Q&A: Why Your Retirement Math Isn’t Adding Up

Joe, 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 is 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 kind of gross, a question I didn't like, how do I compare to everybody else? That part I didn't like because it didn't matter. But that's what everybody wonders. But a lot of people though came to me because they're like, I bet you've got the 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. Uh-oh. Exactly. Major uh-oh. We're also going to hear from a listener who is wondering about some of the advice that our guest Paul Merriman shared on our recent interview

palm airman very much advocated for value funds but she's wondering what about growth funds why value and not growth so we're gonna answer her question but we're gonna kick off with a question that comes from someone who

is confident 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. All of them? All of them. In one episode. In one episode. Can you believe it? Oh my goodness. I got to ask for a raise. What's 5% of zero?

foiled again. Maybe if somebody had a negotiation course, maybe that would help if only if only 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 at your focus, your energy, your attention for any limited resource you need 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'm Paula Pant, your host. I trained in economic reporting at Columbia. I'm here to help you prioritize 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, Joe Salci. Hi, what's up, Joe?

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. And 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 sound checks with it. We haven't run it through its battery of tests.

Haven't had the ribbon cutting? Yeah, exactly, exactly. But the base setup, 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. Oh, I'm holding you to it. Well, let's hear our first question, which comes from Joanne.

Hi, Paula and Joe. My name is Joanne. I am a 45 year old single mother of two kids and I'm recently divorced. My kids are 10 and 12 years old. I've worked for over 20 years and plan to retire or semi-retire in a month or two. 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 I've really had to catch up and your show's been a key part of that for me.

My question is about medium-term investing, but before I ask my question, I'll just give you some of my background.

I have 1.5 million in retirement accounts. I've been making about 150k at my job, which I plan to quit very soon, and I've been making the maximum contributions. I've been pretty good about that. I believe I'm in good shape for a post-age 60 retirement. I also own two condominiums. 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 they come of age to go to college, I'll seal up the condos and sell one back and make that money back. They're worth about 400k each at the moment and they're both paid off. Right now I have about 500k in CDs and a CD ladder. So I was nervous about money after getting divorced and I thought I'd be conservative. This includes a two-year CD, a three-year CD, and three five-year CDs all at a little over 4%.

So that's 500 K in this ladder. I have some passive real estate income from a family real estate property with this money along with interest from investments like currently these CDs and some child 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 settlement payments from the divorce for the next four years. And some of this money will go into funding my children's 529s for college.

As I've been learning about personal finance, there have been some basics that are clear to me. You know, I need to have a fully funded emergency fund. I need to have, for me, it's like one to two years of living expenses in cash so I can feel comfortable. So like the short-term part, it's like I've got that down. I also understand about long-term investing, like letting things ride out in an index fund or a target date fund. Also, in my case, I have the second condo, right, that I can sell back in 10 years.

So my question is, what about the middle term? What about money I'll need in five years? I was lucky enough, or some might say too conservative, I don't know, in building this CD ladder, which will reach full maturity in five years, as the CD's mature, I've gained interest and that will get the liquid cash back at the end. But that opportunity is going away. So now how do I plan for the medium term? Do I do more bonds or some bonds? When the CD's mature, how do I reinvest that money? That's really my question.

Joanne, first of all, I am honored 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 Joanne not just to you, but to every single person who is listening to this, you are all taking the initiative to go out and get the learning that you didn't get in school.

I just had a discussion, by the way, Paula, with a mutual friend of ours, Jackie Cummings-Koski. And Jackie went through a divorce in her late 30s and told me this wonderful story about how she used to get upset because her husband handled the money and she would get upset when she had to go to the bank to sign refinancing the mortgage papers. She didn't want anything to do with anything.

And so then after her divorce, she was horrified because now she has to handle all of it. And what was really empowering for her was when she started handling it. And Joanne, I'm speaking directly to you now. Not only did she find that it was easier than she thought, she actually liked it enough that now she's in the podcasting ring with us. She's teaching people about money all the time and her big message is you can do this. So Joanne, you can do this. It's going to be a really fun ride.

So not just Joanne, not just that you can, but she has. I mean, the long term and the short term, Joanne, you've nailed it both. And as you acknowledged in your voicemail, some people might say that's too conservative, but Joanne, 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, but Joe, as you said earlier, don't play the comparison game. No, not at all. 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 lattered CDs so that you can have short term money. Yeah, but what I also like Paula is she is identified also that that is a problem because it is a problem. And now that she's at the point that she's ready to do something more, definitely she 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 inflation was high and so cities were paying four percent rates 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 where now we have 2.6% inflation as of October 2024. So now you've got a CD 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 she 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 surefire way to beat inflation. Short term, having those CDs is fantastic, having money in a high yield savings account is fantastic. But that messy middle, Paula,

right well okay so i'll tell you and i agree the messy middle is the hardest part so juan you've identified that perfectly idea that i don't like and john curious to know what you think about this i don't like the idea of tilting too heavily into bonds now i'm gonna put a big asterisk here especially for the sake of everyone listening of course

The average person should have a well-balanced asset allocation that if you choose might have some bond allocation, but I don't like the idea for that messy middle of an over-reliance on bonds, because if we do have an inflationary environment, that will

beat up bond prices. And you saw recently bond prices tanked on investor worries about increasing inflation in the future.

My co-host on the Stacking Benjamin Show and your friend OG, and quite a few other CFPs, for the very reason you talked about Paula, 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. I'm 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 barbell allocation. The reason it's called that if you think of a barbell at the gym, you've got that tiny, tiny little rod in the center. And then all of the weight is on one extreme end or the other extreme end. So just like a barbell, you would want to have a lot of cash, a lot of equities. And that's the barbell allocation. And personally, that's what I have.

And the whole goal, Paul, is to do what you emphasize at the beginning. You don't want to overemphasize bonds. And that is going to be really more about Joanne'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.

Yeah, so when we talk about risk, there's two components. There's risk tolerance and risk 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. They're logistical spreadsheet based dollars and cents 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 risk capacity, right? 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 risk tolerance, but between the two, what we have seen over and over and 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's 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 case so and a chocolate bar.

then i am steamed broccoli 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 sandbox money that I could put into crypto. I get the crypto argument. I say I like the crypto argument. When I've owned it in the past,

I don't love owning it. I don't understand what makes it go up. I don't understand what makes it go down. I have been an investor for so long, Paula. I feel much more comfortable with taking a risk that I understand than one that I've realized. I'm not going to understand. Could I make more money? Could I have made more money if my brother-in-law back in 2017 had convinced me

to get into Bitcoin like he did. He's made well over a million dollars just in crypto. And I sat alongside him and went, yeah, I can't do it. I can't do it. There's nothing to do with my belief in crypto has to do with me when I've owned it. It's too big a roller coaster ride for me. Right. The psychology of it. Yeah. Well, as an example, for AI, I talked to you about my crazy investment in Lumen.

this company that has had a lot of debt that now is refinancing their debt. I love my investment in Lumen. It might be the dumbest thing I've ever done. Love it. I think it's great. Just for the sandbox part of my portfolio, one works and one doesn't, but it is clearly risk capacity, not risk tolerance. My risk tolerance is fine with Bitcoin. It's fine. My risk capacity? No, thank you.

Going back to the subject of 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 historically 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 often that 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 it's on a different fulcrum. Yeah. But the reason is it's a different fulcrum, not because it's inverse. Right. So it's independent rather than inverse.

Yeah, absolutely. We saw that also going back in time in 2007, 2008, when everything went down. There was truly no place to go for safety. Gold historically has been the thing that rallies a lot when the stock markets down Paula. Even more than bonds, gold has been the rallying cry. 2007, 2008 wasn't the case there either. Gold also went through the floor. It didn't matter what you owned. People were selling it.

Well, and so what's happening now to take a look at the current economic landscape, it's a wait and see game, but there is anticipation of the possibility that prices might rise in 2025 across the board. And the reason that bond yields have skyrocketed and therefore bond prices have fallen is because of that anticipation. And so we're seeing that play out in the market right now.

We can talk about specifically because I definitely have a wait and see approach and I roll my eyes a little on stack of vegments. We did a headline talking about this where economists predict that the national debt will go up somewhere between $1.1 trillion and $15.6 trillion, which is hilarious.

For those of you not watching the video, Paula just gave me the same look that OG did when we did this headline, which is nobody knows. Just looking at how huge that field goal is. Yeah. That's when you set 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 tariffs.

specifically tariffs on goods. And if he does implement a tariff strategy, Wall 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 bond 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.

Because mortgage rates are actually more tied to the ten-year treasury yield than they are to the Fed's 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 and the future as the Fed continues to lower interest rates. Right, it's possible. The thing about tariffs is that

There are two possibilities. There's the possibility that we have a one-time step up in prices once the tariffs are implemented and then we just stay at that new level. Option B is the possibility of retaliatory tariffs and if we end up

being subject to retaliatory tariffs from other nations that could create this back and forth scenario in which prices increasingly go up to be precise tariffs 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 retaliatory tariff

Domino right exactly and so that's where the wait and see game comes and that's why it was on November 6 that was the day that bond prices plummeted and so all of this is to say I would not recommend making bonds a big part of the middle that messy middle portion of your portfolio because

The bond market in general is going to have a lot of volatility, I think, in 2025 because there's so much uncertainty about what is going to happen in our markets that is absolutely impossible to know in advance.

Investors are going to be trading bonds based on that uncertainty. We're going to see bond prices rise and fall and rise and fall and rise and fall throughout 2025 depending on how the situation shakes out. Also, just long term, even without this short term discussion, I like the biased against it anyway. The biased against it historically is

the right move. You open with that, I would stay away from bonds. 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 wreck 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 beat inflation. Think about your lifestyle today, even if you decrease that by 20 or 30%, trying to live for 25 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 beat inflation. You're 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 than what you want to live because the only ways 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 a barbell allocation, even with that messy middle portion of the portfolio. Her question was, what should she do with money that frees up as the CDs mature? Yeah, clearly wouldn't do that for Joanne though. Just based on the fact that she had half a million dollars in CDs. The barbell allocation does not work for Joanne. I have three choices.

The first 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&P 500 Value Index. It's an easy way to get this done. And then the other half, I would go further than Jenny Maes or 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 Jenny Mayes. But this is more middle than that. I'll look in five, six, seven years out. So I'm buying a good intermediate term index bond fund. So go with a two fund approach, intermediate term bonds and the S&P 500 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 want to give that to somebody else, you could buy a balanced mutual fund. That's a fund that's going to buy large companies and it's going to buy intermediate term.

bonds. The problem I have with that one, Paula, is that when you go to sell that, you don't know what bonds and stocks you're selling. So you can't pick your poison about what to choose. But if you want to press the easy button, you're going to be well off that way. I've gone on record many times saying, I can't stay on target date funds. I really can't. I think 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 simpler than you think. But

If you're gonna use a target date fund, find a 10 year target date fund because target date funds quote, land the plane quicker than they should. You're going to have a big pie of investments. Use a target date fund for that messy middle that's maybe a 10 years out into the future from today target date fund. So that would be like target date 2035. By a 2035 fund. So I like the three of those. If she actually intends to use the money in 2030 by the 2035.

Absolutely. Yeah. Buy a little bit further than when she out them when she because target date funds have a lot of cover your butt in them to put it nicely. 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, Paula, and then make some investing decisions. But I could be happy with any of those three. Wow. That was not at all what I thought you were going to say. I thought you were going to recommend Juni Mays and tips. No, not aggressive enough.

for me. I don't think we get that interest rate where we needed to be to beat inflation, which is my worry. I hear, Joanne, what you're saying about feeling like you're right for the middle, you didn't tell us how much money's coming in to cover it. You said you think that you're covered. I just do the math on your assets and you're not covered. So I'm hoping that these numbers that you didn't give us for cashflow coming in from other places,

is enough to make sure that even with inflation that you're covered in the future a lot of the time when i was a financial planner paula people 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 tighter than it did you like what happened with the price of bread went up that's what happened. So joanne 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 overweight 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 by lottery tickets. I'm sure that's where Joanne's going. Put it all in crypto. Yeah. Horse number three in the fifth race.

All right, 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 Merriman's advice, why value stocks and not growth stocks, we're going to answer that question. And then we're going to hear from a caller who is wondering if she has correctly calculated her financial independence number. Stay tuned.

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Welcome back. Our next question comes from Jesse.

Hi Paula, thanks for a great episode with Paul Merriman on diversifying your portfolio to increase your gains. I wanted to ask, I noticed that his recommendations tended to lean towards diversifying with value stocks rather than diversifying with growth index funds. And I wanted to ask if

there would be similar findings if you were diversifying 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.

Jesse, thank you for the question. Fundamentally, the question is, why value? Why not growth? You're tapping into an age-old debate in the investing world. Historically, there were two famous investors. One was named Benjamin Graham and the other was named Philip Fisher. Benjamin Graham is known as the father of value investing. Philip Fisher was the father of growth investing. Ironically, Philip Fisher's son is a value investor.

of course exactly because every time talking role designs that's why warren but it has said that his investing philosophy is a mashup between benjamin graham and fillet fisher but it's not a fifty fifty mashup warren but it has said that his investing philosophy is eighty five percent benjamin graham fifteen percent fillet fisher so his investing philosophy is basically eighty five percent value fifteen percent growth

And the part of Phillip Fisher that 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, Paula, than the piece of Fisher's investment philosophy that before I invest in an individual company, I'm gonna know the heartbeat 100% of what that company does, which is why Warren Buffett, you and me, trying to be like you and I,

We all agree. That's why the average investor, one of many reasons why the average investor should just buy indexes because doing it the fissure way requires lots and lots and lots and lots of diving in deep. Yeah, like an enormous due diligence to the point where it's your obsession. It's not just your full-time work, it's your obsession.

Exactly. So what we've seen and what Paul Merriman 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 fillet-fisher 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.

Yeah, and the reason depends on the size company that we're looking at. Overall, it's funny growth and value over long periods of time. If you look at the S&P growth index versus the S&P value index over long, long, long periods of time, the growth index to your point, Paula, slightly below the value index, but not by a ton. The bigger reason why Merriman's research and a lot of people's research

will land and the large company side on 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 value is 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 you're a growth investor you're going to ignore some of the

information that a value investor really is interested in. A value investor wants to make sure that the pieces of the company, a special equal a deal. 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're 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. Or maybe just a little bit on the oops side, where a growth investor, if I think a company's 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 Nvidia have been embezzling money or cooking the books and nobody knew it, that's 100% of growth company. There is no value there. It's all growth. If somebody pops that bubble, the downside is huge. It's absolutely huge. So that's why on the large company side, Merriman 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 50 years, you're going to probably be great with growth. If you're there for 10 years, growth is either going to be way ahead or way behind value stocks on the large side. It's actually different though, Paula, with small companies. With small companies, it's a whole different rationale why we go with value versus growth. Oh, tell me why.

Well, because when a company is small, a company is either undiscovered or discovered. And actually, a small company value stock is usually going to be a value stock because the masses haven't discovered the genius of what this company does yet.

If it's a little tiny company and it's value oriented, value-oriented small companies tend to get the biggest pop of anybody in the market, because all of a 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 there early and a lot of these companies don't do as well. So small growth is super risky. Small value.

If I've got 100 companies or 500 companies and I'm underpaying for 500, the chance that three or four of these are going to be 10 years from now, the next hot thing, I'm going to find a few. And by the way, I can miss on a lot of underpriced 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. Small value, we're actually looking for the next hot growth stock. Large value, we're actually not trying to make a mistake and when we get off the train. 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. Feeded a bunch of cash. I have many, many friends. They're 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. 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, 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 to 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 just keep jenga towering new levels on top of shaky shaky foundation eventually that whole jenga tower falls apart. We can actually look at poll a couple case studies that i think a lot of our for anything audience knows.

In this case, companies that have survived, but are vastly different than they were when they started. And it was because they had this huge speed bump when it came to growing too quickly. SoFi, I think, is a company that a lot of people in the audience knows. You look at the SoFi management team, it's 100% different people than started that company. And part of that was they had this massive growth. They ended up having a lot of scandal inside the company. And that company nearly got wiped off the planet.

Luckily they were able to turn it around away luggage is another company that had big time growth i had huge problems oh my goodness away poor i love their product so it made me very very sad to hear about what was happening in the company the product is incredible.

But growing too quickly in both of those companies, it changed the corporate culture because they hired a ton 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 mass. And luckily, both of them are still around, especially for a way, because I like that luggage too. I think those are a couple of case studies about exactly, Paula, what you're talking about. Right, exactly.

I think you raised an important point when you said that today's small cap value often become tomorrow's large cap growth. Big difference why merriman would go with small cap value than with large cap value. I've been pointing to Paul merriman a lot lately.

This isn't Paul Merriman making stuff up and he's not like Gandalf 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 ton of research.

I don't point people toward Paul Merriman's research because of the fact that he's a Wizkid guru on where the markets headed tomorrow. If you ask Paul Merriman where the markets headed tomorrow, he will tell you don't know, don't care. That is not his game. His game is what has worked in the past because when it comes to the future of the economy, is it going to look different? Sure, it will. But is it going to rhyme with the past? A hundred percent, absolutely.

the trends that we've had for the past 80, 100 years in these markets is going to to some degree continue.

Right. You know, our YouTube video with our Paul Merriman 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 and our interview with Christine Benz, those two just, there's a huge hunger for voice a reason. Yeah. 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've reached and so is a testament to not just to the incredible research that they've both done but also to the how smart this audience is that they want to learn from the best.

And Paul Merriman absolutely is one of the best. If you haven't heard the show, I encourage you to watch it on YouTube, youtube.com slash 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.com slash afford anything. But if you want to find the audio episode, it's episode 550. That's affordanything.com slash episode 550. Well, thank you, Jesse, for the question. And I hope that gave you a solid discussion of why value and not growth.

We're 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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Don't miss out on saving big with Wayfair this holiday. Head to Wayfair.com now to shop Wayfair's Black Friday deals. That's W-A-Y-F-A-I-R dot com. Welcome back! Our final question today comes from Nancy.

Hi Paula, my name is Nancy, I've called before for Sage 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 split between a Vanguard account as well as TSP and

real estate. I think it's pretty straightforward when it comes to Vanguard, I can just see what my balance is. With TSP, I'm wondering if you would consider the amount invested, the amount that I've put in, the amount that I've put in, plus the amount that my employer's 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 real estate, I'm also curious about what does it 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 numbers are different and I'm just curious how you would

advise us to look at those numbers when thinking about our fire number and the amount invested we would need to retire or to work when we wanted to. It's work optional. Thanks so much for your guidance. Have a great one. Paul, I'm wondering if Nancy's sitting at her desk at work going. How do I get the hell out of here?

as many people do. 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 phi number? And those are two different questions. So when you ask, for example, about

the TSP, what do you count your contributions or your plus your employer's contributions or the total portfolio value? That, to me, sounds like a question about how do I calculate my net worth. 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 net worth?

We'll answer that question in just a moment, but I want to first make a distinction between the questions of how do I calculate my net worth, and then the question of how do I calculate my phi number, because your phi number is an estimate of how much you would need in order to make work optional, whereas your net worth is a snapshot of where you are at this point in time. And I understand many people will base

their Phi number on what ultimately ends up being a total net worth, but that is not necessarily how it 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 net worth, just think of it like this. Your net worth is everything you own minus everything you owe. So I would take the total portfolio value of your TSP 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 it's 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 net worth. So for example, hypothetically, a person might say, when I have a net worth of 2 million, I will be financially independent or 2.5 million or 3 million. But I think that there is a risk when it comes to

Using your total net worth as your five number for the very reason that you've identified which is that your net worth is made up of both liquid and illiquid investments.

Well, and not just liquid investments, but also investments that you are not going to want to use as fuel, possibly for financial independence. So as an example, the house that you live in, unless that house you live in is going to be fuel for your financial independence, you don't want to use any of 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 net worth. And so when it comes to your home, and this is totally up to you. I know some people who are like, as soon as I reach financial independence, I'm going to sell my home. I'm going to move into an RV. I'm going to RV around the country or I'm going to sell my home. I'm moving to Costa Rica.

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 scenarios as well because they might not want to live in that RV or live in Costa Rica.

Yeah, because our feelings change over time. I mean, it's funny because you and I, I think both interview Bill Perkins a long time ago, but that dude's having a moment right now. I have no idea why and all the online communities everybody's talking about Bill and about die with zero again. But Bill's main tenant is

you change over time. And so if I say that I'm very comfortable Paula living in a tent down by the river, I might not be comfortable living in a tent down by the river 15 years from now. I might not want to go to Costa Rica 15 years from now. So if I'm doing that because standard of living wise, it's the lowest common denominator

Plan and i can barely scrape by i'm gonna be really nervous that i'm in costarica going what the hell am i doing here i don't want to be here and now i want to upgrade my lifestyle and i can't right and that in a way almost gets to the question of lien five verses fat fi in terms of do you define fi or work optional as.

the smallest amount of money that you would need to live in order to get by and be okay, or do you define it more as some bigger amount of money where you would have flexibility and comfort. I guess I should wear eye stand.

So a part of it is, are you aiming for the psychological comfort that comes with Lean Phi? Because Lean Phi 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 is all of them. I have seven and they're fully paid off, free and clear. I could move into one out of those seven, rent out the other six, and I'd be okay.

Going to bars and restaurants and concerts every weekend, but I'd be okay. 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 am I going to eat tomorrow? How am I going to make a decision that supports me? You're able to go. I'm going to tell the boss to shove it today because I hate this job and there's no amount of money worth working right.

But acting on it then to go live in that apartment is there i love the psychological part yeah i think lean fi 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 offense 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-fi is a great, fantastic, fantastic mechanism. But if you're playing offense, then for that bucket of money, for offensive-fi...

You'll want to calculate that with money that you actually would be willing to tap. Well, I'll tell you what else I like. And you know, Paul, more than anybody, how much I hate these terms. I can't stay in these terms, but I'm going to lean into them. You ready? Look at that pun. Lean coast-fi, meaning I'm not there yet, but I know that for two years, I could coast and taking that two-year sabbatical to go find the right thing.

That's even a powerful spot to be. Like I don't even need to be 100% there, but just knowing I could take a couple of years off savings and I'm still going to be okay. That's pretty kick ass too when it comes to some of those toxic situations. Exactly. But I think I just said a bunch of terms that made me throw up in my mouth.

Joe's 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 the fire movement for those of you that are new here. And these terms are exclusionary because people that are brand new to this movement are like, what the eff are you talking about? I disagree. I think having a common vocabulary is a common vocabulary is what unites a group. It's what creates in-group cohesion.

Well, then Roth IRA would be far easier for people to get around or a straddle option strategy. All these great terms that we have, 72t. I don't know. I think we need fewer of those terms. I think the more we get the jargon out of it, we make it open to more people. It's great. Joe and I are disagreeing again. Yes. And as usual, I'm. We are want to do.

Can I give Nancy something else? Yeah. If this is a really important goal for you, 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 25 times your income number that also makes me throw up in my mouth because it so doesn't apply to anybody. It applies to zero people, but this is such an important goal, Paula, for everybody.

It's such an important thing. And yet every study shows we spend more time planning our next vacation than 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 I want financial independence to look like for me? It ain't going to be 25x my number today. It's not going to be that. It's going to be something that's unique to me. And when I take the time to pour myself into that goal, guess what happens? The goal becomes even stickier. Like, don't get me wrong, Nancy. I can hear you're there right now, right? That's why I joke that maybe Nancy's sitting at her desk going, how do I get out of here?

But dive into 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 loan value. But if you're not going to sell that piece of real estate, it then becomes a cash flow engine.

And now I don't want 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 25x, no matter how you do it. So I would go get a calculator. And I would really dive into this. Because A, it's fun. And it gets more fun. The more you do these, what if scenarios? What if I did this? What if I did this? Ooh, maybe I'll try this.

And then you become incredibly committed because you spent some time on it. But I think Nancy's asking what number should she plug in or what set of numbers should she plug in. But I think she's got a plug in the cash flow on the real estate piece, which is going to blow up the rest of the calculation if she talks about her five number.

When you say cash flow in the real estate piece, Joe, are you saying if she were to move out of her home and rent it out? I'm saying for anybody, and this is why this doesn't apply to Nancy, anybody that has cash flowing property or cash flowing positions where they're using the cash flow and not the equity to fund their financial independence. That's where Nancy's 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 net worth, but rather it's, how do I make, let's say, $5,000 a month, hypothetically? We'll just use that as a illustrative example. And if the goal is $5,000 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 stake in 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 4%? So what income streams do I have that would tally up to $5,000 per month?

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 answers Nancy your exact question because Nancy's like, Joe, why'd you go off on that? Cause I don't have half 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 net worth number that doesn't meet our financial independence goal. So I'm not going to include my equity in my home in last year point. I'm going to move in downsides. If I'm going to move in downsides, then I'll take some of the equity. But it clearly then Nancy answers your question about does this count? Does that not count?

And that's why calculating the fine number is 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'll 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'd say at least once a year, have an annual marker of where that number is.

It's funny because I don't find net worth to be that useful myself except for one thing, one thing. It's like my annual accounting of all my stuff. And then that gets my subconscious brain going on. Am I optimally using each of these things?

Because often we'll have an old IRA over here or a savings account at this other bank that we forgot about. And I'm like, what use do I have for that anymore? Does the reason I had it last year still makes sense? That's the only reason for me I like net worth. Right. Just to use kind of an exaggerated example for the sake of illustration, if you lived in a fully paid off $2 million home,

Ooh, okay. But you had only $10,000 in portfolio assets and investable assets. Oh, I'm out.

And this is an exaggerated example for the sake of illustration. Yes, you would own your home free and clear, but you would have virtually zero income stream. Even if you were to draw down that $10,000 at a 4% rate or a heck of 5% rate, it would amount to nothing, not even enough to pay your 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 $2 million net worth, but you wouldn't be anywhere close to buy because the amount of tapable money would be so small.

It also shows why this idea that my home is the cornerstone of my investment empire is so misguided. Right. Primary residence, yes. And I saw it again last week in a forum that so many people still see their primary residence as the centerpiece of their investment portfolio. We got to work harder getting that word out, Paul. Yeah, we do.

So Nancy, I hope this helps answer your question. And there are two numbers you need to calculate, your net worth, which is just fun to know. But more importantly for you, your capital money, 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 like to calculate for people that aren't close. We don't know if Nancy's close or not. Maybe she's calculating it because she thinks she might be there, which would be awesome. But for people that aren't close, I also like calculating how much time can I spend away and still be okay, because that also gives you power against the killer of long-term vision, which is doing short-term and obvious stuff versus long-term and not so obvious, but far healthier stuff.

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 she goes into her next position. And I haven't asked her about her numbers, so I don't think that she is phy for life, but she's definitely phy for as long as I've known her. She's definitely been phy for a solid like

year. Hey, it's the reason why I'm here with you is because at age 40, I had that guy I looked up to said, I've done a great job of saving and I don't love being a financial planner. I like it, 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 adventure travel company has climbed most of the tall peaks.

In the world, we thought it was a metaphor. Turns out it wasn't. He really had mountains 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 100% 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. Oh, fabulous as always, Paula. Amazing. Joe, where can people find you if they'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're half gone and they are selling very quickly. But you and I and our friend, Doc G, are having an event in Manhattan. We're coming to see Paula. Yes. Yes. We're having an event in New York City on December 12th.

Also, a special guest, my co-host on Stacking Benjamin, so Gee's joining us, as is our friend, Jillian Johns-Rude, and we're talking to some other celebrities. Personal finance celebrities, fire celebrities, and PF celebrities.

Yes, but we don't have room for everybody, so we don't want you to be left out in the cold. So if you're anywhere close to Manhattan on December 12th, the place to go to sign up is stackingbedgiments.com slash NYC. So stackingbedgiments.com slash NYC gets you to the place to grab tickets. And we hope we get to hang out with you on December 12th. Yes, I can't wait. That's going to be so much fun.

Yes, we're violating so many restraining orders all at the same time. I thought you were going to say health code violations. Maybe that too. Well, thank you to all of you for tuning in for being part of this community. If you enjoyed today's episode, please do three things. First, sign up for our newsletter, affordanything.com slash newsletter. Second, please leave us a review in your favorite podcast playing app. While you're there, make sure that you hit the follow button so that you catch all of our amazing upcoming episodes.

And third, please share this with your friends, your family, your neighbors, your colleagues. Share this with the people in your life. Thank you again for tuning in. This is the Afford Anything podcast. I'm Paula Pant. I'm Joe Salsihai. And we'll meet you in the next episode.