In Episode 5, I sit down with Roger Ma, an industry recognized CFP, to talk about how high earners can optimize their retirement accounts and avoid common mistakes.
What you’ll learn in this episode:
- Roger’s path from investment banker to financial advisor
- The most common mistakes working professionals (even high earners) make when it comes to their retirement accounts
- What moments in life are there special opportunities to optimize your retirement accounts (plus, the concrete steps to take)
- Why early retirees should be thinking about their “why” more than their “how”
- Why Roger joined the AARP at 35
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Links mentioned in this episode:
- Life Laid Out
- Work Your Money, Not Your Life: How to Balance Your Career and Personal Finances to Get What You Want
- Donor-advised funds
- HYW private Facebook community
Read this episode as a post:
All right, finance friends. Thanks so much for tuning into today’s episode.
Today, I have invited an industry recognized CFP, that’s Certified Financial Planner, his name is Roger Ma, to come talk to us about things that we should think about as we optimize our retirement accounts.
And this is something I plan to do regularly on the show, depending on the topic, to invite other experts who can share their wisdom and their insights and their experiences with us to teach us things that would be helpful for us to know about how we can build our wealth more efficiently and effectively and take advantage of strategies to optimize our earning, saving, investing and protecting.
Remember the four by four FIRE framework: earn, save, invest, protect.
So I plan to invite guests regularly to the show to share their insights with us on these things.
And tell me your feedback.
Is this type of format helpful and valuable to you?
Do you want to hear from other voices in the industry?
And what kinds of topics would be most valuable to you for me to pull in guests to share their insights with us?
All right, as for today’s episode, I talk with Roger about his career path from investment banker to financial advisor and ask his insights on the common mistakes that working professionals and even high earners make when it comes to their retirement accounts.
We also talk a little bit about what are the moments in life when there may be special opportunities to optimize your retirement accounts and what folks who are working toward FIRE, financial independence, retire early, should be thinking about in terms of their why more so than there are how.
We’ll also talk a little bit at the end about why Roger chose to join the AARP at age 35.
So definitely encourage you to tune in, it’s going to be an interesting interview.
One thing I wanted to caveat, though: I had to do this interview outside of my normal small recording studio, so I did not have access to my normal good microphone.
I had to use wired earbuds.
So the audio quality on my side isn’t the best.
You can definitely still understand everything but you know, but wanted to let you know in advance.
That’s the reason why the audio quality is going to dip here in a second and definitely apologize for that.
Whenever I’m able to record interviews in my small studio, the audio quality, at least on my side, tends to be much better.
The calls are often done via Skype. And so the other side will often sound more like a telephone, like the person on the other end of a telephone, and that’s okay.
All the content is definitely understandable.
But in cases where I’m not able to do the interview in my studio, because I have to be remote or away, I will often have to do it just using wired earbuds.
And in those situations, the audio quality can sometimes be not as good, but hopefully it doesn’t detract from the content.
The real value and importance of the interview is in the content itself.
So I hope you get a lot of value from that.
All right, last thing before we jump in.
I want to invite you as always to join the private hacker wealth Facebook group, which you can access at hackyourwealth.com/fb.
It’s a way for us to connect have a two way dialogue. I am in there every single day responding to questions and comments.
And it’s a place where group members can ask questions about financial independence, early retirement tax strategies, real estate, investing side business income, online income, career advice, or just any questions that are on your mind about personal finance related matters or even career matters.
It’s a great group of people, really friendly folks, who are engaged and helpful and would definitely encourage you to join us. We would love to have you there.
All right now time for today’s subscriber review.
Today’s review comes from shellroby, who writes:
No nonsense wealth building. I’ve followed the hack your wealth blog for a few years and was excited to see Andrew launched this podcast so I can listen on the go.
He describes strategies for building wealth with a direct, simple to digest approach.
He’s smart, articulate and cuts through the jargon to tell you what you need to know to be more educated about wealth building for those who have some basics under their belt.
I had tried a bunch of other podcasts on the topic, but I couldn’t stomach their high and mighty egos.
Andrew wants to educate, highly recommend.
Well thank you shellroby for the nice words.
I am a little bit embarrassed to read them out loud to myself but I really appreciate the kind words and you’re tuning into the podcast and getting value from the podcast.
And to all the listeners out there. I do encourage you to consider writing a review for the podcast if you are enjoying it.
It does help the podcast a lot helps other people find it who are looking for this type of So thank you so much now on with the show.
Alright, without further ado, let’s jump into the interview.
My guest today is Roger Ma.
He is a former investment banker, certified financial planner, founder of his own financial planning practice and he’s currently writing a career and personal finance book scheduled for release next spring.
He’s a guest contributor to Forbes.com and thestreet.com and was selected as one of investment news 40 under 40 in financial planning, and one of investopedia top 100 most influential financial advisors.
I invited Roger to come on the podcast today and to talk to us about retirement account strategies.
Roger it’s so great to have you join us here today.
Roger Ma 5:38
Thanks so much for having me, Andrew.
Andrew Chen 5:41
I would love to you know, before we jump into the nuts and bolts, just learning a little bit about you and your background.
What motivated you to become a financial advisor in the first place and you know, what do you what do you specialize in now?
Roger Ma 5:57
So my background is in Investment Banking. I spent seven grueling years in the industry.
And, you know, during that time, I wasn’t so much interested in the corporate part of finance, but started to get interested in the personal finance aspects.
But I think for a lot of years, because I was working so much, I didn’t really have time to think about personal finance.
And honestly, I think, to some extent, intimidated me, so I kind of put it to the wayside.
And I used to ascribe to the formula that, you know, all I had to do was work hard, you know, get a good job, keep getting promoted and kind of like the financial stability, financial independence stuff would would take care of itself.
And it wasn’t until unexpected layoff in 2012, that I really had to start thinking about personal finance and how it related to me and some of the basics like, what was my net worth?
And what does that mean in terms of how much I spent or how much I could spend and what types of jobs I could take?
Did I have to take another investment banking job?
Or could I take a big pay cut?
And so I think that’s where I really started to get serious about learning more about personal finance and starting to gradually see the power that getting a hold of your finances had on your entire life.
And so that was kind of a gradual process where I started writing about personal finance and then I started realizing, oh, this stuff is a lot of fun and and that kind of led me on the path to get my my CFP designation and then ultimately, to start my own firm.
Andrew Chen 7:46
What was the motivation?
Do you think to make the transition from investment banking to personal finance, I know that, you know, isn’t an especially common path.
Was there a moment in time when you realized, this is actually where I want to take my career down this direction instead.
Roger Ma 8:03
Yeah, you know, I, personally, I mean, this stuff stressed me out for the longest time.
And it always seemed like when I was talking to people about investing in personal finance that everyone else had it together, you know.
I can remember co workers, you know, telling me Oh my god, Roger, I, I made so much money in leveraged ETFs.
And I would think to myself, what the heck is a leverage ETF? Like, what the heck is going on here?
And, you know, I remember another vivid situation where I just started in my job in finance, and, you know, sign up for health care and started thinking about this thing called a 401k.
And I had no idea where to start in terms of investing and so I, I started blankly at my 25 different choices for a number of months.
And I finally just gave up and was like, You know what, I’m just gonna put my money equally into four funds.
That sound good and kind of leave it from there.
So it kind of stressed me out for a long time and I think educating myself and and realizing the burden lifted off my shoulder by empowering myself I felt was awesome.
And I wanted to be able to help others that felt the same way I had about finance.
So that’s kind of what motivated me to get into the industry.
Andrew Chen 9:26
Have you found that even amongst, you know, well educated professional office working population that there is, you know, a decent lack of understanding or confusion about, you know, certain personal finance issues and retirement saving and things like that.
Has that been a common theme in your practice that you found?
Roger Ma 9:49
Totally, yeah, so I specialize in young couples typically in their late 20s. Early to late 30s.
Typically, they are newly engaged, married or wanting to have a baby or buy an apartment, and they might not have really thought about personal finance in the past.
And it’s, it’s not surprising.
I mean, we learn about all these different subjects social studies, math, calculus, we don’t ever learn about how to manage our money or how money impacts the rest of our life in high school, college or thereafter.
So it’s not surprising that people don’t have a handle on Oh, you know, what is it 401k? Or what are the difference between tax deferred versus a Roth 401k?
It’s just, you know, after you work a long week, I don’t think a lot of people will think well, let me let me start reading up on 401k investing strategies.
It’s just not something you think about. You’re like I want to kick back. I want to go hang out, you know, at the local restaurant or have my friends and have some downtime.
Andrew Chen 11:00
Yeah, it’s a good point.
It’s something actually I’ve been thinking about a decent amount recently as well, because I have a young baby at home, she’s a year and a half or so.
And, you know, I’m well aware that in school, you don’t really learn these things.
But once you become an adult, like, damn, like you suddenly need to start adopting.
Did you have any thoughts? Like why, like everybody realizes it’s important, like, why doesn’t our education accommodate that type of education?
Roger Ma 11:29
Yeah, that’s a that’s a good question.
I have no idea.
I think there’s more and more states that are requiring some personal finance education at the high school level, but there might just be seven to 10 out of the 50 that are required that and the the type of education they require could be in a lot of different forms and might just be, you know, a six session very basic class.
So I just I don’t know why it doesn’t exist in the at the high school or college level.
But I think those that are proactive about learning about it, even in college or in your early career can have a huge difference on the trajectory of your life
Andrew Chen 12:19
Definitely. It’s one of the things that I semi regret that I just didn’t get an earlier head start getting smart on, even though I didn’t have any money. The learning curve is fairly long to ramp up, really understand, so that by the time you have money, like you just know what to do rather than starting to learn when you start having money, which then delays everything.
And so I imagine you see this a lot in folks that you advise.
And so I’m curious, when it comes to saving for retirement, which is like, I think important for anyone, particularly for probably the young couples you advise, that are really starting to think about this once they get married and especially once they have children.
What are common mistakes or missed opportunities that you see working professionals, even high earners make when it comes to preparing for their retirement through saving and investing and really optimizing their retirement accounts.
Roger Ma 13:13
Yeah, I think the first mistake I see is a mistake that I made myself in thinking that, you know, if you work hard and just continue to make a high salary and continue to progress, that the financial stability, financial independence, retirement will kind of take care of itself and you don’t really have to worry about it.
And so just not being engaged with either not contributing to your 401k not controlling the max or putting it just into random funds, I think is one common mistake that I see.
I think another common mistake is just assuming that you put your money in a lot of different funds that you’re well diversified.
A third mistake I see is that some companies will match their employee contributions in the form of company stock.
And some employers will just simply keep that match in their company stock rather than putting it in a more diversified funds.
And so yeah, I work a lot with people on how to create investment strategy for retirement that they’ll be able to manage themselves moving forward.
But the way that I frame it to them I you know, I think retirement is, is kind of a stupid concept.
And when I was doing research, I’m in the process of writing and publishing a book.
And when I was in the process of researching retirement I started reading about some of the old history.
And, you know, I think in the 1800s, late 1800s, a lot of people just worked until they passed away, there wasn’t this concept of retirement.
And then in around the 1890s, this Chancellor in Germany was wanting to get older, less productive people out of the workforce. In favor of younger people.
You can imagine that back in the late 1800s work was much more manual and you’re outside, it’s very physical.
So a 70 year old would not be as productive as a 20 year old. I mean, even me at nearing 40, I probably wouldn’t be able to kick it with the 20 year olds.
And so I think they’re trying to find a way to get that get those people out and get the younger people in.
But the thing is, like even when you did retire, retirement didn’t really last that long.
So I think only the in the mid 1900s, late 1900s, have life expectancies is gone up.
Standard retirement age has stayed around, you know, 65, 67.
And now we have this expanding length of time that we know is retirement where, you know, we’re taught that it’s going to be this awesome time where we do nothing but sit on the beach, or play golf and it’s just amazing and.
And that’s a really foot with me or a lot of a lot of people that I advise a lot of people that are in hard working driven careers.
It’s not natural. And I just don’t think it’s going to happen that, you know, you’re you work 60-70 hours a day and one day you say, Oh, yeah, I stop and I’m going to I’m just going to love doing nothing.
It’s just not natural.
And I was in Seattle a couple months ago, talking to this guy that had recently retired.
I think he had retired a year before. And he started driving for Uber. And I asked him why he started doing that.
He said, You know, it’s just he got bored. I was doing nothing was watching TV. And I just felt myself wasting away.
So now what I do is I drive four hours a day, I don’t really need the money, but I do it for the engagement.
And I think that, you know, you think about those dynamics and how easy it is now to start a business work on your own and things like that.
I think a lot more people will be working in their their 60s 70s trying to find work that they want to do rather than retiring completely
Andrew Chen 17:37
For sure. You mentioned that one of the mistakes is that people will sort of just put their money in random funds or think that if they put it in a few funds and they’re diversified.
If that’s the wrong way to do it, what’s the right way to do it?
Roger Ma 17:53
I think it’s a path. I think it depends on the type of accounts that you have.
If you just have a 401k that’s one thing.
I think it depends on where you are in your investing career. Did you just get a school? Did you just have a 401k or do you have a Roth account outside of the 401k and a taxable account as well?
I kind of break it down for my clients into three different structures and it kind of depends on number of funds and complexity as well.
So I think the easiest investment structure is having simply a target date fund and that could be you know, you’ve seen this with Fidelity Schwab Vanguard, it’s some variation of some date target retirement funds, so like the 2050 target Retirement Fund, which will have a mix of probably three or four different funds and be allocated to some percentage of stocks and bonds based on that target retirement fund.
That fund will take care of ongoing rebalancing. And then as you get closer to whatever retirement date you chose, it will make sure to decrease the amount of stocks you have and increase the amount of bonds, thus decreasing the risk of the variation your returns from year to year.
And so I think that’s the simplest way to get started and still have a well diversified portfolio. And I think a target date fund is great for someone that is simply starting out and just has a pre tax or Roth 401k and no other accounts.
The second structure I talk about is the three funds portfolio and I know the Bogleheads talk about this a lot.
It’s having a total domestic stock funds, total international funds, and a total bond funds.
And the way that I talk about it is you might have just money in your 401k or you might have multiple different accounts whether it’s a 401k, and taxable account.
In this second structure, use the same three funds, same allocation in your 401k and your taxable accounts.
And then the third structure I talked about is a variation of that three fund portfolio, where I call it the asset located portfolio, where you’re using the same three or four funds to get whatever asset allocation you’re trying to target.
But you may not have the same asset allocation in your 401k as your taxable account, because, you know, some investments are more efficient in a taxable account than others.
And that’s where you might have a lot of your total stock or total international stock market funds in your taxable account and put more of your bond fund in your 401k.
And so that’s kind of how I break it down in terms of easiest is just using one fund, and you don’t have to do any rebalancing.
The three fund portfolio, you’re expanding it to three funds, but you’re having the same asset allocation in each account. So it’s pretty easy to remember.
And then the most complex is using a three or four fund portfolio, but having different allocations in each of your accounts. So it’s super tax efficient, but it’s going to take you a little more brain damage to rebalance on an ongoing basis.
And so, I tell people that you’re trying to balance efficiency and simplicity.
So the most simple investment strategy, the target date fund, is gonna cost a little more, but it’s set it and forget it.
The asset located fund, you using more funds, and you’re probably having a rebalance in a spreadsheet or trying to figure out how much how much more total stock market do I need, but it’s the most tax efficient and you’re paying amount of fees.
And I think when people are trying to think about what strategy is right for them, they have to be honest about, well, how much do they like this stuff. Or how much they want to be involved in day to day?
And how important is it for them to know that they have the most efficient portfolio or the portfolio with the least amount of cost?
Andrew Chen 22:18
That’s really good advice.
And I like that three structures, kind of like, depending on how comfortable you feel, being active and managing your portfolio.
One question I had is like, what is the actual expense ratio diff between a target date versus doing the three fund portfolio like the Bogleheads advise?
Roger Ma 22:35
Yeah, I’d say I’d say targeted fund is typically under 20 basis points. I think Vanguards is 0.15 or 0.16.
And then if you do the three fund portfolio, you’re getting it down to about 0.08%.
Andrew Chen 22:52
So it’s like double is that’s kind of the rough mental shortcut to think about it.
Roger Ma 22:59
It’s about double. But you know, you talk about eight verses 15 basis points. We’re really talking about small numbers here.
Andrew Chen 23:09
For the investor who wants to do the third bucket, so they want to be tax efficient, and they want to do the three fund portfolio, what are best practices that you would advise for making sure that you rebalance regularly, smartly?
Is there a mental checklist that you have or that you would suggest to somebody who wants to take that approach to make sure they’re not just silently letting their portfolio drift out of proportion?
Roger Ma 23:44
Yeah, I mean, I think that in terms of rebalancing, I don’t I don’t think there’s a one size fits all.
I think you can either do it time based, whether it’s annually semi annually or quarterly, or you could do it value based and say that my target asset allocation is 90% socks and 10% bonds.
If that proportion drifts more than 5%. So if drifts 95/5 or something like that, that’s what I need to rebalance.
And, again, I think the value based approach is a little more hands on and require you to look at your portfolio more.
If you’re someone that wants to do that asset located portfolio, you might be someone that naturally wants to look at your portfolio or like is into getting to that efficiency.
But, you know, I think that it’s fine to rebalance, quarterly or semi annually, and especially for those that may be followers of your site and podcast, they might still be in accumulation phase.
So you might read a lot of articles say will, a lot of times they talked about selling.
But you don’t really have to sell if you’re in the accumulation phase.
You just change the proportion of how much you’re buying of the stock portfolio versus the bond portfolio.
So if you’re over indexed in the stock portfolio, you just buy more of the bond portfolio and less of the stock portfolio on an ongoing basis till you’re back into sync with your target asset allocation.
So I think that’s the big thing that you don’t have to sell.
And if you do sell, it might make sense to first try to sell or transfer funds within a tax advantaged account, like a pretax 401k or a Roth 401k or IRA, which does not have immediate tax implications.
If you’re looking to rebalance in a taxable account, you might have immediate tax implications in terms of having to pay capital gains.
Andrew Chen 25:54
Yeah, that’s good advice.
I haven’t come across this but I was curious. Are there like a little notification services are features that can alert you when your portfolio drifts outside boundaries that you predefined?
Roger Ma 26:11
Not that I know of for the consumer. I think I think some advisors may have some software that does that for them.
But for consumers, I haven’t seen anything like that.
Andrew Chen 26:22
Got it. It seems like it’d be useful.
So you’re right, that most of the folks who are going to listen to this podcast and who follow hack your wealth are in the accumulation phase.
And so you know, they’re kind of clocking and earning a good salary.
And so there’s not maybe a whole lot of variance that they might do on a year to year basis when it comes to optimizing their retirement accounts.
They’ll just contribute, they’ll maybe rebalance quarterly or annually.
But sometimes there will be these milestones in one’s life where there is a special opportunity to optimize a retirement account.
And I guess the way I’ve thought about this in the past is like, when your income takes a sudden drop, or when you have a life event that happens, there may be a special opportunity to do some optimization.
And I was curious, what are from your perspective the milestones that you would encourage folks to keep in mind so that when they come, they can remember to do some retirement account optimization?
And more importantly, what exact steps should the person do in that situation?
Roger Ma 27:32
Yeah, I mean, I think anytime that someone is earning a high income, and they enter a year where they’re expecting to make significantly less money, whether it’s because they decide to pursue a graduate degree, they decide to take a break from work, what have you, I think that’s a great opportunity to take a look at your portfolio to see you know, what tax bracket do I think I’m going to be in for that particular year?
And is there an opportunity to convert some of my pre tax retirement monies into Roth monies to pay either a low tax rate or no tax rate.
And if you do have earned income in that year, for that low tax bracket year, does it make sense if I’ve been contributing all along on a pre tax basis, to actually contribute to my retirement account on a Roth basis, because the immediate cost to me in terms of having to pay taxes today will be much less because I’m in a lower tax bracket versus when I was making more money.
And then I think the third thing is, looking at the tax brackets, you know, I think often people think about capital gains rate in the 15 to 20%.
But if you are in a very low tax bracket, there are situations where you might pay zero percent capital gains for increases in your taxable account.
And so, again, if you are in any of those situations, it may be interesting to look at holdings that you have in your taxable account that have gained in value.
And to actually sell those, get the free zero percent capital gains and rebuy them back.
So then you’ve effectively I think people call it like stepped up your basis without having to pay any taxes.
Andrew Chen 29:28
And no wash sale problems in that scenario, right?
Roger Ma 29:32
So wash sale only occurs if you’re selling at a loss.
In this case, you’re selling it again so you could buy it back immediately.
Andrew Chen 29:41
Yeah, that’s one of the beautiful things.
So just so that a listener or reader who is not intricately familiar with the exact steps, if you were explaining this to somebody who had never heard of this strategy, but they understand it conceptually, what are the exact steps that they should be doing to to implement this?
Let’s say so last year, you know, you have a client who was making high salary and then this year they go to grad school. So salary goes to zero.
And what they want to take advantage of exactly what you just said, how should they be doing the actual calculation to make sure that they’re optimizing every penny?
Roger Ma 30:24
Yeah, so I think in those cases, it might make sense to go to an accountant just to verify, but one of the ways to think about it is your filing status.
Looking at whether you’re taking the standard deduction, or the itemized deduction.
Standard is, I believe, like a little over 12,000 for single filers and 24,000 for married filers.
So let’s say that you have 12,000. Let’s just keep it simple and just take advantage of the standard deduction.
And if you’re making no other income, you might be able to convert 12,000 of money in your pre tax account to Roth for free.
And the way that you would do that is, you could go to your, whoever your retirement provider is.
And there should be a button that says, one of the options is, you know, convert money to Roth IRA, and then you can specify how much money to convert, and it’ll take a couple days to, to execute.
Andrew Chen 31:30
And then on top of that, they still get a capital gain step up, they could take advantage of that.
And so what should they do? Like what are the steps that they should do in a more granular way?
Roger Ma 31:44
You know, for the capital gains one, to be honest, I often check with an accountant myself when I’m with clients, just to just to make sure.
So I would have I would have your listeners maybe verify with an accountant, what the actual limit is.
Andrew Chen 32:04
Sure. Okay, cool.
Are there other milestones that are noteworthy that folks should keep in mind where there’s maybe a special opportunity to optimize?
Roger Ma 32:14
I don’t think so. I think drops in income or significant drops in income are key points.
It’s so interesting, though, that when you do have a drop in income, sometimes those are the times where you may not have the money to be able to take advantage of a particular opportunity.
I can remember advising some friends when they went to grad school to exactly what we just talked about: oh my god, you got to convert your, your pre tax 401k into a Roth.
Just do it for me so I could live vicariously through you.
And so I think being aware is one thing. Remembering to do it, and then potentially having the money to be able to make that $6,000 contribution to a Roth is important as well.
And so I think the situations you mentioned are probably the key ones. Just a drop in income.
But I think it makes sense to just think about your strategy anytime you have some key milestone, whether it’s getting engaged, getting married, or having a baby, buying a house, these are times where I think it does make sense to revisit your particular strategy and make sure you’re on track.
Andrew Chen 33:32
You mentioned getting married, I guess, if you are getting married, a bunch of the thresholds double.
So in theory, if your income stayed the same, and you had a stay at home spouse, might there be some opportunities there to like fill up more, given the thresholds all increase?
Roger Ma 33:50
Yeah, there could be some opportunities there.
I think from you know, oftentimes for the engaged and married standpoint, I think a lot of it, I think a lot of the value actually is just organizing, and making sure that each of the partners is on the same page.
They’ve probably been managing their finances very individually, just like accumulating random accounts.
And so I think once they get married, it gives them an opportunity to say like, hey, what the heck did we even have available?
Hey, what was that random Chase count over there for?
Should we, you know, combine this into one joint account?
And so I think it gives them opportunity to simplify their situation, maybe combine their situation and I think that has downstream effects to or, you know, estate planning and other things like that.
Because, you know, if someone were to pass away, the other partner isn’t left with oh wait, what were all those 20 random accounts that we had, again, I can’t remember. Now it’s streamlined.
It’s, we have one joint account. And maybe we’ve already set it up. So that’s one joint account.
We have we have our beneficiaries on our retirement accounts. And our investment account is joint. So it makes it very clean.
Andrew Chen 35:16
Yeah. Gotcha. Good advice.
Okay. So in the end of 2017, there was a big tax change that that was, you know, pushed out by Congress signed into law by the President, the Tax Cuts & Jobs Act.
It was a very consequential tax reform bill, and most of it went into effect in 2018.
Are there any important or notable strategies that retirement account holders should be aware of or thinking about to take advantage of following the tax reform bill that came out?
Roger Ma 35:50
Honestly, there hasn’t been any change to how I work with clients on retirement.
I think it’s continuing to use low cost passive investing, try to be as tax efficient as possible, and then focusing on tax diversification as well.
And so not concentrating all your money in a pre tax account, but making sure that we’re being deliberate about trying to get money in Roth as well and taxable. And a lot of times to get money in the Roth, we’re relying on either mega backdoor Roth strategies or regular backdoor strategies.
I think one of the biggest things that that changed was the $10,000 cap on state, local and property taxes.
So that has an impact on you know, how many people actually itemize deductions.
A lot more people will take the standard deduction, even if you’re in a low cost of living area and you do have a mortgage, you might still actually be using the standard deduction.
And I think one of the big things that I’ve advised people on is in the past, you might just assume, oh, I’m, I’m donating to charity. This is going to give me a tax write off.
But it only gives you a tax write off if you itemized deductions.
And so, when I do see a client that itemize itemized deductions, one of the cool strategies that I have them think about is using a donor advised fund.
And that allows people to separate getting a tax deduction for a donation versus the timing of when they actually have to distribute that money.
And so if they, let’s say that they donate $5,000 today, a donor advised fund allows them to get that $5,000 tax deduction today, but then they could decide to you know, throw off $50 here, $50 dollars next year to XYZ charity.
And meanwhile, the money in that donor advised fund is invested and hopefully growing.
And I think the best part of the donor advised fund is you can donate cash or you could donate appreciated securities.
And so donate appreciated securities in your taxable account, the regular mechanic would be that you might sell that stock pay capital gains, and then donate some lesser amount.
But with the donor advised fund, you could donate the appreciated stock directly and get the tax deduction on that full amount.
So that’s one of those things that I look for that’s changed, especially for the standard versus itemized, that people assume that the charitable deduction will be a tax benefit.
But it isn’t always now because more and more people are taking the standard deduction.
Andrew Chen 38:46
Yeah, very interesting.
And I guess in that case, where you donated appreciated securities, the fund or ultimately the charity, they don’t pay capital gains taxes either right? It’s like, stepped up in basis at that point.
Roger Ma 39:01
So what happens is you will, you’ll donate the appreciated securities to a donor advised fund and Fidelity has one, Vanguard has one, actually Fidelity I really like because the minimum is lower it’s 5000 and then allows you to donate in increments of $50.
I think Vanguard is still $25,000 initial minimum, and then their minimum donation increments is $500.
And so the way that it would work is, you know, let’s say you donate $5,000 of whatever XYZ stock that’s appreciated to the donor advised fund.
Donor Advised fund then sells that and says, okay, Andrew, what kind of fund would you like to put this in while you’re waiting to donate it?
And they’ll give you some options that I think look like target date fund-esque.
And then Whenever you want, you can start to deploy that money to whatever charity that you’d like.
Andrew Chen 40:05
I see. So you get to specify the charity, doesn’t matter what it is, could be as small or as large as you please.
Roger Ma 40:12
I think as long as it’s a qualified 501c3.
Andrew Chen 40:17
And so to access these Donor Advised funds, you would do this typically through your standard brokerages, like a Fidelity or a Vanguard.
Roger Ma 40:26
Yeah, so I don’t know if every brokerage has a donor advised fund.
I know, Fidelity and Vanguard are some of the larger ones. And Fidelity I think is one of the most user friendly just because of the lower minimums.
Andrew Chen 40:43
I see. Okay, cool.
Do you see any upcoming legislation on the horizon that could bubble up that we should be paying attention to, that could change important rules when it comes to retirement accounts?
Roger Ma 41:00
I haven’t been the best about keeping track. I thought I saw something on raising the age of RMDs.
You know, I think there’s been some stuff here and there, but it didn’t seem like it was getting into the serious territory. So I kind of tuned it out honestly.
Andrew Chen 41:21
Gotcha. Okay. Okay, so a bunch of my listeners and readers are folks who are, you know, aspiring to FIRE.
There’s this whole movement around fire financial independence, retire early, which is basically retiring before your traditional retirement age of 65. So that might be in your 50s or 40s, or even 30s. And in some really extreme cases, even in your 20s.
And I’m curious, do you have any recommendations for ways that folks who have early retirement in mind, what they should be thinking about in terms of saving and investing, how they should be thinking differently from, say, somebody who simply plans retire at your typical, you know, 65?
Roger Ma 42:04
Yeah, I mean, I think that anybody on the FIRE movement has probably followed and knows a lot of the different strategies.
And I think what I’ve seen from the FIRE movement is that when someone gets on the FIRE path, they’re like, all right, I got my number, here’s my burn rate, multiply by 25.
I just got to reach that and then I can leave.
But I think what happens is, on that path to getting 25 times your burn rate or whatever, you know, whatever you’re using the 4% rule or 3% rule, I think something changes in their mentality like, well, you know, my job isn’t as bad as I thought it was.
It actually is quite good. I don’t know if I want to retire.
And what I’ve seen from a lot of the more vocal FIRE proponents is that they end up not really leaving their job.
Or if they do they get another position that pays, and so they’re not really withdrawing money at all.
And so I think what I’d ask myself if you are on the path is why are you on the path?
And what is FIRE going to allow you to do once you get to the end of the rainbow that you can’t do now?
And a lot of the times I feel like it’s not much. And I sometimes feel like people use FIRE as a risk averse way to make a job change.
And what I want to tell them is you don’t have to wait so long to be able to make that change.
I don’t think you need that much money to make a job change or make a big change in your life.
And so, yeah, I would I would tell listeners to just get clear on why they’re on the path. What FIRE is going to get for them. And what is life going to look like when they actually FIRE.
Andrew Chen 44:09
Yeah, there’s definitely a mindset thing that is important to get clear on your why for sure. So definitely something to think about.
One thing that I think about in particular, though, is that if you have gotten clear in your head, and you know that there’s a you know you want to retire early, whether you should think about putting money in a tax advantaged versus a regular taxable account, in a different way, in so far as a tax advantaged account typically is going to stay locked up until you’re about 59.5.
Whereas investing in a taxable account, you may not get any tax break, but is more flexible in terms of your ability to access it.
And so, I think the kind of traditionally prudent investor will max out their 401k every year, maybe even max out an after tax IRA to do a backdoor IRA. And then maybe they won’t have enough time left over for much, and maybe they will, I don’t know.
But it’s kind of like you can develop this kind of reflex of just max it out, max it out and they’re all managed and they’re all locked up till you’re 60.
Is there any different way of thinking that you would advise if you already had it clear that you were going to retire early with regard to how you allocate your money in this way?
Roger Ma 45:35
Yeah, I mean, I think whether you’re thinking about retiring early or not, I would be cautious about putting all your money into a pre tax retirement account.
I’ve seen a lot of clients in their 60s and approaching the RMD age of 70.5, only have money in a pre tax account, and then we started with looking at what the RMDs are going to be.
Their social security is going to be taxable, they might have some other fixed income as well.
And while they were accumulating, putting this money in, they thought, Oh, well, my tax rate is going to be lower in retirement.
And with these retirement distributions and other fixed income, it gives you much less control over being able to control your tax bracket in retirement.
And so, you know, as an ideal metric, I say it would be great to target a third, a third, a third in each bucket a third in pre tax, a third in taxable and a third in Roth.
I know that’s not often realistic, just because most people don’t either have the cash flow, or the tools in terms of the mega backdoor Roth or regular backdoor Roth, to be able to into that a third, third, third.
But I think that type of tax diversification, gives you more options, whether you retire at 40 or retire at 60.
And I think if someone is really set on retiring and 40 not working at all, and really just not making money and doing whatever, I think that presents an opportunity to what we discussed before in terms of gradually converting the pre tax monies to Roth monies, essentially turn them into tax free monies.
I think there’s other ways to get the money out of that 401k if you want to do these substantially equal periodic payments.
And so, yeah, I think that it’s always good to have some amount of tax diversification or have money in each of the different tax buckets.
Another account that my clients and I have been talking about recently is the health savings account, and using that as another stealth retirement vehicle, because it’s the only triple tax free account available.
It’s even better than the Roth. I tell people I would marry the HSA if I could.
I don’t have one myself. But, you know, I live vicariously through others and seeing them use that as another vehicle that they can use for future health care expenses.
Andrew Chen 48:25
For sure. Yeah.
And like healthcare is one of those things that I think people who are young and healthy may take for granted.
But when you’re old, you need to start thinking about so that triple tax advantage which just means you know, tax free in tax free growth and tax free out when it’s for qualified health care expenses can really help for sure.
Okay, I think those are pretty much all the retirement related questions I have.
Where can people find out more about you, what you do, what you’re all about?
Roger Ma 48:53
Yep, they can go to my site at lifelaidout.com, ,y Twitter handle is @lifelaidout.
Andrew Chen 49:02
Cool. And you’re writing a book right now about career, career development and investing.
Tell us what that’s going to be about. I know it’s coming on the spring.
Roger Ma 49:10
Yeah, we are still targeting day, but I think it should be April 2020.
It’s about how to find a job you like and then teach you the financial strategies to actually make that path a reality.
We hear a lot of these myths about what good jobs are.
I used to think that good jobs were a very high paying jobs, you work for a prestigious company, and that didn’t prove true to my life.
And then you have other myths, where people say, you know, just do what you love. But doing what you love may not pay the bills.
So how do you reconcile those two thoughts, and that’s what I try to do in the book.
Andrew Chen 49:52
Very cool. Well, definitely I hope folks check it out.
One thing I actually I was reading in prepping for this interview, I was reading some of your past articles.
And one thing that caught my eye I just remembered I wanted to ask this. I forgot to do it earlier.
But one thing I that caught my eye, I thought was super interesting, is that you joined the AARP few years ago, which is uncommon for somebody who’s millennial ish, professional.
What were what was your rationale thinking? And what does that what does it do for you? Do you recommend it etc?
Roger Ma 50:30
Yeah, I was booking a hotel, I was booking a Hilton Hotel to Houston.
And I used the standard rate. You could use advanced rates, you see all those different things.
And one day I saw the AARP and I was just curious, and I thought, well, how is that different than the HR rate? The Hilton honors rate that I’m paying.
I noticed that it was $16 cheaper or something like that. And I can I join AARP?
And I started doing some online searches and figured out that even though I thought that I couldn’t join AARP until I was 50, there is really no age requirement.
And it’s super cheap. It’s $16 a year, and you can add another person that’s in your household.
So when I joined AARP, I surprised my wife and said, Hey, Jen surprise, you’re now a member of AARP. We’re, we’re part of the cool kids.
And so I think hotel discounts is the big one. In Manhattan, you also get discounts actually, across the country, but I think, especially Manhattan, it might be in other big cities might be more worthwhile.
You get discounts movie tickets at Regal Cinemas. And so tickets in New York are $18 to $20.
I think I was getting movie tickets for $10 to $12 to this discount.
And then there’s some discounted, I think restaurants, car rental services as well, the ones I’ve used mostly are just the movie deal and the hotel deal, but that’s already paid for itself for sure.
Andrew Chen 52:09
Do you get a quizzical looks when you flash your AARP card at check in?
Roger Ma 52:14
You know they actually haven’t asked for it.
I’ve actually been disappointed, I wanted to be able to flash think for the rest of the day.
What the heck is going on?
Andrew Chen 52:28
Okay, so you don’t you recommend it then if for nothing else, then lower hotel costs?
Roger Ma 52:33
Yeah, I think it’s, you know, take a look for yourself.
There’s there’s a number of different hotel chains that are available.
And see, one if you stay at those hotel chains, and then two, what rate you get now, whether through a preferred member rate or corporate discount, and then compare it to the AARP rate and see if there would actually be a savings for you.
There was savings for me but there might not be savings for everyone.
Andrew Chen 53:01
Gotcha. Okay, cool. Good advice.
All right. Roger, thank you so much for taking the time to chat with us. Really good advice.
And best of luck on your book coming out. And everybody check out Rogers book. It’ll be a good one.
So, thank you so much.
Thanks so much for having me.
All right, that’s a wrap.
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