Joe Shin wrote in and asked, what are the rules for living off of stocks before retirement? I'll have a few years of no income because of grad school, but I have about 350k in a brokerage account. Do I sell slowly or all at once? And what do you think about this idea? What are the rules about living off of stocks before retirement?
a few years of no income because a grad school after a broke account to a sell slowly or once one of the rules about it well we know this if we've been saving into retirement accounts if we've been saving into four or one case or raw fire rays or counts like that
We can't use them until a certain time. We can't actually get to those assets until 59 and a half, or if it's a 401k, if we're, we retire in the year we turn 55, we can do that. But these are like retirement assets. And so I think the question Joshon's asking is, okay, before I get there, before I get to 59 and a half,
How should I think about creating an income stream? And if I have a portfolio, he said right now, I've got $350,000. How do I think about that? And we have a lot of folks who do enter into early retirement and they're part of the fire movement or fine movement. And there are some things that you can think about when it comes to early retirement. Like one of the ones I think about, I know we do for a lot of clients is, you know,
If you're able to manipulate your income to the extent that you can keep it super low, you might qualify for 0% capital gains. So even as you have these stocks and you begin to liquidate them as needed, you can pay 0% capital gains if you stay below certain income thresholds.
what i think is interesting though for joshin is it you know he didn't see say that it's it nobody is he said brokerage accounts i'm assuming these are not retirement these are after tax assets one of the things that i would think through is uh... if you're entering into retirement if you're in the pseudo retirement
What I would argue is that before you even think about like, okay, well, how am I selling my stocks and how am I selling my brokerage assets? Is my cash or is my level of liquidity at the place that it ought to be? Because you know, we say that when you're accumulating and you're in step four of the financial order of operations, you want to have three to six months of living expenses and liquid cash. However, when you get to retirement, when you get to financial independence, you start living off of these assets.
We want to see your cash levels increase. We want you to have somewhere between 12 to 18 months of distributable living expenses available for you. Well, if you do that, what you're not going to do is get in a situation where you have to start immediately selling stocks or selling stocks at the worst possible time. So my immediate question for Josh would be like,
Okay, what's the strategy or what are the rules for pulling out an early retirement? My question would be, what's the rest of your financial situation look like? Because that's going to dictate what the rebalancing strategy inside of the portfolio looks like. I think it's interesting because I'm going to take the stance that he's younger and he's on a sabbatical. He just said I'm 28.
So the younger on a sabbatical. So this is a retirement. Well, but this is what makes it weird is like, if you were a retiree, it's not hard for us to say, let's make sure you have 12 to 18 months of cash in your account. And we'll replenish this every 12 to 18 months so that we can go to market and take advantage of, are we in a good time or a bad time and take advantage of what's been performing the best and look at the tax rates and all the other things. And it's a nice clean system.
I worry about for somebody who's in their 20s is because if I had to guess, your asset allocation is going to be probably equity and then cash. That's it. Whereas your retiree is going to have equities, they're going to have bonds. So even if I liquidate, if we're done with cash for retirees,
If the market's getting its teeth kicked in and I still need to get access to assets, I have a whole huge basket of fixed income and other very conservative assets. I can still go replenish the cash flow in retirement. Whereas you, in your 20s, if you don't think about this sabbatical or period of time well, you might, if you only did,
Um, if you were pulling a just in time accounting system on your cash flow and selling every month, what do you do in those months? So there's interior volatility periods where the market's down 15% is real painful real fast. You're going to be like, holy cow, where am I going? How am I going to pay the bills on this? And you're going to get caught making a desperate decision.
Fast forward. Maybe you even said, I'll just go ahead and I'll liquidate for the next 12 months or even 18 months because I heard the guys talk about 12 to 18 months. That's what they do with retirees. And then what happens? You get into 24 months and the market is down 30%, 40%. Because your asset allocation is all equity, it's not going to be as well. So grad school, here's the thing.
began with the end in mind. You know the time period, you know the goal, which is grad school, make sure that you, you know, I don't mind if you want to have a multiple tiered system here with it, but you probably need to go heavily
More on the cash side of the thing of what the total value of the goal is because you don't have a backup planning. You're definitely within that three to five year of what I consider short term. This isn't money you want to have at risk. So don't just assume you're like the same as a retiree because your asset allocation and all the other things don't align the same way.
Yeah, I think I'll probably misunderstood the question. I was thinking pretty well, this is how to fund something like an intermediate term goal. So if that's the question, Joseph, here's a rule I think that I would think that I want you to go to moneyguy.com slash resources that I want you to check out our wealth multiplier because here's what I really want you to understand. If you're going to
Take a sabbatical or if this is going to cover your grad school, you really need to understand the cost of every dollar that you take off the table, right? So if you have $350,000 in an after-tax brokerage account, that's wonderful. At 28 years old, you are well on your way for that money to turn into millions of dollars by the time that you get to retirement.
If you live off of that 350 and you pull it all out over the next four or five years, you need to recognize that what you did in that season was you pulled millions of dollars out of your future financial self. So you have to figure out, does that make the most sense? This is where I think, especially for people who are gonna cash flow grad school or gonna try to live off of their resources while they're still in the accumulation phase,
Being as lean as possible and having a small footprint as possible is probably the best solution. What you don't want to do is live high on the hall, get to the end of the sabbatical, get to 33, 34 years old, about to restart in your career and say, holy cow, I burnt through all the stuff I saved in my 20s. Now I'm behind. Right now you are in the head position. I want you to do everything about power to see how do I stay in the head position.
By the way, in case this becomes a highlight, what was great about doing a live show is that we were getting additional details fed to us. So if that came off as like, why is this segmented? It's because I give the content team. Y'all were giving us, I guess, information is coming through the chat. Y'all were putting on the teleprompter. It's not even a teleprompter, but it's in front of the monitor, the comfort monitor.
comfort monitor. That's what we call that. That's a teleprompter too. No, it's just a screen so we see slides. Yeah, that is a thing. Like if you're like live speaking comfort monitor. By the way, yeah, when I was doing the book tour, I was like, can we just have a comfort monitor so I can see the slides and notes and we didn't. So remember the location. It was like we didn't. Was it the Texas location? Yeah, it was in the movie theater. Could you imagine adding a comfort monitor in there? No way. It wouldn't work.
I can tell you, if you ask me my favorite venue, it's been far enough along that I can say this, no? It was a Dallas show, which was in a movie theater. I kid you not. They basically just go into a movie theater and flip on the lights and then just bring two nerds to stand in front of everybody. And I loved it because there were so many unique things that happened. We had a cockroach go across the floor.
that Carter kicked out of the way. We had one of you lovely people who was in the audience. You decided with the full lights on, decided crocheting right in the second row, you know, just going to town while I was talking, which was just kind of a unique thing to look up and see somebody just crocheting all the way through. It was the only place where you could see the money. You could see people like make eye contact with them. And I think it made for
funnier show, but I think you love it. Oh, and how about the fact there's no green room? There was no green room or wait place for it. So Bo and I were just hanging out in the entrance of another movie theater that we thought like there was no movie in there. There was no show going on. And then all of a sudden this older woman, I guess she was gonna be the only person that watched this movie I'd never heard of. And she's like, what are y'all doing? We're both dressed up. She's like, I think we're going to the wrong movie.
That was a really funny thing. Honestly, that was a really fun show. It was a blast. We sold out this thing and everybody, and you guys, Dallas, I loved that. Not only thinking the barbecue was really good, but I was like, maybe I could live in Dallas. You guys made us feel so welcome there. It was awesome. He liked us in Dallas. He got another reason to take the show on the road. That was fun.
And we got into more Jake there, too. You know, so it's fun meeting me. Jake said Dallas was the best because I was there. He always said that in the chat right now. It's kind of true. Maybe it was because Jake's wife was there. There we go. We got to meet her. She gave all the beans, by the way. She just spilled it all. All right, good sidebar there. But all that to say, Joshon, thank you for that question. If you would like a Money Guy Tumblr, just email winner at moneyguy.com. And we would love to send you one since we answered your question on the show today.
All right, speaking of people we met on the tour, Carlos has a question. Hey, Carlos. I just wanted to know how big should my emergency fund be if we are dual income and plan to rent our house? Should we have separate emergency funds for each? And I like this question because he's respecting your real estate and cash rules, Brian and Bo. So maybe you can speak to it and give them a little bit of guidance.
yes let's talk about what should your baseline emergency fund be uh... if you're a dual income household and let's say that you have about the same income
There's a lot of folks who say, hey, we want to be a little bit more aggressive. We feel comfortable with three months of living expenses for our emergency fund. And that's appropriate because we're both income earners and we're both at about the same spot. That would be permissible and allowable. But say you're dual income earners, but one of you has a much higher income than the other. Well, I would argue that there's more risk inherent in your situation. So your emergency fund should likely be
greater than three months it should probably somewhere closer to four or five maybe even six months of living expenses well that's just in the normal circumstances in the normal environment whenever you start introducing real estate you start thinking about having a rental property having other assets and obligations i think that also affects the emergency funding uh... the appropriate emergency fund levels agree yes and that's why i think when you get into this level of complexity it's it's not
Look, the input of what you're trying to create is only going to be as good as all the scenarios you plan for. And that's why I know we throw about there all the time, but it really is when you get into doing rental property and renting out a house that you used to live in, you're kind of starting a new business. I mean, and there's a lot of things that even when you're thinking about taking on a brand new job, that's a new endeavor and it's going to change your cash flow, it's going to change your house dynamics.
Don't sleep on doing the 3D glasses plan. I mean, there's a reason we talk about this is that I want you to do some preparation and do some homework and figure out, hey, what's going to happen if this goes really well? That's the dream plan. If it goes how I think it will, that's the down to earth plan. And then what happens?
when literally this thing goes belly up and it's the doodoo plan. Don't sleep on that. And that's why you might come to the, cause it'll let you do a gut check on your personality and how you handle the emotional stuff as well. Because if you, if y'all are two separate people from an emotional way, you look at money and you, you see the doodoo plan and you like full on panic, we can't, we gotta make sure that we boost up our cash to get us through this point here.
but then you're married to a cowboy that's like, or you're in this relationship with somebody that's like, oh, it'll be all right. Y'all are in completely different places. Different places. You've got to go ahead and have that communication plan. And what if you're in two different places and you all's income, exactly what Bo was talking about are in two different places on who can provide what, you've got to reconcile those things and why not do it now
before things go south either with the property or with the dynamics of, you know, if you're having, if you're having a tough time in the relationship, it's better to go ahead and plan this stuff now while things are good versus letting this be the thing that creates a lot of stress and strife in your relationship.
I do think, let me ask this, what are your thoughts on keeping those funds separate? Can you have all one emergency fund or if you have a rental property? Should you think of that as a separate bucket of emergency funds? Well, you have to be careful. Look, I don't want to, because there's a state, you know, there's
Who owns what? Relationships are tough, and I didn't hear Carlos talk about marriage or whatever, so that's its own other dynamic in there as well. But I'm trying to be respectful of the fact that if this is a couple, living together but not married, is that these things are strange dynamics. I'm talking about the household emergency fund versus if you have a rental property. Should that all be combined?
into one emergency fund, or should you have a separate emergency fund? No, I think you could treat it as a separate, because you essentially have an entity together. But I do think what I thought you were alluding to, and I've had this conversation with somebody else recently, when you have two people making completely different incomes, and they're living together and sharing a house, is that the money can become a power dynamic. And I always think that that's a weird thing, because
Relationships are already hard, so you just want to make sure that you all have really good communication about the dynamics of money and emergency reserves and access and all the other stuff, because that's the hard part to make a relationship where it can get difficult and if your communication's not good, it can fall apart.
I don't know if that was clear, but that's what I've experienced. It took lots of angles, but I mean, they were all good things to think about. Carlos, thank you for the question. If you don't already have one and you want a money guy tumbler, just email winner at moneyguys.com.
All right, Eric has a question up next. It says, my company offers you to buy into ownership. Shareholder bonuses usually are about 10 to 20% of the initial investment and the value of the shares increase over time. What step of the food is this?
Okay, so the company offers you to buy into ownership. Shareholder bonus is usually about 10, 20, and the initial investment. The fact, yeah, so this is just, I'm gonna call this making partner. I have the making partner opportunity at my employer, because here's what you didn't say. You did not say this was some sort of like employee stock purchase plan where you're getting a discount on the shares. If you're getting a discount on the shares, I'd argue that's like free money. That would be more of a step two thing.
If this is something where you're just able to buy into the entity for whom you work and you're able to do it at a reasonable market valuation, in my opinion, this is going to be a step seven hyperaccumulation, step eight tight goal because you want to make sure you've done all the other things. Brian, can you hold up the thing real quick? You want to make sure
that you've got the emergency fund in place, and that you're building your financial foundation, you've matched your Roth IRA, you've done your HSA, you're funding your retirement accounts, and this is no different than quote unquote starting a business, right? Like you would put this in the same place as starting a business because basically
what you're doing is you are in fact investing in a business. It just happens to be a business that you also work for. So not only are you saying, hey, my human capital is tied up in this thing and this is where my paycheck comes from, but now I also want to tie some of my financial capital to it. And while that could be a wonderful thing and could have an amazing ROI, you want to make sure you're doing it at the right stage of your financial journey or not too earlier, you become way over concentrated.
I've got a word for Eric, ill liquid. You think about this, bow laid out all the details, but even when we get to steps five and six of the financial order of operations, I mean, I don't want you. It would make me cry. I mean, physical wet tears coming down my cheek if you actually tried to get to your Roth IRA for an emergency, but you could do it. I mean, you really could do it. You could get it, even your 401K
would probably allow you to either take a loan or hardship. You could get it. I would not advise it. It's not a good idea. But if you get in a pickle of a situation and you call your owner of the company and say, hey, that stock purchase plan I'm in, I've got a little hardship going on right now. I'd like to get some of that money back. They're like, no, it doesn't work like that.
You know, this is an illiquid investment. You have a period certain or there's windows where you can take action, but only in those windows. So that's why Bo is spot on. Since this has limited access, it is illiquid. This is a step eight of the financial order of operations. This is something after you've built the financial foundation underneath you.
and you want to maximize the opportunities of what this could create for you both from a cash flow as well as from an investment in your employer. But I also, I think both said something that I think is very valuable and should be emphasized. Be careful having both your human capital and your financial capital all loaded up and only want entity. Like some of you can't help avoid it, like
You know, look, I've started several small businesses and it's just the nature that sometimes that becomes one of your biggest financial assets. But I've tried in the background to be building up as much liquidity and access to assets elsewhere outside of my small businesses as fast as possible. Don't just assume just because things have been good this year and for the last five years, 10 years that trees don't grow to heaven. Great.
Well, Eric, I know I was reading all the names that I had already done, but Eric, if you would like a Tumblr, just email winner at moneyguy.com. We would love to send you one. Thank you for submitting your question. All right. Amber's questions up next for you. It's an open enrollment question, she says. Yeah. I know it's that time of year. When might an HSA or a high deductible plan not be a good idea?
What should I consider? I currently have a low deductible plan, but pay a higher monthly premium. So how do you think about this as we go into this open enrollment season?
especially as a financial meeting with that HSA access potentially. Yes, so you know we love HSA's. We love what they can do for their triple tax advantage. You can put money in on the front end, get a tax deduction. You can invest the dollars, they can grow tax deferred, and then you can use them tax-free for qualified medical expenses. They are wonderful. But they're not the end all be all. There are a lot of circumstances in which, and by the way, in order to be able to contribute to a HSA, you have to be covered under a high deductible plan.
Well, the high deductible plan is not always the best decision. I'll speak to one scenario where it's not and I'll leave some more for you. One scenario where it doesn't make sense is let's say you work for an employer that has highly subsidized Cadillac insurance. You could go get the high deductible plan and maybe it's going to be a lower premium or maybe your employer covers 100% the cost.
If they have another type of insurance that is fully subsidized or highly subsidized and it's just copays and it's not going to cost you a lot either for the premium or for the services that you might receive throughout the year and you're a healthcare user that goes to the doctor and needs those services, you may be much better off taking
the very, very affordable, really, really good Cadillac health insurance instead of opting for the high deductible plan just because you want to be able to contribute to HSA. There's one example. Yeah, look, you got to do the homework. Don't skip leg day, meaning that open enrollment should not just be due what you did last year. It needs to be you need to think ahead, begin with the end of mind and say, hey, in the coming year,
What am I going to be using health care for? Is it just catastrophic protection like a high deductible health plan will be providing? Because I feel healthy. Things are good. No big life changes are coming my way. That's one option. But always, you know, I'm the one like a knucklehead that still does a lot of the HR and payroll stuff around here. And I love one of my favorite things because it's kind of like a gossip thing. This is this is what it feels like to work at TMZ, I think.
is that when we do open enrollment, I get to see what people are choosing on their health insurance. I'm like, oh, somebody's doing some family planning because they went to, because they went to that hot cream. They went to that Cadillac plan. I'm like, I wonder why they're doing the Cadillac plan this year. And I know because we have a bunch of financial mutants that work here.
They're doing it because they're growing the family more than likely. In the next 12 months, I'm going to have them come to my office and say, guess what? You know, we're growing the family. And I'm like, yeah, I got to do it, you know, because I saw your health insurance election. So there's nothing wrong. And look, that's the fun part of it. I'll tell you, I turned to certain age. And so did other people in my household that I knew that there was like some testing that was required at these ages. It's expensive. It's pretty invasive. And they put you to sleep and, you know, we go to a facility to do all this stuff.
Well, I'm just telling you, you know that this ain't cheap. You know, all these, and they even got this racket set up to where you have to go talk to the doctor first. You're like, hey, you guys have told me we have to do this. Why do we have to have a consult beforehand to do this? It's because, you know, everything is to extract as much out of this process as possible. You might want the Cadillac insurance. You have a lot of procedures or surgeries or things coming up.
I mean, so there's nothing wrong with you being a proactive participant, doing the homework, thinking about how you're actually going to use this plan in the coming year, and do it. And then by the same token, though, if you did grow your family last year, and now you got open enrollment coming your way, and you know, hey, everybody's healthy. It looks like this is good. Don't just stay on the Cadillac because that's what you did last year. Go to the high deductible plan, get back on the HSA savings,
And don't skip out on just doing the homework. But you always share, I'm going to screw this up. So that's all right because I got you to protect me. You're supposed to look at what the premiums are on the high deductible versus the Cadillac. And then go look at how you're using the money. Because you got the savings, you got to go then compare where your deductible is on the two different plans, see where the difference is, figure out where the break even, and then make your decision.
Yep, that's the two of them. And the next two are any employer incentives. If your employer puts money in your HSA or if they offer any sort of health reimbursement account or something like that. And then fourth is tax savings. So you have premium costs, you have actual healthcare costs, employer incentives, then you have tax savings. You stack up those four columns.
Are those four rows for all of your health plans? In every and open enrollment, you make your decision, which one makes the most sense for next year? And then next year, you rinse, repeat, rinse, repeat, rinse, repeat, and you make sure you're always optimizing. Hey, well done. Well, I got half of them. The tag team. You know, I ate 500 and get you in the hall of fame.
Amber, great question. Thanks for being here and we would love to send you a Money Guy Tumblr just as a thank you since we answered your question on the show. Email winner at moneyguy.com to cash in on that. Remember, just because the live stream end doesn't mean that the personal finance conversation
ends, go to moneyguy.com where we have our entire archive of episodes on all kinds of topics along with moneyguy.com slash resources where you can get all of our free stuff. We've got some calculators, some free downloads that go even more in depth on some of the topics that we talked about today and more. So be sure to check that out because we made it for you.
Ruby, what I loved is that last question. Let me highlight, it really did highlight the fact that money's only a tool. It's not really a goal. So, you know, that's what I think we try to put out there to our Money Guy family is take an active role in your financial life. You know, actually realize those small little decisions you're making really can lead to your great, big, beautiful tomorrow. I'm your host, Brian Preston, Mr. Bo Hanson. Money Guy team, out.
The Money Guy Show is hosted by Brian Preston. A Bound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities, laws, and regulations. A Bound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only and does not constitute financial, tax, investment, or legal advice.
