Should We Use Retirement Money to Buy a House?

Ray

Next question is from Daniel. It says, I have the option to buy title insurance for myself for my new home. I am required to purchase it from my lender. Is it. It is about $1,100 for the title insurance.

I heard that it's a scam and pays out at a much lower rate than any other type of insurance. Do I still need title insurance? This is a great question, and this is one forever. I kind of. I just piggybacked on somebody I look up to.

Bo Hanson

I was about to say, but no. But I want to tell you I've bought a few houses now, so I've got a little more of experience on where you can squeeze on this a little bit. Is that car coward. We all know Clark Howard. Fingerprints all over me.

Brian Preston

Anybody from Atlanta or even. I know he's, you know, Clark touches. He's all over the place. But I love me some Clark Howard and Clark forever would be like, buy that title insurance. Now.

Here's what I recognized once I started buying houses, is that if you're doing a mortgage, your lender is already going to require that a title search. And buying insurance is already part of the process. What your goal should now be, and you can do some research on this, is keeping them honest that they're not double dipping, charging both of you the same cost. You want to kind of find out and do a little research and even squeeze them on, since they're already having to do the title insurance for your mortgage company, can they get a little more competitive with that piggyback policy? Essentially, that's already going off the heavy lift that you're having to pay for, for the mortgage company and give you that.

That policy at a much cheaper price. Squeeze them on that. Ask and negotiate. But, yes, I like title insurance just for the peace of mind, especially if you've got a mortgage, they're already doing the work anyway. See if you can get it for a very reasonable add on fee, and then you're protected.

Yes, but hopefully you'll never need to claim it, but you're at least covered on a very expensive asset. Yeah. I think that people don't often recognize how much of the home closing process is negotiable. Even a lot of first time home buyers, they just think, okay, well, I've never done this before, don't know what I'm doing. I show up and, all right, show me where to sign and where do I send the check?

Bo Hanson

You can advocate for yourself. And, you know, they do the thing, and I feel like it's almost set to fail. But you go in for the closing, and I think you told me you were one of the people who, at your very first home closing, you sat there and, like, read every. Well, I think they tried to discourage you from doing that, from, like, reading all the stuff. Make sure you educate yourself.

You ought to say, okay, well, what if I go out, Daniel, and I buy this title insurance policy? What's it protecting me from? What's the risk that I could run into where I would have to utilize this policy? And is that something that actually gives me apprehension? Okay, if the answer is yes, it gives me apprehension.

Is it worth $1,100 to me, or is it worth some dollar value less than that? Because it's going to come down to a little bit of your own risk tolerance, risk capacity standpoint, and you have to navigate it that way. But I think the more that you can educate yourself on the closing process, the more well prepared that you will be to go into that. And I do think this is even one of the things, you know, I know there's some stuff out there about it now. Really good real estate agents can help you with some of this stuff.

If they've gone through a lot of this, they can be advocates to educate you on exactly what you are signing off on and how that app, how that operates at the closing process. Let me give a few additional tips to kind of tie into this title insurance question. Is that because. And this is, by the way, from my own, what I've learned. I've.

Brian Preston

I think I'm five houses now between, you know, investments and that. And then if you did closings on commercial property, I'm probably getting close to double digit closings for personal stuff. And then I've reviewed a bunch for clients. Here's. Here's some things you should know.

I showed up to my first closing with a checkbook and didn't know anything about it, my wife and I, and I realized we were 24, 25 years old when we bought this first house. I showed up, and they're like, what? Like, no, you have to wire the money. You have to wire the money. And I was like, no, I thought I was gonna just write a check.

And they're. I'm surprised they even let me get into the closing, but we somehow worked our way through it. But. But here's. So here's some things that I have done.

Being a person who's had a little more experience buying houses, you don't go to closing unless they have, and you put them on notice that you need to see all the settlement statements. And you want to see how the money is going to flow out a few days before closing. You're not wired because they'll tell you a lot of, I think a lot of times with title companies, they just give you the amount you owe and then they expect you just to wire it. Now I want to see how they broke it out. I want to make sure.

And even before that, I'm negotiating on the title insurance and other things. But there's nothing wrong with you advocating for yourself to want to see all the numbers, make sure you agree with everything and make sure you're on the same page. And then once you agree on everything, you be very careful with the wiring process. You will wire the money. But criminals have gotten very good because it's not uncommon with data breaches, especially with real estate attorneys, is that they can get in and then be in an email account and then find out who closing, you know, closing things and then send a bogus email with false wiring instructions.

So that's why even if they email you wiring instructions and the letterhead looks good, I would go on the Google, I called it like an old man. I'd go on the Internet. Go on the Internet, look up the title company from the Internet directly, Google, search it, or however you find it, call the number that's on the Internet, then talk to the person, verify the wiring instructions, then wire the money to make sure you're in a good place. I think those are just some of the tips that I would do. Don't show up with a checkbook.

You're going to wire the money, but you will need to be very cautious about wiring because a lot of times you're on the hook if you sent it to a criminal. And then just make sure that you see the settlement statement so that you know where the money's going. Congratulations on closing your first home. That's no small feat in this real estate environment. Absolutely.

And by the way, the settlement, settlement statement lets you not annoy the attorney by reading every. You still go through the forms and let them explain, but you're not going to sit there and go, what do you mean, this costs this much. You will have already had it in your privacy of your own home. You'll be able to have those conversations with yourself. Good advice.

Ray

All right, we're going to move on to Tyler H's question. It says, is there an advantage to a Roth IRA versus a Roth? Four hundred one k. I hear lots about the IRA as a great tool and not so much about the 401K, besides the match, am I missing some advantage of the Iraq? Well, let's go through some pros and cons, right?

Bo Hanson

So you have Roth IRAs and Roth 401 ks, and you're specifically asking what are the advantages to the Roth IRA over the 401K? So I'll speak to that, and then you can talk about why the 401 ks are awesome. So not all 401 ks are created equal. Some of them might have a poor array of investment options. They might be heavy, laden with, like, insurance type products, really expensive underlying investments.

And so when you look at that, you may determine that, man, this 401K, even if I did Roth, is kind of expensive. With a Roth IRA, I get to choose my provider. I can go look at a fidelity or a Vanguard or a Charles Schwab or a fill in the blank, and I get to choose the investment options in there. If I want to go buy a super low cost index fund or target retirement index fund, I can do that. So Roth IRa, I get to make all the choices around that.

So there's a really good chance that it's going to be less expensive because of that. Additionally, Roth IRas don't have a third party administrator or a record keeper that are having to charge to administer the plan. With a 401K, those costs are there. Now, with a lot of companies, the, or with a lot of 401 ks, the company might cover the cost of those plans. But again, with a Roth IRA, you get to pick and choose.

So the costs are likely going to be less. And then this is the third advantage I would throw out there. When you leave a company behind or when you change jobs, if your Roth IRa is at Fidelity or at Charles Schwab, it can just stay there as is. You don't have to go through HR, you don't have to communicate with anyone else. You can let it just sit there and stay the way it is.

With a Roth 401K, there's a chance you're going to have to continue to maintain a relationship with your prior employer or with the prior provider so that you can get information on your account. So I would argue with a Roth IRA, the ball stays a little bit firmer in your court around the decision making and communication. What would you say the advantages brought to Roth or to the 401K side are? Yeah, well, 401k, look, it used to also be just from a historical context, Roth IRAs in the past didn't have required minimum distributions, whereas your Roth 401K did. However, they fixed that little quirk.

Brian Preston

So that's good. So the pros for an employer plan was you can put more money because the annual contributions are substantially higher with your 401 ks, your 403 B's, than they are with the Roth IRAs. I mean, I'm talking about, was it 22,500 now versus. That was last year. This year's 23,000.

Man, why am I having a hard time switching into 2020? So 23,000, do you know why? It's because you're ketchup eligible. You don't care about those numbers. And now that you got that catch.

Up, 23,000 versus, and I'm not even going to try to embarrass myself, what's the 401? I mean, the IRA contribution. So see, you can see there's a substantial difference. There's $16,000 difference between those two. Also, 401 ks have what's called ERISA protection, meaning that if you got into a lawsuit, creditors or anything like that, your 401K likely would have more protection than the IRA would.

I'll just the cons. Bo already kind of set them with the 401K as the investment choice. Now, there's a good chance if you work for like a big corporation, you might not have a negative thing, because if they're already working with like the fidelities, the vanguards or the Schwabs, and you have low costs, you get all the protections and your employer's covering all the costs. That's a solid thing, but that's not for a lot of the small plans. And then there is that awkwardness, as if you leave your employer, you probably are going to have to reach out to somebody in HR or whoever does payroll or bookkeeping for your former employer to get access to the rollover paperwork.

Um, or you have to worry as my account over, you know, is it $5,000 or whatever? It depends on how. Either 1000 or 5000. Yeah, but you don't want to be forced into a distribution. If it gets big enough, they can't do that to you.

But still, you have to deal with an old employer, which has some complications sometimes if you don't leave on, on best of terms. Only two things I'd add to that with the 401K, no income limit, Roth IRA over a certain income. You can't contribute to a Roth with a 401K, that's not the case. And with 401K, there's a match. Right.

Bo Hanson

So don't ever forego your match in order to do a Roth IRA because matching money in 401 ks is so, so, so valuable. What's funny is that I can see over here Bo has a sticky note with four things on it. I see check marks next. Two of them I failed on those other two. So there you go.

Just different strokes, that's all. Playing horseshoes. That's it. I just want to make sure we give nice, good, thorough answers. That's all.

Ray

You got two of them. Now he's going to do two. I could have taken notes while you were talking. That's right. Fantastic.

All right, well, Tyler H. Thank you so much for that question. We're gonna move on to a question from homegrown Hillary. It says, can you explain the difference between a spousal IRA and a sep IRA for a stay at home parent who has a side hustle?

Bo Hanson

Okay. A spousal IRA simply is another way of saying a traditional Iraq for the spouse. Right. So we have Roth iras and traditional iras. Roth are tax free.

Traditional iras, if you satisfy certain requirements, can be tax deductible. So those are both limited to like $7,000 a year in this year if you're under age 50. So one of the things that's great about spousal iras is that if you are a working spouse and one spouse stays home, you guys can both contribute to your iras. Even if the stay at home spouse does not have any earned income. That's then called a spousal IRA.

They can make a contribution based on the household earnings record of their spouse. That's different than in this situation. Homegrown Hillary says, hey, what's different than a spousal IRA versus a spouse who has a side income that might be able to do a sep IRA? Well, when the spouse has an income, that changes it. Now they have a sep IRa availability.

Brian Preston

Yeah, a Sep IRA. By the way, if you have a side hustle, side income, that's considered earned income, self employment income. It's gonna be subject to Medicare, Social Security. By the way, if you're wondering what's earned income, anything that's subject to Social Security, Medicare, or self employment taxes is kind of what's on that, that threshold. Sep IRA is going to be funded at 20% to 25% of whatever depend upon how it's structured because you have a self employment tax adjustment on there.

That's why I give you a range on that. But it's, it's gonna be off of how much you made on the side hustle. The spousal IRA has zero earned income as long as your spouse has earned income. And it lets you essentially use a portion of your, your, your working spouse's earned income to apply for your own benefits. So that, that's the big difference is I would tell you if you're actually doing a sep IRA and a side hustle and you have a good amount of money coming in, because remember I said that the profit sharing from a sep IRA is only 2020 5%, you actually might be able to do both.

It's just. But you wouldn't do a spousal IRA. You just go do a, set up a roth ira or traditional ira or plus a sep Ira. You can, you can do both of these without concern. Yeah.

Bo Hanson

One of the things that I would encourage you to think about, because we've seen this happen a few times, is make sure you do the math on which one is actually more advantageous. We've seen it happen before where a spouse will have some sort of side income and let's say maybe it's two $3,000 of side income, and they immediately think, hey, I'm going to do a set because I can do that based on that earned income. Well, if you happen to fall into the place to where you can deduct your traditional IRA contributions, it would be more advantageous for you to take a $7,000 traditional deduction, then make a 20% to 25% contribution on two or $3,000 of side income. So make sure you understand which one of those is actually the most advantageous for you. I think as you get into higher side hustle incomes, the SEp or the solo 401K are going to be the ones.

But at those lower amounts, it's worth measuring twice, cutting once on that, you. Could do the sep, you know, take the tax deduction and then do the Roth. There we go. And get the tax free growth. I mean, love it.

Brian Preston

There's all kind of opportunities here with, with, for homegrown Hillary. And by the way, I don't know why, when I see it here, home grown Hillary, I think of clogging. I don't know why. It just name it just, it sounds like it made me feel. And maybe it's because, I mean, it's just where I grew up with, I.

Ray

Just didn't expect that I was thinking of 10,000. Clogging was not going to be on there. Maybe it's because when I was at spring training last week, you know, there was some clogging on one of the dugouts. That's what it was. It was, that's.

Brian Preston

And it made me think of, because, I mean, it's not uncommon. By the way, if you come up here on Saturdays. Uh huh. Have you been up here on Saturdays? Yeah, yeah.

There's a bunch of cloggers that come out here on the Franklin square and are always. Cause when I come up here and work every now and then, bring my daughter. She loves just looking out the window, watching them clog on the square. That's amazing. I mean, hey, maybe Hillary does clogging.

I don't know. I don't know why I was really surprised. That is, if I was a clogger. That would be my name. What kind of plot twist would it be?

Bo Hanson

If the side income was for, like. Clogging gigs at home, that would be great. Also, the hotel I stayed at for spring training, they were hosting a ballroom dancing competition. Did you enter in? Oh, we did get it.

Brian Preston

We were there for spring training, but I thought it was fascinating. Cause as we were walking to the car, you could see in the convention centers attached, they had all these rows of, like, these fancy dresses that they were like, vendors and other things for ballroom dancing, like selling dresses or like. I guess. I don't know. We didn't go in.

That's wild. I mean, but it was a lot of sparkly stuff all set up. That sucks. Sounds, well, fantastic. Sounds awesome.

Ray

Okay, we're going to move on to Ben's question next. It says, we've been investing in our HSA and keeping receipts for many years. Would it make sense to keep maxing our HSA contributions, but start cashing in old receipts to allow us to contribute more to our Roth accounts? You always talk about triple tax advantage and HSA, so I'm curious to hear what you say. Okay, let me think through this.

Bo Hanson

We've been contributing to HSA, and we're saving a lot of receipts. So we have a lot of, like, built up expenses. By the way, for those of you that don't know if you're one of the 4% of the populations doing this, you do know it. If you're one of the 96% that do not do this, listen up. With health savings accounts, you can put money in, get a con, get a deduction on the front end.

You can invest those dollars, they can grow tax deferred. And then if you use it for future medical expenses or prior medical expenses that you incurred while covered by a high deductible plan, all those distributions are completely tax free. Only 4% of folks do that. We would encourage you to be one of those 4% if you can. So Ben says, all right, I'm putting money in HSA.

I'm saving the receipts. Would it be advantageous for me to begin cashing in some of those receipts so that I could put money into the Roth. Well, that's the only thing. Because, look, both of those, if I hold up the financial order operations, you can go to moneyguy.com resources, you can download your own. Both of those are step five.

Brian Preston

And the reason they're step five is because they're tax free growth opportunities. But I give Ben credit because it's like you said, we always talk about HSA is the reason that right there with Roth IRAs is the triple tax advantage. If you're just using an HSA, a health savings account, as a clearing account, you're only taking advantage of the deduction on the front end. You're not taking advantage. That's only one.

That's not triple. That's one tax advantage. I like that Ben's doing both. But here's the dilemma is that. And this is something.

Cause I love Roth Iras. I want him to be funding that, too. But I also know that first ten years, that you invest most of the contribution, especially first five years, if you look back, you'll see, like, man, my account value is probably 80%. My contributions versus the fair market value. Ten years in the future, it might be, man.

Now, my contributions are only. And I'm making these numbers off of. But we've done research on this in the past off of like 50% of the account value. But then if you go out 20 and 30 years in the future, you're like, holy cow. Now my, you know, 70% to 80% of the account value is actually all growth.

So that's why you're in a dilemma that, you know, you. How do you maximize the timing? But then I bring it back to the point of, but I really like Roth Ira's, too. He's getting the tax deduction. Do the Roth.

So I think you create a system that you kind of. That reflects. Cause I don't like you not doing a Roth Ira also. Well, I think that in my mind, as I'm thinking through this, I think they're the same. I think that they're equivalent.

Bo Hanson

While the dollars are sitting in there. If you have receipts to justify that money is the same whether it's sitting in a Roth or whether it is sitting in HSA. As long as you have medical expenses that offset. That's right. Now the earnings are what change.

And this is the only thing that I'm thinking through academically. Why it might make sense because the. HSA is going to have a limit on the tax free meaning you have to have expenses. You have to have expenses, whereas the Roth does not. True, but I'm going to argue that it's health care.

Brian Preston

We're all. We're going to use. We're all going to have enough money on health care as we get older to be able to burn that money. This is where I. This is one place I think that the change is if you pass away with HSA dollars, I believe there's been legislation that came out that says that the decedent, so long as you have medical records, you can then distribute tax free to the estate, the HSA dollars to reimburse for medical expenses with a Roth IRA.

Bo Hanson

If someone were to inherit the Roth IRA, not only did that money grow tax free for their life, it can grow tax free for the ten years of the beneficiaries lives. So I think from an estate planning standpoint, the Roth might be slightly more advantageous than HSA. Right? From. Yes.

Brian Preston

I mean, after you take advantage of the deduction on the HSA, then you still want to make sure you get the Roth out. Yep. So, yeah, I would agree with that. But it goes back to Ben's question. When should he cash in some of those existing?

So here's what I would say, Ben. If you have to do it to the Roth, then let's go ahead and start doing it. But if you can actually fund the. Take the deduction, and then the deduction now allows you to do the Roth. Do as little of cashing in as possible, but try to get the Roth Ira.

I think that's the answer. You just said do both. No, I said fund the HSA, but then sell enough to where he can then fund his Roth Ira, but not an ounce more so that he can continue to let that 4%, double and triple tax advantage work in the HSA. Okay, cool, man. We made that about as clear as I think.

They're milkshake. Well, that helps. So, it's a hard question. We don't know if there's one perfect answer there. It's really hard.

Bo Hanson

Well, they're nuanced. I would love to see. This is the problem. I hate it when in financial planning, I say, people ask me a question, I say, well, it depends. And then I need to see your data to give you the exact personalized information for your situation.

Brian Preston

So I'm trying to give an answer that even though I don't know all of Ben's things, that works, and that's hard. Well, Ben, we appreciate the question, and we do hope that kind of helped you think through some different nuances of your question. So thanks for being here. Natasha's question is up next. It says, my fiance and I want to buy a home.

Ray

I've been saving for a down payment for almost two years, but he has a lot of his money in retirement accounts. Should he pull any money out of those retirement accounts so that they can buy this home? I think that this is both a logistical question and it's a relational question, and I'm very interested to see how you answer that. You know what I find interesting, by the way, Natasha, the first thing, and this goes back to we had another relationship question, communication is a key component here because it sounds like for the last few years, the last two years, for sure, you all had two separate things rolling here. You've, at some point, you made the determination that, you know, what's important to me is we ought to buy a house.

Brian Preston

So I'm going to start saving for a down payment. But your spouse, I don't know if y'all didn't have that conversation or if y'all just doing things completely independently, like, let's load up the cash. I'm loading up the retirement, and that's fine if your cash savings are enough, but if you're both in on this, you got yourself in a little bit of a pickle, because, yes, there's. There are some small loopholes, which would. Because I don't even off the top of, what was it, $10,000 you can do for a first time home purchase out of a, you know, something like that.

You could do loans, but I hate taking money from retirement accounts because it just works against what the whole purpose of those assets are for. But there are some things that maybe can get this back to the middle for you guys. But the first thing, you got to start making sure you all are on the same page about financial objectives and goals, because that's just, that's a problem when they're going into. Neither of those are bad goals. That's the thing, too.

Ray

Like, I don't know, maybe you're gonna come together and find a way to, like, take advantage of the things that you've done. I agree. It does sound like they're saving to two different things. And it's interesting. This is what, I don't know.

Bo Hanson

It says, my fiance and I want to buy. Oh, fiance. Okay, so we don't know how. We don't know how long. That's true.

You guys have been engaged, so maybe y'all. Maybe y'all have not been on different pages, y'all just came together, and now you're wanting to buy a home together. But, you know, as you get married and that kind of stuff, which is great. So let's. Let's remove the relational, emotional part from the equation.

Is it a good idea to draw money out of retirement accounts for a down payment? I'm going to argue, man, if you can avoid doing that, I think that your future self would likely. Thank you. So what I would encourage you guys to think about is, okay, what is the down payment we need to save up for? By the way, if you're thinking about buying this first house, go to moneyguide.com resources.

We have tons of home buying tools out there. We have calculators, we have checklists, we have all kinds of articles that we've written to help you make sure you're making this decision really, really well. Because one of the unique things that is unique, I think, to our perspective, is when it comes to that down payment, rather than having to come up with a 20% down payment, so long as you can make sure that your total housing cost does not exceed 25% of your gross income, you only have to come up with three to 5% for that down payment. So I would figure out, okay, based on what we both have readily available in after tax non retirement assets, how far away are we from that down payment? And how long would we have to continue on our current trajectory to get there without pulling out of our retirement to do that?

Because I just think that you're going to find when you start using retirement assets to begin funding those types of goals, even though they're like, admirable, wonderful goals of home ownership, that money becomes really, really expensive, especially if you're doing premature distributions, especially if you're going having to to pay penalties and ordinary income tax rates on those. It just becomes so expensive. So I'd love to see the two of you put together a plan that allows you to accomplish that without having to go into the retirement coffers to do so. Yeah. Lean on the home buying checklist.

Brian Preston

And then if this is y'all's first house at three to 5% down payment, it should provide a lot of grace. And then start having good conversations, because Bo makes a great point. I didn't. I didn't catch on to the fields in December. Yeah.

So, I mean, this is. Congratulations. Great point. Now to start having great communication, take advantage of the three to 5%, and then I'll figure out how you can work those goals out together. Love it.

Bo Hanson

Ray was that good? We give enough meat on that one. Yeah, I think you did. I think you're exactly right. You gave the non emotional, like, hey, I don't know if retirement account is the place you want to draw money from, but, yeah, you gave a lot of good advice.

Ray

I liked it. Awesome. If rabies sounds off on it, we're good. Natasha, I hope that helped. And honestly, congratulations.

Cause it sounds like this is pretty recent. So it's great that you're asking these questions and that you're wanting to get on the same page and have these financial goals. So I think that that's fantastic, and we're glad that you're here, and hopefully we're gonna help you consider those things as you watch the money guy show. Okay, andrew's question is up next. Was that Andrew or Andrea?

Andrew. Andrew. Don't be picking on Reb. I was gonna say, I thought I. Said it pretty clearly, but, hey, that was on me.

Bo Hanson

That's me. I'm very sensitive to how people pronounce things now. I was genuinely not picking on you. Thank you. Appreciate that.

Brian Preston

I think I'm just hypersensitive now. Okay, well, Andrew asks, my employer gives us an annual bonus, which can be taken as cash, leveraged stock options or a mixture of both. How do I think about which option to take? Wait a minute. Let me get this right.

Annual bonus, leverage stock options. What was the other two options? Cash or a mixture of both. And bonus ranges from five to 10% is the last piece of information. So how should you think about which option to take?

Bo Hanson

Okay, I want to be clear here. I don't know. I want to make the word leverage here threw me off. I'm going to go out on a limb here and ask Andrew. I bet there's not, like leverage stock options.

I bet your bonus you're able to choose, do I either take stock options or cash? That's a more common thing that we see. The levered thing kind of. Kind of threw it off on me. And so the.

Cause, that's what threw you off to me. Right. It sounds like a casino almost. It's like, hey, we can let you. Borrow cash, or we'll go with leverage.

Brian Preston

You know, leveraged stock options, I think. I think it's either stock options or cash, which is not uncommon. A lot of times, especially when you work for publicly traded entities, they will give you an option on how you receive your bonus. You can either receive it in employer stock, in this case, options, to buy the stock at some future date, or cash. So how do I go about deciding which one of these makes sense.

Bo Hanson

And, Brian, you and I have a ton of experience. We've worked with a lot of people over the last, what, 20 years or so, who've had options available through their employer, whether that be part of their compensation or part of the way they elect to receive bonuses. And options can be wonderful, because what an option does is it gives you the opportunity to buy a stock at a given price at some point in the future. So you get an option, I want to buy my company stock for $10 per share, and I get to decide when I want to do that. Well, it's kind of a no brainer if the stock price goes up to $100 per share, but you have an option that allows you to buy it for $10 a share.

That option is pretty stinking valuable, so it allows you to participate in the growth of the company. So it can be a very attractive thing. Cash, on the other hand, is exactly what it is. You get cash today, and it's worth exactly what the cash is. So how does Andrew go about deciding, how do I do this?

Is it better to take stock, or is it better to take the cash? Yeah, this is. I always say we need a little bit more data, because even it could be a stock purchase plan, it could be stock options, it could be restricted stock units. We see all kind of versions, and then there's, there's usually some type of incentive when you take the stock as well. Think about like employee stock purchase plan.

Brian Preston

They usually have a discount, either 15% off the beginning of the quarter or whatever the, whatever the lowest price is, either the beginning quarter, end of the quarter. So that's almost like a guaranteed 15% payment there. Restricted stock units, they usually, you know, you're dealing with some stated, you know, you work here long enough, we're going to give you these. They're going to vest over time. There's an incentive to keep you there.

So I need a little bit more data on how this is structured. But I will say this, assuming there is some incentive that they're going to give you on the options, rsus or the employee stock purchase plan, make sure that your human capital and your investment capital stay somewhat separated. I want you to take advantage of the incentives that you're, especially if they're, they're kind of really giving you some type of incentive to do the stock. I would encourage you to do that, but just make sure that you try to keep it below 10% of your total investable assets. And that's why you'll probably want to create some type of timeline of action because there's just a risk of having your human capital, meaning the hours you trade of your time to go towards labor and wages to create income for your family.

You don't want that tied into your financial assets completely because then you literally have all your eggs in one basket. If it goes down, it destroys your entire financial life. So that's why it's nice to kind of diversify those things. Now look, concentration can create tremendous wealth, whereas usually when you get wealth you want to diversify. But it is one of those things where you have to be careful.

And a lot of times as an insider or working for a company, you get caught up in all the excitement and it might blind you to the risk. So just don't get caught up in all that. Make sure there's a balance there on your wealth building journey of creating diversification. Financial assets that are working just as hard as you do with your back, your brain and your hands. Love it.

Ray

Fantastic. One other consideration. Sorry, put it in there. One of the benefits of options when you're thinking through this is that with options you get to choose the taxability event. You get to choose when the tax event takes place.

Bo Hanson

So one of the things that may be going on with your employer is if you receive the cash bonus right now, it's going to be immediately taxable to you this year. If you were to receive the options, there's a good chance that the taxability will be deferred until some point in the future when you exercise those options. So there's also this like higher level of thinking you need to enter into to say, okay, is there likely over the next ten years because most options have a ten year expiration window. Is there a chance that when I want to receive the value of these options, I'm going to be in a different tax environment that will have been more advantageous for me to choose to trigger that taxable event. And then coupled with that, what do I really think the trajectory of the employer stock is going to look like?

Are we like a new, exciting technology? Is there something going on there? Is it a blue chip stock or is it something super aggressive that could likely fall out of the money based on where my exercise price is? So there's a lot that has to go into this. And I would even contend the choice that you make may change year over year based on your personal circumstances and based on your company's personal circumstances.

This should be one that every open enrollment as you're making this election, you're really thinking through the best way to tackle it. And we didn't even talk about deferred comp. We didn't talk about top hat programs. These are things, like I tell you guys all the time, the more successful you get, the more complexity will come your way. That's why when everybody says, why would you ever need a financial advisor?

Brian Preston

Just go buy the s and P 500. Ask yourself, do you know what to do with all these? That's what these are the. This is why you don't need a financial advisor if you're just buying index funds and you don't have complexity. But I'm telling you, the more successful you get, this stuff just tracks you down.

And that's why we'll keep the lights on the front porch. You come and let us know and we'll be here to help you out. Love it. Keep the lights. I don't like that.

Ray

It was cute. I liked it, too. It's like a bound will be if you need us.

Brian Preston

Okay, never mind it, because I'm sure that is such an old brand. Yeah, we'll keep the lights on for you. Somebody in the chat will know it already. Oh, man. Motel six.

There it is. Okay. Type right now. Type in, where is the closest motel six? Okay, this part's for free, guys.

Bo Hanson

Where is the closest motel six? Oh, we got one in Murfreesboro. Dixon, Nashville. We are just surrounded by this. Oh, man, there's a lot of dots on that map.

Ray

What was the guy's name? He'd always say name. Um, blah, blah, blah. We'll keep the lights on for you. I forget the spokesman's name.

Okay, maybe we remember enough about this. Maybe we shouldn't have be. We're essentially saying we're just using somebody's trademarked line. We'll probably. We should stay away from that.

Bo Hanson

Tom Ledette. Tom. Tom Beaudet? Is that his name? Was his name Tom Bodette?

Brian Preston

Don't ask me. I don't know. Oh, y'all have to tell me. I barely speak English. If I just pulled that out of, like, my TBS days back as a child.

Bo Hanson

Oh, man, that's gonna be awesome. Gonna be so proud. Well, you wanna do one more question? Of course. Let's go.

Ray

We've got a question from Fuzzy Frank. Fuzzy Frank. Yup. He says, is he a pink teddy bear, purple teddy bear? What's the one in toy story?

What? Is that his name? Oh, was his name Frank? I don't think it was Frank, but it makes me think of that the teddy bear in the toy story. Your mind is just an amazing thing.

Bo Hanson

It's unbelievable. I overused it doing the audiobook. Okay, sorry, Fuzzy Frank. Maybe that just means he's, like, half my dad's friends. They were all, you know, as a kid, they always had fur on their back, so maybe that's what fuzzy Frank means.

All right, this thing is off the rails. I'm sorry, Fuzzy Frank. We'll just start over with you. Not really sure what to say, so I'm just gonna go back to the question. It's his name.

Ray

Fuzzy Frank asks. My spouse and I both work. However, we live off my income and use hers to invest into our Roth and brokerage. Do we aim for a savings rate based off my income or our combined income? I like the strategy, though.

I think it's smart moving off one income, if you can do that. Tell them the details. Yeah, yeah. So I love. I love the way y'all are doing this.

Bo Hanson

We love off my. We live off of my income, and we save off of her income. That sounds great, but what if. What if you make $200,000 a year and she makes $20,000 a year? Well, now you have a little bit of problem.

So while it's great that you might be saving her income, I'd argue percentage wise, you're not saving enough. So the best way that we think to take about this is you add up both of your gross incomes and your savings rate should be based off 25% of that number. Household income. That's it. That's the one.

And if you're able to do save 25% off the gross number, if it just so works out that that is 100% of her compensation, then that's great. If you make $100,000 a year and she makes $25,000 a year and you save all of her income, then that math works. But you have to make sure that you do the actual exercise so that you don't fall into the false sense of security. Oh, we're saving enough. We save all of hers, and we live off of mine.

You gotta make sure that actual, mathematically, it makes sense. Well, that's what I. Sometimes we've had questions in the past where somebody says, man, I save 35% of my income, but my spouse won't save anything. Tell me how to fix this. And I'm like, well, you're not really saving 35%.

Brian Preston

You're saving out of your income, but you need to look at your household income. And then I would now start having a conversation. It doesn't sound like fuzzy Frank has this issue because it sounds like they've actually been very deliberate with, they're going to live off one, save the rest. I just want to make sure that now you consolidate that into an actual united plan where you understand what you're working off of. That's why the net worth statement and all those things when having those romantic meals where you're actually discussing your goals and what you're, you know, what you're planning for in the future can be so beneficial to the communication of a healthy relationship.

Bo Hanson

And I think that you ought to think through, like, when it comes to opportunities available to both of you, I would not compartmentalize. Oh, well, we're just going to save off of hers. We're going to live off mine. Because what happens if, like, your 401K is way better than hers? Like, what if the options are better, the matching is better, the choices are more attractive.

You want to look at the absolute best options across the household and it might be, well, okay, we're going to save hers. But my 401K, we got to max that out because it is so attractive at the company. I work at her, I have access to an employee stock purchase planner. Fill in the blank. You want to make sure you look at all of the income that comes in the household as well as all of the saving opportunities that are available to the whole household.

Because not all benefits packages at all employers are the same. You want to be able to pick and choose the ones that are the best, and this is not uncommon. Just because you might work for the bigger company and have the bigger comp does not mean you might have the better benefits. The smaller income may have a better benefits package that you want to figure out. How can we take advantage of that?

Brian Preston

Well, and I've even seen it getting, talking about the complexity of success is that I've seen situations where the small employer is very generous, but their 401K is horrible on investment choices, so you still load it up to take advantage of the huge match that they have. But maybe you only buy the bond fund because that's the only fund that they had in the 401K that seemed worthy because they didn't offer index funds they didn't offer. So that's why you really get nuanced on which benefits are out there. What are the investment choices? How's the compensation structure?

This is fun stuff and this is the jigsaw puzzle that is typically what we do with clients. Reb, I'm gonna throw this out there so that YouTube cannot annihilate me for this. I made a public math error and I did not catch it. But they caught I think I know you got to. I was talking so fast.

Bo Hanson

I said $100,000, $25,000. She makes 25,000. If you save hers, that's 25%. You are correct. The total household income would have been 125,000.

Ray

So it's not enough. So it's not enough. If you made 75 and she made 25, then the math would work out. So YouTube, don't come and get me. It's public math, not my thing.

The money guy show is hosted by Brian Preston. Abound 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. Abound 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.

Should We Use Retirement Money to Buy a House?

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2: Pros and Cons

3: Alternative Strategies

4: Listener Questions

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