about that is tariff, specifically terrace on goods.

And if he does implement at a tariff strategy, while street is worried that that will make Prices go up, now will that happen? Nobody knows. It's kind of a let's wait and see. But but yields have gone up because of that possibility of inflation. That's also the reason why as the fed drops interest rates, we haven't seen mortgage rates come down like other rates have come down.

right? Because mortgage rates are actually more tied to the ten year treasury yield then they are to the fed interest rate.

If there ends up being no tariff policy and we keep open markets well, then you actually could see mortgage rates drop significantly in the future as the fact continues to lower interest.

right? right? It's possible. And the thing about terrify is that there are two possibilities. There is the possibility that we have a one time step up in Prices once the terrible are implemented, and then we just stay at that new level. Option b is the possibility of retaliatory refs.

And if we end up being subject to italia ory terrify from other nations, that could create this back in for scenario in which Prices increasingly go up. To be precise, terrify are technically not inflationary if they are a one time step up in Prices, but they can have an inflationary effect if there is a rotatory terrify, right? exactly.

And so that's where the way and see game comes. And and that's why IT was on november six. That was the day that bond Prices plumage. And so all of this is to say I would not recommend making bonds a big part of the middle that messy middle tion of your portfolio because the bond market in general is going to have a lot of volatility, I think, in twenty twenty five, because there are so much uncertainty about what is going to happen in our markets, that is absolutely impossible to know in advance. And so investors are going to be trading bonds based on that uncertainty. And so we're gone to see bond Prices rise and fall and rise and fall and rise, fall throughout twenty twenty five depending on how the situation shakes out.

And also just long term, even without the short term discussion. I like the bias against IT. Anyway, the bias against IT historically is the right move you open. With that, I would stay away from ponds. I think a long term investor should be looking at how do I implement bonds in a way that IT makes me sleep at night but doesn't red my ability to really beat the pants off inflation because I don't have enough money to invest dollar for dollar, the amount i'm going to need later. That's the reason we need to be inflation.

Think about your lifetime style today, even if you decrease that by twenty or thirty percent, trying to live for twenty five years without money and you've got to save dollar for dollar because your quote, risk tolerance doesn't allow you to invest in things that be inflation are never going to do IT. You're going to end up working jobs that you don't like. You're going to end up living a life that's less then what you want to live. Because the only way to beat inflation are to invest in the things that are the drivers of inflation in the first place, which are the Price of goods, the Price of real estate. Those are two big drivers in the inflationary game.

right? So joe, i'm curious, you suggested IT a barber allocation even with that messy middle portion of the portfolio. Her question was, what should he do with money that freeze up as the city's mature?

Yeah, clearly wouldn't do that for Joanna, just based on the fact that SHE half a million dollars and cds, the barbelle occasion does not work for join. I have three .

choices.

The first is, is to divide the portfolio as she's investing into two different funds. One would be value based, really huge companies. Again, I talked about utility companies.

I would just go with maybe the S, M, P, V. Five hundred value index is an easy way to get this done. And then the other half, I would go further than Jimmy.

Major tips. I like that for a second tier, more aggressive if you're going to just overweight cash that you don't need for two or three years, then use to mates. But this is more middle than that outlook in five, six, seven years out.

So i'm buying a good intermediate term index bond fund. So go with the two fun approach, intermediate term bonds and the S M P. Five hundred value, if you want to make IT easier, but a little more messy, meaning that you're not going to get to decide how much in bonds and how much in stocks you wants to give that to somebody else.

You could buy a baLance mutual fund. That's a fun that's going to buy large companies and it's going to buy intermediate term bonds. The problem I have with that one polar, is that when you go to sell that, you don't know what bonds and stocks you're selling so you can pick your poison about what to choose.

But if you want to press easy button, you're going to be well off that way. I've got on record any time saying I can't stay and target date funds, I really can't that you're smart enough to do IT yourself. I don't think it's hard. We hear about people saying, hey, keep IT easy, keep IT simple. It's simple as than you think.

But if you're going .

to use a target date fund, find a tenured target date fund because target date fund, quote, lane the plane quicker than they should, you're going to have a big pie of investments. Use a target date fun for that messy middle that maybe a ten years out into the future from today.

target date funds. So that would be like target date twenty thirty five .

by a twenty thirty five fun. So I like the three of those.

If SHE actually intends to use the money in twenty thirty by the twenty thirty five.

absolutely yeah by a little bit further than when SHE out then when SHE because targeted funds have a lot of cover your butt in them to put IT nite yeah. So I like those. My favorite is the first one. I know that's going to feel too complicated for a lot of people to buy the two funds and then make some investing decisions. But I could be happy with any of those three.

Wow, that was not at all, but I thought you were going to say I thought you were going to recommend jie maze and tips.

Not aggressive enough for me. I don't think we get that interest right where we needed to be to beat inflation, which is my worry. I hear, john, what you're saying about feeling like you're right for the middle.

You didn't tell us how much moneys coming in to cover IT. You said you think that you're covered. I just do the math on your assets. You're not covered.

So i'm hoping that these numbers that you didn't give us for cash will coming in from other places is enough to make sure that even with inflation that you're covered the future. A lot of the time when I was a financial planner, pola, people would think they're covered because they have enough for today. But five years, seven years, eight years from now, all the sudden IT feels much tired than I did.

You like what happened? Well, the Price of bread went up. That's what happened.

So joe, those are three options for how you could handle that messy middle as well as a lengthy explanation of what not to do, right? Don't over wait to bonds. So thank you again for the question, and best of luck and call us back at some point and let us know give us an update.

She's like I decided just buy loader tickets. I'm sure that's where joins .

go in put at all .

in cypher yeah horse number three in the fifth race.

we're going to take a moment to hear from the sponsors who make this show possible. And when we return, we are going to hear from someone who is wondering about paul merman's advice why valued stocks are not growth stocks. We're going to answer that question. And then we're going to hear from a collar who is wondering if he has correctly calculated her financial independence number.

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Welcome back. Our next question comes from Jessie.

Hi, pola. Thanks for a great episode with paul mariann on diversity your portfolio to increase your gains. I wanted to ask I notice that his recommendations tended to lean toward diversion with value stocks rather than diversifying with growth index funds. And I wanted to ask if there would be similar findings if you were diverse with growth focused index funds or if his findings suggest that value funds would be more productive for most everyday investors to diversify with? Thanks for everything you do.

Jessie. Thank you for the questions. So fundamentally, the question is why? Why value? Why not growth? And you're tapping into an age old debate in the investing world.

So history ally there two famous investors, one was named Benjamin gram and the other was named phillip p. Fisher. Benjamin gram is known as the father of value investing.

Philip Fisher was the father of growth investing. Ironically, phillip Fisher sun is a value investor. OK, yeah exactly.

Because every time dad talking world desires.

that's why dad warn butter has said that his investing philosophy is a mashup between Benjamin graham, phillip Fisher. But it's not a fifty fifty measure of born. But that has said that his investing philosophy is eighty five percent Benjamin gram, fifteen percent phillip Fisher. So his investing philosophy is basically eighty five percent value of fifteen percent growth .

and a part of phill Fisheries. And he says he likes a lot is phillip Fisher's penchant for diving in and learning every single little thing he can learn about the company. IT is less to do with the growth part polar than the piece of Fisher's investment philosophy. Before I invest in an individual company, i'm going to know the heartbeat, one hundred percent of what that company does, which is why warn of that you and me trying to be like you and I, we all agree. That's why the average investor, one of many reasons by the average investor, should just buy indexes because doing IT the Fishery requires lots and lots and lots and lots and lots of divine deep right.

Yeah like enormous due diligence to the point words, it's your obsession. It's not just your full time work. It's your obsession. exactly.

So what we've seen in what paul merman shows in his research is that historically, value oriented investments tend to do Better over the long term. That being said, there is that space that phillip sher philosophy there is that space for growth. But it's harder to succeed in a growth environment, particularly for the average investor who isn't doing this full time.

And the reason depends on the size company that we're looking at. Overall, it's funny. Growth and value over long pards a time. If you look at the sp growth index, first is the S M P value index over long, long, long periods of time. The growth index, to your point, pola, slightly below the value index, but not by a ton. The bigger reason why marian's research and a lot of people's research will land in the large companies and value is because we don't know when you're getting off the train and because we don't know when you're getting off the train.

IT is easier and more probable that values not going to suck at the time that you need to sell IT growth funds over short periods of times will have phenomenal Spikes because when your growth investor, you're going to ignore some of the information that a value investor really is entrusted in, a value investor wants to make sure that the pieces of the company a special equal a deal like I can buy this company and i'm going to get stuff that's on sale. That's what they're looking for. A growth investor just wonders if they are going to take over the world if a value investor is wrong. Maybe it's not a deal now, maybe it's just fairly market valued. So that or maybe just a little bit on the ooops side where a growth investor, if I think that companies going to take over the world and they don't like the downside right now, if we find out that insiders at the top of the video SHE is have .

been embezzling .

money or cook in the books and nobody knew IT, right? That's one hundred percent of growth company. There is no value there at all growth. If somebody pops that bubble, the downside is here is absolutely you.

So that's why on the large company side, merman goes with value because when you go to sell IT, there's not as much of a roller coaster ride as there is in growth. Now if you're there for fifty years, you're going to probably be be great with growth. If you're there for ten years, growth is they're going to be wee ahead or way behind value stocks. On the large side, it's actually different top up with small companies. With small companies, it's a whole different rational why we go with value versus growth.

Oh, tell me why.

Well, because when a company is small company is either undiscovered or discovered and actually a small company value stock is usually going to be a values stock because the masses haven't discovered the genius of what this company does yet. If it's a little tiny company and its value or value in small companies tended git the biggest pop of anybody in the market, all the sudden they go, oh, I had no idea that this company was as cool as IT is.

And when IT is small value, often graduates to large growth, right? Small growth is problematic because everybody expects this company to be a hot company and they're still small. And so the growth investors try to get in their early and a lot of these companies don't do as well.

So small growth is super risky, small value. If i've got one hundred companies or five hundred companies that i'm underpaying for five hundred, the chance that three or four these are gonna ten years from now, the next art thing, right? I'm going to find a you.

And by the way, I can miss, on a lot of surprise, tiny company stocks and get that one big hit or two or three big hits. Those cure. A lot of the mistakes that I made in picking so small value were actually looking for the next top growth stock.

Large value. We're actually not trying to make a mistake. And when we get off the .

train and you know and that makes sense just intuitively, that makes sense because one of the fastest ways to kill a small company .

is to force IT to grow too quickly, right?

Feeding a bunch of there are entrepreneurs with small companies that have outside funding. The problem with outside funding, the problem with other investors coming in is that they are expecting a growth multiple that is very hard to sustain. And so what happens is you take on more and more risk.

You hire faster and really kind of before you're ready. You don't have the processes in place. You're building the plane as you're flying IT and to an extent, and every small business is always building the plane as you're flying IT.

But if you are undiscovered and you can move at a slower pace and you can figure out how would IT build the plane as you're flying IT. Every small company is building the machine as they go. But it's nice to have the time to do IT properly so that you can really here's where i'm mixing metaphors so you can cement that foundation before you build to that next level. If you can't quite get a stable foundation and you're already building the next level and then you would just keep jacker towering new levels on top of shaky, shaky foundation. Eventually that whole Janet tower falls apart.

We can actually look at the a couple case studies that I think a lot of our afford anything audience knows in this case, companies that to survive, but are vastly different than they were when they started IT was because they had this huge speed bump when IT came to growing too quickly. So far, I think, is a company that a lot of people in the audience knows.

You look at the sofi management team, it's one hundred percent different people and started that company. And part of that was they had this massive growth. They are having a lot of scandal inside the company, and that company nearly got wiped off the play IT. Luckily, they were able to turn IT around. A weight luggage is another company that had big time.

great. They had huge problems. Oh, my godness away. I love their product. So made me very, very sad to hear about what was happening in the company because their product is incredible.

but growing too quickly in both of those companies that changed the corporate culture because they hired a lot of people very quickly and didn't have a lot of the oversight, the systems, the ability to deal with the massive changes happening inside the company with all these new hires and just a mess. And luckily, both of them are still around, especially for awake because I like that luggage to I think those are a couple of case studies about exactly polo what you're talking about.

right? exactly. And so I think you raised in an important point when you said that today's small cap value often become tomorrow's large cap growth.

Yeah, big difference. Why mary man would go a small cap value then with large cap value. I've been pointing to paul merriman a lot lately.

This is an paul merman making stuff up. And he's not like gand off the wizard of investing who's magically picking these allocations. He's just a guy that's done a lot of research.

He's done a lot of I don't .

point people toward paul merman's research because of the fact that he's uh, with kate gu on where the markets headed tomorrow if U. S. Paul berman where the market had to tomorrow, he will tell you, don't know, don't care.

That is not his game. His game is what is worked in the past, because when IT comes to the future, the economy is IT gona look different? Sure, IT will.

But is IT gonna ride with the past one hundred percent? absolutely. The trends that we've had for the past eighty hundred years in these markets is going to, to sum degree, continue.

right? You know our youtube video with our where paul merman interview is one of our most watched recent youtube videos right out of the gate IT just blew most of our other videos out of the water that in our interview with Christian bands, those two just there's a huge hunger for voice reason. yes.

You know, both of them are incredible researchers. I mean, they have spent decades immersed in research and data that back the financial conclusions that they reached. And so is a testiment to not just to the incredible research that they've both done, but also to how smart these audiences that they want to learn from the best.

And paul merman absolutely is one of the best. If you haven't heard the show, I encourage e you to watch IT on youtube. Youtube got come flash afford anything, because on the youtube video we have charts and graphs and visual supplements that enhance what he's talking about.

So you can find that again, on our youtube channel, youtube dot com sesh afford anything. But if you want to find the audio episode, it's episode five five zero. That's afford anything to calm flash episode to five five zero.

Well, thank you, Jessie, for the question. And I hope that gave you a solid discussion of why value and not growth are going to take one final break to hear from the sponsors who make the show possible. And when we return, we will hear from a member of this community who's wondering if SHE calculated her financial independence number correctly.

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Welcome back. Our final question today comes .

from Nancy hypo. My name is Nancy. I've called before for same advice many, many years ago, and I figured I would give this a try with you today.

I'm trying to understand my fire number based off of understanding Better the amount that I have invested. I have money slip between a vanguard account as well as tsp and real state. I think it's pretty straight forward when IT comes to vanguard.

I can just see what my baLances the tsp and wondering if you would consider the amount invested, the amount that I have put in, the amount that I put in plus the amount of my employers put in or the current value of my portfolio now, which includes its interest. But much of that is not a rough, so I don't know how much would be taken out with taxes. And then when IT comes to realize, i'm also curious about what does that mean to assess how much i've invested.

So are we talking about the amount of cash that i've put in, whether that be from the actual down payment and my monthly payments, that entire accumulation that amount? Or are we talking about the equity minus the loan value? Are we talking about the full current valuation or the amount of the purchase Price? All of those number are different.

And i've just curious how you would um advise us to look at those numbers when thinking about our fire number and the amount invested we would need to a retire or to work when we wanted to the work optional. Thanks so much for your guidance. Have a great one, paul.

I'm wondering if Nancy sitting desk at work going, how do I get the hello to here.

as many people do? Well, so Nancy, what strikes me about your question is that I hear almost a conflation of two different questions. I hear the question, how do I calculate my net worth? And then I also hear the question, how do I calculate my five number? And those are two different questions. So when you ask, for example, about the tsp note, what do count your contributions or your plus your employers contributions or the total portfolio value?

That, to me, sounds like a question about how do I calculate my network? And similarly with the house, do I calculate the equity in the home or do I calculate the total value of the home? That also, again, sounds like a question about how do I calculate my network will answer that question in just a moment, but I want to first make a distinction between the questions of how do I calculate my network and then the question of how do I calculate my five number? Because your fine number is an estimated how much you would need in order to make work optional, whether your network is a snapshot of where you are at this point in time.

And I understand many people will base their fine number on what ultimately ends up being a total network, but that is not necessarily how I should be done for reasons that we can get into in a moment. So to answer the first portion of your question, which is how do I calculate my network, just think of IT like this. Your network is everything you own.

Mind us, everything you. Oh, so I will take the total portfolio value of your T, S P, because that is included in everything you own. And then for your home, I would in the plus side have the value of your home and in the minus side subtract out the baLance of your mortgage.

So that way is everything you own minus everything you own. Now that's how you calculate your net worth. And many people will use as their fine number, a given network. So for example, hypothetically, a person might say when I have a net worth of two million, I will be financially independent, or two point five million or three million. But I think that there is a risk when IT comes to using your total network as your fine number for the very reason that you've identified, which is that your network is made up of both liquid and illiquid investments .

well and not just illiquid investments, but also investments that you are not going to want to use this fuel, right, possibly for financial independent, right? So as an example, the house that you live in, unless that how you live in is going to be fuel for your financial independence, you don't want to use any the equity in the house you live in, right?

So when you're calculating the bucket of money that you have for five, I would calculate money that you would actually be willing to tap, which is different from total network. And so when IT comes to your home, and this is totally up to you that I know some people who are like, as soon as I read financial independence, i'm going to sell my home. I'm going to move into an R V, going to R V around the country, or i'm gna sell my home and moving the costa. So there are some people who will tap that home equity because they plan on liquidating that house at the time that they reach financial independence.

But I still question that number as well. I question both of those scenario as well.

Oh, because they might not want to live in that R, V. Or living a yeah because .

our feelings change over time. I mean, it's funny because you and I I think both in interview built perkins a long time ago, but that just have a moment right now. I have no idea why.

And all the online communities, everybody he's talking about bill and about die with zero again, but bills maintenant, is you change over time. And so if I say that i'm very comfortable polar living in a tent down by the river. I might not be comfortable living in a tent down by the river fifteen years, right?

I might not want to go to coastal of fifteen years from now. So i'm doing that because standard of living wise, it's the lowest common denominator plan and I can barely scrape by. I'm going to be really nervous that i'm a close to rick ago and what the hell I do in here. I don't want to be here and now I want to upgrade my lifestyle and I can, right?

And and that, in a way, almost gets to the question of lean five versus fat thi in terms of do you define thi or work optional as the smallest amount of money that you would need to live in order to get by and b OK? Or do you define IT more? Is some bigger amount of money where you would .

flexibility.

flexibility and comfort?

I guess I showed .

wear I staying. yeah. So a part of IT is, are you aiming for the psychological comfort that comes with lean five? Because lean five does have there is an enormous sense of relief, like I can tell you personally, I feel an enormous sense of relief knowing that if I needed to, I could move into one of my rental properties, which was all of them, i've said, in their fully paid off, free and clear. I could move into one out of those seven, rent out the other six, and i'd be OK. I wouldn't be going into bars and restaurants and concerts every weekend, but i'd be OK.

I love that psychologically because IT gives you the power to think long term with your .

decision making, right?

You're not thinking about how we going to eat tomorrow, how going to make a decision that supports me. You're able to go. I'm going to tell the bus to show that today because I hate this job and there's no money of money worth working here, right? But acting on IT then to go live in that apartment, I love the psychological part.

I think lean fy is great for the psychological benefit, but actually acting on IT is hard to sustain long term. It's a great option. If you're in a situation that you have to get out of, are you playing offence or are you playing defense? If you're playing defense and you're in a situation that is toxic and you need to get out of that situation, lean fire is a great, fantastic, fantastic mechanism. But if you're playing offence, then for that bucket of money, for offensive five, you'll want to calculate that with money that you actually would be willing to tap what I tell you.

what else I like, and, you know, pull up more than anybody, how much I hate these terms. I can stay at these terms. I'm going to lean into them.

You ready. Look at that. Pn.

lean coasts. Fy, meaning i'm not there yet, but I know that for two years I could coasts, and taking that two years sabbatical to go find the right thing that's even a powerful spot to be like. I don't even need to be one hundred percent there, but just knowing I could take a couple years off savings and i'm still gonna. Okay, that's pretty kick as to when IT comes to some of those toxic situations.

exactly. But I think I just set .

a bunching of terms that made me throw up in my mouth.

He is going to come around to the fire movement eventually.

Well, it's not that i'm there. I just think we need more people to experience fire movement for you. They're new here. And these terms are exclusionary because people that are brand new to this woman and like what the effort you talking about.

I disagree. I think having a common vocabulary.

I think it's .

common vocabulary, is what unites a group. It's what creates .

in group cohesion would be far easier for people to get around or a strategy, option strategy, all these great terms that we have, seventy two T I don't know. I think we need fewer those terms. I think the more we get the jargon out of IT, we we make IT open to more people. great.

Joe and I are disaggregation again.

Yes.

as we are want to to do.

can I give Nancy .

something out .

too if this is a really important goal for you and not Nancy? I'm not talking to you. I'm talking to everybody.

Get on a calculator and start to put together a real plan because of the fact that this twenty five times your income number that also makes me throw up in my mouth, because IT so doesn't apply to anybody, that applies to zero people. But this is such an important goal. Polo for everybody is such an important thing.

And yet, every study shows we spend more time planning our next vacation, then we planning our retirement. Now clearly, that's not this community, but we still try to press the easy button on this thing that means so much to us. And IT is not that much harder.

And it's incredibly sticky if we just get on a calculator and say what exactly do I want? What do what I want financial independent to look like for me, it's going to be twenty five x my number today. It's not going to be that it's gonna be something that unique to me.

And when I take the time to pour myself into that goal, guess what happens? The goal becomes even sticker like, don't get me wrong and I see I can hear you're there right now, right? That's why I joke that maybe the ancyra or desk go and how do I get out of here but dive in to some calculators and look at this a little more analytically.

Because when you do that, you're going to find things like what i'm going to mention next, which is you talked about the real estate equity minus the long value, but if you're not going to sell that piece, a real estate IT then becomes a cash flow engine. And now I don't want to to use the equity at all because the equity in that house is my golden goose. And so the equity versus the cash flow is not going to have twenty five x no matter how you do IT.

So I would go get a calculator, and I would really dive into this because it's fun and IT gets more fun the more you do these. What if scenario? What if I did this? What if I did this? Oh, maybe i'll try this. And then you become incredibly committee because you spend some time on IT.

But I think Nancy is asking what number should SHE plug in or what set of number should SHE plug in.

But I think she's got to plugged in the cash flow on the real estate piece, which is going to blow up the rest of the calculation, which he talks about a five number.

When you say cash ful in the real state piece show, are you saying if he were to move out of her home and rented out?

I'm saying for anybody and this is why this doesn't ly IT and see anybody that has cash flowing property or cash flowing positions where they're using the cash flows and not the equity to fund their financial independence. That's where Nancy whole question becomes more difficult to answer.

So in other words, if a person wanted to calculate their fine number, perhaps the number that they're calculating is not some kind of a network, but rather it's how do I make what's the five thousand dollars hypothetic tics? We just use that as a illustrative example. And if the goal is five thousand dollars a month, then the calculation becomes, all right, what combination of rental property income or residual income from other businesses that I run or have an ownership taken.

income streams in general?

Yeah, exactly what income streams do I have? And if it's equities, are you pulling out the dividends? Are you selling off a portion of your portfolio? Four percent. So what income streams do I have that would tell up to five thousand dollars per months?

And what I like that we're doing from the very beginning with what you just said. What I love about that is IT really also answer nanty your exact question because Nancy is like, so why do you go off on that? Because I don't have ef of that.

IT wasn't about you. IT was definitely about why I don't like this calculation. What I like about what you just said is that we automatically then take out any number from that network number that doesn't meet our financial independent school.

So i'm not to include my equity in my home in less to your point. I'm in a move in down size something to move and downsize and i'll take some of the equity. But IT clearly that nanty answers your question about does this count doesn't not count.

right? And that's why calculating the fine numbers distinct from calculating your net worth because your net worth, Nancy, is the total portfolio value of your tsp and IT is the total current market value of your home minus the outstanding mortgage baLance. So that's how you will know what your net worth is.

And that's a nice number to know because it's so what gets measured gets managed. So it's important to measure that number. I say at least once a year, have a an annual marker of where that number is.

It's funny because I don't find network to be that useful myself, except for one thing. One thing, it's like my annual accounting of all my stuff, right? And then that gets my, gets my subconscious brain going.

And I optimates using each of these things because often we'll have an old array over here, savings account to other bank that we forgot about. And like, well, what use do I have for that anymore? Does the reason I did last year still make sense? That's the only reason for me. I like .

network, right? Just to use kind of an exaggerated example for the sake of illustration, if you lived in a fully pay off two million dollar home, 哦。

okay.

but you had only ten thousand dollars in portfolio assets, in investable assets. Oh, I right. And this is an exaggerated example.

For the sake of illustration, yes, you would own your home free and clear, but you would have virtual zero income stream, even if you were to draw down that ten thousand dollars at a four percent rate, or a fut hecker five percent rate, IT would a mount to nothing, not even enough to pay our electricity bill. And obviously, that is a caricature of an example. Nobody is actually going to have that type of a position. But IT illustrates how, in that example, you could have a two million dollar net worth, but you wouldn't be anywhere close to fy because the amount of capable money would be so small.

That also shows why this idea that my home is the corner stone of my investment empire is so misguided.

right? Primary residence.

yes. And I saw IT again last week in a form that so many people still see their primary residents as the centerpiece of their investment portfolio. We ve got to work hard.

Your good network out. Yeah, we do. So, Nancy, I hope this helps to answer your question. And there are two numbers you need to calculate your network, which is just fun to know. But more importantly for you, your capable money here, what are your income streams to get you to the amount that you would need every month when work becomes optional?

A number that i'd like to calculate for people that aren't close, we don't know dancy closer, not maybe she's calculating IT because she's inks. You might be there would be awesome. But for people that aren't close, I also like calculating how much time can I spend a way and still be OK, because that also gives you power against the killer of long term vision, which is doing short term obvious stuff first, is long term not so obvious, but far healthier stuff? Yeah.

yeah. I have a friend right now. Actually, she's on a sabbatical. SHE was an engineer at a tech company for a long time and is now intentionally taking a sabbatical before he goes into her next position. And I haven't asked her about her number number so I I don't think that he is fine for her life, but she's definitely fight for as long as i've known you know she's she's definitely been fired for a solid .

like year. Hey, it's the reason why i'm here with you is because at age forty, I had that guy, I looked up to you that i've done a great job of saving. And I don't love being a financial planner.

I like you, but I don't love IT. I think I have other mountains to climb. And he took time to go find himself and now runs an inventor travel company has climbed most of the tall peaks in the world.

We thought I was a metaphor. Turns out IT wasn't. He really had a mountain's to climb, and that was so inspiring to me, the fact that somebody could take time to just go find IT versus doing the same thing I did yesterday. That might not be a hundred percent. What I want to do that is a great, great, great thing.

Thank you for the question, Nancy, and best of luck as you build to work optionality and everyone who's ever called in, please call us back with an update, call us a year from now and tell us how things have gone. Joe, we've done IT again.

No, fabulous is always polar amazing. Joe.

where can people find you if you'd like to know more of you?

Well, what i'd like to focus on is where they can find both of us because hopefully by the time this comes out, tickets are not completely gone. As we record this, they are half gone and they are selling very quickly. But you and I and our friend duc chi are having an event in manhattan and we're coming to see poll.

yes, yes. We're having an event in new york city on december twice.

Also special guest my coasts stacking beijing in or just joining us, as is our friend jillian johns rude and we're talking to some other celebrating .

celebrator personal finance celebrities, fire celebrities and P F. celebrities.

Yes, but we don't have room for everybody, so we don't want to be left on the cold Sophia anywhere close to manhattan on december twelve. The place to go to sign up is stacking bedroom s dcom slash nyc. So stacking bedroom in's docs, lash and M Y C gets you to the place to grab tickets. And we hope we get to hanging out with you on december twelve.

Yes, I can't wait. That's going to be so much fun.

Yes, we're violating so many restraining orders all the same time.

I thought you were going, say, health code violations. Maybe that well, thank you to all of you for tuning in for being part of this community. If you enjoy today's episode, please do three things.

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